Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is proposing rule and form amendments that would modernize the disclosure framework for open-end management investment companies. The disclosure framework would feature concise and visually engaging shareholder reports that would highlight key information that is particularly important for retail investors to assess and monitor their fund investments. Certain information that may be less relevant to retail investors—and of more interest to financial professionals and investors who desire more in-depth information—would no longer appear in funds' shareholder reports but would be available online, delivered free of charge upon request, and filed on a semi-annual basis on Form N-CSR. Funds' shareholder reports would serve as the central source of fund disclosure for existing shareholders. Thus, instead of delivering prospectus updates to existing shareholders each year, open-end funds would have an alternative way to keep shareholders informed. This framework would rely on the shareholder report (which would include a summary of material fund changes), along with timely notifications to shareholders about material fund changes as they occur and continued availability of the fund's prospectus. The Commission is also proposing amendments to open-end fund prospectus disclosure requirements to provide greater clarity and more consistent information about fees, expenses, and principal risks. Finally, the Commission is proposing amendments to the advertising rules for registered investment companies and business development companies to promote more transparent and balanced statements about investment costs.

DATES:

Comments should be received by January 4, 2021.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form ( https://www.sec.gov/rules/submitcomments.htm ); or
• Send an email to rule-comments@sec.gov. Please include File No. S7-09-20 on the subject line.

Paper Comments

• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-09-20. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's website ( http://www.sec.gov/rules/proposed.shtml ). Comments are also available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information you wish to make available publicly. Persons wishing to provide comments regarding the proposal may wish to submit our Investor Feedback Flier or Smaller Fund Feedback Flier, available at Appendices B and C, respectively.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Zeena Abdul-Rahman, Daniel K. Chang, Mykaila DeLesDernier, Pamela K. Ellis, Angela Mokodean, Senior Counsels; Amanda Hollander Wagner, Branch Chief; or Brian McLaughlin Johnson, Assistant Director, at (202) 551-6792, Investment Company Regulation Office; Daniel Rooney, Assistant Chief Accountant; Keith Carpenter or Michael Kosoff, Senior Special Counsels, at (202) 551-6921, Disclosure Review and Accounting Office; Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

SUPPLEMENTARY INFORMATION:

The Commission is proposing new 17 CFR 230.498B [new rule 498B] under the Securities Act of 1933 (“Securities Act”). We also are proposing amendments to the following rules and forms:

Table of Contents

I. Introduction and Background

A. Current Approach To Disclosure for Fund Shareholders

B. Information About Investor Preferences

1. Fund Shareholder Preferences Regarding Ongoing Disclosures

2. Fee and Risk Disclosure Preferences

3. Disclosure Delivery Preferences

C. Developments Affecting Fund Disclosure and Marketing Practices

II. Discussion

A. Overview of Proposed New Disclosure Framework

1. Executive Summary

2. Considerations and Goals

B. Annual Shareholder Report

1. Scope of Annual Report Disclosure, and Registrants Subject to Amendments

2. Contents of the Proposed Annual Report

3. Format and Presentation of Annual Report

4. Electronic Annual Reports

C. Semi-Annual Shareholder Report

1. Scope and Contents of the Proposed Semi-Annual Report

2. Format and Presentation of Semi-Annual Report

3. Electronic Semi-Annual Reports

D. New Form N-CSR and website Availability Requirements

1. Proposed Form N-CSR Filing Requirements

2. Proposed website Availability Requirements

3. Proposed Delivery Upon Request Requirements

E. Disclosure Item Proposed To Be Removed From Shareholder Report and Not Filed on Form N-CSR

F. Proposed Rule 498B and Treatment of Annual Prospectus Updates Under Proposed Disclosure Framework

1. Overview

2. Scope of Proposed New Rule 498B

3. Conditions To Rely Upon Proposed New Rule 498B

4. Other Requirements

G. Amendments Narrowing Scope of Rule 30e-3

H. Proposed Amendments To Fund Prospectus Disclosure Requirements

1. Improved Prospectus Fee Disclosures

2. Improved Prospectus Risk Disclosures

3. Prospectuses and SAIs Transmitted Under Rule 30e-1(d)

I. Investment Company Advertising Rule Amendments

J. Technical and Conforming Amendments

K. Compliance Date

III. Economic Analysis

A. Introduction

B. Economic Baseline and Affected Parties

1. Descriptive Industry Statistics

2. Fund Prospectuses

3. Fund Shareholder Reports

4. Delivery of Fund Prospectuses and Shareholder Reports

5. Investor Use of Fund Disclosure

6. Fund Advertisements

C. Costs and Benefits

1. Broad Economic Considerations

2. Modified Disclosure Framework for Existing Fund Shareholders

3. Prospectus Disclosure Amendments

4. Advertising Rule Amendments

D. Effects on Efficiency, Competition, and Capital Formation

E. Reasonable Alternatives

1. More or Less Frequent Disclosure

2. More or Less Information in Shareholder Reports

3. Retaining Rule 30e-3 Flexibility for Open-End Funds Registered on Form N-1A

4. Limiting the Advertising Rule Amendments to ETFs and Mutual Funds

5. Amending Prospectus Fee, Expense, and Principal Risk Disclosure in a Different Manner

6. Amending Shareholder Report Requirements for Variable Insurance Contracts or Registered Closed-End Funds

7. Requiring Funds To Comply With Proposed Rule 498B

8. Requiring Form N-CSR to be Tagged in Inline XBRL Format

9. Modifying the AFFE Amendment

F. Request for Comment

IV. Paperwork Reduction Act Analysis

A. Introduction

B. Form N-1A

C. Proposed New Shareholder Report Requirements Under Rule 30e-1

D. Form N-CSR

E. Proposed Rule 498B

F. Rule 482

G. Rule 34b-1

H. Rule 433

I. Rule 30e-3

J. Rule 498

K. Request for Comment

V. Initial Regulatory Flexibility Act Analysis

A. Reasons for and Objectives of the Proposed Actions

B. Legal Basis

C. Small Entities Subject to the Rule

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

1. Annual and Semi-Annual Reports

2. New Form N-CSR and website Availability Requirements

3. Proposed Rule 498B, and Treatment of Annual Prospectus Updates under Proposed Disclosure Framework

4. Amendments to Scope of Rule 30e-3

5. Proposed Amendments to Fund Prospectus Disclosure Requirements

6. Investment Company Advertising Rules

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

G. General Request for Comment

VI. Consideration of Impact on the Economy

VII. Statutory Authority

I. Introduction and Background

The Commission is proposing to tailor the disclosures that mutual funds and exchange-traded funds (“ETFs” and, collectively with mutual funds, “funds”) must provide to investors to highlight key information investors need to assess and monitor their fund investments and make informed investment decisions. Currently, most mutual funds and ETFs rely on a layered disclosure framework with respect to the prospectus information they provide to fund investors in order to tailor this disclosure to investors' informational needs. The vast majority of funds provide: (1) A summary prospectus to investors in connection with their initial investment decision; and (2) more-detailed information that may be of interest to some investors, which is available online in the form of the “statutory prospectus” and Statement of Additional Information (“SAI”). However, this approach to layered, tailored disclosure does not extend to other disclosure funds provide to their shareholders. After making their initial decision to invest in a fund, fund shareholders typically receive an updated prospectus annually, as well as annual and semi-annual shareholder reports (or “annual reports” and “semi-annual reports” respectively, and collectively “shareholder reports”). These shareholder reports provide detailed information about a fund's operations and activities during the last full- or half-year period and can be quite lengthy. For example, it is not unusual for annual reports to exceed 100 pages in length.

In June 2018, the Commission issued a request for comment seeking feedback on retail investors' experience with fund disclosure and on ways to improve fund disclosure. We have considered feedback the Commission received in response to this request for comment, which generally showed that retail investors prefer concise, layered disclosure and feel overwhelmed by the volume of fund information they currently receive. We have also considered prior investor testing and surveys, past fund disclosure reform initiatives, and developments affecting fund disclosure practices.

After considering this information, we are proposing a layered disclosure framework for fund shareholders that would highlight key information for assessing and monitoring a fund investment and informing investment decisions (e.g., whether to buy additional shares, continue to hold, or sell a fund investment), with additional information available online and upon request. The proposal would implement this new framework principally by amending the requirements for funds' annual and semi-annual reports to highlight information that we believe is particularly important for retail shareholders to assess and monitor their ongoing fund investments. These tailored shareholder reports would serve as the primary fund disclosure that existing shareholders receive each year, in addition to notices of certain material changes if they occur during the year.

The proposal is designed to alleviate concerns that fund retail shareholders currently may receive disclosure materials that are not well-suited to their needs, which may contribute to investor confusion or indifference. Current disclosures, for example, may include information that is less useful for most retail shareholders to assess and monitor their fund investments, either because the information is primarily designed to inform an initial purchase decision, or because the information is of interest to only some investors (for example, those investors who want detailed fund information), as well as financial professionals and market analysts. Furthermore, current fund disclosures in some cases are delivered close in time to one another and include similar sets of information that may appear redundant or inconsistent to shareholders. Under the proposal, the amounts and types of available fund information would remain largely unchanged. However, information that is of interest only to some shareholders, or information that we believe generally is less useful for purposes of assessing and monitoring an ongoing investment, would be available online and delivered upon request to fund shareholders who want that additional information.

In addition to layering disclosure for existing fund shareholders, we are proposing certain amendments to the way funds present their fees and expenses and principal risks in prospectuses. Many retail investors responding to the Fund Investor Experience RFC stated that current fee and expense and principal risk disclosure is difficult to understand and use. The proposed amendments are designed to provide investors with simpler, easier-to-understand information about a fund's fees and expenses and principal risks, including a summary presentation of bottom-line fee figures that uses plain language descriptions and more concise principal risk disclosure that generally orders risks by importance. Consistent with the current layered approach to prospectus disclosure, additional information about a fund's fee and expenses and risks would remain available for interested investors.

To improve the clarity of fee and expense information that is available to investors more generally, we also propose to amend the Commission's investment company advertising rules. The proposed amendments would require that a registered investment company or business development company (“BDC”) advertisement discussing fees and expenses include certain standardized figures and provide reasonably current information. In addition, we are proposing amendments to address potentially misleading statements about fees and expenses in these investment company advertisements.

A. Current Approach To Disclosure for Fund Shareholders

Today, a fund investor receives a prospectus in connection with his or her initial purchase of fund shares. A fund's prospectus serves as the principal selling document for potential investors to help inform investment decisions and facilitate fund comparisons. Fund prospectuses provide important information that an investor should consider when making an investment, including information about a fund's principal investment strategies, fees and expenses, principal risks, and performance. Under the Federal securities laws, a fund (or a financial intermediary) must deliver an updated copy of the fund's summary or statutory prospectus to an existing fund shareholder if the shareholder purchases additional shares of the fund. We understand that, to satisfy applicable prospectus delivery requirements, most funds send an updated summary or statutory prospectus annually to all shareholders to avoid the need to track each shareholder's additional purchase activity throughout the year. Other funds may track this activity and send a summary or statutory prospectus only to those shareholders who have purchased fund shares during the relevant period. The vast majority of funds use summary prospectuses. Outside of the annual prospectus update, a fund shareholder may also receive updates at other times during the year when a fund supplements, or “stickers,” its prospectus disclosure to reflect material or other changes.

In addition to annual prospectus updates and interim stickers, fund shareholders also receive shareholder reports on a semi-annual basis. These reports include detailed information about a fund's operations over a given half- or full-year period, including information about the following items. Certain of this information, including fund performance information, appears only in annual reports.

• The ongoing costs of a $1,000 fund investment for the most recent fiscal half-year, including actual expenses (which a shareholder can use to understand his or her ongoing costs of investing in the fund) and hypothetical expenses (which a shareholder can use to compare different funds' ongoing costs);
• Performance, including information about the fund's performance over the past 10 years and fund management's discussion of fund performance for the last fiscal year;
• Portfolio holdings, which includes a list of the fund's investments and graphical representations of the fund's holdings by certain categories (e.g., type of security, industry sector, geographic region, credit quality, or maturity);

• Fund financials, including financial statements and financial highlights, which are audited in annual reports;

• A fund's board of directors and management, including remuneration that the fund paid to these and certain other parties;
• Results of any shareholder vote held during the relevant period;
• The availability of additional information regarding the fund's proxy voting record, code of ethics, quarterly portfolio holdings, and board of directors;
• Changes in and disagreements with fund accountants;
• Any board approval of an investment advisory contract during the relevant period; and
• The operation and effectiveness of the fund's liquidity risk management program.

Additionally, some funds currently include other information in their shareholder reports that is not required by Commission rules or forms. For example, some funds typically include in their shareholder reports information such as president's letters, interviews with portfolio managers, market commentary, or specific portfolio statistics that are not required (e.g., top ten largest holdings, summary statistics with respect to debt yields and maturities). Based on staff analysis, the average annual report is approximately 134 pages long, and the average semi-annual report is approximately 116 pages long.

Shareholder reports and prospectuses provide some of the same categories of information, including information about expenses and performance. A fund shareholder typically receives an annual report and an annual prospectus update close in time, commonly within two months of one another. We understand that some funds even deliver a shareholder report and the annual prospectus update at the same time.

With respect to the delivery mechanism, a fund shareholder currently receives shareholder reports and prospectuses in paper or electronically. We understand that shareholders electing electronic delivery of fund disclosure materials typically receive an email that contains a link to where the materials are available online. Additionally, if a fund chooses to rely on rule 30e-3, beginning as early as January 1, 2021, a shareholder who currently receives fund shareholder reports in the mail may begin receiving instead notices that a shareholder report is available at an identified website address. Nonetheless, a shareholder may continue to receive the full report in paper if he or she notifies the fund (or relevant financial intermediary) that he or she wishes to receive paper copies of the reports. The costs of delivering prospectuses and shareholder reports, including printing and mailing costs and processing fees, are generally fund expenses borne by shareholders.

Beyond prospectuses and shareholder reports, many funds prepare other information for potential or current investors that the securities laws and Commission rules do not require. For example, many funds prepare advertising materials, which can include materials in newspapers, magazines, radio, television, direct mail advertisements, fact sheets, newsletters, and on various web-based platforms. Advertising materials are subject to certain requirements under Commission rules. As an example, many funds prepare monthly or quarterly fact sheets that concisely provide certain information about a fund, such as the fund's performance and strategies, illustrations of the fund's holdings, and certain fund statistics (e.g., net asset value, expense ratio). Fact sheets are often one or two pages long. Some shareholders or financial professionals may use fact sheets to monitor fund investments because, for example, they include more up-to-date performance information than shareholder reports or prospectuses.

B. Information About Investor Preferences

Our understanding of investor preferences regarding fund disclosure is informed by many sources, including responses to the Fund Investor Experience RFC, prior investor testing and surveys, and past disclosure reform initiatives. In response to the Fund Investor Experience RFC, the Commission received many comments from individual investors, including through a Feedback Flier on Improving Fund Disclosure (the “Feedback Flier”) that accompanied the release to facilitate retail investor input. In addition to the input we received from individual investors, some other commenters on the Fund Investor Experience RFC provided the results of investor surveys they conducted regarding fund disclosure. Moreover, the Commission and its staff have been involved with other relevant investor testing and surveys, including investor testing regarding shareholder reports in 2011 and a study on financial literacy in 2012. Several past Commission rulemakings have also provided information about investors' disclosure preferences, including rulemakings regarding summary prospectuses for mutual funds and ETFs, summary prospectuses for variable annuity and variable life insurance contracts, and broker-dealer and investment adviser relationship summaries.

1. Fund Shareholder Preferences Regarding Ongoing Disclosures

Based on available information, as detailed below, we understand that many fund shareholders would prefer to receive a smaller volume of fund disclosures each year. In addition, many shareholders view funds' current annual and semi-annual reports as overly long and complex. Available evidence suggests that, as a result of the volume and complexities of fund disclosures, many shareholders do not read much, if any, of the ongoing disclosures they receive. We understand that fund shareholders would prefer concise, layered shareholder report disclosure that highlights key information and that uses design features to make the reports easier to understand and use.

Investor Preferences for Concise, Layered Disclosure

The vast majority of individual investors responding to questions in the Fund Investor Experience RFC about summary disclosure expressed a preference for summary disclosure with additional information available online or upon request, while only a very few stated that they did not prefer concise, summary disclosure. Some investors specifically addressed and supported a more concise, summary shareholder report. Moreover, several investors expressed concern about the current length of fund disclosure materials. Commenters' overall preference for summary disclosure is generally consistent with other information the Commission has received—through investor testing, surveys, and other information-gathering—that similarly indicates that investors strongly prefer concise, layered disclosure.

Investor Views on the Usability and Design of Funds' Shareholder Reports

Available evidence suggests that investors generally view fund shareholder reports as difficult to understand. Several investors responding to the Fund Investor Experience RFC stated that fund disclosure is too complicated. For instance, many investors indicated that there is too much technical writing in fund disclosure. Investors also expressed a strong preference for the inclusion of more tables, charts, and graphs in fund disclosure to make information more understandable to the average investor. Similarly, the majority of investors participating in certain past quantitative and qualitative investor testing initiatives on the Commission's behalf expressed the view that funds' annual reports are written more for advanced investors, financial professionals, or regulators than for an average investor. Investor surveys that other market participants have conducted further support the conclusion that investors view funds' shareholder reports as too lengthy and complicated, and difficult for the average investor to use to effectively find information of interest. These surveys have found that, for example, approximately 41% to 72% of surveyed investors find fund shareholder reports difficult to understand.

Investors' Current Use of Fund Disclosures

Several investors responding to the Fund Investor Experience RFC stated that they do not review funds' disclosure materials at all. Investor testing and surveys also suggest that many fund shareholders tend to read very little, if any, of funds' disclosure materials. For example, in one investor survey, 12% of fund shareholders stated that they “never” review mutual fund or ETF disclosure, while an additional 37% said that they review this disclosure “some of the time.” Another survey found that 63% of mutual fund shareholders who recalled receiving fund shareholder reports read, at most, very little of them. Two other surveys found somewhat higher readership levels of shareholder reports, with only 4% and 8% of surveyed shareholders responding that they do not read the reports. However, a majority of fund shareholders in one of these surveys also indicated that they spend 15 minutes or less reviewing the reports.

Survey results relating to readership of shareholder reports also suggest that shareholders may not read some, or all, of a fund's shareholder report due, in part, to the fact that many view shareholder reports as overly long and complex documents that are not designed to meet the average shareholder's needs. Fund shareholders may, however, be more likely to read a more concise version of a fund's shareholder report. Academic research similarly suggests that, due to limits on an individual's ability to absorb and process information, investors may be more likely to understand and effectively use concise disclosure that is well-organized and focused on key information.

Investor Views on the Content of Funds' Shareholder Reports

Investors participating in investor testing and surveys have expressed a consistent interest in certain specific shareholder report disclosure items. The principal items of interest that investors have consistently identified for purposes of monitoring an ongoing fund investment include performance, holdings, and fund expenses. For example, investor testing and surveys have found that approximately 60% to more than 80% of investors believe that fund performance information is important. As for fund holdings information, testing and surveys have found that approximately 38% to 79% of investors view this information as important. Testing and surveys have also found that approximately 34% to 72% of investors believe that fund expense information is important.

Investors have expressed varying levels of interest in reviewing a fund's financial statements and financial highlights. For example, at least one survey has found somewhat high levels of interest in this information from shareholders who currently review fund shareholder reports (i.e., 63% of these investors often review a fund's financial statements), and another survey found that a majority of investors rated financial highlights disclosure as important. Other surveys, as well as comments on the Investor Experience RFC, suggest that the average investor may have less interest in financial statements and financial highlights. As for other types of shareholder report disclosure, investors typically have expressed less interest in these other disclosures.

Investor Views on the Volume and Frequency of Fund Disclosure

In addition to concerns about the length of funds' shareholder reports, some investors responding to the Fund Investor Experience RFC expressed concern about the overall volume and frequency of fund disclosures they receive each year. For example, several investors expressed the view that they receive too many fund disclosure materials and that they feel overwhelmed by the amount of information they receive. Another investor expressed a preference for less frequent disclosure.

However, with respect to shareholder reports in particular, one investor survey found that 86% of investors thought that the current semi-annual frequency at which they receive reports was “about the right frequency,” while 11% of investors viewed semi-annual reports as too frequent and 3% expressed a preference for more frequent shareholder reports. In this survey, investors' preferred frequency changed somewhat for a prototype summary shareholder report. If they were to receive a summary shareholder report, 56% of investors preferred semi-annual reports, 27% preferred quarterly reports, 17% preferred annual reports, and 1% did not want to receive the reports.

2. Fee and Risk Disclosure Preferences

We understand that investors generally prefer concise, summary disclosure that allows them to quickly understand key information. Similarly, we understand that this general preference extends to investors' preferences about disclosures regarding fund fees and risks.

Investor Views on Fee and Risk Disclosure

The majority of investors responding to a question in the Feedback Flier about fee disclosure expressed the view that funds do not clearly disclose their fees and expenses. Many of these investors suggested that funds should simplify their fee and expense disclosure. Several investors recommended reducing the number of line items in the prospectus fee table or providing only one “bottom-line” number showing the fees associated with an investment in the fund. Several investors also expressed an interest in comparing fees and expenses across multiple funds to help inform their investment decisions. Other commenters who responded more generally to the Fund Investor Experience RFC also expressed concern that fund fees are hard to understand, and that certain terminology Form N-1A uses (e.g., use of terms like “12b-1 fees” and “front-end loads”) is similarly difficult to understand. Some commenters suggested that funds should disclose fees in terms of dollars rather than percentages to make the disclosure more understandable to investors.

Investor Views on Principal Risk Disclosure

Many investors responding to the Fund Investor Experience RFC also suggested that disclosure about a fund's risks is too long. Some investors suggested that funds should order risks by importance and provide the most important risks first. Other investors suggested that more focused risk disclosure would be helpful. Consistent with these investor preferences, Commission staff has encouraged funds to take steps to improve their principal risk disclosure including by, for example, ordering risks by importance, better tailoring their risk disclosure, and concisely summarizing principal risks in the summary prospectus.

3. Disclosure Delivery Preferences

Based on information from the Fund Investor Experience RFC and investor testing and surveys, investors have shown a general familiarity with using the internet to find information about a fund and have expressed a range of preferences regarding how they receive fund disclosure (i.e., in paper or electronically). In the Fund Investor Experience RFC, the Commission sought information on investors' use of the internet to communicate about and find information on fund investments, as well as their preferences on the form and manner of disclosure delivery. In response, many investors indicated that they go to fund or intermediary websites to get information about a fund investment. Many investors also expressed a preference for receiving fund disclosure electronically, either through email, mobile application, or website availability. Several other investors preferred to access most fund information electronically, with the exception of certain information they preferred to receive on paper. Other investors stated that they generally prefer to receive fund information in paper format. A few investors specifically suggested that paper should be the default delivery mechanism for a “summary” shareholder report. In addition, investor testing and surveys suggest that many investors would prefer enhanced availability of fund information on the internet in a layered disclosure framework, although some investors prefer to receive fund disclosures in paper format.

C. Developments Affecting Fund Disclosure and Marketing Practices

In addition to evidence about investor preferences regarding fund disclosure, our proposal is informed by developments affecting fund disclosure and marketing practices. With respect to our proposed amendments to promote more concise, layered disclosure, these developments include advances in technology and the Commission's experience with summary prospectus disclosure, as well as the growing length and complexity of funds' shareholder reports since the mid-1990s. Additionally, our proposed amendments to investment company advertising rules are informed by our observations about recent investment company marketing practices in light of increased industry focus on fees, and competition based on fees.

Advances in Technology

For more than 20 years, the Commission has recognized the internet's important role in providing disclosure materials and other information to investors and maximizing investor access to information. During this time, technology has continued to evolve, and investors' access to the internet has increased. For example, as of 2019, approximately 94% of households owning mutual funds had internet access, while only 68% of these households had internet access in 2000. Moreover, advances in technology, including increasing use of mobile devices to access information, are expanding the avenues that funds and intermediaries can use to communicate with investors and make it easier to provide interactive or customizable information. We understand that many funds and financial intermediaries are using technology in an effort to communicate more effectively with fund investors and to respond to investor preferences, and continue to explore additional ways to use technology to better communicate with investors. The Commission, while considering the needs and preferences of investors, also has recognized that modernizing the manner in which funds and others make information available to investors allows them to leverage the benefits of technology and reduce fund costs.

Experience With Layered Disclosure, and the Growing Length and Complexity of Shareholder Reports Over Time

The Commission also has taken multiple steps with respect to fund prospectuses to both recognize investors' preferences for concise and engaging disclosure of key information and ensure that additional information that may be of interest to some investors is available through a layered approach to disclosure. We believe these initiatives have benefitted investors. For example, research shows that the introduction of a more concise summary prospectus may allow investors to spend less time and effort to arrive at the same portfolio decision they would have made after reading the longer statutory prospectus. Approximately 93% of funds use summary prospectuses.

On the other hand, the Commission has not taken comprehensive steps to create a layered disclosure framework for funds' shareholder reports. Funds' shareholder reports generally have become longer and more complex over the years. For example, until 1994, funds were only required to provide certain financial information in their shareholder reports, generally consistent with the types of information that section 30(e) of the Investment Company Act identifies. During this time, however, many funds provided other information in these reports voluntarily, including information about general economic conditions, the fund's performance, and services provided to shareholders. Over the past two decades, the amount of information that funds are required to include in shareholder reports (or that funds otherwise voluntarily include in these reports) has increased substantially.

Developments Affecting Investment Company Advertisements

In recent years, investment companies increasingly have been marketing themselves on the basis of costs in an effort to attract investors. For instance, we have observed some funds calling themselves “no-expense” or “zero-expense” funds, or emphasizing their low expense ratios, despite the fact that investors may experience other investment costs. These other investment costs include, for example, securities lending costs or wrap program fees that may provide revenue to the fund's adviser, its affiliates, or others and that may effectively allow the fund to reduce its reported expense ratio because the prospectus fee table is not required to reflect the relevant category of costs. Investment company advertising rules currently place limits on how a fund may present its performance to promote comparability and prevent potentially misleading advertisements. These rules, however, generally do not prescribe the presentations of fees and expenses in advertisements to address similar concerns about comparability or potentially misleading information.

II. Discussion

D. Overview of Proposed New Disclosure Framework

1. Executive Summary

The amendments we are proposing would modify the disclosure framework for funds registered on Form N-1A to create a new layered disclosure approach designed to highlight key information for retail investors. The new disclosure approach is designed to tailor the information that investors receive to help investors better assess and monitor their fund investments and make informed investment decisions. We recognize that investors have different levels of knowledge and experience, and we seek to promote disclosure that is inviting and usable to a broad spectrum of investors.

In order to help achieve these goals, the proposal includes the following principal elements:

• Shareholder Reports Tailored to the Needs of Retail Shareholders: Under the proposal, fund investors would continue to receive fund prospectuses in connection with their initial investment in a fund, as they do today. Thereafter, a shareholder would receive concise and visually engaging annual and semi-annual reports designed to highlight information that we believe is particularly important for retail shareholders to assess and monitor their fund investments on an ongoing basis. This information would include—among other things—fund expenses, performance, and portfolio holdings. We also propose to provide funds the flexibility to make electronic versions of their shareholder reports more user-friendly and interactive.
• Availability of Additional Information on Form N-CSR and Online: Information currently included in annual and semi-annual reports that may be less relevant to retail fund shareholders, and of more interest to financial professionals and other investors who desire more in-depth information, would be made available online and delivered free of charge in paper or electronically upon request by the fund (or intermediary through which shares of the fund may be purchased or sold). This information also would be 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. Shareholder reports would contain cover page legends directing investors to websites containing this information.
• Amendments to Scope of Rule 30e-3 to Exclude Funds Registered on Form N-1A: The proposal contemplates that a fund's shareholder reports, as modified pursuant to the proposed rule and form amendments, would serve as the central source of fund disclosure for existing shareholders. To ensure that all fund investors would experience the anticipated benefits of the proposed new tailored disclosure framework, we are proposing to amend the scope of rule 30e-3 to exclude open-end funds. Beginning as early as January 1, 2021, funds may begin relying on rule 30e-3, which generally permits funds to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of the reports' online availability, instead of directly providing the reports to shareholders. The new proposed disclosure framework considers feedback that commenters provided in response to the Fund Investor Experience RFC and reflects the Commission's continuing efforts to search for better ways of providing investors with the disclosure that they need. In light of these and other considerations, we preliminarily believe that the proposed disclosure approach represents a more-effective means of improving investors' ability to access and use fund information, and of reducing expenses associated with printing and mailing, than continuing to permit open-end funds to rely on rule 30e-3.

• Tailoring Required Disclosures to Needs of New versus Ongoing Fund Investors: It is currently common for fund shareholders to receive an updated annual prospectus each year. We are proposing new rule 498B, which would provide an alternative approach that uses layered disclosure, discussed in more detail below, to keep investors informed about their fund investment and updates to their fund that occur year over year. Under this proposed rule, new investors would receive a fund prospectus in connection with their initial investment in a fund, as they currently do, but funds would not deliver annual prospectus updates to investors thereafter. The proposed layered disclosure framework would instead rely on the shareholder report (including a summary in the annual report of material changes that occurred over the prior year), as well as timely notifications to shareholders regarding material fund changes as they occur, to keep investors informed about their fund investments and enable them to make informed decisions about whether to buy, sell, or hold fund shares. Current versions of the fund's prospectus would remain available online and would be delivered upon request in a manner consistent with the shareholder's delivery preference.
• Improvements to Prospectus Disclosure of Fund Fees and Risks; Request for Comment on Improving Fund Fee and Expense Disclosures: We recognize that fund fees and risks are two areas that investors find particularly important to assessing a prospective fund investment, and two disclosure areas that can be complex and confusing. We are proposing amendments to funds' prospectus disclosure that are designed to help investors more readily understand a fund's fees and risks, and that use layered disclosure principles that tailor disclosures of these topics to different types of investors' informational needs. We are also proposing amendments that would refine the scope of funds that are required to disclose the fees and expenses associated with investments in other funds as a component of a fund's bottom line annual expenses in the prospectus fee table. Furthermore, we are requesting comment on how we could improve the ways in which funds disclose their fees and expenses, in order to represent the full costs associated with a fund investment more accurately and to help investors better understand their investment costs.
• Fee and Expense Information in Fund Advertisements: Finally, we are proposing amendments that are designed to respond to developments that we have observed in fund advertising. The proposed amendments would require that presentations of investment company fees and expenses in advertisements and sales literature be consistent with relevant prospectus fee table presentations and be reasonably current. The proposed amendments also address representations of fund fees and expenses that could be materially misleading. The proposed advertising rule amendments would affect all registered investment company and BDC advertisements and would not be limited to open-end fund advertisements.

2. Considerations and Goals

Concerns and Considerations About Current Disclosure Framework

The proposed new disclosure framework—particularly, the new tailored approach to disclosure with respect to fund shareholder reports and prospectuses—is designed to address the concern that shareholder report and prospectus disclosures may appear redundant or inconsistent to shareholders, as well as our belief that prospectus disclosure in particular may often be less relevant to the informational needs of a shareholder who is simply monitoring his or her fund investment. As a preliminary matter, fund prospectuses and shareholder reports have historically served different purposes. The prospectus acts as the principal selling document for investors to inform investment decisions and facilitate fund comparisons. The shareholder report, on the other hand, provides information to a fund's current shareholders about the fund's operations and performance during the past fiscal period. Moreover, the shareholder report and prospectus present certain of the same types of information (e.g., fund performance and expenses) differently in light of their intended audiences.

As a result, there are ways in which the current disclosure framework may not tailor fund disclosure contents to the needs of different types of investors. Much of the information in a fund's prospectus, including disclosure about the fund's principal investment strategy and principal risks, often remains the same from year to year. Receiving continuing disclosure of this unchanging information therefore might not be useful to existing fund investors, although investors typically receive annual prospectus updates that include this content. On the other hand, to the extent a fund has a material change (e.g., it materially changes its principal investment strategy and has different principal risks, or changes its fees), this information may be more salient to a shareholder's monitoring of his or her investments. Under the current disclosure framework, these changes might not be highlighted to shareholders. The fact that current fund disclosures might not meet investors' informational needs may contribute to investor disinterest or confusion. The potential for disinterest or confusion may be particularly pronounced when a shareholder receives prospectus and shareholder report disclosure close in time, which often occurs in the case of the annual report and the annual prospectus update.

Although prospectus disclosure may be less well-suited for analyzing and monitoring an ongoing fund investment, some fund shareholders may be more likely to review a fund's prospectus instead of its shareholder reports based simply on length. Over the past two decades, the amount of information that funds are required to include in shareholder reports (or that funds otherwise voluntarily include in these reports) has increased substantially. This amount of disclosure may not correspond with investors' expressed preferences for concise, layered disclosure that highlights key information. The substantial length of shareholder reports also may make it more difficult for investors to understand and effectively use the information.

In addition, we have considered the extent to which modifying the disclosure framework for funds, for example by requiring funds to transmit the tailored shareholder reports that this proposal envisions, could result in cost savings. Shareholders generally bear these fund expenses, and therefore may be bearing costs for information they prefer not to be delivered to them. For example, retail shareholders may prefer not to have delivered to them information that is more technical in nature and may be more relevant for financial professionals and other investors who desire more in-depth information (such as complete fund financial statements, as opposed to receiving summary disclosure about fund holdings and expenses).

This proposal reevaluates funds' disclosure framework in light of all of these considerations. The proposed new approach is based on the goal of promoting more-digestible, tailored disclosure that fund shareholders can use to monitor their ongoing fund investments efficiently and meaningfully, with layered information that may be less relevant to retail shareholders available online and upon request. Likewise, the proposed approach is designed to help a fund shareholder to use shareholder reports to compare funds he or she already owns and assess how the shareholder's mix of funds fits into his or her overall investment portfolio.

The proposed approach to funds' overarching disclosure framework would be complemented by more-targeted proposed improvements to fund prospectus fee and risk disclosures, as well as proposed amendments to investment company advertising rules. Collectively, the proposed amendments are designed to facilitate investors' ability to make informed investment decisions and monitor their investments thereafter.

Tailoring Fund Disclosure Using Layered Disclosure Principles

The layered disclosure approach underlying the proposed new disclosure framework would build on the Commission's experience in conforming required fund disclosures to the informational needs of different types of investors. In recent years, the Commission has adopted rules that rely on layered disclosure principles to tailor fund disclosures to the particular needs of retail investors, as well as financial professionals and other investors who desire more in-depth information. Similarly, in past years the Commission has taken into account the relative informational needs of new investors and ongoing shareholders in tailoring the requirements for investment company disclosures.

The proposed new disclosure framework also would reflect various stakeholders' suggestions and stated preferences for fund disclosure that more directly highlights key fund information and is tailored to investors' needs. For example, the Commission's Investor Advisory Committee has recommended that the Commission develop an approach to funds' shareholder reports that would rely on summary disclosure and layered disclosure principles. Similarly, the proposed new disclosure framework would reflect investor preferences as we understand them based on investor testing, surveys, and other information-gathering, which have consistently indicated that retail fund investors prefer concise disclosure that focuses on the most important fund information.

Leveraging Technology To Modernize Funds' Disclosure Requirements

In addition, the proposed new disclosure framework would leverage technology to modernize funds' disclosure requirements. Our proposal would use the internet as a medium to provide information to investors and distinguish between information that investors receive directly (either in paper or electronically, depending on investors' preferences) and information that is available to investors online. The proposal also takes steps to encourage funds to use online tools to enhance and personalize the information that they provide to shareholders, as constantly developing online technology presents unique potential to enrich investors' experience in understanding and engaging with their fund investments.

Shareholder Report as the Central Source of Fund Disclosure for Existing Shareholders

In proposing the new disclosure framework, which employs the shareholder report as the central source of fund disclosure for existing shareholders, we considered the extent to which permitting open-end funds to continue relying on rule 30e-3 to transmit shareholder reports would affect our policy goals. Since adopting rule 30e-3, we have continued to analyze and hear from industry participants regarding further improvements to our disclosure regime. As a result, we now believe that a tailored shareholder report that highlights key information would provide better information for investors than the notices required under rule 30e-3. Furthermore, if a fund were permitted to rely upon both rule 30e-3 and proposed rule 498B, shareholders in such a fund would no longer directly receive shareholder reports or annual prospectus updates, and thus would not be sent any periodic regulatory disclosure documents. We believe the proposed new disclosure framework would also largely preserve the expected cost savings to funds and investors that funds would experience by choosing to rely on rule 30e-3.

E. Annual Shareholder Report

We are proposing to add new Item 27A to Form N-1A to specify the design and content of funds' annual and semi-annual reports. We also are proposing to remove the provisions in current Item 27 of Form N-1A that relate to annual and semi-annual reports.

The table below summarizes the proposed content that funds would include in their annual reports or Form N-CSR reports in comparison to current shareholder report disclosure requirements. While the proposed content requirements for shareholder reports that are transmitted in paper would generally be the same as the requirements for reports that are transmitted electronically (and that appear online or are accessible through mobile electronic devices), we are proposing instructions that address electronic presentation and are designed to provide flexibility to enhance the usability of reports that appear online or on mobile devices.

1. Scope of Annual Report Disclosure, and Registrants Subject to Amendments

We propose to limit the scope of funds' annual reports in several respects to reduce their overall length and complexity. First, we propose to require a fund to prepare separate annual reports for each of its series. Second, we generally propose to limit the content a fund may include in its annual report.

a. Scope With Respect to Separate Series and Classes

Many mutual funds and ETFs are organized as single registrants with several series (sometimes referred to as portfolios). Each series has its own investment objectives, policies, and restrictions. The Federal securities laws and Commission rules often treat each series as a separate fund. A single fund or series can have multiple share classes. Classes typically differ based on fee structure, with each class having a different sales load and distribution fee. Series and classes of a registrant are often marketed separately, without reference to other series or classes or to the registrant's name.

Currently, fund registrants may prepare a single shareholder report that covers multiple series. We believe this approach contributes to the length and complexity of shareholder reports. For example, a shareholder that is invested in one series of the registrant would need to spend more time searching through the report to find disclosure related to his or her investment. Moreover, a shareholder report that provides information for multiple series may present an increased risk of shareholder confusion. For instance, if two series included in the same shareholder report were to have similar names, there could be a greater risk that a shareholder would mistakenly review information that does not relate to his or her investment. Because the length and complexity associated with multi-series shareholder reports are inconsistent with our goal of creating concise shareholder report disclosure that a shareholder can more easily use to assess and monitor his or her ongoing fund investment, we are proposing to require fund registrants to prepare separate annual reports for each series of the fund. As a result, a shareholder would receive an annual report that only addresses the series in which he or she is invested. We believe that this more-focused annual report would be more relevant to shareholders than a multi-series report and, accordingly, shareholders would be more likely to read such disclosure.

Although we are proposing to restrict funds' annual reports to include only one series of a fund, our proposal would not require a shareholder report to cover a single class of a multiple-class fund. Because different share classes of a fund represent interests in the same investment portfolio, much of the proposed shareholder report disclosure would be the same for all classes. For disclosure that would differ among classes, such as expenses and performance data, the amended disclosure requirements that we are proposing would specifically require funds to provide certain class-specific information.

We request comment on the proposed scope of disclosure for the annual report, including the following:

1. Would the proposed requirement that a fund registrant prepare separate annual reports for each of its series result in shareholder report disclosure that is easier for fund shareholders to navigate and assess? If not, why not? Would requiring separate annual reports for each series increase the reports' relevance to shareholders and increase the likelihood that shareholders would read them? If not, why not? How would this proposed requirement affect the approach fund registrants currently use to prepare and transmit shareholder reports? Are there ways to modify the proposed instruction that would further improve disclosure for shareholders or reduce burdens for fund registrants? Instead of the proposed instruction, should we continue to permit fund registrants to prepare a single annual report that covers multiple fund series, as they may today? If so, why, and should there be any limits on the number of series for which information is presented?

2. Are there certain types of funds for which a multi-series presentation in an annual report may be useful to shareholders? If so, which types of funds, and what are the benefits of a multi-series presentation to shareholders? Should we permit certain types of funds, but not others, to prepare annual reports covering multiple series of the same fund?

3. Are there ways we could allow multi-series presentations in annual reports while also promoting our goals of providing concise, readable disclosure to existing shareholders that is tailored to their informational needs? If so, how?

4. A fund may have multiple share classes with differing fee structures. Should these multi-class funds be permitted to reflect only one or a subset of classes, rather than all share classes in a shareholder report so long as a fund produces a shareholder report that relates to each share class? Would such an approach reduce the complexity of the disclosure and provide more-tailored information that is specific to a shareholder's investment in the fund? Or, conversely, would such a requirement not benefit shareholders? For example, could it reduce shareholders' ability to compare classes of a fund? Should there be limits on the number or types of classes that a single annual report may cover to reduce potential complexity or length? For example, should we prohibit an annual report transmitted to retail shareholders from including disclosure related to a fund's institutional class? Are there potential complexities or burdens associated with such an approach? Please explain.

b. Scope of Content

As a general matter, we are proposing to allow a fund to include in its annual report only the information that Item 27A of Form N-1A specifically permits or requires. We believe that allowing only the required or permitted information to appear in a fund's annual report would promote consistency of information presented to shareholders and would allow retail shareholders to focus on information particularly helpful in monitoring their investment in a fund. We also believe this approach would encourage more impartial information by preventing funds from adding information commonly used in marketing materials.

We recognize, however, that there may be limited circumstances in which it may be appropriate for a fund to provide more or less information than what proposed Item 27A of Form N-1A would permit or require. Specifically, if a fund's particular circumstances may cause the required disclosures to be misleading, the proposal would allow the fund to add additional information to the report that is necessary to make the required disclosure items not misleading. As an example, if a fund changed its investment policies or structure during or since the period shown, the expense, performance, or holdings information that a fund must include in its annual report may require additional disclosure to render those presentations not misleading. Disclosure in response to this provision should generally be as brief as possible. Moreover, if a required disclosure is inapplicable, the proposed rule would permit the fund to omit the disclosure. Similarly, to promote better-tailored disclosure, a fund would be permitted to modify a required legend or narrative information if the modified language contains comparable information to what is otherwise required.

The proposed amendments to Form N-1A would not permit a fund to incorporate by reference any information into its annual report. That is, a fund could not refer to information that is located in other disclosure documents in order to satisfy the content requirements for an annual report. The limited number of proposed disclosure items in the annual report is designed to promote the goal of providing a concise, more-engaging report that gives shareholders key information to assess and monitor their ongoing fund investments. We do not believe that permitting funds to incorporate information by reference into the shareholder report is consistent with this goal, because it would require shareholders to take an additional step to locate information that funds incorporate by reference into their reports. While the proposed rule would require or permit a fund's shareholder report to refer to other materials in some cases, those other materials would not incorporate information into the fund's shareholder report for purposes of satisfying the annual report disclosure requirements.

Although the proposed rule would only permit the inclusion of certain information in the annual report, it would not prevent a fund from referring shareholders to the availability of certain additional website information near the end of the report or providing additional information to shareholders in the same transmission as the annual report. For example, the proposed rule would not preclude a fund from providing a letter to investors explaining its management philosophy or investment outlook in the same transmission that includes the annual report. However, the proposal would require that the shareholder report be given greater prominence than these other materials, except for certain specified disclosure materials. We would generally consider a fund to satisfy the “greater prominence” requirement if, for example, the shareholder report is on top of a group of paper documents that are provided together or, in the case of an electronic transmission, the email or other message includes a direct link to the report or provides the report in full in the body of the message. This proposed requirement would not, however, apply to certain specified disclosure materials that a fund may transmit with an annual report, which include summary prospectuses, statutory prospectuses, notices of the online availability of proxy materials, and other shareholder reports.

We request comment on the scope of content that the proposed rule would require or permit a fund to include in its annual report, including the following:

5. Is it appropriate to restrict the content of a fund's annual report to include only the information the form would permit or require? If not, why not? Would these proposed limits on content create a more effective presentation for investors? Are there other approaches we should consider (such as permitting space in the annual report for funds to disclose other information they deem important to investors)? What are the benefits and drawbacks of shorter or longer disclosure, or a more flexible approach to disclosure, for investors relative to the proposed approach?

6. Is it appropriate for funds to have flexibility to include other communications to shareholders in the same transmission as a shareholder report? Should the shareholder report be subject to the proposed prominence requirement? If not, should we require other prominence or formatting standards if the transmission includes other materials, or should we impose other requirements or limitations associated with materials that funds could transmit along with the shareholder report?

7. As proposed, should we allow a fund to modify a required legend or narrative information as long as the modified language contains comparable information? If not, why not? Should we use this approach for all aspects of the annual report, or are there particular areas where requiring uniform language across all funds' annual reports would be particularly valuable to shareholders, for example, to facilitate comparisons or improve shareholder understanding? If so, how should we balance the potential value of uniform language with potential concerns that uniform language may not be well-tailored to a particular fund or its shareholders?

8. Is it appropriate not to permit funds to incorporate information by reference into their annual reports, as proposed? If not, why not? Is there certain information that a fund should be permitted to incorporate by reference into its annual report? If so, what information, and why?

c. Scope With Respect to Other Registrants

Our proposed amendments to annual reports would only apply to shareholder reports for investment companies registered on Form N-1A. These funds represent the vast majority of investment company assets under management. We also have recently adopted changes to the disclosure framework for closed-end funds and variable insurance contracts tailored to these investment companies' characteristics and, in the case of closed-end funds, to implement congressional directives. The recently adopted changes to closed-end fund disclosure include multiple changes to these funds' shareholder report disclosures, and we would like to understand funds' and investors' experience with this new disclosure framework before proposing additional disclosure amendments. Similarly, we anticipate that the recently adopted changes to the variable insurance contract disclosure framework would significantly change investors' experience with variable contract disclosure. While these changes are focused more on prospectus disclosure and not shareholder report disclosure, we would like to assess the impact of these changes prior to proposing additional disclosure changes for variable contracts. Our proposed amendments therefore do not extend at this time to other investment companies such as closed-end funds, unit investment trusts, or managed open-end investment companies not registered on Form N-1A (i.e., issuers of variable annuity contracts registered on Form N-3).

We request comment on the scope of entities that would be covered by our proposed amendments to annual reports, including the following:

9. To what extent, if any, should the proposed amendments to shareholder reports be extended to other investment companies besides open-end mutual funds and ETFs organized as management investment companies?

10. For example, ETFs can be organized as management investment companies registered on Form N-1A or as unit investment trusts (“UITs”) that are registered on Form N-8B-2 and subject to certain Commission exemptive orders. UIT ETFs are organized differently than and subject to a different disclosure framework than funds. For example, exemptive orders for UIT ETFs generally require these ETFs to transmit annual reports that include their financial statements, but the content of these ETFs' annual reports is not necessarily the same as the current content of funds' annual reports. Despite these differences between funds and UIT ETFs, should UIT ETFs be permitted to rely upon proposed rule 498B, or permitted or required to use a tailored annual report? If so, to what extent, if any, should the conditions to rely on proposed rule 498B or use a tailored annual report be modified for UIT ETFs? If a UIT ETF were to use a tailored annual report, should the content of its report differ from the content of a tailored annual report for open-end management companies? For example, should this ETF's financial statements remain in the report in accordance with its exemptive order, or should it be able to provide its financial statements through other means (e.g., on a website and through a Form N-CSR report, even though these ETFs are not otherwise required to file Form N-CSR reports), subject to potential conditions that the ETF provide other information in an annual report? Do shareholders in UIT ETFs have the same informational needs as fund shareholders? For example, do UIT ETFs' shareholders need the same performance information, or do their needs differ since a UIT ETF generally replicates an index?

11. Should the Commission amend the requirements for registered closed-end funds' and BDCs' annual reports, to reflect any of the amendments we are proposing for open-end funds' annual reports? As an example, the Commission recently adopted rules requiring: (1) Certain closed-end funds (registered closed-end funds, as well as BDCs) to include key information in their annual reports regarding fees and expenses, premiums and discounts, and outstanding senior securities that the funds currently disclose in their prospectuses; and (2) registered closed-end funds to provide management's discussion of fund performance in their annual reports to shareholders. If the Commission were to propose to tailor closed-end funds' shareholder reports in a manner that is similar to how we are proposing to tailor open-end funds' shareholder reports, how should such tailoring incorporate these recently adopted disclosure requirements, as well as the other content that currently appears in closed-end funds' shareholder reports? For example, should we propose to update the fee and expense information that appears in closed-end funds' shareholder reports to more closely match the proposed fund expense presentation that would appear in open-end funds' shareholder reports? As another example, would it be appropriate to require closed-end funds to file on Form N-CSR certain information that currently appears in their shareholder reports (such as their full financial statements) and make this information available on a website, instead of including it in their reports, as we are proposing for open-end funds?

2. Contents of the Proposed Annual Report

The following table outlines the information the proposed rule would generally require funds to include in their annual reports. As is the case today, the proposed annual report would not be subject to page or word limits. We are not proposing page or word limits because we believe such limits could constrain appropriate disclosure or lead funds to omit material information. However, we believe that the proposed limits on the contents of these reports would limit their length, which would support our goal of concise, readable disclosure.

* Rule 30e-1(f)(3) currently requires a fund to explain, at least once a year, how a shareholder may revoke his or her consent to householding. This explanation is not currently required in funds' shareholder reports, and we similarly would not require it in the proposed annual report.

To help market participants understand this proposed disclosure, Appendix A to this release includes a hypothetical annual report. This hypothetical annual report is provided solely for illustrative purposes and is not intended to imply that it would reflect a “typical” annual report under the proposed amendments. We also are providing the hypothetical annual report to illustrate for investors what a more concise, tailored shareholder report could look like and are providing a feedback flier that investors can use to provide their views on the hypothetical report and other issues in Appendix B.

We discuss each of the proposed content requirements in detail below, including specific requests for comment regarding each proposed item of the annual report. In addition to the more-specific requests for comment below, we also request general comments on the proposed content requirements for funds' annual reports.

12. In addition to the proposed content requirements for funds' annual reports, should we require or permit funds to provide additional information in their shareholder reports? For example, is there other information that funds typically include in their annual reports as a matter of practice or to comply with other regulatory requirements (e.g., tax-related disclosure under the Internal Revenue Code about the fund's distributions)? Would it be beneficial to shareholders to receive any additional information in the annual report, or should funds provide this information through other mechanisms (e.g., on their websites, in materials separately transmitted with the annual report, or in account statements)?

13. Are the topics that funds would discuss in their annual reports under the proposed amendments appropriate to provide fund shareholders with key information for assessing and monitoring their fund investments? Are there additional topics that should be required? Please explain. Are any of the topics redundant with information that appears in other disclosure requirements? If so, which topics, and why are they redundant?

14. How would the proposed amendments affect the length of funds' annual reports? Would the length of the proposed reports affect a fund's approach for delivering the full report in the mail, relative to its current approach for mailing annual reports?

15. Would proposed Item 27A result in disclosure that is of an appropriate length to be engaging and accessible to fund shareholders, or should we take additional steps to limit the length or complexity of annual report disclosure? For example, should we impose page or word limits on annual reports? If so, what should they be? Should we limit the length of any particular section of the annual shareholder report, and if so, what should these limits be?

a. Cover Page or Beginning of the Report

The proposed amendments to Form N-1A would require a fund to provide the following information on the cover page or at the beginning of the annual report:

• The name of the fund, as well as the class(es) to which the annual report relates;
• The exchange ticker symbol of the fund's shares, or the ticker symbol of each class adjacent to the class name;
• If the fund is an ETF, the principal U.S. market(s) on which the fund's shares are traded;
• A statement identifying the document as an “annual shareholder report;” and
• The following legend: “This annual shareholder report contains important information about [the Fund] for the period of [beginning date] to [end date] [as well as certain changes to the Fund]. You can find additional information about the Fund at [Fund website address]. You can also request this information by contacting us at [toll-free telephone number and, as applicable, email address].”

Currently, funds are not required to include specific cover page information in their shareholder reports. However, we understand that, as a matter of practice, funds typically include identifying information—such as the fund's name, the period of time the report covers, and whether the report is an annual or semi-annual report—at the beginning of the report or on a cover page. We are proposing to require specific identifying information at the beginning of the annual report so that shareholders can readily identify the purpose and scope of the report. This is also substantially similar to information that must appear at the beginning of fund prospectuses.

The proposed legend is designed to help shareholders understand the purpose of the annual report, as well as the time period covered by the report. It also describes how a shareholder can obtain additional information about the fund, consistent with similar legends that appear on the cover page of the summary prospectus. The website address a fund would provide in the legend would need to be specific enough to lead shareholders directly to the materials that would be required to be accessible on the fund's website under this proposal, including the fund's financial statements and financial highlights. Funds also would have discretion to include other ways a shareholder can find or request additional information about the fund, such as Quick Response Code (“QR code”) or referring the reader to mobile applications.

In addition, the proposed amendments would permit funds to include graphics, logos, and other design or text features to help shareholders identify the materials as the fund's annual report.

We request comment generally on the proposed content requirements for the cover page or beginning of the annual report, and specifically on the following issues:

16. Is there additional information that we should permit or require funds to provide on the cover page or at the beginning of their annual reports? If so, what are the benefits of that additional information? For example, should we permit or require funds to include a table of contents, or would a table of contents add undue length to the shareholder report and provide limited benefits to shareholders given the general brevity of the report?

17. Should we remove or modify any of the information the proposed rule would permit or require funds to include on the cover page or at the beginning of their annual report, and if so, what information and how should we modify it?

b. Fund Expenses

We are proposing a simplified expense presentation in the annual report that would require a fund to provide the expenses associated with a hypothetical $10,000 investment in the fund during the preceding reporting period. In particular, the table must show: (1) An assumed $10,000 beginning account value; (2) total return during the period, before deducting expenses; (3) expenses in dollars paid during the period; (4) ending account value in dollars, based on net asset value return and the assumed $10,000 beginning account value; and (5) expenses as a percent of an investor's investment in the fund (i.e. expense ratio). ETFs must also include the ending value of the account based on market value return. The proposed expense example would appear as follows, and the individual aspects of the example are described in more detail below.

What were your Fund costs for the period? (based on a hypothetical $10,000 investment)

Commenters on the Fund Investor Experience RFC stated that shareholders believe the information provided in the current shareholder report expense example is important because it helps them understand the costs associated with investing in the fund. The proposed expense information is intended to reflect shareholders' preferences to understand fee and expense information, while simplifying the expense example that currently appears in funds' shareholder reports.

Funds' shareholder reports currently include an expense example consisting of two different tables.

• The first table shows the actual cost in dollars for a $1,000 investment in the fund over the prior six-month period based on the actual return of the fund. This presentation is intended to help a shareholder calculate the actual ongoing fund expenses, in dollars, that he or she has incurred.
• The second table shows the cost in dollars for a $1,000 investment in the fund over the prior six-month period based on a hypothetical 5% annual return (and not, as for the first table, the actual return of the fund during that period). Because funds are required to use the same hypothetical annual return in calculating their expenses here, this second table is designed to help shareholders compare the expenses of their fund with those of other funds.

Currently, the fund expenses presented in the shareholder report expense examples are different in several respects from those in the prospectus fee table and example. The shareholder report example is derived from a fund's financial statements and therefore reflects actual historical expenses that a shareholder incurred over the past year (i.e., backwards-looking expenses). The prospectus example, on the other hand, reflects hypothetical future expenses (i.e., forward-looking expenses). Currently, the prospectus fee table also reflects sales loads that an investor would pay and the expenses associated with the fund's investments in another fund (referred to as Acquired Fund Fees and Expenses (“AFFE”)), whereas the shareholder report expense presentation does not, because these elements are not reflected in the fund's financial statements. Additionally, unlike the shareholder report example, the prospectus fee table must reflect any material changes in fees that occurred since the prior fiscal year and cannot reflect certain fee waivers.

The information about fund expenses that we are proposing funds include in the annual report is designed to simplify the expense example that currently appears in funds' shareholder reports, and to provide shareholders with additional tools to understand the expenses they paid during the prior fiscal year. The proposal would replace the two current expense examples in the shareholder report with one simplified expense table. The new table would vary from the current disclosures in several respects. First, under the proposal, funds would have to provide the expenses associated with a $10,000 investment in the fund, rather than the current $1,000 investment amount. We are proposing to increase the dollar value because we believe that $10,000 is a more realistic investment amount for an individual shareholder today. Additionally, because Form N-1A requires funds to use an assumed $10,000 investment for the expense presentation in the prospectus, the proposal would align this aspect of the two expense presentations and promote a more consistent disclosure experience for investors. Similarly, we are proposing to align the rounding conventions of the expense presentations in the shareholder report with those of the prospectus.

Furthermore, funds would no longer be required to show the total amount of expenses along with hypothetical return information for the period. Instead, funds would continue to provide expense information along with actual return information, with amendments to this presentation of expenses that we believe would help show shareholders how much of their money was actually invested in the market (versus how much of their money was paid for fees and expenses). Like the current expense presentation, the proposed presentation would show an assumed beginning account value, an ending account value, and expenses paid during the period. However, rather than only requiring funds to disclose the ending account value net of fees (as they do today), we are proposing to require funds to disaggregate this amount. Funds would individually disclose: (1) The costs paid during the period, (2) the fund's total return during the period before costs were paid, and (3) the ending account value based on the fund's net asset value return. A fund would have to provide each of these figures as a mathematical expression (using “+”, “−”, and “=” signs), as shown in the example above. Costs would have to be expressed as a negative amount (with a “−” sign preceding the cost amount), and total return, if negative during the period, also would have to be expressed as a negative amount with a “−” sign preceding it. Conversely, if the fund's total return were positive during the period, it would be preceded by a “+” sign.

We believe that this presentation would facilitate a shareholder's understanding of how costs and performance affect his or her ending account value. Fund fees and expenses are central information for shareholders because they can significantly affect a fund's investment returns over time. We recognize that shareholders could benefit from additional transparency into the costs associated with investing in the fund. However, while some of these costs are fixed and easily quantifiable, others are variable and can be difficult to calculate.

The proposed presentation is designed to help investors evaluate these costs by disclosing costs directly deducted from the fund's assets alongside the fund's return. The fund's return will reflect these costs as well as any performance expenses associated with the fund's portfolio management activities (such as the fund's securities lending activities and transaction costs associated with the fund purchasing and selling portfolio investments). Similarly, some fund expenses are paid directly as fees for investing in the fund, while others are performance expenses associated with the fund's portfolio management activities. We believe it is important for shareholders to appreciate fully the costs they pay to invest in a fund, and how performance expenses affect the fund's investment return. We also are proposing to require that funds qualitatively describe, in a footnote to the example, any of these performance expenses that are material as discussed below. We are not proposing to require a similar presentation based on hypothetical performance, because we believe that the primary purpose of a shareholder report is to provide shareholders with actual information about the fund's performance and expenses over the past year or half-year period.

We also are proposing certain ETF-specific disclosures that would provide shareholders more transparency into the unique cost structure of an ETF. Under our proposal, an ETF would be required to disclose two versions of the ending account value, one based on the ETF's net asset value return and the other based on its market value return. This proposed requirement is designed to allow shareholders to understand any difference between the ETF's performance and market price, and to highlight for shareholders the indirect costs associated with investing in an ETF, including commissions and premium/discount costs.

Unlike the current expense presentation, we are proposing to require funds to present expense information in two formats: (1) As a dollar amount, as discussed above; and (2) as a percentage of a shareholder's investment in the fund (which would be a new addition to the current presentation). We believe that requiring two formats would provide shareholders with a more complete understanding of the expenses associated with their investments. The proposed new percentage-based expense information is designed to provide shareholders with a basis for comparing the level of current period expenses of different funds (as percentages are comparable). This addition would complement the dollar-based expense presentation, which is designed to permit shareholders to estimate the costs, in dollars, that they incurred over the reporting period.We are also proposing to require funds to give the expense columns (i.e., the “costs paid” and “costs paid as a percentage of your investment” columns) of the table more prominence than the remainder of the expense table to draw the attention of investors to these important data points. Funds would have flexibility to use various text and table features to satisfy this requirement.

We also are proposing several modifications to simplify other aspects of the required expense disclosure. First, we are proposing to remove the currently required narrative preamble to the expense table in its entirety. As a replacement for this preamble, we are proposing certain specified brief required footnotes to the table. We believe that the simplified expense table, along with the footnotes to the table that we would require funds to include, would provide shareholders with the most relevant information from the lengthy preamble that currently precedes the expense example.

First, a fund would be required to include a footnote to the “total return before costs paid” column that qualitatively describes, in plain English, other costs that are included in the fund's total return, if material to the fund. For example, if applicable, the fund should explain that total return includes fund investment transaction costs, securities lending costs, or AFFE, and that these costs materially reduced the fund's return. We believe that requiring this qualitative discussion would give funds the opportunity to describe certain expenses that may be difficult to calculate, but that materially affect fund performance. Also, by requiring funds to describe these types of performance expenses in a footnote, while including the direct costs of the fund in the expense example, shareholders might be better able to appreciate the fact that the costs associated with their investment include both fixed costs and indirect variable costs.

Furthermore, a fund would be required to briefly explain, in plain English, in a footnote to the “Costs paid as a percentage of your investment” column that the expense information does not reflect shareholder transaction costs associated with purchasing or selling fund shares. This would draw investor attention to the fact that there may be additional costs not reflected in the expense example, if applicable. Finally, if a fund's shareholder report covers a period of time that is less than a full reporting year, the fund would be required to include a footnote to the table noting this and explaining that expenses for a full reporting period would be higher than the figures shown.

We also are proposing certain modifications to the instructions associated with the computation of fund expenses to reflect the proposed changes to the expense example. We are proposing an instruction that would direct funds to calculate “Costs paid” by multiplying 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. The figure in the “Cost paid as a percentage of your investment” column, in turn, would be the fund's expense ratio as it appears in the fund's most recent audited financial statements or financial highlights. The figure in the “Ending account value (based on net asset value return)” column would similarly be derived from figures in the fund's audited financial statements or financial highlights. To calculate this figure, the fund would multiply $10,000 by the fund's net asset value return as it appears in the fund's most recent audited financial statements or financial highlights. The figure in the “Total return before costs paid” column would be calculated by subtracting $10,000 (the figure in the “Beginning account value” column) and the figure in the “Costs paid” column from the “Ending account value (based on net asset value return)” column. Additionally, for ETFs we are proposing an instruction for how an ETF should calculate the ETF's ending account based on market value return.

We are proposing to maintain certain of the current instructions that we believe would continue to provide useful information to shareholders. If a fund incurred any “extraordinary expenses” during the reporting period, we are proposing to continue to allow the fund to briefly describe, in a footnote to the expense table, what the actual expenses would have been if these extraordinary expenses were not incurred. Similarly, if a fund is a feeder fund, we are proposing to continue to allow that fund to reflect the aggregate expenses of the feeder fund and the master fund in the expense table and to include a footnote stating that the expense table reflects the expenses of both the feeder and master funds. Additionally, if the shareholder report covers more than one class of a fund or more than one feeder fund that invests in the same master fund, the shareholder report may include a separate expense table, or a separate line item in the expense table, for each class or feeder fund.

We request comment on our proposed approach to revising the expense information that would appear in funds' annual reports, and specifically on the following issues:

18. Would the information that would be included in the proposed expense example permit shareholders to estimate the actual costs, in dollars, that they incurred over the reporting period and provide shareholders with a basis for comparing expenses across different funds? If not, why not? Which, if any, of the proposed disclosure requirements should we modify? Is there a better way of describing the fund's expenses to shareholders in the annual report?

19. Should we, as proposed, require funds to provide the costs in dollars associated with investing in the fund based on an assumed $10,000 investment? Should we increase the assumed investment amount from $1,000 to $10,000, as proposed? Should we use some other amount, and if so, what amount would be more appropriate and why?

20. Should we, as proposed, align the rounding conventions included in the expense example instructions in the shareholder report with those included in the instructions to the prospectus expense table?

21. Should we, as proposed, require funds to disclose individually: (1) The costs paid during the period, (2) the fund's total return during the period before costs were paid, and (3) the ending account value based on the fund's net asset value return? Why or why not? Instead, should we require funds to disclose the total return net of fees? Are the proposed calculation instructions for these figures appropriate? Why or why not? Would providing expense information in this disaggregated manner facilitate shareholder understanding of how costs and performance each affect the ending account value? Why or why not?

22. Should we, as proposed, require funds to disclose the figures in the expense table as a mathematical expression? Would shareholders find this presentation useful?

23. Should we, as proposed, require funds to use text features to highlight the columns showing costs paid during the period (both in dollars and as a percentage of the investment)? Would this approach draw shareholder attention to those figures? Is there a particular format that we should require to highlight these columns, instead of (as proposed) providing flexibility in how to highlight them?

24. Should we require funds to provide the costs associated with investing in the fund as a percentage of a shareholder's investment in the fund (i.e., expense ratio)? Would this disclosure assist shareholders in comparing the level of current period expenses of different funds?

25. Should we, as proposed, require ETFs to provide the ending value of the account based on market value return, in addition to the value based on net asset value return? If so, should we require or permit ETFs to provide any additional information to explain the costs reflected in these two values to shareholders? For example, should we require or permit ETFs to provide a narrative explanation of what these values represent, how they differ from each other, and/or what impact they have on the fund's performance?

26. Should we require, as proposed, funds to include the expense ratio and cost in dollars only for the period covered by the report? Should we instead require funds to include fund expense information over other historical periods, such as 5 years, 10 years, or some other period?

27. Should we, as proposed, require funds to describe qualitatively other costs included in total return, if material to the fund? Would this requirement be helpful to investors, and if so, what types of investors would find the disclosure to be particularly helpful? If the disclosure would not be helpful to investors, why not? Should we instead permit, rather than require, funds to include these costs in the expense example or in a footnote? Should we require funds to separately disclose the amount of securities lending costs, or fund investment transaction costs, that the fund incurred during the period? Should we require funds to include in the footnote the amount of any acquired fund fees and expenses that the fund includes in its then-effective prospectus fee table? Would quantifying acquired fund fees and expenses in the footnote be appropriate in light of the fact that acquired fund fees and expenses are not included in a fund's audited financial statements, and calculation of acquired fund fees and expenses can require a degree of estimation when the acquired funds have different fiscal year-ends than the acquiring fund? Would disclosing quantitative amounts of securities lending or fund investment transaction costs present the same or additional considerations? Is it appropriate for any or all of these costs to be included in a footnote? Should funds instead be required to include this information in the expense table itself? Is there another, more appropriate, place to include this information?

28. Should we, as proposed, require funds to briefly explain in a footnote that the example does not reflect transaction costs associated with purchasing or selling fund shares? Alternatively, should we permit, rather than require, funds to include this footnote?

29. Should we, as proposed, continue to allow a fund that is a feeder fund to reflect the aggregate expenses of the feeder fund and the master fund in the expense table and to include a footnote stating that the expense table reflects the expenses of both the feeder and master funds? Should we instead require feeder funds to separately disclose the fees associated with the feeder and the master funds, respectively?

30. Do the proposed footnotes to the expense presentation adequately convey the information that was previously included in the preamble to the current expense examples? If not, what additional information should we require or permit funds to disclose, and in what format should funds have to present this additional disclosure? Instead of including the information in footnotes, is there a more appropriate location for the information? Is there any additional information that we should permit or require funds to convey in notes to the expense presentation? For example, if the fund plans to increase its fees materially and this change would be disclosed in the proposed “Material Fund Changes” of the annual report, should we either permit or require the fund to cross-reference this disclosure as a note to the expense presentation?

31. Should we adopt any additional or different expense disclosure requirements for certain types of funds? For example, in addition to what we proposed, are there any additional or different expenses that may only be relevant to ETFs (accounting for the unique characteristics of their structure) that we should require or permit ETFs to disclose?

32. Should we allow funds to cross-reference additional resources that would allow each shareholder to calculate the actual expenses that he or she paid? For example, should we allow funds to cross-reference online expense calculators produced by third-party vendors? Alternatively, should we allow funds to cross-reference an online expense calculator provided by the Commission or FINRA, such as FINRA's fund analyzer tool? Since FINRA's fund analyzer only provides forward-looking information, rather than the actual past expenses that shareholders have paid during the period, would this information be useful to shareholders?

33. In what ways can technology make personalized expense information possible? For example, should funds or intermediaries provide calculators or other tools to help investors understand their individual investment costs? Have improvements in technology since 2004, when the Commission considered requiring personalized expense information in quarterly account statements, made it easier for funds or intermediaries to provide personalized expense information in quarterly account statements or through other mechanisms? If funds were to provide personalized expense information, how can we design the disclosure to reduce potential investor concerns about sharing their personal information or about data security? Are there any other concerns associated with such disclosure?

34. Should we require funds to submit interactive data files (for example, formatted using eXtensible Business Reporting Language (“XBRL”)) containing their expense example information? Why or why not? Would it be useful for shareholders to have access to the expense example in a structured data format? Would this meaningfully complement the current requirement that funds submit their prospectus risk/return summary information in Inline XBRL format, or would it be duplicative with this current requirement? Is there any other information from funds' shareholder reports that we should require funds to submit in a structured data format?

c. Management's Discussion of Fund Performance

Given fund investors' interest in performance information for purposes of monitoring and assessing their ongoing fund investments, we propose largely to maintain the current requirements for the management's discussion of fund performance (“MDFP”) section of the annual report, with several proposed targeted changes. Currently, MDFP disclosure consists of the following:

• A narrative discussion of the factors that materially affected the fund's performance during the most recently completed fiscal year;
• A line graph providing account values for each of the most recently completed 10 fiscal years (or for the life of the fund, if shorter) based on an initial $10,000 investment in comparison to the returns of an appropriate broad-based securities market index for the same period (as well as more narrowly based indexes that reflect the market sectors in which the fund invests, at the fund's discretion);
• A table showing the fund's average annual total returns for the past 1-, 5-, and 10-year periods (or for the life of the fund, if shorter);
• A statement accompanying the line graph and table to the effect that past performance does not predict future performance and that these presentations do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares;
• A discussion of the effect of any policy or practice of maintaining a specified level of distributions to shareholders on the fund's investment strategies and per share net asset value, as well as the extent to which the fund's distribution policy resulted in distributions of capital; and
• For ETFs that do not provide certain premium or discount information on their websites, a table showing the number of days the fund shares traded at a premium or discount to net asset value.

We are proposing amendments to the MDFP requirements to make the disclosure more concise and to take into account that shareholders may no longer receive fund prospectuses—which include performance information—after their initial purchase of fund shares. These proposed amendments therefore would require the MDFP to include additional performance-related information that is available in fund prospectuses, including certain class-specific performance information and comparative information showing the average annual total returns of one or more relevant benchmarks. We also are proposing to amend the definition of an appropriate broad-based securities market index to clarify that all funds should compare their performance to the overall applicable securities market, for purposes of both fund annual reports and prospectuses.

i. Narrative MDFP Disclosure

We propose to retain the current requirement that funds' annual reports include a narrative discussion of factors that materially affected the fund's performance during the most recent fiscal year, with minor modifications to encourage concise disclosure. The narrative MDFP disclosure is designed to aid shareholders in assessing a fund's performance over the prior year. We continue to believe this disclosure provides information that helps shareholders understand and evaluate fund performance over that time period. However, based on staff review of current disclosures, we believe that some funds provide overly long narrative discussions that likely impede shareholders' ability to understand easily the key factors that affected the fund's performance. Therefore, we are proposing to amend the current requirement to specify that the disclosure must “briefly summarize” the “key” factors that materially affected the fund's performance during the last fiscal year, including the relevant market conditions and the investment strategies and techniques used by the fund's investment adviser. A proposed instruction would direct funds not to include lengthy, generic, or overly broad discussions of the factors that generally affected market performance during a fund's last fiscal year. The proposed instruction would also direct funds to use graphics or text features—such as bullet lists or tables—to present the key factors, as appropriate. We understand that some funds currently attempt to make their narrative disclosure easier for shareholders to understand by, for example, using tables or charts to show how the fund performed in comparison to a relevant benchmark or to identify the significant contributors to or detractors from the fund's performance by holding, industry, geographic region, or other relevant category. We believe these types of presentations may be helpful to shareholders, and funds could continue to include them in annual reports under the proposal.

We recognize that funds currently may include additional information in their shareholder reports that is designed to help shareholders understand fund performance and market conditions, such as a fund president's letter to shareholders, interviews with portfolio managers, market commentary, and other similar information. Under the proposed amendments, a fund could not include this additional information in its annual report. We believe that information about the key factors affecting a fund's performance, which the proposal would require, would likely satisfy many fund shareholders' needs and would provide a more focused presentation. Although we understand that the additional information funds currently include in shareholder reports may be helpful to some shareholders, we believe the potential benefits of this information to a subset of shareholders, on balance, do not warrant the additional length they would contribute to the annual report. We also believe that allowing this discretionary information would not further our goal of presenting shareholders with the information that is most central to understanding their fund's performance. Funds would, however, be able to provide materials that include this additional information to shareholders in the same transmission as the annual report (e.g., in the same email or envelope), provided that the annual report is given greater prominence. Funds could also provide this additional information on their websites, as we understand many funds do today. Further, funds could refer to additional website information near the end of their shareholder reports if they reasonably believe that shareholders will likely view the information as important.

We request comment on the proposed amendments to the narrative MDFP disclosure, including:

35. Should we retain the requirement for a fund to include narrative MDFP disclosure in annual reports? Why or why not? Does this disclosure help shareholders better understand a fund's performance?

36. Should we require the narrative MDFP disclosure to summarize briefly the key factors that materially affected the fund's performance during the last fiscal year, as proposed? Would different instructions better further the Commission's goals of making narrative MDFP disclosure more concise so shareholders can understand more efficiently the key factors that affected a fund's performance? If so, what should those alternative instructions be, and how would they better further our goals?

37. As proposed, should we direct funds to use graphics or text features, such as bullet lists or tables, to present the key factors, as appropriate? Should we require funds to use specific graphics or text features to help shareholders more readily understand the key factors affecting fund performance and to create consistency among annual reports? Or is a more flexible approach, like we propose, more appropriate to allow funds to develop presentations tailored to individual funds and the needs of their shareholders?

38. Should we expressly limit the length of the narrative MDFP disclosure? If so, how (e.g., word or page limits)? If not, why not?

39. Are there other ways we could require or encourage funds to provide concise narrative MDFP disclosure focused on the key factors that affected the fund's performance, beyond our proposed revisions and instruction directing funds not to include lengthy, generic, or overly broad discussions of the factors that generally affected market performance? For example, should we expressly require a discussion about the types of investments that drove fund performance, or can shareholders intuit this by reviewing the fund's investment strategy?

40. Should we amend the narrative MDFP disclosure requirement to limit or expand the examples of the types of factors that funds should discuss? For example, should we refer to other factors, beyond the current references in this requirement to relevant market conditions and the investment strategies and techniques the fund's adviser used? Should we require funds to discuss holdings that significantly contributed to or detracted from their performance during the past fiscal year (e.g., by holding, industry, geographic region, or other relevant category), as many funds do today? Should we require or encourage funds to discuss other topics, such as: (1) The fund's performance in relation to its benchmark; (2) the reason for and effect of any large cash or temporary defensive position on fund performance; (3) the effect of any tax strategies, or the effects of taxes, on fund performance; or (4) whether the fund engages in high portfolio turnover and the effect of portfolio turnover on fund performance?

41. Should we incorporate concepts or requirements from management's discussion and analysis requirements that apply to annual reports of operating companies and BDCs on Form 10-K? For example, should we require or encourage funds to disclose material financial and statistical data that the fund believes would enhance a shareholder's understanding of the fund's performance? As another example, would it be appropriate to require or permit forward-looking disclosure? If so, are there any related rules or rule amendments we should adopt to facilitate this disclosure? For instance, should we require or permit a fund to disclose when a key factor that materially affected the fund's performance for the last fiscal year is not expected to materially affect the fund's future performance (e.g., because the fund has sold the underlying investment or because of an unusual or infrequent event or transaction)?

42. Are there ways we could prevent funds from providing generic or boilerplate narrative MDFP disclosure that does not change much from year to year? If so, how?

43. Are there any best practices in narrative MDFP disclosure that we should encourage or require?

44. Should we permit or require additional information in the annual report that is intended to help shareholders understand fund performance, such as interviews with portfolio managers or a president's letter? Is this additional information helpful to shareholders? If so, should it be included as part of the MDFP, or in some other part of a fund's annual report?

ii. Performance Line Graph and Request for Comment on Use of Market Indexes in Performance Disclosure

We also are proposing to retain the requirements for the performance line graph currently included in annual reports, with certain amendments designed to improve the current presentation. The line graph generally shows the performance of a $10,000 investment in the fund and in an appropriate broad-based securities market index over a 10-year period. This disclosure is designed to permit a comparison of the performance of the fund with “the market” and to put the narrative discussion into perspective. In addition to required information about an appropriate broad-based securities market index's performance, a fund has the option to compare its performance to other indexes, including more narrowly based indexes that reflect the market sectors in which the fund invests. We continue to believe the line graph presentation helps shareholders understand how the fund has performed over a 10-year time horizon in comparison to an appropriate broad-based securities market index and other relevant indexes, as applicable. Because this presentation shows performance in dollar terms, based on an initial $10,000 investment, we believe the line graph may contribute to shareholders' understanding of fund performance—because some individuals may find it easier to assess dollar figures than percentages—and complements the percentage-based presentation in the average annual total returns table. We also believe the line graph helps illustrate the variability of a fund's returns (e.g., whether the fund's returns have been volatile or relatively consistent from year to year) and therefore provides shareholders with some information about the risks of their fund investment. Moreover, the line graph presentation may help investors understand the general benefits of long-term investments (e.g., compound interest). We recognize potential critiques that the line graph may not show the variability of a fund's returns as clearly as certain other presentations (such as the bar chart we require in fund prospectuses that shows annual total returns as a percentage of an investment). However, given the other benefits of the line graph—particularly that it presents performance in dollar terms that may be easier for some shareholders to assess—we are proposing to retain the line graph presentation.

We are proposing to retain the current requirement to present fund performance in relation to an appropriate broad-based securities market index because we continue to believe that performance disclosure without relevant context showing market performance would not provide the information that shareholders need to understand how their fund performed. For example, performance disclosure without this type of context would not give shareholders a sense of how their investments might have performed had their money been invested elsewhere. However, we request comment on this proposed requirement below.

We also recognize potential critiques about the use of market indexes in presenting performance information. These include critiques that index licensing fees can be costly to funds (and, indirectly, to fund investors) and that, depending on the index selected, comparing a fund's performance against the index in some cases may be less effective in helping shareholders understand the fund's performance and risks. For example, because funds have discretion to choose an appropriate broad-based securities market index, a fund may choose an index that it is more likely to outperform to make it look like the fund is doing better than the corresponding market (for instance, this could occur if a bond fund selects a more conservative bond market index). In addition, index providers can experience errors or other difficulties in constructing, computing, or maintaining indexes. For example, an index that includes companies in emerging and frontier markets may experience data or computational errors if there is less information publicly available about these companies due to differences in regulatory, accounting, auditing, and financial recordkeeping standards.

While we propose largely to maintain the current line graph presentation and associated instructions, we are proposing three revisions to the instructions associated with the line graph. First, we propose to add a new instruction to clarify the scope of required disclosure in an annual report that covers multiple classes. The proposed instruction would require a fund to present performance information for at least one class in the line graph (in addition to the required information for an appropriate broad-based securities market index). The proposed instruction provides funds with discretion to determine which class or classes to present in the line graph, subject to certain limitations that are consistent with existing limitations on prospectus performance presentations.

Second, we propose to remove an instruction that allows the line graph to cover periods longer than the past 10 fiscal years. We are concerned that this current instruction may introduce variability that reduces the benefits of the line graph. For example, as the time period on the line graph lengthens, any volatility of the fund's returns may become harder to identify because the scale of the line graph typically would need to cover a wider range of account values (e.g., a scale of $0 to $1,000,000 rather than $0 to $30,000) that reflects growth in the account. This increase in scale generally would make any particular increase or decrease in account value (e.g., an increase or decrease of $3,000) harder to identify. Further, this current instruction may result in performance presentations that could give rise to unrealistic investor expectations. For funds in existence for a long period of time (e.g., 40 years), a line graph that shows the performance of a $10,000 investment at the outset of the fund may not be particularly relevant for the average shareholder, who likely has not been invested in the fund for such an extended period of time. The line graph also could show an ending account value that is substantially higher than the value of an initial $10,000 investment at the end of a 10-year period (e.g., an ending account value of $1,000,000 versus an ending account value of $25,000). While we propose to limit the line graph presentation to the fund's last 10 fiscal years, funds may include similar presentations covering longer periods of time on their websites or in other marketing materials.

Third, we propose to clarify the definition of an appropriate broad-based securities market index. Currently, both a fund's prospectus and annual report must compare the fund's performance to an “appropriate broad-based securities market index.” The Commission has described such an index as “one that provides investors with a performance indicator of the overall applicable stock or bond markets, as applicable,” while also stating that a fund would have “considerable flexibility in selecting a broad-based index that it believes best reflects the market(s) in which it invests.” Our staff has observed varying practices with respect to the benchmarks funds use. Some funds, for example, disclose their performance against a benchmark index that may not provide a performance indicator of “the overall applicable stock or bond markets,” such as an index tied to a particular sector, industry, geographic location, asset class, or strategy (e.g., growth or value indexes). While indexes based on narrow segments of the market may be useful for comparison purposes, we believe that all funds should compare their performance to the overall market.

Therefore, we are proposing to include language that clarifies that a “broad-based index” is one that represents the overall applicable domestic or international equity or debt markets, as appropriate. This clarifying language would continue to provide a fund with flexibility in selecting a broad-based index that the fund believes best reflects the market(s) in which it invests. The form instructions also would continue to encourage a fund to include narrower indexes that reflect the market segments in which the fund invests in its performance presentation along with its appropriate broad-based securities market index. If a fund invests in both equity and debt securities, such as a balanced fund, the fund may include more than one appropriate broad-based securities market index. The fund may also include a blended index—one that combines the performance of more than one index, such as equity and debt indexes—as an additional index to supplement the appropriate broad-based securities market index(es) that the fund includes. The proposed amendments to the definition of an appropriate broad-based securities market index would affect performance presentations in fund prospectuses, as well as fund annual reports.

We request comment on the proposed line graph presentation and on the use of market indexes more generally in performance presentations, including the following:

45. Should we require the annual report to include the performance line graph, as proposed? Why or why not? Should we modify the proposed requirements for the line graph? For example, should the line graph show returns in terms of percentages instead of dollar values? Are there other presentations that would help shareholders better understand a fund's performance over the past 10 years (or for the life of the fund, if shorter) and the variability of its returns?

46. We understand that the line graph can be difficult to read in black and white and may not fully illustrate volatility in the early years displayed in the graph. Are there other performance presentations that could better address these issues than the proposed approach and that would retain the benefits of the line graph presentation to shareholders? For example, should we replace the line graph with something similar to the bar chart required in fund prospectuses, which may be easier to read in black and white? Would this alternative presentation better show year-to-year volatility? Is the risk/return bar chart easy for shareholders to understand, or do shareholders prefer the line graph presentation that shows returns in terms of dollars rather than percentages? If we were to replace the line graph with something similar to the risk/return bar chart, should that alternative presentation present returns in terms of dollars instead of percentages?

47. Should we require the line graph to cover at least one class of a fund when a single shareholder report covers multiple classes, as proposed? Alternatively, should the graph be limited to one class or required to cover more than one class? How can we make sure that the line graph remains readable but provides sufficient information to help shareholders understand fund performance and risks?

48. Should we no longer allow funds to provide a line graph that covers periods longer than 10 years in their annual reports, as proposed? What are the benefits and drawbacks of permitting line graph presentations that cover more than 10 years, if a fund's registration statement has been effective for more than 10 years? If we were to continue to permit the line graph to cover a period of time that is longer than 10 years, should we limit the time period that the graph may cover in any way (e.g., limit the time period to no more than 20 years)?

49. Should we require funds to provide information in shareholder reports about the performance of an appropriate broad-based securities market index, as proposed? What are the advantages and disadvantages of this information? Does information about an appropriate broad-based securities market index's performance provide investors with a helpful performance indicator of the overall relevant market? If so, do these benefits justify the burdens, including costs to the fund (and ultimately its shareholders) of paying one or more index providers to allow the fund to include this information in the fund's disclosure? Is cost a significant factor for funds when they determine which, and how many, indexes to include in their shareholder reports? How are these costs assessed (for example, are they assessed on a per-disclosure basis or on some other basis)?

50. Should we modify the definition of “appropriate broad-based securities market index,” as proposed? If not, why not? If so, is the proposed definition appropriate, or should we modify it in any way? For example, should we permit funds to use blended indexes only as secondary indexes, as proposed (as an index could be “broad-based” only if it represents the overall applicable equity or debt markets), or should we permit funds to use these indexes as primary appropriate broad-based securities market indexes under certain circumstances? If we were to permit this, what if any conditions would be appropriate to ensure that the index remains “broad-based”? For example, should there be requirements limiting a fund to the number of indexes that could be blended for this purpose (e.g., 2), or the types of indexes that could be blended? Similarly, should we modify current requirements that permit funds to use non-securities market indexes only as secondary indexes, and not as appropriate broad-based securities market indexes? Are there concerns with certain funds using blended indexes or non-securities market indexes as secondary, rather than primary, indexes, such as concerns about investor understanding or costs associated with disclosing multiple indexes (e.g., index licensing fees)? Do blended or non-securities market indexes provide an appropriate point of comparison for an investor to evaluate his or her fund's performance? If we were to allow blended indexes or non-securities market indexes as a primary index, how could we tailor this approach to make sure that investors receive a performance indicator of the overall applicable market? Is the proposed definition clear? For example, is it clear that an index composed of securities of firms in a particular industry or group of related industries would not be broad-based?

51. Are there other changes we should make to the definition of appropriate broad-based securities market index, or to the framework for providing index performance more generally? For example, are there ways we could facilitate an investor's ability to understand the relevance of an appropriate broad-based securities market index, while maintaining funds' flexibility to select an appropriate and cost-effective benchmark? As another example, are there ways we could address concerns that some funds may choose an index for the purpose of making the fund's performance look better? Are there other instructions or guidance we could provide regarding the selection of an appropriate broad-based securities market index?

52. We are proposing to amend the definition of appropriate broad-based securities market index for purposes of Form N-1A. Should the same amended definition apply to fund prospectuses and fund shareholder reports, as proposed? If not, why not? Should we make corresponding amendments to the definition of appropriate broad-based securities market index in Form N-2 with respect to MDFP requirements for registered closed-end funds? Why or why not?

53. Should funds have discretion to provide information in shareholder reports about the performance of more narrowly based indexes that reflect the market sectors in which the fund invests, as proposed? Is the information these indexes provide helpful to shareholders, or does additional index performance information make the disclosure more difficult for shareholders to understand?

54. Should index providers be required to meet certain governance, due diligence, or other similar standards if an index's performance will be included in fund disclosure? Why or why not? If we imposed any such requirement, how would funds expect to determine whether those standards have been met?

55. Are there alternative measures that we should permit or require funds to use to provide investors with comparative information about market performance, instead of an appropriate broad-based securities market index or more narrowly based indexes that reflect the market sectors in which the fund invests? If so, what alternative measures (e.g., the rate of inflation or a risk free rate), and why are those measures appropriate and preferable to the use of indexes?

iii. Performance Table

We are proposing to retain the current requirement that funds' annual reports include a table presenting average annual total returns for the past 1-, 5-, and 10-year periods, although we are proposing amendments to require three pieces of additional information. Specifically, the proposal would require that the table include: (1) The average annual total returns of an appropriate broad-based securities market index; (2) the fund's average annual total returns without sales charges (in addition to current disclosure that shows returns reflecting applicable sales charges); and (3) average annual total returns for each class that the report covers, in each case for the past 1-, 5-, and 10-year periods. The average annual total returns table is designed to assist shareholders in comparing the performance of different funds. We also believe that the table complements the line graph to help shareholders evaluate a fund's performance and risks.

The amendments we are proposing to the average annual total returns table are designed, in part, to better conform the table to a similar presentation that funds include in their prospectuses. Like the current prospectus disclosure regarding average annual total returns, we propose to require funds to include in the shareholder report table information about the average annual total returns of an appropriate broad-based securities market index. A fund would provide the index's returns for the same periods as its own returns (e.g., 1-, 5-, and 10-year periods). We understand that many funds already provide this information in their annual reports. We believe that requiring all funds to provide this information would help shareholders better understand a fund's performance and risks in the context of the broader market. We also believe that proposing this change would be beneficial because fund shareholders may no longer receive annual prospectus updates as a result of our proposed amendments to the prospectus delivery framework for existing fund shareholders. Consistent with the current prospectus performance presentation, the proposed amendments would permit funds to include returns information for one or more other relevant indexes, such as a more narrowly based index that reflects the market sectors in which the fund invests. We are proposing to permit funds to include more than one index in the table because we understand that in some cases this approach may help shareholders understand how the fund's performance compared to, for example, performance of both the broader market and the market sector in which the fund invests. These proposed amendments are designed to help shareholders more easily evaluate a fund's performance and risks relative to the market and to better align the information in the table with the current line graph presentation so a shareholder has contextual information to help assess both year-over-year returns and average annual returns over set periods. At the same time, we recognize concerns about the use of indexes in performance presentations, and we are seeking comment on our proposed approach.

We further propose to modify the average annual total returns table to require funds to separately provide the average annual total returns with and without sales charges, as applicable. Currently, the table is only required to include average annual total returns that reflect sales charges. We believe comparative information about average annual total returns with and without sales charges may help shareholders better understand the impact of sales charges on the returns of their investments. We also believe that additional information about average annual total returns without sales charges may help shareholders better compare the fund's returns to that of a relevant index.

We also propose to add a new instruction for the average annual total returns table to require a fund to provide average annual total returns information for each class the shareholder report covers. This is consistent with the prospectus average annual total returns table, which must reflect average annual total returns for every class a prospectus covers. We believe it is important for shareholders to receive performance information that directly relates to the class in which they invest. Because each class can have different expenses that affect the class's returns, performance information for each class would allow a shareholder to understand the performance of his or her investment better and to compare performance among the classes the report covers. While the proposed shareholder report expense disclosure would include class-specific performance information for the reporting period, the average annual total returns table would provide class-specific performance information over a longer time period. Further, although the line graph in the annual report similarly provides longer-term performance information, it is not currently required to include information for each class (nor are we proposing to require this, because we recognize that additional lines in the graph for each class may make the graph difficult to read). Additionally, under the proposal, shareholders generally may not receive annual prospectus updates, which include class-specific returns, and would instead receive prompt notices of certain material changes that generally would not include this information. As a result of these considerations, we believe the average annual total returns table in the shareholder report should include information for each class the report includes.

Currently, funds must include a statement accompanying the line graph and table to the effect that past performance does not predict future performance, and that the line graph and table presentations do not reflect taxes that a shareholder would pay on fund distributions or redemptions. We propose to simplify the statement about past performance. Specifically, under the proposed amendments, a fund would be required to include a statement to the effect that the fund's past performance is not a good predictor of how the fund will perform in the future. We propose to require funds to use text features to make this statement noticeable and prominent through, for example, graphics, larger font size, or different colors or font styles. Under the proposal, funds would continue to be required to state that the disclosed performance information does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares to alert investors to these tax consequences.

Additionally, we propose to add a new instruction allowing funds to add brief additional disclosure that would contextualize the line graph and average annual returns table they include in their shareholder reports. Specifically, the proposed instruction provides that if a material change occurred to the fund during the relevant performance period, such as a change in investment adviser or a change to the fund's investment strategies, the fund may include a brief legend or footnote to describe the material change and when it occurred. We believe this additional disclosure could help shareholders understand potential changes in fund performance related to material fund changes that have occurred during the relevant performance period. Under the proposal, funds would have discretion to determine when to disclose information about a prior material change to a fund in connection with its performance presentation. We are proposing a discretionary approach, instead of requiring funds to include this disclosure for all material changes, because we recognize that some material changes to a fund may not affect a fund's performance, or may have only an insignificant effect on performance. Although a fund generally would be able to use discretion to determine when to disclose a prior material change in connection with its performance presentation, a fund would need to disclose information about such a change if, absent that disclosure, the fund's performance presentation would otherwise be misleading.

While we believe it is beneficial for shareholders to receive information about a fund's performance in the annual report each year, we understand that funds provide more current, ongoing performance information through other mechanisms, such as their websites. We are proposing to require funds that provide updated performance information through widely accessible mechanisms, such as fund websites, to include a statement in the shareholder report directing shareholders to where they can find this information. If a fund were to include such a statement, it also would be required to provide a means of facilitating access to the updated performance information, including, for example, a hyperlink to where the information may be found if the shareholder report is provided electronically or a URL address or QR code if the shareholder report is delivered in paper format.

We request comment on the proposed average annual total returns table and associated amendments, including the following:

56. Should the annual report include the average annual total returns table, as proposed? Why or why not? Should we modify the proposed requirements for the table? If so, how?

57. Should we require funds to include the average annual total returns of an appropriate broad-based securities market index and allow funds to include the returns of additional indexes in the average annual total returns table, as proposed, and as funds currently do in their prospectuses? Should we make any changes to this aspect of the proposal? Please explain.

58. Should we require funds to include the average annual total returns of each class that the annual report covers, as proposed, and as funds currently do in their prospectuses? Should we modify this aspect of the proposal? For example, should we only require average annual total returns for one class or for a set number of classes? If so, should we provide funds with flexibility for determining which class to disclose in the average annual total returns table, similar to the proposed instruction for the line graph, or should we take a different approach? Are there ways to improve the design or presentation of the table, particularly when covering multiple classes?

59. Should we modify the average annual total returns table to require funds to separately provide the average annual total returns with and without sales charges, as proposed? Would requiring information about average annual total returns without sales charges be helpful to shareholders, or would this information make the table too confusing or complex? Have we provided sufficient calculation instructions for funds to determine average annual total returns without sales charges? If not, what additional information do funds need for purposes of this calculation?

60. Should we, as proposed, modify the statement that currently must accompany the line graph and table indicating that past performance does not predict future performance and retain the statement that the line graph and table presentations do not reflect taxes that a shareholder would pay on fund distributions or redemptions? Are there other ways we could make the statement about past performance more understandable for shareholders? Is the statement clarifying that performance does not reflect the deduction of taxes helpful to shareholders, or is it unnecessary boilerplate? If it is not helpful to shareholders, should we modify or remove this language?

61. Should we, as proposed, allow a fund to include a brief legend or footnote to its line graph and average annual total returns table to describe a material change, such as a change in investment adviser or a change to the fund's investment strategies, that occurred to the fund during the relevant period? Would this provision provide shareholders with useful contextual information? If so, should we make the disclosure mandatory? If not, why not? Are there ways we could improve the utility or design of this provision? For example, are there ways we should modify the provision to limit any risk that funds might attempt to justify fund losses by referring to an unrelated change to the fund? Is the meaning of “material change” in this provision sufficiently clear, or do funds need more guidance to help them determine whether a change is material for purposes of this provision? Should we modify the standard for determining the types of changes that funds can disclose in connection with their shareholder report performance presentations? For example, rather than refer to material changes, should we identify specific types of changes that funds can disclose? If so, what types of changes should the provision cover (e.g., should it be limited to changes in investment advisers and changes in principal investment strategies, or should it include other changes)? If we retain a principles-based standard, should we use a different standard than material changes (e.g., significant changes)? Should we only allow a “brief” legend or footnote, as proposed?

62. Should we require funds that provide updated performance information through widely accessible mechanisms, such as fund websites, to include information in their annual reports directing shareholders to where they can find updated performance information, as proposed? Should we modify or clarify this requirement in any way? Should we instead permit, but not require, a fund to include this information in its annual report? As proposed, should we require funds that provide updated performance information on their websites to inform shareholders of this updated information in their annual shareholders reports and to direct shareholders to where the updated performance information is located? Should we require all funds to provide updated performance information on their websites? If so, what performance information? How often should it be updated?

iv. Other MDFP Amendments

We propose to simplify the current requirement that a fund discuss in its annual report the effect of any policy or practice of maintaining a specified level of distribution to shareholders (a “stable distribution policy”) on the fund's investment strategies and per share net asset value during the last fiscal year, as well as the extent to which the fund's distribution policy resulted in distributions of capital. The current disclosure requirement is meant to give shareholders a clearer picture of whether a fund had to distribute capital, as well as profits, to maintain its distribution rate. Under the proposed amendments, a fund that has a stable distribution policy and that was unable to maintain the specified level during the past fiscal year would need to disclose this. We also propose to maintain disclosure concerning distributions that resulted in returns of capital. By modifying this provision to focus on circumstances when a fund was unable to meet the specified level of distribution in its stable distribution policy or had distributions that resulted in returns of capital, the proposal is designed to result in disclosure that is more meaningful to shareholders than the current requirement. In particular, we believe that the proposed disclosure about a fund's inability to maintain a specified level of distribution would be important to shareholders in funds that have stable distribution policies because they typically expect to receive regular distributions. As a result, the fund's inability to meet the specified level of distributions may affect a shareholder's investment decision (e.g., whether to continue to hold the fund). In addition, we believe that simplifying the language of this requirement, as proposed, could result in disclosure that is more understandable to shareholders because funds tend to use language in their disclosures that tracks the language of Commission form requirements. As most funds do not have stable distribution policies, we do not anticipate that this proposed disclosure requirement would add to the length of most shareholder reports.

The Commission recently adopted amendments to limit the requirement that ETFs provide premium and discount information in their annual reports to only those ETFs that do not provide premium and discount disclosure on their websites in accordance with 17 CFR 270.6c-11 [Investment Company Act rule 6c-11]. We are not proposing any amendments to this annual report requirement beyond a technical amendment to clarify that it only applies to ETFs. We believe that most ETFs will provide premium and discount information on their websites instead of in their annual reports.

We request comment on the proposed amendments to the MDFP disclosure regarding stable distribution policies and on the ETF premium and discount information that would remain in the annual report, as well as on MDFP disclosure more generally, including:

63. Should we modify the requirement that funds discuss the effects of any stable distribution policy under current Item 27(b)(7)(iii) in their annual reports, as proposed? Would the proposed requirement provide meaningful information to shareholders that is not otherwise available? Should we instead remove any specific disclosure requirements related to stable distribution policies? If we do not require this type of information in annual reports, should we require funds to make it available elsewhere?

64. Should we continue to require ETFs that do not provide premium and discount information on their websites in accordance with Investment Company Act rule 6c-11 to include premium and discount information in their annual reports? If not, where should they disclose this information?

65. Money market funds currently are not required to provide MDFP disclosure in their annual reports because the Commission has previously noted that the problems that MDFP disclosure seek to address with respect to investor understanding of performance do not appear to exist with respect to money market funds. The proposal similarly would not require money market funds to provide MDFP disclosure. Should we require some or all money market funds to provide performance information in their shareholder reports? For example, should we require money market funds to include performance information similar to what they must disclose in their prospectuses (e.g., 7-day yield, average annual total returns table, and performance bar chart) or similar to what other funds must disclose in their annual reports (e.g., performance line graph)? If so, should these requirements apply to all money market funds or to a subset of money market funds, such as only money market funds that rely on proposed rule 498B (i.e., whose shareholders receive prompt notice of certain material changes to the fund, with online access to the prospectus)?

66. Are there other changes we should make to current MDFP disclosure requirements? Please explain.

d. Fund Statistics

We are proposing to require a fund to disclose certain fund statistics in its annual report, including the fund's: (1) Net assets, (2) total number of portfolio holdings, and (3) portfolio turnover rate. We are also proposing to permit a fund to disclose any additional statistics that the fund believes would help shareholders better understand the fund's activities and operation during the reporting period (e.g., tracking error, maturity, duration, average credit quality, or yield). Based on information we received in response to the recent Fund Investor Experience RFC, it is our understanding that investors prefer succinct fund disclosures in graphical format, and they are less likely to review information presented in long narratives. We believe that permitting funds to provide key fund statistics in a user-friendly format could enable funds to provide more meaningful information to investors, and encourage investors to focus on the more significant factors in evaluating the fund's operations.

We are proposing to require funds to include their net assets as of the end of the reporting period because we believe this disclosure would provide important context for other required information in the shareholder report. Under our proposal, funds would be required to provide a graphical presentation of holdings. A fund would have the flexibility to provide this graphical presentation either as a percentage of the fund's net asset value, total investments, or investment exposures. We believe that knowing the fund's net assets would allow a shareholder to appreciate better the impact of each holding on the overall performance of the fund.

Similarly, we are proposing to require funds to include the total number of portfolio holdings as of the end of the reporting period. Investors historically have viewed information about a fund's holdings as important to their investment decision process. Many funds currently voluntarily provide the number of fund holdings on their websites, but Commission rules do not require them to do so. We believe that, together with the graphical holdings information and net assets, knowing the number of a fund's holdings could help investor to understand better the fund's diversification, which could in turn provide insight into the fund's susceptibility to market fluctuations. Accordingly, to help ensure that an investor has access to information about the total number of fund holdings and to help contextualize other information that funds disclose, we are proposing that funds include that information as of the end of the reporting period in their annual reports.

Finally, we are proposing to require funds to include their portfolio turnover rate as of the end of the reporting period. A higher portfolio turnover rate generally indicates higher transaction costs and may result in higher taxes. Therefore, we believe that a fund's portfolio turnover rate may provide shareholders with a more complete view of the costs associated with investing in the fund.

Besides requiring funds to include their net assets, number of fund holdings, and portfolio turnover rate, we are providing flexibility for funds to disclose additional fund statistics if they are reasonably related to a fund's investment strategy. In general, funds would be limited in their ability to include information in their annual reports beyond that which Form N-1A would specifically permit or require. We are proposing an exception to this limitation because these additional fund statistics may help shareholders better understand the fund's activities and operation during its most recent fiscal year. Permitting funds to provide key fund statistics that are tailored to the fund's investment strategy could enable them to provide information that is meaningful to their specific shareholder base. The proposed flexibility to include additional “statistics”—a term that we believe conveys a brief presentation of quantitative measures—is designed to provide information in a concise format that would assist shareholders in evaluating significant factors that reflect the fund's performance and operations. For example, a fund that has a stated investment objective of maintaining returns that correspond to the returns of a securities index might consider including its tracking error as an additional statistic. Similarly, a fund that invests primarily in fixed-income bonds might consider including statistics such as maturity, duration, average credit quality, or yield. In each case, these additional statistics would be reasonably related to the relevant fund's investment strategy and would help shareholders better understand the fund's activities and operations during the reporting period.

We are proposing several instructions that are designed to help shareholders more easily digest any additional statistics that funds would disclose in their annual reports, and to provide context for understanding the disclosed statistics. First, if a fund provides a statistic that is disclosed elsewhere on Form N-1A, the fund must follow any associated instructions describing the calculation method for the relevant statistic. Second, we are proposing an instruction that would encourage a fund to use tables, bullet lists, or other graphics or text features to disclose the statistics. This instruction is designed to promote the presentation of fund statistics in a useful format. Third, if a statistic is included in, or could be derived from, a fund's financial statements or financial highlights, we are proposing an instruction that would require a fund to use or derive such statistic from the fund's most recent financial statements or financial highlights. Fourth, we are proposing an instruction that would allow a fund to describe briefly the significance or limitations of any disclosed statistics in a parenthetical, footnote, or similar presentation. Finally, if a fund chooses to include additional statistics, we are proposing an instruction that would require additional statistics to be reasonably related to the fund's investment strategy. These proposed instructions are, in the aggregate, designed to help promote the integrity and consistency of the information that funds may choose to provide, while allowing funds to tailor their disclosure to increase its usefulness to investors.

We seek comment on our proposal to require funds to provide important fund statistical information in the annual report and specifically on the following issues:

67. Should we require a fund to include its size, in terms of its net assets, in the annual report, as proposed? Should we instead permit, but not require, a fund to include its net assets? Why or why not? What informational benefits would requiring this information in the annual report serve? For example, would knowing a fund's net assets provide shareholders with useful context for evaluating the required graphical representation of holdings that also would appear in the annual report?

68. Are there any additional statistics we should require funds to disclose that would provide information about their size, or the change in their size over time? For example, should we require a fund to provide the change in the fund's net asset value from one year to another over a five-year period, as is currently required in the financial highlights? Why or why not?

69. Should we require a fund to include the total number of portfolio holdings in the annual report, as proposed? Should we instead permit, but not require, funds to include total number of portfolio holdings? Why or why not? What informational benefits would requiring this information in the annual report serve? For example, would knowing this information help shareholders evaluate other aspects of the fund's investment strategy, risks, and/or performance? Or, would this information be misleading to investors under certain circumstances (for example, if a fund has over 1,000 holdings but the majority of the fund's assets are invested in only 10-20 of those holdings)? Does the total number of portfolio holdings information serve as a useful statistic for a shareholder to help understand a fund's diversification and/or susceptibility to market fluctuations? Is the total number of holdings information a useful supplement to the graphical representation of holdings?

70. Should we require a fund to include its portfolio turnover rate in the annual report, as proposed? Should we instead permit, but not require, funds to include portfolio turnover rate? Why or why not? What informational benefits would requiring this information in the annual report serve? For example, does the portfolio turnover rate information serve as a useful statistic for a shareholder to understand the costs associated with investing in the fund?

71. Are there any other statistics that we should require funds to disclose in their annual reports? For example, should we require a fund to include information regarding its annual total return for each of the preceding five years or the fund's portfolio turnover rate, as is currently required in the financial highlights?

72. Is it appropriate to allow a fund, as proposed, to include additional statistics that are reasonably related to the fund's investment strategy and that the fund believes would help shareholders better understand the fund's activities and operations during the reporting period? Why or why not? Should the Commission provide additional guidance on how to determine whether a statistic is reasonably related to the fund's investment strategy? Would allowing funds to include additional fund statistics in their shareholder reports result in disclosure that may be overly long, complex, technical and/or duplicative? The proposal would permit funds to include additional fund statistics online (for example, in online tools that funds may overlay onto the shareholder reports that they provide on their websites), but not in the version of the report that shareholders receive in paper format. Is this approach appropriate? Why or why not?

73. Would funds include additional statistics in their shareholder reports, as the proposed rule would permit? If so, what types of statistics would funds include, and how would these statistics help investors to understand the fund's investment strategy, risks, and/or performance? For example, would a fixed-income fund include statistics regarding yield, maturity, and/or duration?

74. If a fund chooses to include in its annual report a statistic that Form N-1A requires the fund to disclose elsewhere, should we, as proposed, require such a fund to follow the Form N-1A instructions describing the calculation methodology for the relevant statistic? Should we place any additional limitations on the statistics funds would be allowed to include? For example, should we limit the number of additional statistics a fund could include? Should we specify the share class(es) tied to the statistics funds could disclose (e.g., require funds to include information only for the most expensive share class)? Should we only allow a fund to include a fund statistic that the fund otherwise discloses to shareholders and reports to the Commission, such as information the fund includes on Form N-PORT, Form N-CEN, or in the fund's financial statements, prospectus, or SAI? Should we include an instruction that would prohibit funds from including information generated by third-party vendors, such as Morningstar or Lipper ratings or sustainability rankings? If so, why, and what should this instruction specify?

75. Is the proposed instruction that would encourage a fund to use graphics or text features, such as bullet lists or tables, as appropriate to disclose fund statistics helpful to promote succinct, useful presentations of information that will help shareholders understand their fund's investment strategy, risks, and/or performance? Should we require any particular presentation for the statistics that all funds would have to include in their annual report, and if so, what presentation and why?

76. Should we, as proposed, allow funds to describe the significance or limitations of each disclosed statistic? If so, is the instruction that the additional disclosure be presented in a parenthetical, footnote, or similar presentation appropriate, or are there any more-specific requirements that we should include in the instruction? Should we require, rather than permit, this disclosure?

77. Should we, as proposed, require additional statistics to be reasonably related to the fund's investment strategy? Would this limitation appropriately tailor the statistics a fund chooses to include to those that are most pertinent in light of a fund's investment strategy?

78. Should we require a fund to organize the disclosure of the statistics in a manner that gives each statistic similar prominence? Would such a limitation prevent funds from obscuring statistics that reflect less favorably on the fund's performance returns? Are there other instructions that could achieve this goal? Would a “similar prominence” requirement for fund statistics result in any anomalous disclosure results, or the need for Commission clarification or guidance (for example, if certain statistics require more context than others, or certain statistics lend themselves better to graphic display than others)?

79. Are there any additional instructions that we should include that would permit additional flexibility in presenting fund statistics? For example, if the value of a statistic significantly changed during the most recent fiscal year, should we allow or require funds to briefly describe the factors that contributed to the change? As another example, should we allow funds to provide comparative statistics, such as applying the same statistic to a relevant index or peer group in the same fiscal year? Would investors find this comparative information useful? If so, should we require, rather than permit, this disclosure? If the value of a statistic has significantly changed from the value disclosed in the fund's previous shareholder report, should we allow a fund to explain the factors that contributed to the change in value? Would shareholders find this information useful? If so, should we require, rather than permit, this disclosure?

e. Graphical Representation of Holdings

We are proposing to retain the current requirements for the graphical representation of holdings that funds currently include in their shareholder reports, with certain revisions designed to improve the current presentation. The graphical representation of holdings is one or more tables, charts, or graphs depicting the fund's portfolio holdings by category (for example, type of security, industry sector, geographic region, credit quality, or maturity) as of the end of the reporting period. The purpose of this presentation is to illustrate, in a concise and user-friendly format, the allocation of a fund's investments across particular categories of investments (such as asset classes). We understand that many investors, including investors responding to the Fund Investor Experience RFC, have viewed information about a fund's holdings as important to know when making an investment decision. We believe a layered approach to the disclosure of portfolio holdings, where a graphical representation of holdings is provided in the annual report and more detailed and current portfolio holdings information is available online and upon request, helps shareholders understand how the fund invested its assets. While currently investors receive both the graphical representation of holdings and a schedule of investments, we are only retaining the graphical representation of holdings, and not a more complete list of fund portfolio holdings, because we believe it provides a better summary presentation that shareholders can more easily review.

We are proposing two changes to the current requirements relating to the graphical representation of holdings. Currently, funds have the flexibility to base the tabular or graphic presentation of holdings on the fund's net asset value or total investments. We also are proposing to permit funds to show their holdings based on either the fund's net exposure, or total exposure, to particular categories of investments. As funds do today, a fund would have to disclose its graphical representation of holdings using categories, and with a basis of presentation (i.e., presented according to the fund's net asset value, total investments, or investment exposures) that is reasonably designed to depict clearly the types of investments made by the fund, given its investment objectives.

The proposed amendment to allow investment exposure as a basis for presenting a fund's graphical representation of holdings is designed, in part, to provide a more meaningful presentation of holdings for funds that use derivatives to obtain investment exposures as part of their investment strategies. A graphical representation of holdings based on net asset value or total investments may not represent the true economic exposure of a fund that uses derivatives. For example, a fund that executes its strategy primarily through derivatives transactions (e.g., a managed futures fund or a commodity strategy fund) may invest a majority of its assets in government securities or money market funds, while a substantial portion of the fund's risks and returns may be derived from derivatives that compose only a small portion of its assets. In this situation, giving a fund the flexibility to present the graphical representation of holdings on an exposure basis could show a more accurate picture of the sources of the fund's investment risks and returns. A fund that uses “net exposure” or “total exposure” as a basis for representing its holdings would also be permitted to include a brief explanation of this presentation.

The proposed amendment also is designed to provide a more meaningful presentation of holdings for certain funds that hold both long and short positions. Currently, the requirements for the graphical representation of holdings may not take into account both long and short positions. The proposed amendment provides clarity that funds that hold both long and short positions may present the long and short positions separately (i.e., total exposure), or show the combined effect of both positions (i.e., net exposure). We believe this additional flexibility will allow certain funds, such as funds with “long-short” investment strategies, to provide representations that are tailored to their holdings and investment strategies. However, funds would not have full discretion to select their basis of presentation. They must select a basis of presentation (i.e., presented according to the fund's net asset value, total investments, or investment exposures) that is reasonably designed to depict clearly the types of investments made by the fund, given its investment objectives.

We are also proposing a minor change with respect to funds that intend to depict portfolio holdings according to credit quality. Currently, such a fund must describe how the credit quality of its holdings was determined and, if credit ratings are used, the fund must explain why it selected a particular credit rating. We understand that there is diversity in practice as to the length of these disclosures, with some funds including a significant level of detail, while others include only relatively brief disclosure. We are proposing minor revisions instructing funds to keep these disclosures brief and concise. These proposed amendments are designed to keep the narrative disclosures in the annual report brief.

We request comment on the proposed amendments to the graphical representation of holdings disclosure requirements:

80. Should we retain the graphical representation of holdings in annual reports? Why or why not? Does this graphical representation help shareholders better understand a fund's holdings?

81. Are there any concerns about the current graphical representation of holdings presentation in shareholder reports? Are there any best practices we should encourage or require?

82. For funds that take significant derivatives positions or hold both long and short positions, would an exposure-based presentation help shareholders better understand a fund's holdings? Should we permit all funds to present their holdings on an exposure basis, as proposed? Should we require certain funds to present their holdings on an exposure basis? Why or why not? If so, for what types of funds and fund strategies would an exposure-based presentation be particularly useful? Should we be more prescriptive as to how to calculate exposure? If so, how? Should an exposure presentation be on a net or total basis or permit flexibility? Why or why not? Should we permit funds to pick how they present their holdings or should we prescribe when funds should use net asset value, total investments, net exposure, or total exposure? If we prescribe the basis of presentation, how should we determine which type of fund uses which type of presentation?

83. For funds that depict portfolio holdings according to credit quality, we are proposing to require that a fund briefly describe how the credit quality of its holdings was determined and, if credit ratings are used, the fund must concisely explain why it selected a particular credit rating. Is this additional disclosure about credit quality necessary and/or useful? If so, why? Would funds be able to succinctly provide this information? If not, why not?

84. Should we expressly permit or require other types of presentations, such as top 10 holdings or changes in holdings over time? If so, what types of presentations and why? If not, why not?

85. Should we permit or require other ways of presenting a fund's holdings? For example, instead of or in addition to the graphical representation of holdings, should we require disclosure of a fund's top holdings or a complete schedule of investments in the annual report? If so, what types of presentations should we require and why?

86. Should we consider any other changes to the graphical representation of holdings requirements?

f. Material Fund Changes

We propose to add a new section to the annual report to describe material changes to the fund. Specifically, a fund would have to describe briefly any material change in an enumerated list of items (as well as any other material change that the fund chooses to disclose) that has occurred since the beginning of the reporting period or that the fund plans to make in connection with its annual prospectus update. This proposed requirement is designed to highlight for fund shareholders the most salient information they typically receive through annual prospectus updates and tailor the presentation of this information to these existing shareholders' needs (as opposed to the needs of new or prospective investors for whom prospectus disclosure is primarily designed). We believe this new shareholder report disclosure would allow shareholders to better recognize and understand material changes to their fund investment, which may inform a shareholder's future investment decisions (i.e., whether to hold or sell the fund investment, or to purchase additional shares).

Under the proposal, a fund would be required to include disclosure in its annual report that briefly describes a material change with respect to any of the following items:

• A change in the fund's name (as described in Item 1(a)(1) of Form N-1A);
• A change in the fund's investment objectives or goals (as described in Item 2 of Form N-1A);
• An increase in the fund's ongoing annual fees, transaction fees, or maximum account fee (as described in Item 3 of Form N-1A);

• A change in the fund's principal investment strategies (as described in Item 4(a) of Form N-1A);

• A change in the principal risks of investing in the fund (as described in Item 4(b) of Form N-1A);
• A change in the fund's investment adviser(s), including sub-adviser(s) (as described in Item 5(a) of Form N-1A); and

• A change in the fund's portfolio manager(s) (as described in Item 5(b) of Form N-1A).

Additionally, a fund could include any other material fund change that it would like to disclose to its shareholders.

This item would notify fund shareholders of material changes to the fund that have occurred or that the fund expects to make in its forthcoming annual prospectus update. Currently, fund shareholders typically receive information about these changes in: (1) Annual prospectus updates; or (2) other prospectus updates they may receive throughout the year (which can take the form of a prospectus “sticker” or an updated copy of the fund's prospectus or, under the proposal, a notice of material change under proposed rule 498B). While fund shareholders receive information about material changes today, we are concerned that material changes to a fund may not always be readily apparent to an existing shareholder. For example, changes that the annual prospectus update discusses may not be easy for an average shareholder to identify, as there is no requirement for a fund to identify or highlight changes to the fund in its prospectus. Instead, a fund only has to update the prospectus disclosure to reflect the substance of the change. For example, if a fee has changed, the prospectus disclosure would include the new fee, but the prospectus would not have to disclose the old fee or highlight that the fee had changed. Thus, we believe the proposed requirement to disclose material fund changes in the annual report may increase the salience of material fund changes for shareholders and help shareholders more efficiently monitor and assess their fund investments relative to current disclosure requirements.

The categories of fund changes that we propose to require funds to disclose in their annual reports are meant to capture the types of material changes to prospectus disclosure that we believe are important to fund shareholders, that may influence their investment decisions, and that are more likely to occur. Specifically, the types of material changes that a fund would need to disclose in its annual report generally align with the key prospectus disclosure items the Commission requires in summary prospectuses (and in the summary section of statutory prospectuses) that we understand investors typically use to make investment decisions. We believe the annual report should help a shareholder monitor and assess his or her fund investment, which includes information to help a shareholder assess whether to maintain or change a fund investment. Because we understand that investors often use information about a fund's principal investment strategy, principal risks, fees, investment objectives or goals, name, investment adviser, and portfolio manager to inform initial investment decisions, we believe that material changes to these items may affect a shareholder's assessment of whether to hold, buy, or sell fund shares. In addition to the identified types of changes, funds could disclose other material changes on a discretionary basis, which we believe would provide flexibility to funds to highlight any additional material changes for investors concisely. Instead of identifying the types of material changes a fund must disclose and providing flexibility for funds to disclose other material changes, we considered proposing a more principles-based approach. However, we believe that our proposed approach would provide more certainty to funds about the types of changes they must disclose and enhance consistency of annual report disclosure across funds.

Under the proposal, a fund would not be required to disclose material changes to other summary prospectus items (or to the corresponding items in the summary section of the statutory prospectus) because either they are unlikely to change, and we believe they are less likely to affect a shareholder's investment decisions (e.g., tax information or financial intermediary compensation), or the shareholder report already provides similar information (e.g., performance information). Additionally, information about shareholder voting results would not be required to be disclosed in the annual report because we believe that the material fund changes section of the report would reflect many of the types of material fund changes that may result from a shareholder vote. For example, if shareholders approve a change in the fund's concentration policy, implementing this change would likely affect the fund's principal investment strategy and principal risks and warrant shareholder report disclosure of the associated change to the fund's principal investment strategy and principal risks. Further, if shareholders approve a new investment advisory contract with a higher management fee, this would likely increase the fund's ongoing annual fees and would trigger disclosure under this item if the resulting increase was material.

A fund would be required to disclose a change in its annual report only if the change is material to the particular fund. A fund should base this materiality determination on the facts and circumstances of the fund and the specific change. For example, an index fund might determine that a change in its portfolio manager is not a “material” change that it would need to disclose in its annual report, given the nature of the manager's involvement in portfolio decisions for the fund. At the same time, a fund that changes its principal investment strategy from primarily investing in U.S. investment-grade bonds to primarily investing in emerging market high-yield bonds would disclose this change in its annual report, as well as through earlier communications to shareholders if the change already occurred.

To help shareholders understand the material changes, a fund would have to provide a concise description of each change that provides enough detail to allow shareholders to understand the change and how it may affect shareholders. For example, this could include stating that the fund's ongoing annual fees have increased from 0.55% to 0.65%, rather than simply stating that the fund's ongoing annual fees have changed or increased. As another example, if a fund's principal risks have materially changed, it could identify the newly identified or newly removed types of principal risks, rather than only stating that the principal risks have changed.

Disclosure of material fund changes in the annual report would include a legend to the effect of the following:

This is a summary of certain changes [and planned changes] to the Fund since [date]. For more complete information, you may review the Fund's next prospectus, which we expect to be available by [date] at [website address] or upon request at [toll-free telephone number and, as applicable, email address].

The proposed legend would inform shareholders that they can obtain more information about a specific material change by consulting the fund's next annual prospectus update. It also would explain how shareholders may find or request a copy of the annual prospectus update once it is available.

Under the proposed rule, funds generally would be required to disclose any enumerated material change that occurred since the beginning of the fund's most recently completed fiscal year, even if the fund already disclosed the material change to shareholders through other mechanisms during the year. For example, if a shareholder received a prospectus sticker discussing the change, the change would still appear in the annual report. As a result, the annual report would be a general repository for the enumerated material changes that occurred throughout the year. We believe it may be helpful for shareholders to be able to review a brief summary of all material changes that occurred during the year, instead of requiring shareholders to compile information from different sources if they want to understand all material changes for the year.

Along with changes that occurred since the beginning of the last fiscal year, the fund's annual report also would have to disclose material changes that the fund plans to make in connection with updating its prospectus for the current fiscal year. We are proposing this requirement so the annual report could be the primary disclosure source for fund shareholders, and they generally would not need to review the fund's annual prospectus update (other than to gather additional information about a particular fund change of interest). For example, we believe it would be more efficient for a shareholder to be able to review a single report to assess and monitor his or her fund investment, instead of receiving an annual report and then subsequently receiving an annual prospectus update or notice of additional material changes approximately two months later. We understand that it is common for funds generally to be aware of material changes they plan to make in connection with updating their prospectuses before they transmit annual reports. However, we recognize that the fund's associated post-effective amendment making these changes to its prospectus may not be effective at the time the fund transmits its annual report and may be subject to the staff review process. As a result, the manner in which the fund describes the change in its prospectus may be subject to modification at the time the fund is required to transmit an annual report. Under these circumstances, we believe it would be appropriate for a fund to provide only a high-level description of the change because the exact disclosure regarding the change in the prospectus could be subject to modification. The proposed legend that would accompany this disclosure would direct shareholders to the fund's next prospectus for additional detail, and the fund would need to provide a date by which it expects the updated prospectus to be available. In any event, a fund would not have to use the same language describing the change in its annual report as it uses in its prospectus (although neither description of the change would be permitted to be misleading).

We acknowledge that there could be scenarios where a material change occurs shortly before a fund transmits its annual report and, as a result, it would be difficult for the fund to disclose the material change in the annual report while still transmitting the report to shareholders within the required period (60 days after the fund's fiscal year-end). For example, a fund's high-profile portfolio manager may resign shortly before the fund must transmit its annual report to shareholders. Under these circumstances, a fund (or intermediary) should provide a timely notice of the material change to shareholders under proposed rule 498B, if applicable, or through a prospectus sticker or annual prospectus update. The fund would also need to disclose the material change in its next annual report.

We request comment on the proposed material fund changes section of the annual report, including the following:

87. Should funds be required to disclose material fund changes in their annual reports, as proposed? Should all funds be required to disclose fund changes in their annual reports, as proposed, or should we exclude any subset of funds from this requirement (for example, should we exclude funds that do not rely on proposed rule 498B and that deliver annual prospectus updates to existing shareholders each year)? Instead of requiring disclosure about material changes in the annual report, should we require disclosure of these changes somewhere else, such as the prospectus or the fund's website? What location would be most appropriate for purposes of making the information available to shareholders? What location would be the most efficient for these purposes?

88. Are the categories of fund changes in the proposed enumerated list the types of changes that are most relevant to fund shareholders and that may influence their investment decisions? Are there other categories of material changes that should be disclosed in the annual report? For example, should funds be required to disclose all material changes that occur as a result of a shareholder vote, rather than just the ones included in the enumerated list?

89. Is the scope of the categories of fund changes in the proposed enumerated list appropriate? If not, how should we modify the scope? For example, rather than requiring a fund to disclose material increases in a fund's ongoing annual fees, transaction fees, or maximum account fee (as described in proposed Item 3 of Form N-1A), should we require funds to disclose any material changes (that is, both increases and decreases) to fee and expense information described in its prospectus fee summary or fee table?

90. Should we expand or reduce the scope of fee-related items that the material fund changes disclosure would include? For example, should we only require funds to disclose a material increase in ongoing annual fees because the annual report is directed to existing shareholders, or is it valuable for a fund shareholder to receive information about material increases to the fund's transaction fees in case he or she is considering purchasing additional shares in the fund? We understand that account fees are relatively rare and typically small in size. Should the proposed item refer to account fees, or should it only refer to ongoing annual fees and transaction fees? Additionally, we are proposing to allow funds that invest 10% or less of their total assets in acquired funds to disclose acquired fund fees and expenses in a footnote to the prospectus fee table, instead of in the bottom-line ongoing annual fees. Although such a fund's investments in acquired funds would be limited, are there circumstances in which its acquired fund fees and expenses could increase to such an extent that we should require the fund to disclose the increase in acquired fund fees and expenses in the annual report (e.g., as a separate material change, or as a material increase to the fund's ongoing annual fees if the fund's combined ongoing annual fees and acquired fund fees and expenses materially increase in the aggregate)?

91. Would disclosure about the identified categories of material changes be redundant with other shareholder report disclosure? For example, would funds discuss certain categories of material changes, such as material changes to the fund's principal investment strategy, in the narrative MDFP disclosure? If so, do the two disclosure items serve sufficiently different purposes, or should we modify the proposed requirements to limit potential redundancy? For example, if we require funds to disclose information about material strategy changes in the narrative MDFP disclosure and not in the material fund changes disclosure, would it be more difficult for shareholder to identify and understand information about material fund changes? Under that approach, where should a fund disclose information about a material strategy change the fund plans to make in its annual prospectus update?

92. Instead of identifying particular types of material changes a fund must disclose in its annual report, as proposed, should we use a more principles-based or flexible framework for disclosing fund changes? For example, should we require funds to disclose all material changes without identifying particular categories of changes? Under a more principles-based or flexible framework, how could we make sure the disclosure focuses on fund changes that would be of interest to fund shareholders and is not unduly long or complex?

93. Does the proposed provision allowing funds to disclose additional material changes on a discretionary basis provide funds with appropriate flexibility to consider their particular facts and circumstances? Would the benefits of this flexibility justify any resulting increase in the shareholder report's length and complexity? Should we provide more flexibility by permitting funds to disclose other changes that may not necessarily be material to the fund? If so, what types of other changes would funds disclose, and how would information about that change assist shareholders? Alternatively, should we not permit funds to optionally disclose other categories of material changes and instead limit the types of material changes funds can disclose in the annual report to only those listed in the form item?

94. Should funds be required to disclose only material changes, as proposed? Would requiring funds to make a materiality assessment of relevant changes introduce unnecessary subjectivity into the disclosure? Or is a materiality threshold appropriate to limit the annual report disclosure to the types of changes that would be most important to shareholders? Would a different threshold be more appropriate? For example, should we require a fund to disclose “significant” or “substantial” changes in its annual report? If so, why?

95. As proposed, should funds be required to disclose any material changes in their annual reports that occurred since the beginning of the fund's last fiscal year (even if the fund has already disclosed any of these changes to existing shareholders, for example through prospectus supplements, notices under proposed rule 498B, or other non-shareholder report mechanisms)? Would it be beneficial for shareholders to see all of these changes summarized in a single place? Alternatively, would this approach have unintended consequences, such as increased investor confusion?

96. Should funds be required to disclose material changes that they plan to make in connection with updating their prospectuses under section 10(a)(3) of the Securities Act for the current fiscal year, as proposed? Does this proposed requirement raise timing concerns, compliance difficulties, liability risks, or other concerns that we have not adequately addressed? Are there certain types of changes where these concerns are more pronounced (e.g., where the parameters of the change are more likely to be modified between the time a fund transmits its annual report within 60-days after its fiscal year end and the time its post-effective amendment updating the relevant prospectus disclosure is effective, generally within 120 days after its fiscal year end)? How should we address any associated concerns? Are there other mechanisms, other than the annual report, that funds should be required or permitted to use to notify existing shareholders of these changes?

97. How detailed should annual report disclosure of a fund change be? Should we require, as proposed, that the description of the change be concise but with sufficient detail to allow shareholders to understand the change and how the change may affect shareholders? If not, should the description of the change be more or less detailed than proposed? Please explain.

98. Should funds be required to provide the proposed legend in the fund changes section of the annual report? Would the proposed requirement to provide an estimated date by which the fund's next prospectus will be available on its website or upon request present difficulties for funds or shareholders? What are those difficulties, and how could we address them? Would the proposed legend make it sufficiently clear to fund shareholders that the prospectus with additional information about the change is not currently available but will be available at a later date? If not, how could we make this clearer?

g. Changes in and Disagreements With Accountants

We are proposing to require funds to include a concise discussion of certain disagreements with accountants in the annual report. Funds currently are required to disclose certain information concerning changes in and disagreements with accountants in their shareholder reports. The current disclosure requirement is applicable only if a fund's accountant has resigned or was dismissed. In this case, the fund has to disclose the information that 17 CFR 229.304 [Item 304 of Regulation S-K] requires, concerning the circumstances surrounding the former accountant's dismissal or resignation, whether in the fund's two most recent fiscal years there were certain accounting-related disagreements with the former accountant, and other related information. We understand that funds rarely include disclosure about disagreements with accountants, and therefore we assume that the events that necessitate this disclosure rarely occur. In addition, we believe that current disclosure regarding these types of events may not be particularly investor-friendly because of the complexity of the accounting issues that may give rise to any disagreements.

However, we believe that retaining this disclosure in funds' shareholder reports in summary form continues to be important because this would put investors on notice of the dismissal or resignation of an accountant and the existence of a material disagreement with that accountant. We believe this shareholder report disclosure could discourage funds' audit “opinion shopping.” “Opinion shopping” generally refers to the search for an auditor that is willing to support a proposed accounting treatment that is designed to help a fund achieve its reporting objectives, even though that treatment could frustrate reliable reporting.

We propose to move the currently-required disclosure to Form N-CSR and to replace it in the annual report with a high-level summary of information that funds would report on Form N-CSR. Specifically, when a fund has a material disagreement with an accountant that has resigned or been dismissed, the fund would have to include in its annual report: (1) A statement of whether the former accountant resigned, declined to stand for re-election, or was dismissed and the date thereof; and (2) a brief, plain English description of disagreement(s) with the former accountant during the fund's two most recent fiscal years and any subsequent interim period that the fund discloses on Form N-CSR. Funds would not be required to disclose, and we would not expect funds to disclose, the absence of disagreements in response to this proposed disclosure requirement.

We request comment on the proposed amendments to the current requirements to include disclosure about disagreements with accountants in funds' annual reports, including:

99. Should we require funds to include high-level disclosure about changes in and disagreements with accountants in their annual reports, as proposed? Why or why not? Is the current disclosure requirement regarding changes in and disagreements with accountants helpful to fund shareholders? How frequently do the events that necessitate this disclosure occur? Would the proposed amendments improve shareholders' ability to understand this information?

100. As proposed, funds would only need to disclose certain disagreements with accountants (those that occurred within the past two fiscal years and where the accountant either has resigned or was dismissed) in the annual report. Should we require any additional information about changes in or disagreements with accountants in the annual report? Are there any types of disagreements that funds should not have to include in their annual report? Which ones and why?

101. Is there any other information about the fund's accountants or the fund's financial statements that we should require funds to disclose in the annual report?

h. Statement Regarding Liquidity Risk Management Program

In 2016 and 2018, the Commission adopted a series of reforms designed to promote effective liquidity risk management across the open-end fund industry and enhance disclosure regarding fund liquidity and redemption practices. As part of these reforms, if a fund's board of directors has reviewed the fund's liquidity risk management program as required by 17 CFR 270.22e-4 [rule 22e-4 under the Act] during the fund's most recent fiscal half-year, the fund is required to briefly discuss the operation and effectiveness of the liquidity risk management program in its most recent shareholder report. In adopting this requirement, the Commission stated that it had considered commenters' suggestions that shareholder report disclosure would have the benefit of allowing funds to produce tailored disclosure suited to the particular liquidity risks and management practices of the specific fund.

We continue to believe that requiring funds to provide shareholders with information about the operation and effectiveness of the fund's liquidity risk management program (along with appropriate prospectus risk disclosure and MDFP disclosure) may help provide investors a comprehensive picture of the fund's liquidity risks and their management. However, having reviewed shareholder report disclosures responsive to this requirement, we preliminarily believe that the disclosure in its current form is not well-suited to a concise shareholder report. The staff has observed that the shareholder report liquidity risk management disclosure often appears as a lengthy recitation of the requirements of rule 22e-4 and is not tailored to a particular fund. This disclosure does not lend itself to the type of focused disclosure that the proposed shareholder report is designed to include. Therefore, we propose to revise the disclosure requirements to emphasize that the disclosure must be tailored to each fund and be concise.

Given the nature and quality of the disclosure we have seen, we believe the statement regarding the fund's liquidity risk management program (“liquidity risk management disclosure”) should be more tailored, concise, and informative to help shareholders better understand how the fund is managing its liquidity risks, which in turn could inform the shareholders' ability to monitor their investments in the fund. Therefore, we propose replacing the current disclosure with a brief summary of:

• The key factors or market events that materially affected the fund's liquidity risk during the reporting period;
• The key features of the fund's liquidity risk management program; and
• The effectiveness of the fund's liquidity risk management program over the past year.

We are also proposing an instruction that a fund should, where appropriate, tailor the disclosure responsive to this requirement to the fund rather than rely on generic, standard disclosures. The disclosure should not include a recitation of all the elements of the fund's liquidity risk management program. Instead, it should include the key features of the program as they relate to the fund. For example, a loan fund may briefly describe any expedited settlement agreements, or an international fund may describe the availability of a line of credit or increasing its investments in highly liquid assets ahead of extended holidays (e.g., Chinese New Year). We believe this disclosure would help inform investors about the sources of the liquidity risk for the fund, the key steps fund management takes to ameliorate those risks, and a statement explaining whether those steps have been effective. We believe that requiring tailored disclosure would better inform investors, which is a benefit we considered in assessing any incremental additional burden.

Finally, we propose to keep the timing requirements for the liquidity risk management disclosure consistent with the current requirements. We continue to believe it is appropriate to require a fund to include the liquidity risk management disclosure in the annual or semi-annual report following the period when the fund performed its required annual review of the liquidity risk management program, which may reduce costs and allow funds to provide more effective and timely disclosure.

We request comment on the proposed approach of including the liquidity risk management disclosure in the shareholder report:

102. Should we require the liquidity risk management disclosure be included in the shareholder report, as proposed? Should we instead require it to be included in another disclosure document such as the fund's Form N-CSR, statutory prospectus or summary prospectus, or on the fund's website? If so, where should it be included?

103. Would the proposed disclosure requirements provide shareholders the appropriate information to help them understand the fund's liquidity and liquidity risks and make more-informed investment decisions? Is the disclosure an improvement over the current disclosure requirements? Is the requirement to tailor the disclosure to each fund appropriate? If not, why not? How could the proposed disclosure requirements be improved?

104. Should we continue to require the liquidity risk management disclosure to be included in the most recent shareholder report following the board's review of the program or, for consistency, should we only require the disclosure in the annual report?

105. Rather than requiring all funds to include the liquidity risk management disclosure in their shareholder reports as proposed, should we instead require only a subset of funds to include this disclosure? For example, should we only require this disclosure for funds that hold less than 50% of their net assets in highly liquid investments? Alternatively, should all funds that have a highly liquid investment minimum be required to include this disclosure? Are there any concerns about funds identifying themselves through this disclosure as holding a certain percentage of assets that are not primarily highly liquid investments? If so, what are those concerns and how can they be addressed?

106. Is there any other liquidity-related information that may be relevant to shareholders that funds should be required to disclose in the shareholder report or on Form N-CSR? Are there alternative approaches to providing relevant liquidity information to shareholders? If so, what are they, and why should we use them?

i. Availability of Additional Information

We are proposing to require funds to include a statement in the annual report that informs investors about additional information that is available on the fund's website. Specifically, funds would have to provide a brief, plain English statement that certain additional fund information is available on the fund's website. This statement would have to include plain English references to, as applicable, the fund's prospectus, financial information, holdings, and proxy voting information. In addition, if the shareholder report appears on a fund's website or otherwise is provided electronically, the fund must provide a means of immediately accessing this additional information (such as a hyperlink or QR code).

Under current shareholder report requirements, funds must include statements regarding the availability of the fund's: (1) Quarterly portfolio schedule, (2) proxy voting policies and procedures, and (3) proxy voting record. We believe that this information may be important to certain investors, and they may not know this information is available or how to find it. Because of the importance of this information to some investors and consistent with a layered approach to fund disclosure that makes more-detailed or technical information available to those investors who find the information valuable, we believe it is important to continue to inform investors that this information is available and how to find it. The proposed new statement would consolidate several currently required statements about the availability of information (including the quarterly portfolio schedule, proxy voting policies and procedures, and proxy voting record) with a single statement that covers this same information.

We are also proposing to require funds to refer in the statement to other information that would not itself be included in the annual report under the proposal. First, because the annual report would no longer include financial statements, we believe it is appropriate to inform investors that this information is available. In addition, because the annual report briefly describes certain changes to the fund's prospectus, we believe it is important to remind investors about the availability of the current fund prospectus, which may provide additional context to the changes described in the report.

We also propose to provide a fund with the flexibility to refer to other information available on the fund's website, if it reasonably believes that shareholders would likely view the information as important. For example, a fund may wish to refer investors to a document describing the benefits of certain types of investments, a description of credit ratings, additional performance presentations, or additional commentary about how the fund performed. We believe this flexibility is appropriate because funds may wish to provide additional information to investors that may be more tailored or relevant to a given fund. We also believe this flexibility is appropriate given the content limitations imposed on the proposed annual report. This additional information referred to in the annual report would have the same status under the Federal securities laws as any other website or other electronic content that the fund produces or disseminates. The fact that a shareholder report references other information available on a fund's website does not change the legal status of the referenced information. For instance, a performance presentation or description of credit ratings on a fund's website would be subject to the same legal requirements and have the same legal status regardless of whether the information was referenced in a shareholder report.

We request comment on the proposed amendments to include disclosure about additional information that is available to investors outside of the annual report, including:

107. Would this proposed disclosure requirement be useful to investors? Instead of requiring a statement that certain items are available online, should we require a statement that more generally indicates that additional information is available on the fund's website without listing particular items? Are there any other changes we should make to the proposed statement about the availability of additional information? Are there other information items that funds should be required to include in the statement? Why? Are there any information items that should be excluded? If so, why? Instead of one statement that certain items are available online, should we require shareholder reports to include hyperlinks throughout the report linking to additional related content that is available online (e.g., require a hyperlink in the “Graphical Representation of Holdings” section to the fund's portfolio schedule)? If so, what specific additional references and hyperlinks should we require and why?

108. As proposed, funds would have the flexibility to refer investors to additional information that is available on the fund's website if the fund reasonably believes that shareholders would likely view the information as important. Should any limits be placed on this additional information? If so, why? For example, should it be limited to content that the fund has prepared?

109. Should we permit or require funds to refer investors to information at Investor.gov, such as information about how to read a shareholder report? If not, why not?

110. Are there any other changes that should be made to the disclosure requirement about the availability of additional information?

j. Householding

We are proposing to retain the provision that permits funds to explain how to revoke consent to the householding of the annual report. Investors often invest in funds through a variety of individual and family accounts and, as a result, sometimes receive multiple copies of the same documents from those funds. To avoid duplication, Commission rules allow funds to deliver a single copy of a prospectus, proxy materials, and a shareholder report to investors who share the same address and meet certain other requirements. This practice is known as “householding.”

Rule 30e-1 permits and we propose to continue permitting the householding of fund shareholder reports if, in addition to the other conditions set forth in the rule, the fund has obtained from each investor written or implied consent to the householding of shareholder reports at such address. The rule requires funds that wish to household shareholder reports based on implied consent to send a notice to each investor stating, among other things, that the investors in the household will receive one report in the future unless the investors provide contrary instructions. In addition, at least once a year, funds relying on the householding provision must explain to investors who have provided written or implied consent how they can revoke their consent. If relying on the householding provision, one way to satisfy this last requirement (to provide an annual notice) is to include a statement in the annual report. We propose to continue permitting funds to include this statement in the annual report.

We request comment on the proposed permitted inclusion of householding-related language in the annual report:

111. Should funds be permitted to include language about how an investor can revoke consent to householding in the annual report? If not, why not? Should we prescribe specific householding-related language that funds could include in their annual reports? If so, why, and what should that language be?

112. Should we consider any change to the householding disclosure requirements or to the rule provision that permits householding of shareholder reports? If so, why?

3. Format and Presentation of Annual Report

In addition to the proposed content requirements for the annual report, we are proposing general instructions related to the format and presentation of the report. These proposed general instructions are designed to improve and simplify the presentation of shareholder reports and encourage funds to use plain-English, investor-friendly principles when drafting their reports.

First, we are proposing an instruction specifying that the information in the annual reports would be required to appear in the same order as would be required under the proposed amendments to Form N-1A. We are requiring that information appear in a specific order so that the information that we believe to be most salient to shareholders, such as expenses, would appear first in the report, and to promote consistency and comparison across funds. The proposed ordering requirements also would place related content close together to help investors better understand the topics being discussed. For example, fund statistics and graphical representation of holdings both provide information about the fund's portfolio and therefore would be placed adjacent to one another.

In addition, the proposed general instructions to the shareholder report requirements are designed to promote effective communication between the fund and its investors. Therefore, we propose new requirements that funds use “plain English” principles for the organization, wording, and design of the annual report, taking into consideration fund shareholders' level of financial experience. Specifically, the proposed instructions would direct funds to be concise and direct and to use short sentences, active voice, and definite, concrete, everyday words. Funds would be instructed not to use legal jargon, highly technical business terms (unless they are clearly explained) or multiple negatives. Funds also would be instructed to write their annual report as if addressing the investor, using terms such as “you” or “we.” The proposed instructions also would direct funds to avoid the use of vague or imprecise boilerplate, as we believe this type of language would be unlikely to inform an investor effectively. The proposed instructions also direct funds to use white space, and implement other design features to make the annual report easy to read.

Further, the proposed instructions would encourage funds to consider using, as appropriate, a question-and-answer format, charts, graphs, tables, bullet lists, and other graphics or text features as a way to help provide context for the information presented. We believe that these alternative ways of presenting information could increase readability and that this proposed instruction could encourage funds to use these presentation options, where appropriate.

In addition, the proposed instructions would include legibility requirements for the body of every printed annual or semi-annual shareholder report and other tabular data. Those requirements would be consistent with the legibility requirements that apply to prospectuses. We believe that the proposed legibility requirements would help ensure that shareholder reports are easily readable by investors.

We request comment on the proposed general instructions regarding the format and presentation of the annual report, including:

113. Would the proposed general instructions provide clear guidance to funds when preparing an annual report? Should any of the proposed instructions be modified or not be included? If so, which ones, how should they be modified (if applicable), and why?

114. The proposed general instructions prescribe the order of information in the annual report. Is requiring a specific order for that information appropriate? Should the order be changed? If so, how? For instance, are there certain items that funds should disclose earlier (or later) in the report to be more consistent with shareholders' general areas of interest? Should we, for example, require disclosure of material fund changes earlier in the report? Does the proposed order of disclosure items appropriately place related items close together, or are there changes we could make to improve a shareholder's ability to understand how different disclosure items relate to one another?

115. Would the proposed general instruction that directs funds to comply with legibility requirements assist investors by helping to promote the readability of shareholder reports? Are there other requirements that we should include to assist investors with the readability of shareholder reports?

116. Are there other alternative ways of presenting information that we should encourage funds to consider using?

4. Electronic Annual Reports

We recognize that fund shareholders may access their annual reports and other regulatory documents online, rather than (or in addition to) receiving the reports in paper format. Shareholders could elect to receive their annual reports through electronic delivery. Additionally, under our proposal, funds that rely either on rule 498 or on proposed rule 498B would have to make the most recent annual report available online. We also recognize that investors are increasingly relying on mobile applications for financial information, and we anticipate that funds may wish to make annual reports available in a format that these applications support (for example, electronic presentations other than a static email or PDF file). Presenting fund information—including annual reports—electronically has the potential advantage of permitting greater innovation and information-tailoring than the use of a static paper document. For example, funds could overlay electronic tools onto online disclosure, such as calculators, hover-over or pop-up information, and interactive features. Presenting information electronically could also improve the content of fund disclosures by, for example, allowing investors to customize certain fund disclosures, such as fees, expenses, and performance, based on an investor's individual circumstances. However, we appreciate that the use of electronic channels, and the overlay of electronic tools onto required regulatory documents, may present both practical and legal questions for fund registrants and other market participants.

In light of this, we are proposing instructions that are designed to clarify requirements for electronic annual reports and to promote the use of interactive, user-friendly design features that may be tailored to meet individual investors' needs and improve investor engagement. We are tailoring certain proposed instructions to reflect that annual reports may be electronic as well as paper-based. First, the proposed requirements for the annual report's “cover page” are also applicable to the “beginning” of the report, which is designed to reflect that electronic reports may not have a physical page at their beginning. Similarly, the proposed instruction that would provide an ordering requirement for the contents of an annual report also includes a provision for annual reports that appear on a website or are otherwise provided electronically. This proposed instruction specifies that information should be organized in a manner that gives each item similar prominence, and presents the information in the same order, as that provided by the order the proposed instruction prescribes. For instance, an annual report available on a website could satisfy this requirement if each required disclosure item is presented with equal prominence in a separate tab and the order of the tabs follows the prescribed order, such as from left-to-right or top-to-bottom. Similarly, a mobile application could satisfy this requirement if the shareholder report navigation screen presents each shareholder report item with equal prominence and follows the prescribed order of information.

We are also proposing instructions that would provide additional flexibility for funds to add additional tools and features to annual reports that appear on a website or are otherwise provided electronically. The proposed instructions would encourage funds to use online tools designed to enhance an investor's understanding of material in the annual reports. This could include, for example: Video or audio messages, mouse-over windows, pop-up definitions or explanations of difficult concepts, chat functionality, and expense calculators. It also includes other forms of electronic media, communications, or tools designed to enhance an investor's understanding of material in the annual report. For example, this could include the ability to customize expense, performance or holdings information, or to make performance information more interactive. We believe that permitting and encouraging these design features would allow for a more interactive and user-friendly experience and would improve investor engagement. When using interactive graphics or tools, funds are permitted to include instructions on their use and interpretation. In addition, the proposed general instructions clarify that any explanatory or supplemental information that funds provide as online tools may not obscure or impede understanding of the required disclosures.

The default presentation of the content of any electronically presented annual report must use the value that the applicable requirement under Item 27A prescribes. For example, while the default presentation in the expense example and performance line graph must be on a $10,000 assumed investment, a feature may permit an investor to enter a different amount but the investor must, as a default, be able to view the assumed amount. One result of this instruction would be that when the contents of a fund's annual reports are derived from the fund's audited financial statements, the default online presentation would be the audited figures.

Under the general instructions we are proposing, any information that is included in online tools that the fund uses, but that is not included in the annual report that the fund files on Form N-CSR, would have the same status under the Federal securities laws as any other website or other electronic content that the fund produces or disseminates. For example, if a fund includes a video providing more detail about the fund's investments and performance, the video may, based on the facts and circumstances, be an advertisement subject to rule 482. Under these circumstances, the fund would be subject to the same liability standard and filing requirements that attach to any other rule 482 advertisement. This proposed instruction is designed to remind funds about liability and any filing requirements associated with any additional information that a fund chooses to include with the online version of its annual report (other than the shareholder report information that it files with the Commission on Form N-CSR). This supplemental information would also be subject to a record retention requirement.

Finally, we are proposing an instruction providing that if the shareholder report references other information that is available online, the report should include a link or some other means of immediately accessing that information. The proposed instruction states that, for example, the fund should provide hyperlinks to the fund's prospectus and financial statements if the information is available online. The proposed instruction also states that, in an annual report that is delivered in paper format, funds may include website addresses, QR codes, or other means of providing access to such information. We believe these approaches are consistent with a layered approach to disclosure, and that providing ready access to the information that a shareholder report references (but does not directly include) would be a convenient feature for investors. Under these requirements, a fund must include a link specific enough to lead investors directly to a specific item or alternatively to a central site with prominent links to the referenced information. For example, a reference to a fund's prospectus could include a direct link to the prospectus or might include a link to the landing page that includes prominent links to several fund documents, such as the summary prospectus, prospectus, SAI and annual reports. However, the link cannot lead investors to a home page or section of the fund's website other than on which the specified item is posted. This proposed requirement is designed to permit the investor easily to locate (i.e., without numerous clicks) the information in which he or she is interested.

We request comment on the proposed general instructions regarding electronic annual reports, including:

117. Are the proposed instructions that are designed to reflect that annual reports may be electronic as well as paper-based appropriate? Specifically, would the requirements for the “beginning” of the shareholder report clarify the contents that the Commission would require to appear first in electronically presented annual reports? Similarly, is the proposed instruction permitting an “equivalent” order (to that prescribed in Form N-1A) for annual reports that appear on a website or are otherwise provided electronically (such as a mobile application) appropriate, and is this instruction clear? If not, why not? Are there any other instructions that would help clarify content and format requirements for electronic annual reports?

118. The proposed general instructions would encourage a fund to use online tools for annual reports that are available electronically. Would this proposed instruction help to explain the content required to be included in the annual report? Is permitting the additional information conveyed by these tools appropriate? Should there be any limits on the types of additional information that funds present along with electronic versions of their annual reports, in addition to the limits prescribed by the proposed instructions (e.g., that explanatory or supplemental information be responsive to the proposed shareholder report content requirements, that it not be misleading or impede understanding of the required disclosures, and that the default presentation contents in electronically presented shareholder reports be based on the same assumptions required by Item 27A)? For instance, should we permit a fund's expense presentation to include an explanation that compares a fund's expenses to its peer group?

119. The federal securities laws generally do not prohibit a fund from posting a version of its annual or semi-annual shareholder report translated into a foreign language on its website. Further, we understand that funds occasionally will include online tools, such as translators, on their websites to assist non-English speaking investors and investors with disabilities to assess information about the fund. Should the Commission address the translation of a shareholder report or other documents filed with the Commission (such as a prospectus) into a foreign language and the transmission of those documents to shareholders? If so, what factors should the Commission consider? Should the Commission address foreign language shareholder reports (and foreign language versions of other fund regulatory materials) not only for open-end funds, but also other types of funds? If the Commission were to amend its rules to address the transmission of foreign language shareholder reports, should it also require foreign language versions of shareholder reports to be filed with the Commission?

120. As proposed, any additional information that a fund presents in connection with an electronic version of its annual report that is not included in the annual report filed on Form N-CSR would have the same status under the Federal securities laws as any other website or electronic content that the fund produces or disseminates. Is this approach appropriate? Notwithstanding this proposed instruction, should we require a fund to file this additional information with the Commission? If so, why, and through what channels should funds be required to file the additional information (e.g., on Form N-CSR)? Is it appropriate to provide investors additional information online that would not have to be provided in paper to investors who request paper documents? If not, why not?

121. Is it appropriate to require that any electronic version of an annual report provide a means of facilitating access (such as a hyperlink) to any information that is referenced in the annual report that is available online? If not, why not? Similarly, is it appropriate to permit an annual report that is delivered in paper to include website addresses, QR codes, or other means of facilitating access to such information? Should the use of website addresses and QR codes be required for annual reports delivered in paper?

122. As proposed, the additional explanatory or supplemental information permitted in an electronic annual report may not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. Are these restrictions appropriate? If not, why not? Should this instruction also specify that any explanatory or supplemental information that funds provide as online tools be responsive to the proposed content requirements for shareholder reports? Could this additional restriction prevent funds from providing information that some shareholders might find useful? Or would it be helpful in furthering the goal of ensuring that explanatory or supplemental information not obscure understanding of the required disclosures?

123. Rather than what we are proposing, should funds be able to transmit multiple-series annual reports to shareholders but be required to provide tools for tailoring the online presentation of the disclosure to an individual series? Should we require multi-class funds to provide tools for tailoring the online presentation of the disclosure to an individual class? Why or why not?

124. When a fund's annual report is available on a website or otherwise available electronically, should the investor be warned when he or she leaves the annual report content and moves to other fund content? If so, why? Should all annual report content (particularly when shown on multiple pages or tabs), be clearly identified as being part of the annual report? If not, why not?

125. Do the proposed general instructions sufficiently encourage electronic design and delivery of the annual report? Are the general instructions sufficiently flexible to permit delivery on phones, tablets, and other devices and to accommodate information conveyed via videos, interactive graphics, or tools and calculators? How can the Commission encourage funds to make fuller use of innovative technology to enable more interactive, user-friendly annual reports?

F. Semi-Annual Shareholder Report

We are proposing to specify the design and content of funds' semi-annual reports through new Item 27A of Form N-1A. These design and content specifications are similar to those we are proposing for funds' annual reports.

The table below summarizes the proposed content that funds would include in their semi-annual reports and compares the proposal to current semi-annual report disclosure requirements.

1. Scope and Contents of the Proposed Semi-Annual Report

As with the proposed annual report, we propose to limit the scope of funds' semi-annual reports in several respects to reduce the overall length and complexity of these reports. First, we propose to require a fund registrant to prepare separate semi-annual reports for each series of the fund. Second, we propose generally to limit the content a fund may include in its semi-annual report to the information that Item 27A of Form N-1A specifically permits or requires. However, if a fund's particular circumstances may cause the required disclosures to be misleading, the fund may add additional information that is necessary to make the required disclosure items not misleading. Finally, the proposed amendments to Form N-1A would not permit a fund to incorporate by reference any information into its semi-annual report. Collectively, these restrictions parallel our proposed scope and content limitations for annual reports. As is the case today, the proposed semi-annual report would not be subject to page or word limits. As noted above, we believe a set limit could constrain appropriate disclosure or lead funds to omit material information. However, we believe that the proposed limits on the contents of shareholder reports should nonetheless limit their length in support of our goal of concise, readable disclosure.

The cover page or beginning of the proposed semi-annual report would essentially contain the same content as the annual report (with the only difference being references to a “semi-annual report” instead of an “annual report”).

Semi-annual reports currently include an expense example. The proposed semi-annual report would retain an expense example, which would be subject to the same content requirements as the expense example in the proposed annual report.

We do not currently require MDFP in semi-annual reports. Under our proposal, semi-annual reports similarly would not require MDFP, but funds could include this disclosure on an optional basis. We understand that it is currently common for funds to include MDFP in their semi-annual reports, and we believe that continuing to allow this disclosure would enable funds to identify factors that could help investors better contextualize other information disclosed in the semi-annual report. However, any such disclosure would have to comply with the proposed content requirements for MDFP in annual reports.

Under our proposal, semi-annual reports, like annual reports, would have to include certain fund statistics, including the fund's: (1) Net assets, (2) total number of portfolio holdings, and (3) portfolio turnover rate. This new disclosure requirement for semi-annual reports would parallel proposed required disclosures in annual reports. As in annual reports, this proposed disclosure requirement is intended to provide succinct fund disclosures in a format that investors may be more likely to review than long narratives, and is designed to help contextualize other disclosures required in semi-annual reports. In addition, a fund could disclose any additional statistics that it believes would help shareholders better understand the fund's activities and operation during its most recent fiscal half-year.

Semi-annual reports currently include a graphical representation of holdings. For the same reasons that we propose to retain the current requirements for the graphical representation of holdings in the annual report (with revisions designed to improve the presentation), we propose to retain the current requirements for the graphical representation of holdings in funds' semi-annual reports. The graphical representation of holdings in the proposed semi-annual report would be subject to the same content requirements as in the proposed annual report.

We do not currently require a discussion of material changes to the fund in semi-annual reports. Under our proposal, such disclosure would still not be required, but funds could include this disclosure on an optional basis. We believe that permitting, but not requiring, this disclosure is appropriate because we anticipate that it would be common under the proposed rules for fund shareholders to receive notices of material changes as they occur throughout the year (i.e., the notices that proposed rule 498B would require, or as prospectus “stickers” for those funds that do not rely on proposed rule 498B). Requiring a discussion of material changes in the semi-annual report could be duplicative in light of these other notices. However, we are permitting funds to include this disclosure in their semi-annual reports because we anticipate that there could be circumstances in which discussing material changes could help investors better contextualize other information in the semi-annual report. Any such disclosure would have to comply with the proposed content requirements for the discussion of material changes in annual reports.

As discussed above, we are proposing to require funds to include, under certain conditions, a statement in their semi-annual or annual reports regarding their liquidity risk management program. This statement would include a brief summary of: (1) The key factors or market events that materially affected the fund's liquidity risk during the reporting period, (2) the key features of the fund's liquidity risk management program, and (3) the effectiveness of the fund's liquidity risk management program over the past year. Depending on the timing of the fund's board's review of the fund's liquidity risk management program, the fund would include the statement in either its annual or semi-annual report. If the board were to review the liquidity risk management program more frequently than annually, a fund could choose to include the discussion of the program's operation and effectiveness over the past year in the fund's annual and/or semi-annual report, but this discussion would not be required to be included in both reports.

Under current shareholder report requirements, funds must include statements regarding the availability of certain information not included in the semi-annual report, namely the fund's: (1) Quarterly portfolio schedule; (2) proxy voting policies and procedures; and (3) proxy voting record. Under our proposal, the semi-annual report would have to similarly include a brief, plain English statement that certain additional fund information is available on the fund's website, including, as applicable, the fund's prospectus, financial statements, quarterly portfolio schedule, and proxy voting record. The statement could also reference other information on the fund's website that the fund reasonably believes shareholders would view as important. In addition, if the shareholder report appears on a fund's website or otherwise is provided electronically, the fund must provide a means of facilitating access to that additional information (such as a hyperlink). Collectively, these requirements would be the same as the proposed requirements with regard to the availability of additional information in annual reports.

We request comment generally on the proposed scope and content requirements for funds' semi-annual reports, and specifically on the following issues:

126. Is the proposed scope for semi-annual reports appropriate? To the extent the Commission changes the proposed scope of annual reports, should the Commission adopt those same changes for semi-annual reports? In contrast, are there any unique scope considerations for semi-annual reports, as opposed to annual reports?

127. Are the proposed content requirements for semi-annual reports appropriate? To the extent that the Commission adopts changes to the proposed content requirements for annual reports, should the Commission adopt those same changes for semi-annual reports? In contrast, are there any unique content considerations for semi-annual reports, as opposed to annual reports? For example, are there any amendments we should make to the proposed MDFP requirement to clarify disclosure obligations in the context of a semi-annual reporting period, as opposed to an annual reporting period? As another example, should we require the statement regarding the fund's liquidity risk management program in both the annual and the semi-annual reports, instead of providing the flexibility to include this disclosure in either report (depending on the timing of the board's review of the program)?

128. Is it appropriate to permit, but not require, funds to include MDFP and a discussion of material fund changes in their semi-annual reports? Why or why not? Would funds include this optional disclosure in their semi-annual reports, and if so, why? Should we permit any additional flexibility with regard to the content requirements of semi-annual reports and, if so, are there any corresponding changes that we should make to the proposed form amendments to implement such flexibility?

129. Should the Commission make any changes to the frequency of fund shareholder reports? For example, should the Commission require the transmittal of fund shareholder reports more or less frequently than on a semi-annual basis? To what extent would changes in the frequency of shareholder reports impact investors and their investment decision-making?

2. Format and Presentation of Semi-Annual Report

Under our proposal, as discussed below, the semi-annual report would be generally subject to the same format and presentation requirements as the annual report.

Information in semi-annual reports would be required to appear in the same order as the corresponding form items appear in the proposed amendments to Form N-1A. Any information that a fund could choose to include in the semi-annual report would also be subject to this proposed ordering requirement (that is, it would have to be presented in the same order as the parallel mandatory disclosures in annual reports). Like the parallel requirement for annual reports, this proposed ordering requirement for semi-annual reports is designed to ensure that information we believe is most salient to shareholders would appear first in the report. The proposed ordering requirement also is designed to promote consistency and comparison across funds and would place related report contents close together.

The other proposed instructions for annual reports' format and presentation discussed above also would apply to semi-annual reports. These include the proposed “plain English” instructions for the organization, wording, and design of the report. They also include the proposed instructions encouraging funds to consider using, as appropriate, a question-and-answer format, charts, graphs, tables, bullet lists, and other graphics or text features as a way to help provide context for the information presented.

We request comment generally on the proposed format and presentation requirements for funds' semi-annual reports, and specifically on the following issues:

130. Are the proposed format and presentation requirements for semi-annual reports appropriate? To the extent that the Commission adopts rules that include changes to these requirements for annual reports, should the Commission adopt those same changes for semi-annual reports? In contrast, are there any unique considerations with regard to the format and presentation requirements for semi-annual reports, as opposed to annual reports?

131. Under our proposal, semi-annual reports may optionally include certain disclosures that would be required to be included in annual reports. Is it appropriate to require any such optional disclosures to be presented in the same order as the information would be presented in annual reports? To what extent could this cause confusion for investors reading semi-annual reports, given that some semi-annual reports might contain additional optional disclosures interspersed between required disclosures? In contrast, to what extent would it be confusing to require these optional disclosures to be presented in a different order (e.g., following all required disclosures)?

3. Electronic Semi-Annual Reports

a. Proposed Instructions and Requirements

Our proposed instructions for electronic annual reports, including those that promote the use of interactive, user-friendly electronic design features, would also apply to semi-annual reports. Among other things, these proposed instructions would (1) provide ordering and presentation requirements for semi-annual reports that appear on a website or are otherwise provided electronically, (2) provide additional flexibility for funds to add additional tools and features to semi-annual reports that appear on a website or are otherwise provided electronically, and (3) require a semi-annual report to include a link or some other means of immediately accessing information referenced in the report that is available online.

We request comment generally on the proposed instructions regarding funds' electronic semi-annual reports, and specifically on the following issues:

132. Are the proposed instructions regarding funds' electronic semi-annual reports appropriate? Should any of those instructions be modified or should any other revisions be made to the Commission's proposal with regard to electronic shareholder reports, in order to better reflect investor preferences or to encourage the use of electronic shareholder reports by funds?

b. Alternatives Involving Electronic Semi-Annual Reports

Currently, funds are required to transmit semi-annual reports to shareholders, and—as with annual reports—they will be able to satisfy this requirement in certain cases under rule 30e-3 by posting the report (and certain other required materials) online and providing a notice of the reports' online availability. We considered proposing alternative requirements for transmitting semi-annual reports. For example, we considered allowing funds to satisfy the requirement to transmit semi-annual reports by filing certain information on Form N-CSR. Also, in light of current internet use trends, we considered allowing funds to satisfy the requirement to transmit a semi-annual report by updating certain information on a fund website either semi-annually or on some more-frequent basis.

For example, we understand that many funds currently publish monthly or quarterly fact sheets online. These fact sheets tend to include much of the information that would appear in the proposed requirements for funds' semi-annual reports, and often present such information in a concise format that may be appealing to investors. We understand that some shareholders or financial professionals may use fact sheets to monitor fund investments because, among other reasons, fact sheets include more up-to-date performance information than shareholder reports or prospectuses. While we are not proposing an approach in which a fund's obligation to transmit semi-annual reports would be deemed to be satisfied if the fund were to merely post updated fact sheets (or similar documents) online on a semi-annual or more-frequent basis, we are soliciting comment on potential disclosure alternatives that would leverage information that many funds already provide on their websites.

An approach that would leverage frequently updated website content, such as fund fact sheets, raises the consideration of how frequently required regulatory disclosures should ideally be provided to fund shareholders. Our proposed semi-annual report requirement parallels current requirements with regard to the frequency of shareholder reports, which are statutorily mandated to be transmitted on a semi-annual basis. We are currently unaware of any evidence indicating that fund investors specifically desire shareholder reports to be provided less frequently. The proposed approach also reflects our view that the proposed amendments to the contents of annual and semi-annual reports represent the information that would be most useful and salient to investors in assessing and monitoring their fund investments.

More generally, we considered the effects and benefits of a disclosure framework in which fund shareholders have regulatory information “pushed” to them on a semi-annual basis (e.g., the required direct transmission of shareholder reports twice a year) versus a hypothetical disclosure framework in which fund shareholders would have the onus to periodically “pull” regulatory disclosures from various sources (e.g., information that is periodically updated on a fund website). We are concerned that such a hypothetical disclosure framework would represent a significant change in current practices. We are also concerned that a “pull”-only disclosure framework may not be aligned with investor preferences. Although we understand that some investors prefer receiving fund disclosure electronically (e.g., through email, mobile application, or website availability), we do not have evidence that these investors would prefer a disclosure approach in which they would receive no notification that updated disclosures are available. We recognize that a hypothetical disclosure framework could require funds to “push” to investors a short notice that updated information is available online, similar to the current approach under rule 30e-3. However, rule 30e-3 contemplates notices being provided semi-annually. To the extent that, under the hypothetical disclosure framework, funds would update their online materials more frequently than semi-annually, providing notices each time that online materials were updated could be costly and could dissuade funds from updating these materials. Moreover, we understand that some investors generally prefer to receive at least certain fund information in paper format. We recognize that there are other possible permutations of these disclosure approaches (for example, providing a notice of updated online information only semi-annually or permitting a fund to rely on rule 30e-3 with respect to the requirement to provide semi-annual reports, while continuing to require funds to provide annual reports directly to shareholders), and we request comment on these possible approaches below.

In addition, potential regulatory challenges and unintended consequences could result from such a hypothetical disclosure framework. For example, as discussed below, we seek comment regarding the extent to which this hypothetical framework could result in a bifurcated disclosure system. That is, we ask about the effects on fund investors if certain funds would no longer transmit semi-annual reports directly and instead would update information posted online, while other funds would continue to transmit semi-annual reports directly.

We request comment generally on the alternatives to the proposed semi-annual report transmission requirement that we considered, and specifically on the following issues:

133. Should the Commission require the direct transmission of semi-annual reports, as proposed? Alternatively, should the Commission adopt different conditions for satisfying this transmission requirement? For example, should funds be permitted to satisfy this requirement by filing certain information on Form N-CSR, pursuant to certain conditions? If so, what information should be filed, and what conditions would be appropriate? As another example, under the proposal, funds registered on Form N-1A would no longer be permitted to rely on rule 30e-3 to satisfy annual and semi-annual report transmission requirements. Should we instead continue to permit these funds to rely on rule 30e-3 as an alternative method of transmitting their semi-annual reports (while, as proposed, no longer permitting them to rely on the rule with respect to annual reports)? What evidence is there (for example, of investor preferences) to support different transmission requirements for semi-annual reports versus annual reports?

134. As a further alternative, would it be appropriate for the Commission to permit funds to satisfy their obligations to transmit semi-annual reports by updating certain information that appears on their websites (for example, updating a fund fact sheet), either semi-annually or on some more frequent basis? If so, what frequency and which information would be appropriate? Would it be appropriate to require a fund's website to include all of the information that we are proposing that funds include in their semi-annual reports, a subset of this information, or different information? To what extent should the Commission specify the content, presentation, and/or accessibility requirements for such information, and what should these requirements be? How, if at all, should funds be required to inform shareholders that updated information is available on their websites? Should there be any other conditions for a fund to be able to satisfy its semi-annual report transmission obligations in this way, and if so what should they be? To what extent should the Commission consider or address the fact that, pursuant to rule 482 under the Securities Act, fact sheets and other information that funds make available online are generally considered to be omitting prospectuses, and are thus subject to prospectus liability that does not apply to shareholder reports? Should information that funds make available online under this alternative be required to be filed with the Commission? To what extent would this alternative approach result in a bifurcated disclosure system, as described above? What would be the effects on investors and those who wish to review semi-annual reports, if semi-annual reports were only prepared by some, but not all, funds? Would this alternative be aligned with investor preferences for fund shareholder report disclosure? Would it otherwise raise any investor protection concerns, and if so, what concerns?

135. Are there any further alternatives the Commission should consider with regard to semi-annual reports specifically, or reports that the fund would transmit on an other-than-annual basis generally? To what extent should any of these alternatives provide special consideration for electronic shareholder reports?

G. New Form N-CSR and Website Availability Requirements

We are proposing to amend Form N-CSR and rule 30e-1 to implement our proposed layered disclosure framework.

We are proposing to require funds to continue to file certain information, which is currently included in fund shareholder reports, on Form N-CSR. Section 30 of the Investment Company Act requires funds to file their shareholder reports, including certain information that must appear in their reports, with the Commission. Because we are proposing a framework in which certain information would no longer appear in funds' shareholder reports, we are proposing amendments to Form N-CSR that would create new filing requirements for this information in order to continue to require funds to file the information with the Commission.

This Form N-CSR filing requirement would further the proposed layered disclosure framework by making available a broader set of fund information than the information that appears in funds' annual and semi-annual reports. The information that would be filed on Form N-CSR is less retail-focused than the information that would appear in funds' annual and semi-annual reports, but as detailed below we believe that retaining the availability of this information would be important for investors who desire more in-depth information, financial professionals, and other market participants. The information included on Form N-CSR also would continue to provide shareholders and other market participants with access to historical, immutable data regarding the fund on EDGAR. This historical information also would facilitate the Commission's fund monitoring responsibilities and could create significant efficiencies in the location of information for data gathering, search, and alert functions used in those monitoring activities. For example, filing on EDGAR facilitates the financial statement reviews that section 408 of the Sarbanes-Oxley Act of 2002 mandates. Additionally, because Form N-CSR is filed with the Commission on EDGAR, a fund can incorporate by reference information that is disclosed on Form N-CSR, including the fund's financial statements, into a fund's registration statement, subject to certain limitations. Finally, a fund's principal executive and financial officer(s) are required to certify the financial and other information included on Form N-CSR, and are subject to liability for material misstatements or omissions on Form N-CSR.

The amendments that we are proposing to rule 30e-1 would require funds to make available on their website the information that they would newly have to file on Form N-CSR, and to deliver such information upon request, free of charge. These proposed website availability requirements are designed to provide ready access to this information for shareholders who find this information pertinent. The proposed requirements also would assist those investors who find it most convenient to locate fund materials on a website that is not EDGAR.

The following table outlines the content that we propose to require funds to include in their Form N-CSR filings and make available online. This content is currently included in a fund's annual and semi-annual reports.

1. Proposed Form N-CSR Filing Requirements

a. Financial Statements

We are proposing to require a fund to file its most recent complete annual or semi-annual financial statements on Form N-CSR, and provide certain data points from the financial statements in its annual and semi-annual reports, in lieu of including the fund's complete financial statements in its shareholder reports. Consistent with current requirements, the fund's annual financial statements would be audited and accompanied by any associated accountant's report, while the semi-annual financial statements need not be audited.

Currently, funds are required to include audited financial statements in their annual reports and unaudited financial statements in their semi-annual reports. Section 30(e) of the Investment Company Act provides that funds' annual and semi-annual reports include the fund's financial statements, which in turn must include a statement of assets and liabilities, a schedule of investments that shows the amount and value of each security owned by the fund on that date, a statement of operations, and a statement of changes in net assets. The annual report must include audited financial statements accompanied by a certificate of an independent public accountant. The financial statements (including the fund's schedule of portfolio investments) provide data regarding the values of the fund's portfolio investments as of the end of the reporting period. This provides a “snapshot” of data at a particular point in time, or, for example in the case of the statement of operations, historical data over a specified time period.

The rules under Regulation S-X establish general requirements for portfolio holdings disclosures in fund financial statements. Information regarding a fund's schedule of portfolio investments is designed to enable shareholders to make more informed asset allocation decisions by allowing them to better monitor the extent to which their investment portfolios overlap. In addition, this information may provide shareholders—particularly those with facility in analyzing funds' individual portfolio holdings—with information about how a fund is complying with its stated investment objective and expose any deviation from the fund's investment objective (i.e., style drift). In lieu of providing a complete schedule of portfolio investments as part of the financial statements included in its shareholder report, a fund may provide a summary schedule of portfolio investments (“summary schedule”). The summary schedule must list, separately, the 50 largest issues and any other issue exceeding one percent of the net asset value of the fund at the close of the period.

Much of the length of funds' current annual and semi-annual reports is due to the inclusion of the complete financial statements. Commenters on the Fund Investor Experience RFC, as well as information from prior investor testing and surveys, suggest that some investors generally believe the financial statements, or information derived from financial statements, is important. However, we understand that many shareholders may find the current shareholder report financial statement disclosure to be complex and difficult to understand. For example, the 2012 Report on Investor Testing of Fund Annual Reports noted that while about a quarter of investors surveyed expressed the view that financial statement information is important, the majority of investors did not find the financial statement section of the shareholder report easy to understand, and investor comprehension of the section was low. Similarly, one commenter on the Fund Investor Experience RFC stated that much of the information included in financial statements is of a technical nature with little importance to the average retail investor, and recommended that this information be included online.

We are proposing to require funds to provide the complete financial statements on Form N-CSR, while retaining the graphical representation of holdings in the annual and semi-annual reports. We believe that this layered approach to disclosure will help shareholders understand how the fund invests its assets. This approach is also designed to permit all shareholders, including retail shareholders, to monitor and assess their ongoing investment in the fund in a concise, easy-to-understand pictorial format, while preserving access to the more complete financial statements for shareholders that find this broader information useful. The graphical representation of holdings in funds' shareholder reports is also in line with the preferences investors have expressed for including more tables, charts, and graphs in fund disclosure to make information more understandable to the average investor.

We also are proposing amendments to Form N-1A that would eliminate a fund's ability to provide a summary schedule in lieu of providing a complete schedule of portfolio investments as part of the financial statements. We believe that this is appropriate because the proposed annual and semi-annual reports would no longer include the complete financial statements (which includes the schedule of portfolio investments). Therefore, because a fund's full schedule of investments would only be included on Form N-CSR and on the fund website, we believe that allowing funds to use the summary schedule would be unnecessary and could potentially be confusing to shareholders. This proposed change would also reduce costs to the extent funds need not print and mail a complete schedule of portfolio investments as part of the financial statements unless a shareholder requests this information. Furthermore, because the proposed annual and semi-annual reports are designed to help investors focus on the most salient features of the fund to better evaluate their investment, we do not believe it would be useful to shareholders, and may even be confusing, to allow funds to provide a summary schedule alongside the complete schedule of portfolio investments online.

We seek comment on our proposal to require funds to file their annual and semi-annual financial statements on Form N-CSR and make them available online rather than in a fund's shareholder reports, and specifically on the following issues:

136. Would our proposed layered approach to disclosure of financial statement information—by providing the graphical representation of holdings in the annual and semi-annual report and the complete financial statements on Form N-CSR—help tailor information to shareholders based on their informational needs? Are there any other data elements from funds' financial statements that should be included in funds' annual and semi-annual reports, and if so, what elements and why would they be useful for retail shareholders?

137. Is the direct transmission of audited financial statements, or a portion of them, important to fund investors, and if so, why? If important, would it be helpful to investors for any information in the annual report to be replicated verbatim from the audited financial statements, and for the report to make clear that certain information was audited? What information and why?

138. Should we, as proposed, eliminate a fund's ability to provide a summary schedule in lieu of providing a complete schedule of portfolio investments as part of the financial statements? Should we instead either permit funds to continue providing a summary schedule as part of their financial statements, or require funds to include a summary schedule in their shareholder reports? Would the latter alternative provide an appropriate complement to the graphical representation of holdings, or would including the summary schedule in funds' shareholder reports be duplicative and/or confusing in light of the proposed requirement to include the graphical representation of holdings in funds' annual and semi-annual reports? If we were to continue to permit funds to provide a summary schedule as part of their financial statements, should we also require these funds to make their complete portfolio holdings, as of the close of the fund's most recent second and fourth fiscal quarters, available on a website (in addition to the proposed requirement discussed below that funds make their first and third fiscal quarters' complete portfolio holdings available online)? Should we permit a fund to make the summary schedule available online instead of the complete schedule of portfolio holdings? Why or why not?

139. Other than complete financial statements, is there any other financial information that funds should be required to file on N-CSR? Do investors and other market participants currently use the financial statement information that appears on EDGAR as part of funds' filed shareholder reports, and if so, how?

b. Financial Highlights

We are proposing to require funds to file their financial highlights information on Form N-CSR. This information is identical to the information currently required in fund shareholder reports. We are proposing that funds would not include financial highlights information in their annual or semi-annual reports, with the exception of certain specific data points as discussed below.

Currently, funds are required to disclose the condensed financial information that Item 13(a) of Form N-1A requires (i.e., financial highlights) in their annual and semi-annual reports. The financial highlights include a summary table of financial information covering the preceding five years (or since the fund's inception, if less than five years). Under certain circumstances, a fund may incorporate by reference its financial highlights from a report to shareholders into its prospectus.

The information contained in a fund's financial highlights is generally designed to help investors evaluate the fund's historical performance and fund manager's investment management expertise. For example, disclosure of changes in a fund's total return over a five-year period is designed to give a shareholder information regarding the fund's performance trends over time (i.e., volatile vs. steady returns). Similarly, a higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account.

While we would require funds to file the entirety of their financial highlights on Form N-CSR, we are also proposing to retain certain elements of the financial highlight information in funds' annual and semi-annual reports. These retained elements are those that we understand may be particularly helpful for shareholders to evaluate a fund's performance. This layered disclosure approach is designed to retain the financial highlight information that we believe would be most salient to retail shareholders in funds' shareholder reports, while preserving the entirety of this information on Form N-CSR for those shareholders to whom the broader information would be useful. While one industry survey found that the average retail shareholder finds most of the items from the financial highlights section difficult to understand, this survey also concluded that a majority of shareholders found the total return and expense ratio information important for shareholders to monitor and assess their investments in a fund. Accordingly, we are proposing that a fund would have to disclose its expense ratio in the “Fund Expenses” section of the proposed annual and semi-annual reports. Also, while funds' shareholder reports would no longer include annual total returns for each of the preceding five years, the MDFP section of the annual report would continue to include certain information regarding a fund's annual total returns. Shareholders also would continue to be able to assess performance trends over time using the performance line graph and performance table that would appear in the annual report. Finally, we would require annual and semi-annual reports to include funds' disclosure of their net assets and portfolio turnover rate (which are also data elements from the fund's financial highlights) as of the end of the period covered by the report. We believe that all of these data elements that would appear in the proposed annual and semi-annual reports would together serve as a snapshot—of both period-end data and data over time—that would provide retail shareholders with the financial highlights data that they have indicated they find most useful. Investors who want to continue to have access to all of the information that currently appears in funds' financial highlights would continue to be able to access this information on Form N-CSR and online.

Item 13 of Form N-1A currently requires a fund to include financial highlights information in its prospectus, and an instruction to this item permits a fund to incorporate this information from a shareholder report under rule 30e-1 by reference into its prospectus. Because, under the proposal, funds' shareholder reports would no longer include financial highlights, we are proposing to amend the current instruction to allow a fund to incorporate by reference into its prospectus its financial highlights from Form N-CSR. For existing shareholders that have received the fund's shareholder report, a fund would be required to include a legend stating that additional information about the Fund's annual and semi-annual financial statements is available in Form N-CSR. For new investors in the fund, the fund would be required to provide the fund's most recent shareholder report along with its prospectus. This provision parallels the current provision that allows a fund to incorporate by reference its financial highlights from the fund's shareholder report.

Finally, as discussed above, we also are proposing amendments to Item 13(a) of Form N-1A to require an ETF to disclose its total return based on the ETF's per share market value return as of the end of the period. This would align the information provided in the financial highlights with the expense information included in the annual and semi-annual reports.

We seek comment on our proposal to require financial highlights information to be disclosed on Form N-CSR, and specifically on the following issues:

140. Should we, as proposed, layer the information that appears in funds' financial highlight information to preserve the most retail-focused disclosure in funds' shareholder reports, while making the full financial highlights available on Form N-CSR and online? Would this proposed layered approach help tailor disclosure to shareholders based on their informational needs? If not, what changes should we make to the proposed approach?

141. Should we, as proposed, revise the Form N-1A instruction to permit funds to incorporate by reference their financial highlights from Form N-CSR into their prospectuses? Why or why not? If so, should we require funds to include a statement explaining that the fund's financial statements are included on Form N-CSR, that Form N-CSR is available, without charge, upon request, and how a shareholder may make inquiries to request Form N-CSR, and whether the fund makes available Form N-CSR on the fund's website?

142. Should we, as proposed, require ETFs to disclose market value return in their financial highlights? Would shareholders find this information useful? Because we are proposing to require this information to be included in the fund expenses section of the shareholder report, is it useful for shareholders to have this information in both the financial highlights and in the shareholder report?

143. Rather than allowing funds to incorporate by reference their financial highlights from Form N-CSR, should we instead remove the current Form N-1A instruction permitting funds to incorporate their financial highlights by reference into their prospectuses (thereby requiring funds to include their financial highlights in their prospectuses instead of incorporating this information by reference)? If we were to require funds to include their financial highlights in their prospectuses, should it be necessary for them to also file this information on Form N-CSR? Would shareholders benefit from having access to this information on Form N-CSR in addition to the prospectus? How burdensome would it be for a fund to include financial highlights into their prospectuses and also file that information on Form N-CSR?

144. Rather than requiring the full financial highlights to be filed on Form N-CSR, should we require funds to file and post only certain data points from the financial highlights? If so, which ones? Do investors and other market participants currently use the financial highlights information that appears on EDGAR as part of funds' filed shareholder reports, and if so, how?

c. Changes in and Disagreement With Accountants for Funds

We are proposing to require a fund to file on Form N-CSR the disclosures that Item 304 of Regulation S-K currently requires, concerning changes in and disagreements with accountants. As discussed above, funds must currently include this information in their shareholder reports. The proposed Form N-CSR filing requirement would complement the proposed requirement for funds to include a high-level summary of changes in and disagreements with accountants in their annual reports.

While the disclosure that we are proposing funds to include in their shareholder reports would be designed to put shareholders on notice of the dismissal or resignation of an accountant and the existence of a material disagreement with that accountant, the information that funds would report on Form N-CSR would provide additional, more nuanced and technical disclosure that may be informative to some shareholders and other market participants. For example, this disclosure could be meaningful as it indicates that the fund has especially challenging, subjective, and/or complex accounting policies and financial statement disclosures or the accountant could not resolve audit findings. Moreover, we believe that it is appropriate to retain this disclosure in a location that includes audited financial information (as proposed, Form N-CSR) to provide those investors, financial professionals, and other market participants who review and analyze this disclosure with appropriate contextual information.

We seek comment on our proposal to require a fund to disclose on Form N-CSR the information required by Item 304 of Regulation S-K. We specifically request comment on the following issues:

145. Should we, as proposed, require a fund to file the information required by Item 304 of Regulation S-K on Form N-CSR? Why or why not?

146. Would requiring the Item 304 information to be filed on Form N-CSR be useful to investors, financial professionals, or other market participants? If so, what types of audiences would find this information to be particularly useful, and why? If not, why not?

147. Is the proposed Form N-CSR disclosure requirement appropriate and necessary in light of the proposed summary information about changes in and disagreements with accountants that we propose funds to include in their shareholder reports? If not, why not?

148. Rather than the proposed approach, should we instead amend and/or streamline the requirement to disclose Item 304 information and retain the amended disclosure in the fund's annual report? Why or why not? Do investors and other market participants currently use the Item 304 information that appears on EDGAR as part of funds' filed shareholder reports, and if so, how?

d. Matters Submitted for a Shareholder Vote

We are proposing to require funds to include information about matters submitted for a shareholder vote on Form N-CSR, rather than in their shareholder reports. This information is identical to the information currently required in fund shareholder reports. Currently, when a matter is submitted to a vote of shareholders, funds must disclose information regarding the substance of these matters, along with the results of such votes, in several ways. First, shareholders receive proxy statements that include detailed descriptions of issues brought before shareholders for their vote. If a matter is submitted to a vote of fund shareholders during the period covered by an annual or semi-annual report, the fund must include certain information regarding the vote results in that report. Furthermore, funds are required to disclose on Form N-CEN whether the fund submitted any matters for a shareholder vote during the reporting period. Shareholder voting plays a valuable role in fund regulation, and providing information regarding shareholder votes keeps shareholders informed and may operate as a deterrent to self-dealing by the fund's adviser.

The proposed amendments to the disclosure requirements for matters submitted for a shareholder vote are designed to further our proposed layered approach to shareholder report disclosure. The approach we are proposing also reflects our understanding that many retail shareholders tend not to review the information regarding vote results currently required in the shareholder report.

Under our proposal, funds' annual and semi-annual reports would no longer include information about the results of shareholder votes, but shareholders would continue to receive information about these matters through other channels. Shareholders would continue to receive a detailed description of matters submitted for a shareholder vote in fund proxy statements. Furthermore, because the proposed annual report would require funds to describe certain material changes that have occurred in the fiscal year, shareholders would receive disclosure of certain material changes that have resulted from shareholder votes. If it would be valuable to a shareholder to review additional information about the outcome of matters submitted for a shareholder vote, the shareholder would continue to have access to this more-detailed information, which the fund would file on Form N-CSR. For example, we anticipate that certain shareholders, particularly investors who desire more in-depth information, and other market participants would want to continue to have ready access to information about shareholder votes, to the extent they express investor preferences on matters such as changes in the fund's fundamental policies, investment advisory agreements, board of directors, and organizational documents.

We seek comment on our proposal to require funds to disclose the matters submitted to a vote of shareholders on Form N-CSR rather than the fund's shareholder reports, and specifically on the following issues:

149. Should we, as proposed, require funds to file the information regarding matters submitted for a shareholder vote on Form N-CSR? Why or why not? Alternatively, should we only require funds to disclose the information regarding matters submitted for a shareholder vote on the fund's website, and not also require funds to file this information with the Commission on Form N-CSR? Why or why not? Do investors and other market participants currently use the information regarding matters submitted for a shareholder vote that appears on EDGAR as part of funds' filed shareholder reports, and if so, how?

150. Would requiring this information to be filed on Form N-CSR be useful to investors, financial professionals, or other market participants? If so what types of audiences would find this information to be particularly useful, and why? If not, why not? If so, should we include information regarding matters submitted for a shareholder vote, or any summary of this information, in the proposed annual report? Why or why not?

151. Are there certain types of matters submitted for a shareholder vote that shareholders find more important than others? If so, what are they? Should we require funds to include in their annual and semi-annual reports the results of only certain matters submitted to a shareholder vote that retail shareholders find most pertinent? What matters would those be?

152. Rather than the proposed approach to disclosure regarding matters submitted for a shareholder vote, should we instead amend and/or simplify the current shareholder report disclosure requirement? If so, should we retain the amended disclosure in funds' annual and semi-annual reports? Why or why not?

e. Remuneration Paid to Directors, Officers, and Others

We are proposing to require funds to file the aggregate remuneration the fund paid to its directors, officers, and certain affiliated persons on Form N-CSR. This information is identical to the information currently required in fund shareholder reports. Funds currently provide this information in their annual reports under section 30(e) of the Investment Company Act.

As the Commission has noted, because of the substantial influence a fund's investment adviser has in determining its own remuneration, as well as the remuneration paid to directors and officers of the fund, availability of information about remuneration paid to the fund's directors and officers may help shareholders to analyze the use of corporate funds and assets, and to assess the value the fund's directors and officers bring to the fund. In addition to the aggregate remuneration disclosure in a fund's shareholder report, a fund is currently required to provide detailed disclosures regarding compensation paid to each of the directors, members of any advisory board, and certain officers and affiliates in the fund's SAI.

Based on the comments the Commission received on the Fund Investor Experience RFC, as well as information from prior investor testing and surveys, we understand that retail shareholders generally do not find remuneration information useful in the shareholder report and seldom review this section of the current shareholder report. One commenter also stated that information regarding the remuneration of directors is technical, and recommended that this information instead be included online. Because we believe that this type of information is not directly pertinent to a retail shareholder's understanding of the fund's operation and performance, and because similar information is available in the fund's SAI, we are proposing to remove the current remuneration disclosure from the shareholder reports. Investors who desire more in-depth information, financial professionals, and other market participants who would find remuneration-related information valuable (for example, in monitoring fund management) would continue to be able to find it in the fund's SAI (where compensation information is disclosed for each director), as well as in Form N-CSR filings (where compensation information is aggregated, as it is in shareholder reports today).

We seek comment on our proposal to require funds to disclose information about remuneration paid to directors, officers and others on Form N-CSR rather than the fund's annual reports, and specifically on the following issues:

153. Should we require funds to include information concerning remuneration paid to directors, officers and others in the proposed annual report? If so, why?

154. Is this remuneration information useful to investors, financial professionals, or other market participants? If so what types of audiences would find this information to be particularly useful, and why? If not, why not?

155. Rather than removing this disclosure entirely from the annual report, should we require funds to provide certain data points regarding remuneration paid to directors, officers and others in their annual reports? For example, should we require disclosure of remuneration paid to directors in the fund's shareholder report if it exceeds a certain threshold? Or, should we require a fund to disclose in its annual report any changes to director or officer remuneration during the reporting period?

156. Because more detailed information regarding compensation paid to directors and officers already must appear in a fund's SAI, would the proposed aggregated remuneration information filed on Form N-CSR meaningfully and usefully supplement this current SAI disclosure? If so, how? Or would the proposed aggregated remuneration information be duplicative of existing SAI disclosures? Do investors and other market participants currently use the information regarding compensation paid to directors and officers that appears on EDGAR as part of funds' filed shareholder reports, and if so, how?

f. Statement Regarding Basis for Approval of Investment Advisory Contract

Currently, funds are required to provide a statement, in the annual and semi-annual reports, regarding the basis for the board's approval of the fund's investment advisory contract. We are proposing to require funds to provide this information on Form N-CSR, rather than in the fund's shareholder reports. This information is identical to the information currently required in fund shareholder reports.

Under current shareholder report disclosure requirements, if the board of directors approved any investment advisory contract during the fund's most recent fiscal half-year, the fund is required to discuss in reasonable detail the material factors and the conclusions with respect thereto that formed the basis for the board's approval. When the Commission adopted these requirements in 2004, it stated that the purpose of this requirement was to “encourage funds to provide a meaningful explanation of the board's basis for approving an investment advisory contract,” which, in turn, the Commission hoped would encourage boards to “consider investment advisory contracts more carefully and investors to consider more carefully the costs and value of the services rendered by the fund's investment adviser.”

We continue to believe that requiring funds to provide shareholders with information regarding the board's review of investment advisory contracts preserves transparency with respect to those contracts, and fees paid for advisory services, assists investors in making informed investment decisions, and encourages fund boards to engage in vigorous and independent oversight of advisory contracts. However, we preliminarily believe that this disclosure is not well suited to the fund's shareholder report because it pertains less directly to a retail shareholder's understanding of the operations and performance of the fund and does not lend itself to the type of focused disclosure that the proposed annual report is designed to include. Because of the nature and quantity of information in this disclosure, we therefore believe that it may be better suited to appear in a different location that would continue to permit access to fund shareholders and other market participants who find this information to be particularly useful and meaningful. We believe that providing this information on Form N-CSR would continue to allow these persons effectively to consider the costs and value of the services that the fund's investment adviser renders.

We seek comment on our proposal to require funds to disclose the basis for the board's approval of the fund's investment advisory contract on Form N-CSR rather than in the fund's shareholder reports, including the following specific issues:

157. Should we, as proposed, remove the information regarding the basis for the board's approval of a fund's advisory contract from shareholder reports? Should we instead amend and/or simplify this disclosure requirement and/or retain the amended disclosure in funds' annual and semi-annual reports? Would this amended disclosure be useful for retail shareholders to use to monitor and assess their ongoing investment in a fund?

158. Should we, as proposed, require funds to file the information regarding the board's approval of a fund's advisory contract on Form N-CSR? Why or why not? Do investors and other market participants currently use the information regarding the board's approval of a fund's advisory contract that appears on EDGAR as part of funds' filed shareholder reports, and if so, how?

2. Proposed Website Availability Requirements

a. Website Content Requirements

We are proposing to require a fund to post online all of the information that the proposal would newly require on Form N-CSR. The fund would have to make this information available from 70 days after the end of the relevant fiscal period until 70 days following the next respective fiscal period. Currently, funds are required to file reports on Form N-CSR not later than 70 days after the close of the fund's fiscal half-year. Therefore, our proposal would align the timing of the availability of the information provided online with when reports on Form N-CSR are filed.

In addition, we are also proposing to require a fund (other than a money market fund) to make its complete portfolio holdings, as of the close of the fund's most recent first and third fiscal quarters, available on a website. A fund would have to make this information available within 70 days after the close of each such quarter. A fund's portfolio holdings information for its first and third fiscal quarters would have to remain publicly accessible online for a full fiscal year.

This portfolio holdings information would complement the second and fourth fiscal quarter portfolio holdings information that we also are proposing to require funds to make available on a website (as part of the proposed requirement to make their financial statements available online). The proposed requirement to post first and third quarter portfolio holdings online is therefore designed to provide investors and other market participants with easy access to a full year of complete portfolio holdings information in one location. Funds are currently required to disclose their holdings as of the end of each fiscal quarter in reports on Form N-PORT filed with the Commission (which are available on EDGAR). However, all open-end funds are not currently required to send holdings information as of the end of the first- and third-quarters to shareholders or to make that information accessible on a website other than EDGAR. The proposed requirement would provide centralized access to this information, rather than requiring investors to access the fund's reports on Form N-PORT for each of those periods separately. Also, we anticipate that the portfolio holdings information that funds would make available online would be available in a more user-friendly presentation than the information that funds report on N-PORT in structured data format.

We seek comment on the proposed requirements for website content that funds would have to make available under the proposals, including the following specific issues:

159. Should we, as proposed, require a fund to post online all of the information that would newly be filed on Form N-CSR?

160. How often should funds be required to update the information that appears online? For example, should we require a fund to update its online financial statement information more or less frequently than semi-annually or its online portfolio holdings information more or less frequently than quarterly? Should we instead, for example, require funds to update all information that appears online monthly or as soon as it becomes available? Why or why not?

161. What is the appropriate time period for a fund to have to make the newly required Form N-CSR information available online? Should we, as proposed, allow funds to delay the availability of materials online by 70 days after the end of the relevant fiscal period? Because funds send their annual and semi-annual reports 60 days after the end of the fiscal period, should we similarly adopt a 60-day delay for the online accessibility of information that funds would file on Form N-CSR?

162. How long should each of the newly required Form N-CSR materials have to remain accessible online? Should we, as proposed, require funds to maintain the required information on their websites for a full fiscal year? Is it useful for investors to have this information available for a full fiscal year? Should we require the information to be available for a period longer or shorter than a full fiscal year (such as two years, or six months)?

163. Should we require only certain Form N-CSR items to be available for a full fiscal year? If so, which items should we require funds to make available for a full year and why? For example, how long should funds be required to maintain the portfolio holdings information that appears online? Should we, as proposed, require a fund to maintain its holdings information as of the close of each fiscal quarter for a full fiscal year? Would shareholders find this useful? As another example, should we require funds to maintain only their financial statements and portfolio holdings information for a full fiscal year, while permitting funds to remove the remainder of Form N-CSR information from their websites on a semi-annual basis?

164. Should we, as proposed, require the portfolio holdings information for the first and third quarters to be presented in accordance with the schedules set forth in §§ 210.12-12 through 210.12-14 of Regulation S-X?

165. Should we require any additional disclosure on fund websites to clarify to investors that portfolio holdings information for the fund's second and fourth quarters is available online as part of the fund's financial statements?

166. Should we adopt a specific format for how a fund should present its first and third fiscal quarter information online? If so, what should it be? For example, should we require this information be posted in XML format or a PDF form?

167. Rather than requiring funds to maintain all four most recent fiscal quarters of portfolio holdings information on fund websites, should we instead require funds to only provide portfolio holdings information for their most recent fiscal quarter (or some other period, such as the fund's most recent two fiscal quarters)? Alternatively, should we require funds to maintain additional portfolio holdings information on their websites, such as the past two or five years of information?

168. As funds would be required to file their portfolio holdings information as of the close of their second and fourth fiscal quarters on Form N-CSR as part of their financial statements, should we also require funds to file the portfolio holdings information as of the close of their first and third fiscal quarters on Form N-CSR? Would it be useful for investors or any other market participants—for example, data aggregators—to have historical holdings data for all of a fund's fiscal quarters filed on a single Commission form (as opposed to having to aggregate this information either from information filed on Form N-CSR and the portfolio holdings filed as exhibits to Form N-PORT, or from information that funds would otherwise be required to make available online on websites other than EDGAR)? Is it easier for data aggregators to collect information from a single Commission form? Does easier access to information by data aggregators increase the flow of information to investors?

169. Instead of requiring complete portfolio holdings information, should we require funds only to disclose a subset of holdings, such as the top ten largest holdings, for each quarter on their websites and/or in the proposed annual report?

b. Accessibility and Presentation Requirements

Under our proposal, funds also would have to comply with certain conditions designed to ensure the accessibility of information that is required to appear online. First, the website address where the required information appears must be specified on the cover page or beginning of the shareholder report and could not be the address of the Commission's electronic filing system. Second, the materials required to appear online would have to be presented in a format convenient for both reading online and printing on paper, and persons accessing the materials would have to be able to retain permanently (free of charge) an electronic copy of the materials in this format. These conditions are designed to ensure that information appearing online pursuant to the proposed rule is user-friendly and allows shareholders the same ease of reference and retention abilities they would have with paper copies of the information.

The rule as proposed also would include a safe harbor provision providing that a fund shall have satisfied its obligations to transmit shareholder reports even if it did not meet the posting requirements of the rule for a temporary period of time. In order to rely on this safe harbor, a fund would have to have reasonable procedures in place to help ensure that the required materials appear on its website in the manner required by the rule and take prompt action to correct noncompliance with these website availability requirements. The proposed rule would require prompt action as soon as practicable following the earlier of the time at which the fund knows, or reasonably should have known, that the required documents are not available in the manner prescribed by the proposed rule.

We are proposing this safe harbor because we recognize that there may be times when, due to events beyond a fund's control, such as system outages or other technological issues or natural disasters, a fund may temporarily not be in compliance with the web posting requirements of the proposed rule. Providing for this safe harbor by rule may obviate the need to provide exemptive relief from the proposed rule's conditions under these very limited and extenuating circumstances, as we have done from time to time.

Finally, we are proposing to provide funds with some flexibility on how online information is presented. Under our proposal, funds would have the option to satisfy the website availability requirement for the information that the fund would newly have to file on Form N-CSR by posting its most recent report on Form N-CSR, free of charge, on the website specified on the cover page or beginning of the shareholder report. The proposed rule also provides funds flexibility to post the online information separately for each series of the fund or grouped by types of materials and/or by series. If a fund were to group the information on its website by type of materials and/or by series, the grouped information would have to meet certain presentation requirements, including that the grouped information: (1) Is presented in a format designed to communicate the information effectively, (2) clearly distinguishes the different types of materials and/or each series (as applicable), and (3) provides a means of easily locating the relevant information (including, for example, a table of contents that includes hyperlinks to the specified materials and series). This proposed provision is designed to allow funds to tailor the presentation of information on their websites to the unique aspects of their funds, while presenting the information in a manner that facilitates shareholder access. For example, for a fund complex that includes several funds, each with multiple classes, the fund complex's website could include a master table of contents that contains hyperlinks to the specific materials for each fund and each class.

We seek comments on the proposed website availability requirements, including:

170. The rule as proposed would require that the materials required to be accessible online be publicly accessible, free of charge, at the website specified at the cover page or beginning of the shareholder report, and does not expressly require that the website be the fund's website. Should the rule require that the materials be accessible at the fund's website? Why or why not?

171. The rule as proposed would require that the website information be presented in a format or formats that are convenient for both reading online and printing on paper. Are these proposed format requirements appropriate? Should we instead require that the materials be presented in a format or formats that are human-readable and capable of being printed on paper in human-readable format? Why or why not?

172. Are there any additional presentation or formatting requirements that we should adopt to facilitate investor access to the information that would appear online? For example, should we require that each item appear separately on the fund's website under a relevant header instead of permitting, as proposed, a fund to post its Form N-CSR to satisfy the requirement to make certain information that the fund would file on Form N-CSR available online?

173. The proposed rule would contain a safe harbor for instances in which the online materials are not available for a temporary period of time. Is the safe harbor as proposed appropriate, or should we modify it in any way? For example, should the rule be more prescriptive as to the period of time in which a fund must take action to resolve any issues?

174. Should we, as proposed, provide funds the flexibility to either post the online information separately for each series of the fund or to group the information by types of materials? Why or why not? Should we, as proposed, allow funds to group the material by type or by series? Are there other type of groupings that we should allow? If we allow funds to group the information posted online, should we require the grouped information to meet the presentation requirements discussed above? Are there any additional presentation requirements that we should consider?

3. Proposed Delivery Upon Request Requirements

We are proposing to require funds to send, at no cost to the requestor and by U.S. first class mail or other reasonably prompt means, a paper copy of any of the materials discussed above to any person requesting such a copy within three business days after receiving a request for a paper copy. A fund must also send, at no cost to the requestor by email or other reasonably prompt means, an electronic copy of any of the materials discussed above within three business days after receiving a request for an electronic copy. These requirements would apply also to any financial intermediary through which shares of the fund may be purchased or sold. We understand that some investors continue to prefer to receive information in paper format, and therefore our proposal is designed to allow shareholders to have ready access to the fund information that appears online in print format, if they so prefer, or to receive electronic copies of this same information.

We seek comment on our proposal to require funds to provide shareholders, upon request, paper or electronic copies of the information that the proposed rule would require to appear online, including the following issues:

175. Are the proposed delivery upon request provisions appropriate? Is the delivery time frame that the provisions would require appropriate? For example, would a fund experience challenges sending a paper copy of the information to a requesting shareholder within three business days, and if so what would these challenges be? Would other time frames for sending a paper copy be more appropriate, and if so, what should these time frames be?

176. Do funds require additional clarity regarding what would qualify as a “reasonably prompt means” of delivering an electronic copy of any of the materials discussed above? If so, what type of guidance should the Commission provide?

177. Should we incorporate a provision in rule 30e-1 that would permit investors the option to notify the fund (or the shareholder's financial intermediary) that the investor wishes to receive paper copies of reports on a going forward basis? Why or why not?

H. Disclosure Item Proposed To Be Removed From Shareholder Report and Not Filed on Form N-CSR

In general, we are proposing that the disclosure items that funds currently have to include in their annual and semi-annual reports would either be retained in those reports (some items in a simplified form, and some items only in the annual report), or instead filed on Form N-CSR and made available online. However, with respect to the management information table that currently appears in funds' annual reports, we are proposing to remove this disclosure item from the shareholder report without requiring its disclosure elsewhere.

Currently, a fund is required to disclose certain information about each of the fund's directors and officers in the annual report (“management information table”). This information is also included in the fund's SAI. The Commission adopted these requirements in order to provide shareholders with basic information about the identity and experience of the fund's directors and to highlight for shareholders any potential conflicts of interests that the fund's directors and officers may have that would be relevant to shareholders.

While we continue to believe that shareholders should have access to information regarding fund directors, we believe it is unnecessary to include this disclosure in multiple disclosure documents. We also preliminarily believe that the management information table is not well suited to the fund's shareholder report because it pertains less directly to retail shareholders' understanding of the operations and performance of the fund and does not lend itself to the type of focused disclosure that the proposed annual and semi-annual reports are designed to include.

We considered whether we should propose to require funds to file the management information table on Form N-CSR or to post it online. We determined, however, not to propose such a requirement because the information included in the management information table does not frequently, or significantly, change from year to year. The most significant changes to this information usually occur when the fund has an election of directors, which would require disclosure of this information for the candidates standing for election in the relevant fund proxy statement. The results of such an election would be reflected in the fund's SAI, which is updated annually. Therefore, we believe that it would be unnecessarily duplicative for funds to also include this information on Form N-CSR.

We seek comment on our proposal to remove the management information table from the annual report, and specifically on the following issues:

178. Should we require funds to include the management information table in the proposed annual report? If so, why? Should this information also be included in the proposed semi-annual report? Is the management information table useful to shareholders to monitor and assess their ongoing investment in a fund? Why or why not?

179. Rather than removing this disclosure entirely from the shareholder report, should we require funds to provide certain data points regarding fund management (for example, any subset of the disclosure about directors and officers that funds currently have to include in the management information table) in their shareholder reports? If so, what information and why, and should it be included in the semi-annual report as well as the annual report? For example, should we require disclosure of other directorships held by the director? Should we require disclosure of information in the management information table only with respect to interested directors? Or should we require a fund to disclose in its shareholder reports only if any changes have occurred during the reporting period with respect to management information (other than changes that the proposed rules already would require funds to disclose in the annual report's discussion of fund changes)?

180. Should we require funds to file the management information table on Form N-CSR? Should we require funds to post this table online? Should we require funds to do both? Would shareholders benefit from having the information in one or both locations? What benefit would this provide to shareholders and other market participants, in light of the fact that this disclosure already appears in the SAI and in proxy statements for the election of directors?

I. Proposed Rule 498B and Treatment of Annual Prospectus Updates Under Proposed Disclosure Framework

1. Overview

In addition to the changes we are proposing to the requirements for fund shareholder reports, we are also proposing new rule 498B, which would address shareholders' continued receipt of annual prospectus updates following their initial investment in an open-end fund. Like the proposed new requirements for funds' shareholder reports, proposed rule 498B uses layered disclosure concepts to tailor funds' required disclosures to the informational needs of different types of investors. Under the proposed rule, investors would continue to receive a prospectus in connection with their initial fund investment, as they do today. Thereafter, a shareholder would no longer receive annual prospectus updates, in light of the fact that the fund's current prospectus would be available online, and the shareholder would be receiving (1) tailored shareholder reports (which would include a summary of material fund changes in annual reports), and (2) timely notifications regarding material fund changes as they occur. This new rule is designed to further the disclosure goals discussed above, including improving fund disclosure by tailoring it to the needs of new versus existing investors, addressing concerns about duplicative and overlapping disclosure materials, and responding to investors' expressed preferences for simplified, layered disclosure that highlights key information.

Legal Operation of Proposed Rule 498B

Specifically, proposed rule 498B would allow a fund to satisfy any obligations under section 5(b)(2) of the Securities Act to have a statutory prospectus precede or accompany the carrying or delivery of a security to the fund's existing shareholders to be satisfied under specific conditions. Those conditions would be: (1) The existing shareholders have been previously sent or given a prospectus in order to satisfy any obligation under section 5(b)(2) of the Securities Act, such as in connection with their initial investment in the fund; (2) certain specified disclosure materials (including, among other things, current summary and statutory prospectuses) appear online; and (3) existing shareholders receive notices of certain material changes to the fund when those changes occur. The proposed rule also includes delivery upon request and website presentation requirements (which are not conditions of reliance on the proposed rule to satisfy prospectus delivery obligations), including that a fund must: (1) Deliver, in a manner consistent with the requester's delivery preference, a copy of any of the fund documents that the rule would require to be made available online, at no charge to the requester, subject to certain additional conditions; and (2) ensure that those fund documents required to appear online are presented in a format convenient for both reading online and printing on paper, and can be permanently retained in such a format by persons accessing those materials, free of charge.

Proposed Rule 498B and the Legal Responsibility for Misleading Disclosures

The proposed rule would not relieve funds of any legal responsibility for misleading disclosures with regard to the fund documents required to be made available online. In particular, a fund that relies upon the layered disclosure framework in proposed rule 498B would be subject to the same prospectus and registration statement liability and anti-fraud provisions as if the fund had sent or given those prospectuses to existing shareholders. Those liability provisions would apply to the summary and statutory prospectuses required to appear online, together with information incorporated therein by reference.

2. Scope of Proposed New Rule 498B

Delivery Obligations for New Investors and Existing Shareholders

The proposed new rule is designed to tailor delivery obligations for new investors and existing shareholders in open-end funds registered on Form N-1A, to match their respective informational needs. For this reason, proposed rule 498B would continue to require that investors receive a fund prospectus in connection with their initial fund investment, and would affect funds' prospectus delivery obligations only as they apply to existing shareholders. The prospectus provides forward-looking information and acts as the principal selling document for potential investors. It provides certain key information, including disclosures regarding the fund's: (1) Investment objectives; (2) costs; (3) principal investment strategies, principal risks, and performance; (4) investment advisers and portfolio managers; (5) purchase and sale of fund shares; (6) tax information; and (7) financial intermediary compensation. We believe it is important for new investors making an initial investment decision to receive a prospectus that includes this information to inform their investment decisions and facilitate fund comparisons. The proposed shareholder reports would contain similar information to some of those prospectus disclosures where we believe that both new investors and existing shareholders would benefit from receiving this information to make informed decisions about whether to buy, sell, or hold fund shares.

Definition of “Existing Shareholder” Under Proposed Rule 498B

For the purposes of proposed rule 498B, an “existing shareholder” would generally be a shareholder to whom a summary or statutory fund prospectus was sent or given to satisfy any obligation under section 5(b)(2) of the Securities Act and who has held fund shares continuously since that time. This definition is designed to ensure that after an investor has received a prospectus, that investor would have received notice regarding all subsequent material changes to the fund. The investor would have received notice of these changes either through prospectus amendments or supplements that would be sent or given per current practice to investors that hold fund shares (before the fund relies on proposed rule 498B), or via notices of material changes that proposed rule 498B would require (after the fund relies on proposed rule 498B). We believe that the definition's requirement that the shareholder continuously hold the fund shares is necessary because, if the investor purchased fund shares and then subsequently sold these shares, that investor would not receive notification of material fund changes that occurred when he or she did not hold fund shares. In this case, we believe it would be appropriate for such an investor to once again receive a fund prospectus before falling under a disclosure framework that provides information tailored to continuously existing investors.

For purposes of the proposed rule 498B, an “existing shareholder” of a money market fund also would generally be a shareholder to whom a summary or statutory fund prospectus was sent or given to satisfy any obligation under section 5(b)(2) of the Securities Act. However, the requirement that the shareholder must have continuously held fund shares since that time would differ under the proposed rule with respect to shareholders in a money market fund. This difference would recognize the manner in which money market funds are used by investors and practices that we understand are generally common with money market funds. Money market funds are often used as cash vehicles with frequent withdrawals and deposits, and thus a money market fund investor who has sold all shares may often purchase additional shares shortly thereafter. For this reason, we understand that money market funds generally send or give prospectus supplements and amendments to former shareholders who maintain accounts in those funds. Similarly, we understand that money market funds generally apply the same treatment to beneficial owners of such accounts opened through financial intermediaries, such as brokerage clients who have their cash deposited in a money market fund sweep account maintained in the name of the broker but for which the brokerage client is a beneficial owner. Therefore the definition of “existing shareholder” would also include a shareholder in a money market fund who has continuously maintained (or been a beneficial owner of) an account with that fund because a fund prospectus has been sent or given to that shareholder.

Scope Excludes Variable Annuity and Variable Life Insurance Contracts

Proposed rule 498B would be available only with respect to funds registered on Form N-1A. Proposed rule 498B would not apply to investors that hold the fund through a separate account funding a variable annuity contract offered on Form N-4 or a variable life insurance contract offered on Form N-6. The Commission recently adopted 17 CFR 230.498A [rule 498A], which provides that prospectus delivery requirements under section 5(b)(2) of the Securities Act are satisfied with respect to those investors if the fund's current prospectuses and certain other documents appear online and certain other conditions are met. Rule 498A, like the disclosure framework for funds that we are proposing, relies on a layered disclosure approach that tailors the disclosure that investors receive to the informational needs of both new and ongoing investors in variable contracts. The conditions associated with the satisfaction of prospectus delivery requirements pursuant to rule 498A are tailored to the unique nature of variable annuity and variable life insurance contracts, and provide disclosures and protections that we believe are more appropriate for investors in those contracts (compared to disclosures and protections associated with the satisfaction of prospectus delivery requirements pursuant to proposed rule 498B). Accordingly, we are not proposing to make proposed rule 498B available for those products.

We seek comment on the scope of our proposed new rule 498B and specifically on the following issues:

181. Is the way that the proposed new rule would address existing fund shareholders' continued receipt of annual prospectus updates appropriate, in light of the other aspects of the rules and rule amendments we are proposing? Would existing shareholders be receiving the right set of information under the proposal, and would such information be delivered or made available in an appropriate manner?

182. Should we make proposed rule 498B mandatory for all funds (instead of a permissive rule, as proposed)? If so, why? Would a permissive rule result in confusion for fund shareholders (because existing shareholders in funds that choose not to rely on the rule would continue to receive annual prospectus updates year over year), or produce any other detrimental effects? What would be funds' primary considerations in determining whether to rely on proposed rule 498B?

183. Would the proposed rule's layered disclosure approach adequately protect existing shareholders who have no or limited internet access or who prefer not to receive information about their investments over the internet?

184. Should we modify the proposed scope of the rule in any way? For example, should the scope be extended to include new investors, or investors that hold the fund through a separate account funding a variable insurance contract? Why or why not?

185. Is the definition for “existing shareholder” under the proposed rule appropriate? If not, how should we revise this definition? Is it appropriate that, as proposed, the definition of “existing shareholder” includes a shareholder in a money market fund who has continuously maintained (or been a beneficial owner of) an account with that fund because a fund prospectus has been sent or given to that shareholder? Do commenters agree that money market funds generally continue to send or give prospectus supplements to former shareholders, so long as those shareholders maintain (or are beneficial owners of) an account with the money market fund? Are there any general limitations on this industry practice or other limitations that we should add with regard to this provision in the proposed rule? Should the proposed definition of “existing shareholder” also include specific provisions for certain types of funds other than money market funds, and if so, what types of funds, and what should these provisions be, and why? For example, should the rule generally reference funds used for cash management purposes, as opposed to (or in addition to) simply referencing money market funds?

186. Proposed rule 498B's layered disclosure framework for existing shareholders would only apply to open-end management investment companies. To what extent, if any, should we extend this aspect of our proposal to other types of investment companies? If we were to do this, should we modify any of the conditions to rely on proposed rule 498B, and if so, how? For example, proposed rule 498B is designed to work in conjunction with our proposed amendments to funds' shareholder reports. How should we modify the rule to apply in contexts where other types of investment companies (for example, registered closed-end funds and BDCs, and ETFs that are organized as unit investment trusts) have different shareholder report requirements than those we propose for open-end management investment companies? Please address the utility and policy implications of implementing a layered disclosure framework for existing shareholders, similar to that which proposed rule 498B would create, in the context of other types of investment companies.

187. If we were to adopt proposed rule 498B, how should we evaluate the effectiveness of the new framework? What methods or approaches should we use to evaluate it, and what areas of the new framework should we focus on in any such review?

3. Conditions To Rely Upon Proposed New Rule 498B

A fund would have to satisfy certain conditions in order to rely on the proposed new layered disclosure framework for existing shareholders, as outlined below. Failure to satisfy any of these conditions would mean that the fund could not rely on proposed rule 498B to satisfy prospectus delivery obligations to existing shareholders.

a. Website Availability of Certain Fund Documents

To rely on rule 498B, a fund would have to make certain materials publicly accessible, free of charge, at the website address specified on the cover page or at the beginning of the fund's annual and semi-annual reports. These materials would include: The fund's current summary and statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports (collectively, the “rule 498B online fund documents”). This set of documents would be identical to the set of documents that are publicly accessible online for funds currently relying on rule 498. This proposed condition is designed to implement the contemplated layered disclosure approach by ensuring that current versions of the fund's summary prospectus, statutory prospectus, and SAI would be available online so that existing shareholders who did not receive those documents would have ready access to them in a convenient, centralized location, together with other relevant documents for existing shareholders such as the most recent annual and semi-annual shareholder reports.

The reference to “current” versions is designed to ensure that amendments or supplements to those documents are included in the rule 498B online fund documents as a condition of reliance on proposed rule 498B. Because funds generally continuously offer and sell shares, funds effectively must continuously maintain a current prospectus to satisfy their ongoing obligations to deliver the fund's prospectus to new investors. Thus, a fund relying on proposed rule 498B would be required to maintain current versions of the rule 498B online fund documents so long as the fund is engaged in a continuous offering. Proposed rule 498B would not specify a time frame for maintaining current versions of these documents online, but when the document is no longer “current,” a fund would have to replace it with the current version.

Under the proposal, a fund would be required to include a summary prospectus as one of the rule 498B online fund documents. While funds' use of a summary prospectus is optional under rule 498, we estimate that currently 93% of all funds use a summary prospectus. Without requiring a summary prospectus, proposed rule 498B's new layered disclosure framework for existing shareholders could result in funds having less incentive to use a summary prospectus. We believe it is important to make available both a summary prospectus and the statutory prospectus to continue the current approach for funds, which gives investors the option to choose the amount and type of information to review. To the extent that existing shareholders might find it useful to review a fund prospectus (for example, in connection with a prospective additional investment in the fund), this condition would continue to make summary information about the fund available online, which we believe investors may be more likely to use and understand than the lengthier statutory prospectus.

Although funds would be required to prepare a summary prospectus to comply with the conditions of rule 498B, a statutory prospectus could still be used to satisfy prospectus delivery obligations under section 5(b)(2) of the Securities Act. We understand that some funds that prepare summary prospectuses still choose to deliver a statutory prospectus under certain circumstances. For example, we understand that certain funds that prepare summary prospectuses still choose to send or give a statutory prospectus when investors are invested in multiple series covered by a single statutory prospectus. Likewise, certain funds may choose to send or give a statutory prospectus for certain product lines where the fund believes it would be helpful for investors to see the full suite of fund options (e.g., target date funds, sector funds, or target risk funds), to the extent that multiple series of the fund are described in a single statutory prospectus.

The proposed rule would include additional conditions regarding the format, or formats, in which the rule 498B online fund documents would be presented on the website. First, the format must be human-readable and capable of being printed on paper in human-readable format. This requirement is designed to help ensure that the information provided will be user-friendly, both online and when printed. This would impose a standard of usability on the online information that is comparable to the readability of a paper document.

Second, the format must provide persons with the ability to move back and forth within documents and between certain documents. Specifically, the format must permit persons accessing the statutory prospectus or SAI to move directly back and forth between each section heading in a table of contents of such document and the corresponding section of the document. Similarly, the format must permit persons accessing the summary prospectus to move directly back and forth between: (1) Each section of the summary prospectus and any section of the statutory prospectus and the SAI that provides additional detail concerning that section of the summary prospectus; or (2) links located at both the beginning and end of the summary prospectus, or that remain continuously visible to persons accessing the summary prospectus, and tables of contents of the prospectuses and the SAI. These requirements are designed to result in online information that is in a better and more usable format than the same information when provided in paper. Being able to move directly within and between documents would be more efficient than the equivalent task in a paper document (i.e., flipping through multiple pages).

Additionally, documents required to appear online would be subject to retention requirements that would require that persons accessing the rule 498B online fund documents would have to be able permanently to retain, free of charge, an electronic version of such materials in a format that is human-readable and permits persons accessing the statutory prospectus or SAI to move directly back and forth between each section heading in a table of contents and the corresponding section of the document. This condition would provide shareholders with the same retention capabilities they would have with paper copies of the information, while still maintaining the technological enhancements associated with the electronic versions of the materials.

Further, there would be a safe harbor available if the rule 498B online fund documents were temporarily unavailable at the specified website, provided that the fund meets certain conditions. Those conditions would be substantially similar to the conditions associated with the proposed safe harbor provision addressing the website availability of the materials that the fund files on Form N-CSR. As with that safe harbor, we recognize that there may be times when, due to events beyond a fund's control, a fund may temporarily not be in compliance with the web posting requirements of proposed rule 498B. Providing for this safe harbor by rule may obviate the need to provide exemptive relief from the proposed rule's conditions under extenuating circumstances, as we have done from time to time.

These website availability conditions are modeled on the parallel conditions that rule 498 includes, requiring funds that wish to rely on that rule's summary prospectus option to make certain materials available online. We believe that this would create efficiencies for funds that wish to rely on proposed rule 498B, because many of these funds would likely be familiar with these conditions and would already have compliance processes in place pursuant to rule 498 to the extent that these funds choose to send or give summary prospectuses to new shareholders.

We generally seek comment on the proposed website availability requirements, and specifically on the following issues:

188. Are the proposed website availability requirements an appropriate condition to rely on proposed rule 498B? Why or why not?

189. Are the proposed rule 498B online fund documents—the fund's current summary and statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports—an appropriate set of materials for funds to have to make available online in order to rely on the proposed rule? Why or why not? Should this set of materials include any additional materials? Should we modify the proposed rule to reduce in any way the set of materials funds would have to make available online? Are there any revisions or simplifications that we should make to account for the information that the proposed amendments to rule 30e-1 would require a fund to post online? If so, should we make any conforming changes to proposed rule 30e-1? In addition to requiring the fund's most recent annual and semi-annual shareholder report to appear online, should we also include a requirement that the fund (or a financial intermediary through which shares of the fund may be purchased or sold) must have provided existing shareholders with a paper or electronic copy of the fund's most recent annual and semi-annual report as a condition of reliance on the proposed rule? Alternatively, should we include as a condition of reliance that the fund must adopt policies and procedures reasonably designed to ensure delivery of the fund's most recent annual and semi-annual shareholder reports?

190. Is it appropriate effectively to require funds that wish to rely on proposed rule 498B to prepare a summary prospectus that complies with the requirements outlined in rule 498(b)? To what extent is it important to make summary prospectuses available to investors? Should we, as proposed, include a summary prospectus among the list of rule 498B online fund documents? If we do not require a summary prospectus to be included, what would be the effects on investors? Would funds continue to prepare summary prospectuses, and if not, what would be the effects on investors? Under proposed rule 498B, updated prospectuses would generally be posted online instead of being printed and mailed to existing shareholders, and therefore there would be fewer economic incentives for funds to prepare and use a shorter summary prospectus in addition to the required statutory prospectus. If funds cease to prepare summary prospectuses, should we rescind rule 498 since that rule would essentially be moot? If so, what would be the effects on investors?

191. The website availability conditions in proposed rule 498B are modeled on the parallel conditions in rule 498. If we modify any of the website availability conditions in proposed rule 498B that have parallel conditions in rule 498 (and rule 498A), should we similarly modify the parallel conditions of rule 498 and/or rule 498A? Should proposed rule 498B include parallel provisions to any other conditions in rule 498 and, if so, which ones and why? For example, should proposed rule 498B include a provision similar to that in rule 498(b)(3)(iii) specifying when information is conveyed to a person for purposes of 17 CFR 230.159 [rule 159 under the Securities Act]? Are there provisions not included in current rule 498 that we should include in rule 498B?

192. Although we estimate that 93% of funds currently use a summary prospectus, are there significant issues that could prevent a fund from preparing a summary prospectus and that would therefore prevent the fund from relying on the proposed prospectus delivery option? If not, and to the extent that a summary prospectus would provide investors with summary information that they might be more likely to use and understand relative to the broader (and potentially more complex) disclosures in a statutory prospectus, should we require funds relying upon proposed rule 498B to use a summary prospectus to satisfy prospectus delivery obligations (as opposed to allowing satisfaction of such obligations via a statutory prospectus)?

193. Are there any aspects of the proposed website availability provisions of proposed rule 498B that should be harmonized, modified or clarified to reflect the different purposes of or interactions between rule 498 and proposed rule 498B? For example, to the extent that proposed rule 498B(c)(1) largely restates the web posting framework reflected in proposed rule 498(e), should proposed rule 498B instead reference, in whole or in part, the requirements of proposed rule 498(e)? If so, how should we address the fact that the website availability requirements of rule 498 are based upon the assumption that a summary prospectus will be sent or given to shareholders, which would not necessarily be the case under proposed rule 498B (because the rules would operate independently of one another, and a fund relying on rule 498B would not also have to rely on rule 498)? For example, rule 498 provides that the documents required to be made available online must appear at the website address specified in the summary prospectus sent or given to investors, whereas under proposed rule 498B existing shareholders would not be sent or given a summary prospectus.

194. Rule 498 specifies the time frame for posting current versions of the documents it requires to appear online. Proposed rule 498B, on the other hand, specifies that “current” versions of the required online materials must appear online, and we envision that this requirement would in effect dictate the required time frame for posting (i.e., when the prospectus, SAI, or annual or semi-annual shareholder report is no longer current, it would be replaced online with a current version). Should we revise proposed rule 498B to parallel the provisions in rule 498(e) regarding when the required online materials must be accessible and when they must be removed? If so, how should we address the fact that no prospectuses would be delivered to existing investors under proposed rule 498B (whereas under rule 498, the time frame for web posting is triggered by the delivery of a summary prospectus)?

195. Are there alternate website posting frameworks that would be more appropriate for us to incorporate into rule 498B, rather than—as proposed—a framework that reflects the website posting requirement of rule 498?

b. Notice of Material Changes

Funds generally maintain current prospectuses by filing annual post-effective amendments to their registration statement and, as necessary, supplementing or “stickering” the prospectus or SAI to reflect material or other changes to the information disclosed. Rather than bearing the expense of sending a prospectus with each confirmation of an investor's purchase of additional shares, which often occurs on a periodic basis (e.g., monthly), most registrants instead send copies of the new prospectus (or prospectus supplement or sticker) to all investors each time it is updated (or whenever the supplement or sticker is issued).

Under the layered disclosure framework that proposed rule 498B would create, existing shareholders would receive shareholder reports to keep them informed about their ongoing fund investments in lieu of receiving annual prospectus updates. Consequently, existing shareholders would no longer be required to have prospectus supplements or amended prospectuses delivered to them. Therefore, proposed rule 498B includes a requirement that is designed to help ensure that existing shareholders would continue to be informed in a timely manner regarding material changes to the fund (which, for shareholders in funds that are not relying on rule 498B, would otherwise be disclosed in updates to the prospectus). Absent this condition, existing shareholders potentially would not receive notice of a material change to the fund until the next annual shareholder report.

Specifically, if there is a material change with respect to certain topics that the proposed rule specifies, a fund relying on proposed rule 498B would have to send or give existing shareholders notice of that change. This provision would not apply to changes previously disclosed in the fund's most recent annual report to shareholders. The particular topics would be the same types of material changes in the proposed annual report. We believe this approach would have certain benefits over a more principles-based approach, such as a more general requirement that a fund must send notice of “any material change” to the fund. Specifically, we believe that the proposed approach would provide more certainty to funds about the types of changes that would necessitate notice to shareholders, and would enhance consistency of such disclosures across funds and across disclosure documents. These types of material changes also generally align with the prospectus disclosure items the Commission requires in summary prospectuses (and in the summary section of statutory prospectuses) and that we understand investors typically use to make investment decisions. We understand that investors often use information about these topics to inform initial investment decisions, and similarly we believe that material changes to these items may affect an existing shareholder's assessment of whether to continue to hold, buy, or sell fund shares. In addition funds could disclose other material changes on a discretionary basis, which we believe would provide flexibility to funds to highlight changes that they believe would be of significance to existing shareholders.

To help ensure shareholders receive notice in a timely manner, the proposed rule would require the notice to be provided within three business days of either the effective date of the fund's post-effective amendment filing or the filing date of the prospectus supplement filing, by first-class mail or other means designed to ensure equally prompt receipt. Further, the proposed rule would not specify the form of this notice. Therefore, a fund could satisfy this requirement, for example, by sending existing shareholders the prospectus supplement filed with the Commission, an amended prospectus which reflects the material change, or another form of notice that discusses the change.

Proposed rule 498B would allow “householding” of notices of material changes if the notice satisfies rule 154 under the Securities Act. Rule 154 generally provides that funds may deliver a single copy of a prospectus to investors who share the same address, pursuant to certain other requirements. Accordingly, funds that wish to household notices of material changes, based on implied consent, would send a notice to each investor at a shared address stating, among other things, that the investors at the shared address would receive one notice of material change(s) in the future unless the investors provide contrary instructions. In addition, at least once a year, funds relying on the householding provision would be required to explain to investors who have provided written or implied consent how they can revoke their consent, and this explanation must be reasonably designed to reach these investors. We anticipate that a fund would generally choose to provide this explanation in the notices of material changes that it provides under proposed rule 498B, and/or in the annual shareholder report.

We generally seek comment on the proposed condition regarding notice of material changes, and specifically seek comment on the following issues:

196. Is the proposed requirement regarding notices of material changes to the fund an appropriate condition to rely on proposed rule 498B? Why or why not?

197. Are the conditions that would necessitate a notice of material changes appropriate? For example, are the categories of topics identified in proposed rule 498B for which material changes would require notice to existing shareholders appropriate? Are those the topics that are most relevant to fund shareholders and their investment decisions? Does the proposed provision allowing funds to disclose additional material changes on a discretionary basis provide funds with appropriate flexibility to address their individual facts and circumstances? To the extent that the Commission adopts rules that include changes to the conditions that would necessitate disclosure of fund changes in shareholder reports, should the Commission adopt those same changes to the corresponding notice of fund changes that would be required pursuant to proposed rule 498B? In contrast, are there any considerations with regard to the disclosure of fund changes that apply uniquely to the notice contemplated by proposed rule 498B, as opposed to the proposed disclosure of fund changes in shareholder reports?

198. Are the requirements for sending the notice of material changes appropriate? Should the rule, as proposed, require the notice to be provided within three business days of either the effective date of the fund's post-effective amendment filing or the filing date of the prospectus supplement filing? Would a longer or shorter period be appropriate? Should the rule, as proposed, require the notice be provided by first-class mail or other means designed to ensure equally prompt receipt? Is this requirement sufficiently clear, or should additional delivery methods be specified in the rule? Would these requirements, together with the requirements to post online updated prospectuses and other additional information, provide sufficient notice to investors of material fund changes? As an alternative to the proposed requirements for sending the notice of material changes, should the rule instead require a fund to post notices of material changes on its website? Would this approach provide investors with sufficient notice of material fund changes, if notice were not sent (either in paper or electronically) directly to investors?

199. Are there any revisions the Commission should make to this aspect of the proposal? For example, instead of allowing flexibility regarding the form of this notice, should the Commission specify a particular format or presentation? If so, what format and why? Likewise, instead of identifying specific topics that would necessitate notice of material changes to existing shareholders, should the Commission adopt a more principles-based approach (that, for example, only requires a fund to send notices of “material changes”)? If so, why, and what should the alternative approach require?

4. Other Requirements

a. Delivery Upon Request of Certain Fund Documents

We are proposing to require a fund (or financial intermediary through which shares of the fund may be purchased or sold) to deliver, in a manner consistent with the person's delivery preference, a copy of the rule 498B online fund documents to any person requesting such a copy. The fund or intermediary must send requested paper documents at no cost to the requestor, by U.S. first class mail or other reasonably prompt means, within three business days after receiving the request for a paper copy. The proposed rule would also require a fund or intermediary to send electronic copies of these documents upon request within three business days. The proposed rule would provide that the requirement to send an electronic copy of a document may be satisfied by sending a direct link to the online document, so long as certain conditions are met. First, a current version of the document would have to be directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent. Second, the email would have to explain both how long the link will remain useable and that, if the recipient desires to retain a copy of the document, he or she should access and save the document.

Collectively, these requirements are designed to help ensure that an investor has prompt access to the required information in a format that he or she prefers. Under our proposal, an existing shareholder would no longer receive annual prospectus updates, or supplements or updates to the prospectus that the fund makes between annual updates, but would be able to review those and other relevant documents online and also receive those documents directly, in paper or electronic format, upon request. Rule 498 would continue to require a fund to send specified fund documents to shareholders upon request, if the fund relies upon rule 498 to satisfy its prospectus delivery obligations or to send communications after the effective date of the fund's registration statement. However, the delivery upon request obligations of rule 498 would not apply with respect to existing shareholders if the fund were to rely on proposed rule 498B. Thus, under our proposal, we are including delivery upon request provisions as conditions of proposed rule 498B that are parallel to the delivery upon request provisions of rule 498.

We seek comment on the delivery upon request provisions of proposed rule 498B, and specifically on the following issues:

200. Are the delivery upon request provisions of proposed rule 498B appropriate? Are they necessary in light of the parallel provisions in rule 498? Is it necessary to have delivery upon request provisions in proposed rule 498B, in light of the fact that the materials subject to these provisions would be required to be available online? Why or why not? Are these considerations different than in rule 498 and/or rule 498A, and should the delivery upon request provisions be retained in rule 498 and/or rule 498A? Why or why not?

201. Should we modify the delivery upon request provisions of proposed rule 498B in any way, and if so, how? For example, should any of the terminology or concepts in the proposed requirement to deliver an electronic copy of a requested document be revised to reflect technological developments or to ensure that they are consistent with the goal of technological neutrality (e.g., email, direct link)? Should persons relying on proposed rule 498B be required to send the rule 498B online fund documents to any requestor within three business days of such request, as proposed? Likewise, if persons relying on proposed rule 498B send a direct link to an online document in response to a request for electronic delivery of that document, should we require a current version of that document to be directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent, as proposed? In either case, would a different time period be appropriate? If we do modify any of the delivery upon request provisions of proposed rule 498B, should we similarly modify the parallel provisions in rule 498 and/or rule 498A?

202. How does the proposed rule affect shareholders' ability to request paper copies of the rule 498B online fund documents? Are there any changes to the proposed rule that we should consider to make the process for requesting paper copies more convenient for shareholders? Should we require funds to make available to shareholders a way to opt into automatic annual delivery of future summary or statutory prospectuses in a paper format without having to specifically request them each year? What would the operational challenges of this approach be? Should we allow funds to give shareholders the option of automatic delivery in paper?

203. The delivery upon request provisions of proposed rule 498B would not apply to the information funds must post online pursuant to proposed rule 30e-1, because proposed rule 30e-1 has its own delivery upon request provisions. Should we revise proposed rule 498B's delivery upon request provisions in any way to account for the information that proposed rule 30e-1 would address, and if so, are there any conforming changes that we should make to proposed rule 30e-1?

b. Convenient for Reading and Printing

In addition, the proposed rule would require the rule 498B online fund documents to be presented in a format that is convenient for both reading online and printing on paper. This requirement is designed to ensure that the information appearing online would be user-friendly, both online and when printed. In addition, the proposed rule would require persons accessing the rule 498B online fund documents to be able to retain electronic versions permanently, free of charge, in a format that is convenient for both reading online and printing on paper. Collectively, these requirements impose on the online information a standard of usability that is comparable to the readability and retention of a paper document.

We seek comment on these “convenient for reading and printing” provisions of proposed rule 498B and specifically on the following issues:

204. Are the “convenient for reading and printing” provisions of proposed rule 498B appropriate? Are they necessary in light of parallel provisions in rule 498? Should we modify these provisions in any way? If so, how, and should we also modify the parallel provisions of rule 498 and/or rule 498A? Is the phrase “convenient for reading and printing” sufficiently clear or should we provide additional guidance or rule text?

205. How would the proposed rule affect shareholders' ability to read and print rule 498B online fund documents? Are there any changes to the proposed rule that we should consider to make reading and printing such documents more convenient for shareholders?

206. The “convenient for reading and printing” provisions of proposed rule 498B would not encompass the information funds would be required to post online pursuant to proposed rule 30e-1, because proposed rule 30e-1 contains similar “convenient for reading and printing” provisions that would cover that information. Should we revise proposed rule 498B's “convenient for reading and printing” provisions in any way to account for the information that proposed rule 30e-1 would require funds to make available online and, if so, are there any conforming changes that we should make to proposed rule 30e-1?

c. Compliance With Other Requirements

The delivery upon request and “convenient for reading and printing” requirements would not be conditions of reliance on proposed rule 498B. We are proposing that failure to comply with these requirements would not negate a person's ability to rely on proposed rule 498B to satisfy its delivery obligations under section 5(b)(2) of the Securities Act. Such failure would, however, constitute a violation of proposed rule 498B.

We recognize that a fund could inadvertently violate the delivery upon request and “convenient for reading and printing” requirements of the rule. For example, weather issues or other forces outside of the fund's control could present challenges for compliance with the three-business-day deadline. Likewise, whether a particular format is convenient for reading online and printing depends on a number of factors and must be decided on a case-by-case basis. In order to provide greater certainty to market participants and funds who seek to rely upon the rule, these requirements would not be conditions to rely upon proposed rule 498B, as discussed in the paragraph above. We seek comment on this provision of proposed rule 498B and specifically on the following issues:

207. Should compliance with any or all of the proposed delivery upon request or “convenient for reading and printing” requirements be a condition of reliance on proposed rule 498B? That is, should failure to comply with these requirements result in a violation of section 5(b)(2) of the Securities Act? Alternatively, should the failure to comply with these requirements be a violation of Commission rules that does not result in an inability to rely on the rule or a violation of section 5(b)(2)?

J. Amendments Narrowing Scope of Rule 30e-3

Subject to conditions, rule 30e-3 generally permits investment companies to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of that availability instead of directly mailing the report (or emailing an electronic version of the report) to shareholders. We are proposing to amend the scope of rule 30e-3 to exclude investment companies registered on Form N-1A, which would be sending tailored annual and semi-annual reports under the proposal. We are also proposing conforming amendments to Form N-1A that would remove the current statement that rule 30e-3 requires to appear on a fund's summary and statutory prospectus and annual and semi-annual reports informing investors of the change in delivery format options if the fund intends to rely on rule 30e-3 prior to January 1, 2022.

When the Commission adopted rule 30e-3 in 2018, it stated that the rule's new “notice and access” option for transmitting shareholder reports was intended to modernize the manner in which funds deliver periodic information to investors. The Commission also stated that it believed that the new rule would improve investors' ability to access and use this information (for example, by providing investors with access to at least a full year of complete portfolio holdings information in one location), while reducing expenses associated with printing and mailing that are borne by funds, and ultimately, by their investors. Furthermore, the Commission stated that it continues to search for better ways of providing investors with the disclosure that they need to evaluate funds in which they are considering investing or currently hold shares. As part of these general efforts, the Commission noted that it was issuing—at the same time that it adopted rule 30e-3—the Fund Investor Experience RFC, which was directed at investors regarding ways in which fund disclosure, including shareholder reports, may be improved.

As discussed above, the new proposed disclosure framework considers feedback that commenters provided in response to the Fund Investor Experience RFC and reflects the Commission's continuing efforts to search for better ways of providing investors with the disclosure that they need. The proposed movement away from a notice and access model for open-end fund shareholder report transmission—and towards a model that contemplates direct transmission of concise shareholder reports—reflects our understanding based on responses to the Fund Investor Experience RFC, prior investor testing and surveys, and other disclosure reform initiatives that shareholders strongly prefer layered disclosure. It also reflects a model that certain commenters to the Fund Investor Experience RFC specifically suggested fund investors would find to be useful. Furthermore, the proposed approach reflects the Commission's recent experience with tailoring investment company disclosure requirements to the needs of new versus existing investors. In light of all of these considerations, we preliminarily believe that the proposed disclosure approach represents a more-effective means of improving investors' ability to access and use fund information, and of reducing expenses associated with printing and mailing, than continuing to permit open-end funds to rely on rule 30e-3.

Although funds can generally begin relying on rule 30e-3 on January 1, 2022, funds may rely on rule 30e-3 prior to that date if they include certain legends on fund prospectuses and shareholder reports stating that shareholder reports will eventually be available online and no longer will be sent to shareholders. We required an extended transition period and related disclosures in connection with implementation of rule 30e-3 to alert investors that they would no longer be receiving reports in the mail and to provide time for affected investors to tell their fund or financial intermediary that they wished to continue receiving reports in paper, if that was their preference. Under this proposal, in contrast, investors would be receiving this information directly, and so there would not be a need to provide time for investors to express a different preference. Shareholders receiving the annual and semi-annual reports that this proposal contemplates would be receiving tailored information more directly than they would via the rule 30e-3 notice. However, if this proposal is adopted, a fund that has previously relied on rule 30e-3 might wish to communicate to investors the change and could, for example, do so in an annual report sent to investors.

We generally seek comment on the proposed amendments to rule 30e-3, and specifically seek comment on the following issues:

208. The proposed amendments would exclude investment companies registered on Form N-1A from relying on rule 30e-3. Is such exclusion appropriate, in light of our goals of ensuring that all investors in these funds experience the anticipated benefits of the new tailored disclosure framework? Is the proposed approach to the transmission of shareholder reports preferable to the optional shareholder report transmission method that rule 30e-3 currently provides, in terms of the goal of improving investors' ability to access and use fund information, and reducing expenses associated with printing and mailing? Does the proposed approach more closely align with shareholders' preferences than the approach under rule 30e-3? Does the proposed approach represent a better way of providing investors with the disclosure they need to monitor their fund investments and make informed investment decisions? Are there any other considerations we should take into account in evaluating whether to adopt the proposed approach in lieu of continuing to permit open-end funds to rely on rule 30e-3's notice and access model?

209. If we were to adopt the proposed rules and amendments for tailored shareholder reports, should we also allow open-end funds to continue to rely on rule 30e-3? Why or why not? If we were to permit funds to continue relying on rule 30e-3, are there any changes we should make to the proposed rules and amendments in light of this? For example, should we prohibit funds that are relying on rule 30e-3 from also relying on proposed rule 498B?

210. To what extent, if any, should the scope of these amendments be extended to exclude other types of investment companies from relying on rule 30e-3? If we were to do this, how should we modify the rule to apply (or not) in contexts where other types of investment companies (for example, registered closed-end funds and BDCs, and ETFs that are organized as unit investment trusts) have different shareholder report requirements and would not have the layered disclosure framework for existing investors that we propose for open-end management investment companies?

211. Under our proposal, funds planning to rely or currently relying on rule 30e-3 would not be required to provide notice to investors of the proposed amendments to rule 30e-3 because the amendments would result in those investors directly receiving information tailored to their informational needs. Should we require such notice to investors and, if so, to what extent should we specify the form, timing, and substance of such notice?

212. Are there any difficulties that funds that have already begun to rely on rule 30e-3 would encounter in complying with the proposed changes to the scope of rule 30e-3? What difficulties would these be, and what Commission actions could help mitigate these difficulties? Should the Commission, for example, provide a longer compliance period in connection with any adoption of the proposed amendments to rule 30e-3? If so, should we delay the effectiveness of rule 498B for the same period of time to avoid a period where existing shareholders do not directly receive either a shareholder report or an annual prospectus update?

K. Proposed Amendments To Fund Prospectus Disclosure Requirements

We are also proposing several amendments to the content of funds' prospectuses. Specifically, two of the critical elements in prospectus disclosure relate to (1) fees and (2) risks, and we are proposing certain changes that we believe will improve disclosure regarding these topics. Our goal is to provide greater clarity and more comparable information with regard to fees and risks and by doing so, improve investor comprehension and facilitate investors' ability to make informed investment decisions.

1. Improved Prospectus Fee Disclosures

In addition to proposing amendments to fee presentation in shareholder reports, we are proposing improvements to prospectus disclosure about fund fees. These fee presentations are different because the annual report expense presentation is designed to help fund shareholders assess and monitor their ongoing fund investments looking back over the prior period, while the prospectus disclosure helps investors assess a prospective fund investment and is based on the fund's current estimated fees.

When considering investing in a fund, fees and expenses are an important factor investors should consider. Fees and expenses can significantly affect a fund's returns. For example, a fund with higher costs must have higher returns than a fund with lower costs to generate the same performance. In addition, differences in costs that appear to be small, for example on an annual basis, may have a large impact when comparing returns of funds over time. Funds disclose their fees in the prospectus and the annual and semi-annual reports. The presentations in each of these contexts disclose information about fees and expenses in a standardized format to help investors compare that information across funds. Despite these existing disclosure requirements and educational efforts, the degree to which investors understand fund fees and expenses remains a significant source of focus and attention, and the Commission and staff have continually sought to improve investors' understanding in this area.

We are proposing revisions to simplify the presentation of fees and expenses in the prospectus and help increase investor comprehension. These proposed amendments respond to feedback that commenters provided in response to the Fund Investor Experience RFC. We are proposing to replace the current fee table in the summary section of the statutory prospectus with a “fee summary.” The goal of this simplified fee summary would be to streamline the presentation of fees and provide an easier-to-understand presentation that includes fewer data points to help provide a clearer picture of the total costs of investing in a fund. The current fee table, which includes additional detail, would be moved to the statutory prospectus, where it could be used by investors who want additional details about fund fees to supplement the fee summary. In addition, we are proposing to replace certain terms in the current fee table with terms that we believe investors would more easily understand (these terms would also be used in the fee summary, as applicable).

We are also proposing to permit funds that make limited investments in other funds to disclose AFFE, the fees and expenses associated with those investments, in a footnote to the fee table and fee summary instead of reflecting AFFE as a line item in the fee table and fee summary (as all funds do today). This proposed amendment is designed to enhance consistency of funds' prospectus fee disclosure in recognition that, for funds whose investments in other funds are limited, the fees and expenses of the underlying funds may more closely resemble other costs of investment that are not currently reflected in the prospectus fee table.

a. Current Prospectus Fee Disclosure

Currently, funds must provide two separate presentations of fee information in the prospectus: (1) A table under the heading “Fees and Expenses of the Fund,” (the “fee table”) which shows shareholder transaction fees and annual fund operating expenses, generally in terms of a percentage of the amount invested in the fund; and (2) an example, which is a hypothetical calculation that shows the estimated expenses, in dollars, that an investor will pay for investing in a fund over different time periods.

The fee table currently includes two categories of fees: “shareholder fees” and “annual fund operating expenses.” Shareholder fees are charges that investors pay directly—they are deducted from the amount that an investor invests in the fund. These charges typically appear as a percentage of the amount invested, and include:

• Sales charges (also known as “loads”), which generally pay investment professionals compensation for selling shares of a fund to an investor; and
• Other applicable fees related to redemptions, exchanges, and account fees.

Some shareholder transaction fees appear as a dollar amount in the fee table.

Annual fund operating expenses are charges that an investor pays indirectly, because these charges are deducted from fund assets. Annual fund operating expenses appear as a percentage of net assets and generally include:

• “Management fees,” which a fund pays to its investment adviser for deciding which investments the fund buys and sells and for providing other related services;
• “Rule 12b-1 fees,” which pay for marketing and selling fund shares;
• “Other expenses,” which represent various categories, such as auditing, legal, custodial, transfer agency fees, and interest expense; and
• For funds that invest in other funds, AFFE (the fees and expenses of acquired funds).

A fund may also reflect certain waivers that may reduce the fund's total fees.

The example is a hypothetical calculation that shows the estimated expenses that an investor will pay for investing in a fund over different time periods. The goal of the example is to provide a means for investors to compare expense levels of funds with different fee structures over varying investment periods. The example appears in dollar amounts, based on a hypothetical investment of $10,000, and assumes a 5% annual return over the course of 1, 3, 5, and 10 years.

Funds must also include brief disclosure regarding portfolio turnover immediately following the fee table example. Portfolio turnover measures how often a fund buys and sells its investments. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. The portfolio turnover rate will vary depending on the fund's investment strategy. This disclosure is designed to help investors understand the effect of portfolio turnover, and the resulting transaction costs, on fund expenses and performance.

b. Proposed Fee Summary

We propose to require a simplified fee summary that would streamline the presentation of fees and focus on the total costs or “bottom line” of an investment in the fund. The fee summary would be included in the summary section of the statutory prospectus (or, for funds that rely on rule 498, the summary prospectus), which funds provide investors at their initial purchase. The full fee table would be included in the statutory prospectus for those who want the additional level of detail. This is a layered disclosure approach designed to provide investors with concise, key information relating to the fund in the summary fee disclosure, with access to more detailed information elsewhere. The information in the fee summary would incorporate a subset of the information that appears in the fee table, and the fees that appear in the fee summary would be the same as any corresponding fees in the fee table.

We are proposing that the fee summary begin with a narrative statement that the fee summary shows amounts the investor could pay to buy, hold, and sell shares of the fund and that these costs reduce the value of the investment. The narrative statement also would state that the investor may pay other fees, such as brokerage commissions and other fees to financial intermediaries. This would occur, for example, in the case of ETFs or “clean shares.” The narrative must state that these charges are not reflected in the fee summary and example. We are not proposing to require that the fee summary and example include these fees, because we understand that financial intermediaries that distribute the fund typically determine such fees, and that the amount may vary across financial intermediaries and distribution channels.

The body of the fee summary would consist of two sections: (1) A summary fee table showing the fund's transaction fees, maximum account fee (if applicable), and ongoing annual fees, and (2) a simplified version of the example. The proposed requirements for the fee summary are shown in the following chart, with current fee table line items shown on the left and corresponding items in the fee summary on the right. We discuss the proposed changes in more detail below.

We seek comment on the proposed new fee summary, and specifically on the following issues:

213. Is the proposed new fee summary appropriate? If so, is it also appropriate for the current full fee table to appear in the fund's prospectus outside the summary section of the prospectus (or, for funds that rely on rule 498, outside of the fund's summary prospectus)? Is this “layered” format appropriate for fee disclosure?

c. Proposed Summary Fee Table

We propose to require a simplified fee summary in the summary section of the prospectus that is designed to improve investor understanding of fees and expenses. The proposed summary fee table would change the current fee table heading “Shareholder Fees” to “Transaction Fees,” which we believe is a more plain-English term to describe fees paid each time an investor buys or sells shares of the fund. The line items under the heading “Transaction Fees” would generally encompass the same types of fees that currently appear as line items under the “Shareholder Fees” heading. However, we propose to re-title the line items with more plain-English descriptions, to increase investor comprehension. The proposed line items under the heading “Transaction Fees” that are parallel to line items currently appearing under the heading “Shareholder Fees” include:

• Any “Purchase Charge” to purchase shares, and any “Exit Charge” to sell shares;

• The “Maximum Purchase Charge Imposed on Reinvested Dividends [and Other Distributions]”;

• Any “Early Exit Fee,” which would show the redemption fee charged for exiting the fund early (and is distinguished from sales charges, which are covered under the “Exit Charge” line item);

• Any “Exchange Fee,” which is a charge that may be imposed on an investor who wishes to move assets from one fund in a fund group to another.

The one line item that currently appears under the heading “Shareholder Fees” that would not appear under the proposed “Transaction Fees” heading is the “Maximum Account Fee.” This fee is not a transaction fee, so we are proposing to include it as its own separate heading in the summary fee table.

The fee summary is designed to be a focused presentation of transaction costs and, consequently, we are proposing to instruct funds that any transaction fee equaling $0 should not be included in the summary fee table (and the applicable line item that would appear in Form N-1A should be omitted from the summary fee table). We understand that certain of these fees are not common in practice (e.g., account fees, and increasingly, exit charges). Therefore, even though there are a number of line items that would appear under “Transaction Fees” in Form N-1A, we do not expect that most funds would have to include all of these line items in their fee disclosure. As a result, we do not anticipate that the proposed amendments to the form would detract from the focused nature of the fee summary. While we are proposing to consolidate the line items that currently appear under “Annual Fund Operating Expenses,” as we discuss in more detail below, we are not similarly proposing to consolidate the corresponding line items that would appear under “Transaction Fees.” The imposition of transaction fees depends on whether an investor buys or sells shares of a fund, and will therefore be different for each investor. Accordingly, consolidation of transaction fees would be confusing to an investor who would be unable to determine whether and when he or she would bear those fees.

For each of the line items under the “Transaction Fees” heading, and the “Maximum Account Fee,” a fund would have to indicate the maximum amount that the fee could be (and state that the fee is “up to” the stated amount), if the fund offers sales charge discounts. This presentation would indicate to the reader that the actual sales charge may in fact be lower than the maximum fee disclosed in the fee summary.

The proposed fee summary would change the current fee table heading “Annual Fund Operating Expenses” to “Ongoing Annual Fees.” This new heading is designed to convey, in plain English, that there are charges that an investor will have to pay each year. The “Ongoing Annual Fees” entry in the proposed summary fee table would consist of one line item showing the total amount that the investor would pay annually. Rather than an itemized list of Ongoing Annual Fees, this proposed fee presentation would show a total, “bottom line” figure that investors can expect to pay. This is a figure that investors could compare across funds in evaluating the ongoing annual fees associated with each fund.

The proposed summary fee table would, like the current prospectus fee presentation, address expense reimbursements and fee waiver arrangements. If the fund's full fee table in the statutory prospectus were to show an expense reimbursement or fee waiver arrangement (a “discount”), our proposal would permit an additional line item in the proposed summary fee table: “Ongoing Annual Fees with Temporary Discount.” This line item would reflect the amount of ongoing annual fees after any discount, which would more precisely reflect the fees that the investor will pay while the discount is in place. This line item would appear after the “Ongoing Annual Fees” line item that does not reflect the discount, because we believe that the “gross” figure should be the most prominent, given that expense reimbursement and fee waivers are generally only temporary. Further, we are proposing that this optional Ongoing Annual Fees line item be accompanied by a footnote stating the expected termination date of the discount.

We propose to require that each line item in the summary fee table show the cost investors could pay in dollars assuming a $10,000 investment, as well as the same charge shown as a percentage of assets. Research suggests that investors may better appreciate the impact of costs when expressed as a dollar amount rather than a percentage of assets. While this proposed addition would add some marginal length to the fee summary, we do not believe the length is inappropriate when balanced against the need to communicate the impact of costs to investors effectively. Also, we believe that the proposed tabular presentation of the fee summary is an efficient way to present fee information, including the new dollar-based presentation, in a manner that investors can easily read and understand.

Under the proposal, the “Ongoing Annual Fee” amount generally would be the same figure that funds currently report as “Total Annual Fund Operating Expenses” (i.e., the fund's expense ratio). In addition to direct and fixed fees, such as management fees, this expense ratio figure currently includes certain performance expenses that are not operating costs reflected in a fund's statement of operations but rather are indirect expenses paid by the fund to generate performance and excludes other such expenses. Performance expenses currently reflected in a fund's expense ratio include AFFE, interest expense, and dividends paid on short sales (although AFFE is not included in the fund's statement of operations). However, the expense ratio does not currently reflect all or even most of the material performance expenses that similarly affect the fund's performance. These include costs associated with the fund's securities lending activities and transaction costs. For example, funds that lend securities generate income from securities lending that is included in the fund's performance. To generate that income, the fund incurs certain expenses, such as fees to the securities lending agent. Further, it is our understanding that the income generated is used to offset the fund's operating costs. Transaction costs are the costs a fund incurs when it buys or sells portfolio investments. These costs include commissions, spread costs, market impact costs, and opportunity costs.

Although a fund's fee table does not reflect securities lending costs and fund transaction costs, a fund's prospectus and SAI include, in locations other than the fee table, other information about these costs. For example, a fund's total return in the prospectus performance presentation reflects these costs. However, an investor reviewing a fund's total return cannot identify whether the fund's securities lending or trading activity had a positive or negative effect on the fund's returns, or the overall costs associated with these activities. In fact, an investor would likewise not be able to ascertain the effect of the performance expenses currently included on the fund's return. However, beyond inclusion in the total return, funds also provide certain information about securities lending income, expenses, and services in their SAIs. Funds also report information about their securities lending activities on Form N-CEN. On transaction costs, prospectuses provide a fund's portfolio turnover rate, and SAIs include the amount of brokerage commissions the fund paid. This information can help investors understand how fund transaction costs may vary among different funds.

While we require funds to provide some information related to their securities lending costs and transaction costs, we understand that there could be benefits in providing investors a more complete or focused disclosure in one location regarding performance expenses. Among other benefits, this could include more transparent cost information that would allow investors to better compare funds. At the same time, there are complexities associated with requiring funds to disclose this information in their prospectus fee tables and in the proposed summary fee table. For instance, what is the best way to include the information in a manner that reflects the corresponding income (or loss) to the fund from the particular activity? Moreover, there are some challenges associated with measuring certain performance expenses, such as transaction costs, including the potential for inconsistent or inaccurate measurements that may confuse or mislead investors. While we are not, at this time, proposing to modify fund prospectus disclosure to address these performance expenses, we are soliciting input on whether and how to include these performance expenses in the fund's prospectus. We note, in particular, our modifications of the shareholder report expense presentation that would take a new approach to the presentation of fees and expenses designed to reflect both the direct, fixed fees as well as the material performance expenses by requiring disclosure of the fund's net performance together with qualitative disclosure on the material expenses to performance.

We seek comment on the proposed summary fee table and on the scope of costs and performance expenses it would reflect, and specifically on the following issues:

214. Is it helpful to investors to require simplified, “bottom line” disclosure of the ongoing annual fees they will pay with their fund investment in the fee summary, and more-detailed disclosure about the components of the ongoing annual fees in the full fee table? Is it investor-friendly to provide for one total figure for ongoing annual fees and not permit a fund to include subcategories of such expenses in the fee summary? Should we also consolidate any or all of the transaction fees reported in the proposed fee summary? If so, how should Form N-1A instruct funds to consolidate this information?

215. Is it appropriate, as proposed, that the summary fee table show the fund's transaction fees, maximum account fee, and ongoing annual fees? Are there any other general types of fees and charges that the summary fee table should include? If so, which ones?

216. Is it appropriate not to require in the proposed summary or full fee table or example disclosure of brokerage commissions and other fees to financial intermediaries? Do commenters agree with our approach not to require such fees because financial intermediaries that distribute the fund typically determine such fees, and the amount may vary among financial intermediaries and distribution channels? Are there reasons such fees should be disclosed?

217. Some investors commenting on the Fund Investor Experience RFC expressed interest in a single, “all-in” presentation of investment costs (or in personalized fee disclosure more generally) that would reflect both fund and intermediary costs. Other commenters indicated that preparing combined or personalized expense information could present some challenges, including the potential need for coordination and information-sharing between funds and intermediaries. Should funds provide more comprehensive fee and expense presentations that account for both fund and intermediary costs? If so, how? For example, are there ways we could better integrate information an investor receives about fund costs in fund prospectuses and information an investor receives about intermediary costs in a Form CRS relationship summary? If so, how? Should any integrated presentation of costs provide illustrative, standardized information about fund and intermediary costs, or should it provide investor-specific information? As another example, if a fund is only or primarily offered through one or more known wrap fee programs, should fund disclosure materials recognize the wrap fee program costs? Would this approach present challenges to funds or intermediaries? If so, what are those challenges, and how could we address them? If we modify fee and expense presentations to account for both fund and intermediary costs, should we also require performance information that recognizes both sets of costs? Would the proposed presentation of fees in terms of dollar amounts, in addition to the currently required percentage amounts, be useful to investors? Should an investment amount other than $10,000 be used? If so, what would be the appropriate amount?

218. Is the narrative statement that we are proposing to precede the fee summary useful and appropriate? Is it helpful to note that fees reduce the value of an investment? Is it helpful to include the statement, as proposed, that investors may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the summary fee table or the expense example? What changes, if any, should the Commission make to the proposed narrative statement?

219. As proposed, the “Transaction Fees” heading in the summary fee table would include specified line items: Purchase Charge, Exit Charge, Maximum Purchase Charge Imposed on Reinvested Dividends, Early Exit Fee, and Exchange Fee. Should the “Transaction Fees” heading include all of these line items, or should the Commission limit this fee presentation in any way (e.g., by only permitting a fund to include the purchase charge and exit fee in the summary fee table)? Would the proposed inclusion of all of these line items detract from a focused presentation of transaction costs? Do commenters agree with our expectation that most funds would not include all of these line items, given the proposed instruction that any transaction fee equaling $0 should not be included?

220. Is it appropriate to move the current “Maximum Account Fee” line item to its own section in the summary fee table in light of the proposed change of the headings in the fee table from “Shareholder Fees” to “Transaction Fees”?

221. Is it appropriate to require a fund to indicate the highest amount that the fee could be (and to state in its disclosure, as proposed, that a particular fee is “up to” that amount if the fund offers fee discounts)? Is this an effective means of indicating that charges may be lower than the maximum fee that the fund discloses in the summary?

222. Is the proposed optional “Ongoing Annual Fees with Temporary Discount” line item appropriate? If so, is it also appropriate to require a fund to disclose the gross figure before any such waivers, as proposed? Should these two line items appear adjacent to one another in the summary fee table, as proposed?

223. Should we modify the types of fund costs that funds currently must include in their expense ratios, which funds would disclose in the proposed summary fee table and the full fee table? For example, should the reported expense ratio include any performance expenses—such as securities lending costs or fund transaction costs—that it does not currently include? If so, how should funds measure each newly disclosed category of performance expenses? For example, should securities lending costs be disclosed as a percentage of net assets in the prospectus, based on current disclosure of these costs in the SAI? Alternatively, should performance expenses that are currently included in the expense ratio, such as interest expense or dividends paid on short sales, not be included as a component of the expense ratio? Should the presentation distinguish between direct fees and expenses (i.e., operating expenses) versus performance expenses associated with portfolio management activities that detract from fund performance (such as interest expenses, dividends paid on short sales, AFFE, securities lending costs, and fund transaction costs) and, if so, how?

224. Should a fund's prospectus include additional disclosure about performance expenses, in lieu of including these expenses in the fund's expense ratio? If so, should the disclosure be quantitative or qualitative? If quantitative, how should funds measure each newly disclosed category of fund cost? If qualitative, how should funds concisely describe the fee or expense? Where should the additional information appear? For instance, should funds disclose these costs in a footnote accompanying the fee table and fee summary? As one example, should a fund that qualitatively or quantitatively discloses these costs, if material to the fund, in a footnote to its shareholder report expense presentation under the proposal also qualitatively or quantitatively disclose these costs in a footnote to its prospectus fee table and fee summary? Why or why not? Alternatively, should funds disclose these costs in connection with the prospectus's presentation of fund performance under Item 4 of Form N-1A given they can detract from performance? If so, should they, for example, be required to disclose the top three—or some other number—types of costs that detracted from fund performance?

225. If funds were to provide additional disclosure of securities lending costs, should they also be permitted and/or required to explain that these costs may improve a fund's performance or, in certain cases, permit a fund to reduce its fees? If so, how could this information best be presented to help investors understand these potential considerations without adding unnecessary length or complexity to the prospectus?

226. If funds were to provide additional disclosure about securities lending costs or fund transaction costs in prospectuses, would this disclosure complement existing disclosure requirements in the prospectus, SAI, and Form N-CEN? Or should we remove or modify those existing disclosure requirements?

227. How would modifying prospectus disclosure to reflect securities lending costs, fund transaction costs, or other performance expenses of a fund's portfolio management activities affect investors? What disclosure modifications would help investors better understand these costs, and conversely, are there any disclosure modifications that would contribute to investor confusion or potential misinterpretation? For example, how would reflecting additional costs in the proposed summary fee table or other quantitative presentation affect investment decisions? If we were to modify the fee presentation in a way that might change a fund's fees, how should we inform investors of the changed requirements or transition to the new requirements in a way that minimizes investor confusion? For example, if a fund's fee under current requirements is 0.50%, but under any new requirements that same fund, operating in the same manner, might have a fee of 0.75%. How can we help investors understand this change?

228. Do investors need more information about how a fund's adviser and its affiliates may receive compensation from a fund, either to better understand fund costs or to understand potential conflicts of interest? For example, some funds use securities lending agents that are affiliated with the fund's investment adviser, which can result in the adviser and its affiliates receiving compensation from a fund in a way that the prospectus fee table does not reflect. As another example, some funds use affiliated broker-dealers when transacting in portfolio investments, which can result in the costs associated with these transactions accruing to affiliated persons of the fund. However, affiliated parties also could be less expensive or provide better services than those provided by unaffiliated parties. If investors would benefit from additional information about compensation that the fund's adviser and its affiliates may receive from the fund, where should this disclosure appear? Should it be quantitative or qualitative? For instance, should funds disclose any revenue paid to the fund's adviser or its affiliates that the fee table does not reflect (e.g., outside of the management fee), as a percent of fund assets or a percent of the fund's total expenses? If so, where should this disclosure appear (e.g., in the prospectus fee table, a discussion accompanying the table, or elsewhere)? Should a fund be permitted or required to disclose why it selected an affiliated service provider instead of an unaffiliated third party?

229. Do investors need additional information to help them compare the fees and expenses of different classes of a fund, or other aspects of a fund investment that differ between classes (e.g., fund performance)? For instance, do investors need more information to help them determine whether they are eligible to invest in a particular class or to compare fees, performance, or other aspects of different classes? If so, how should funds provide this information? How could we help investors better understand class eligibility, particularly when a prospectus (or shareholder report) could only cover a subset of a fund's classes?

230. Are there ways we could reduce complexities associated with funds offering multiple share classes with different fee structures? For example, should funds more clearly present their classes based on investor eligibility? What are the challenges of such an approach?

231. Are there ways we could facilitate an investor's ability to calculate costs and compare different funds? For instance, are there steps we could take to improve investors' familiarity with, or access to, interactive calculators or fund comparison tools?

d. Proposed Simplified Example

In addition, we propose to simplify the example in the fee summary. We are proposing to modify the current narrative that precedes the example slightly, to enhance clarity and brevity. We are also proposing to decrease the number of time periods that the expense example must show. While the current example shows expenses over 1, 3, 5, and 10-year periods, the proposed example would show costs over 1 year and 10 years (or 1 year and 3 years in the case of a new fund). We believe that having fewer time periods would help to simplify the example. At the same time, we believe that requiring a fund to present expenses over 1 and 10 years would provide meaningful disclosure regarding the effect of fees in both the short-term and long-term. We understand that investors typically hold mutual fund shares for a relatively long term. For example, one commenter estimated that two-thirds of fund investors have owned their funds for at least 10 years, and 80% of fund investors have held their fund investments for 5 years or more. The 10-year time frame is addressed to the long-term nature of many fund investments. Investors wishing information for the interim 3 and 5 year periods could find that information in the full fee table.

We considered proposing to incorporate elements of the proposed shareholder report expense presentation into the prospectus in lieu of simplifying the current fee example. As discussed above, the proposed shareholder report expense presentation would disclose costs directly deducted from the fund's assets alongside the fund's return, which in turn would reflect direct costs as well as any performance expenses associated with the fund's portfolio management activities. While the shareholder report expense presentation would not itemize these performance expenses, funds would be required to discuss them qualitatively if material to the fund, in a footnote to the expense presentation. In addition to helping investors understand that a fund has performance expenses that are in addition to a fund's direct costs, the proposed shareholder report presentation has other benefits. For example, the shareholder report presents a fund's fees alongside its performance to help shareholders understand how costs and performance each affect the value of his or her investment.

However, unlike the shareholder report presentation, the prospectus fee table, fee summary, and example reflect hypothetical future expenses (i.e., forward-looking expenses). The prospectus fee presentation—while also based on a fund's financial statements—reflects sales loads, the expenses associated with the fund's investments in other funds, material changes to fund expenses, estimated expenses for new funds, and only certain fee waiver arrangements. These additional fee elements make it difficult to import a presentation similar to the backward-looking shareholder report expense presentation into the prospectus. Also, a shareholder report-type approach based on backward-looking information would be difficult to implement for new funds with short or no performance history. Moreover, because the proposed shareholder report presentation shows expenses for the past fiscal year only, it would not illustrate the long-term effect of fund fees for investors. Given these considerations, we are not proposing to incorporate elements of the proposed shareholder report presentation into the prospectus.

We seek comment on the proposed simplified example, and specifically on the following issues:

232. Is the proposed simplified example presentation appropriate, and would it be useful to investors? Would restricting the example to including expense information for 1- and 10-year periods accomplish the goal of streamlining the fee summary, while providing meaningful disclosure? Should the simplified example include different time periods, and if so, which ones? Is the proposal to require new funds to present expense information for 1- and 3-year periods appropriate?

233. Instead of providing an expense example in the prospectus that shows estimated costs over set intervals of time based on an assumed 5% annual return, should funds base their expense example on the fund's actual historic performance? For example, should the expense example be based on the fund's gross performance over the past 1, 5 and 10 years? If so, how should funds that do not have a long-enough performance history be treated? Would investors benefit from a presentation based on actual rather than hypothetical investment returns? If not, why not?

234. If we were to require using an assumed annual return, as is the case today, would the assumed 5% annual return continue to be appropriate? If not, what is a more appropriate assumption and why? Should the assumption be different for different fund types? For example, should a money market fund have a lower assumed investment return than an equity fund? What are the benefits and drawbacks of using a higher or lower assumed annual return?

235. Instead of the current fee table example and the proposed simplified example in the prospectus, should the examples more closely resemble the expense presentation in the proposed shareholder report? If so, how should the proposed annual report presentation be modified to show the impact of transaction fees (such as purchase and exit charges)? Should the presentation be based only on costs that are directly deducted from fund assets, or all of the fees reflected in the fee table (which may include AFFE)? How should the longer-term impact of fees be reflected? For example, certain fund share classes may be intended for investors with a short time horizon and have higher ongoing annual expenses while other classes may be intended for longer-term investors and have higher up-front charges but over the long run may be less expensive. How should the proposed annual report presentation be modified for use in the prospectus to help distinguish the differences in share classes over both the short and long term? How should new funds that do not have any performance history present an example?

236. Do the different presentations of fund fees and expenses in prospectuses and shareholder reports currently contribute to investor confusion? Would our proposed amendments to fee and expense presentations in both documents increase, reduce, or have minimal effect on the potential for investor confusion? How could we modify the presentations to reduce the potential for investor confusion? For instance, one difference is that the prospectus fee table may reflect the costs associated with investments in other funds (i.e., AFFE) while the annual report does not directly reflect these expenses. For example, a fund of funds may show an expense ratio of 0.20% in its annual report but reflect expenses of 1.00% in its prospectus fee table because the prospectus presentation also reflects the costs associated with investment in other funds. How can we address these differences to minimize the potential for investor confusion?

e. Proposed Fee Summary Formatting Requirements

We are proposing that a fund generally would not be permitted to include footnotes and other extraneous disclosure in the fee summary. We believe this is consistent with the goal of the proposed simplified fee table, which is to streamline the presentation of fees and to provide an easier-to-understand presentation with fewer data points and a clearer picture of the total costs of investing in the fund. We are proposing an exception if omitting a footnote would cause the disclosure to be materially misleading such that the fees borne by investors would be materially higher than presented in the fee summary. For example, if a fund charges a “fulcrum fee,” by which the advisory fee varies depending on the performance of the fund, the fee in the current year could be greater than the fee reflected in the fee summary.

We seek comment on the proposed fee summary formatting requirements, and specifically on the following issues:

237. Is it appropriate to limit the use of footnotes in the fee summary, as proposed? Are there circumstances where footnotes would be useful to investors that the proposed instruction would not permit?

f. New, Simplified Fee Terminology

In addition to proposing to create the fee summary, we are also proposing changes in some terminology that funds would use to describe fees in the prospectus. These changes are designed to enhance the presentation of fees and investors' understanding of these fees. The changes we are proposing in the terminology used in the fee table would flow through to the fee summary, as applicable. Plain language plays an important role in investors' ability to use and understand fund disclosures. The terminology changes we propose are designed to be more consistent with everyday language and to effectively communicate the nature of the fees the fund charges. Unless otherwise discussed in this release, although we are proposing to substitute some terms that would appear in Form N-1A and funds' prospectuses, we intend the meaning of these terms to remain unchanged. Below is a chart showing captions and terms that the current fee table references, along with their replacements.

We seek comment on the proposed fee terminology, and specifically on the following issues:

238. Are the proposed changes to the current terminology helpful? Are there other terms currently used in the form that could be simplified? Would our proposed changes in terminology contribute to more understandable disclosure?

g. Acquired Fund Fees and Expenses

We are also proposing to modify the current prospectus fee table requirements by refining the scope of funds that must disclose AFFE as a component of bottom-line annual fund operating expenses. Specifically, the amendments we are proposing would permit funds that invest 10% or less of their total assets in acquired funds to omit the AFFE line item in the fee table and instead disclose the amount of the fund's AFFE in a footnote to the fee table and fee summary. Funds that invest more than 10% of their total assets in acquired funds would continue to present AFFE as a line item in the prospectus fee table and include AFFE in the bottom-line expense figure, as they do today.

Currently, any fund that invests in acquired funds—which include investments in other investment companies and in private funds that would be investment companies but for sections 3(c)(1) or 3(c)(7) of the Investment Company Act—must disclose the amount of fees and expenses the fund indirectly incurs from these investments in the fund's fee table. This disclosure generally appears as a separate AFFE line item in the fee table, although a fund may reflect AFFE in the “other expenses” fee table line item (without separately identifying the AFFE amount) if AFFE does not exceed 0.01 percent, or one basis point, of the fund's average net assets. As a result, regardless of the size of a fund's investments in acquired funds, AFFE currently is a component of the line items that, summed together, produce the fund's bottom-line annual fund operating expenses (which we propose to rename to “total ongoing annual fees”) in its fee table. AFFE disclosure is designed to provide investors with a better understanding of the costs of investing in a fund that invests in other funds, which have their own expenses that may be as high as—or higher than—the acquiring fund's expenses. As recognized above, AFFE is a performance expense that is not an operating cost reflected in a fund's statement of operations. Instead, it is an indirect expense paid by the fund to generate performance.

Some commenters on the Fund Investor Experience RFC and on the Commission's 2018 proposal related to fund of funds arrangements have expressed certain concerns about current AFFE disclosure requirements. For example, several commenters have suggested that fee table disclosure should focus on a fund's operating expenses and should not incorporate AFFE. Some of these commenters have expressed concern that combining operating expenses with indirect AFFE costs may confuse investors by over-emphasizing AFFE costs and that combining expenses in this way does not align with a fund's financial statements. Several commenters have also expressed particular concern about treating BDCs as acquired fund investments and have recommended excluding BDC investments from AFFE. One of these commenters suggested that the Commission remove AFFE from the prospectus fee table and require funds to disclose AFFE amounts in an accompanying footnote to address these concerns. On the other hand, other commenters have expressed general support for AFFE disclosure. Two commenters stated that AFFE disclosure provides investors with necessary information to understand the layering of fees in a fund of funds arrangement and to compare similar funds.

We agree that AFFE information is valuable and can help investors to understand the layered fees and expenses associated with a fund of funds arrangement and to compare similar funds. We believe this information is particularly important when a fund substantially invests in other funds such that the fund is, in essence, managed significantly at the acquired fund level. At the same time, we are sensitive to the concern that requiring every fund to include AFFE in its fee table as a component of the fund's ongoing annual fees reduces consistency with the fund's financial statements and may in some cases magnify the presentation of AFFE by requiring fee table disclosure of this discrete category of performance expenses even though the fund does not invest significantly in acquired funds and may incur other indirect costs that are not reflected in the fee table. We understand these factors may contribute to investor confusion.

As a result of these considerations, we are proposing to permit funds that invest 10% or less of their total assets in acquired funds to omit the AFFE line item in the fee table that is a component of the fund's bottom line ongoing annual fees, and instead disclose the amount of the fund's AFFE in footnotes to the fee table and fee summary. The proposed amendments are designed to maintain the benefits of transparent AFFE disclosure for investors and to provide more consistent disclosure of information related to indirect costs. Where a fund invests in other funds to a limited extent—10% or less of its total assets (consistent with statutory limits on funds' investments in other funds)—the fees and expenses of the acquired funds may more closely resemble other indirect costs, such as transaction costs, and these types of indirect costs each would not be reflected in the prospectus fee table. Specifically, the proposal would provide for more consistent treatment with other indirect costs by removing AFFE as a line item that represents a component of the bottom line ongoing annual fees figure in such a fund's fee table and fee summary, while retaining information about the amount of AFFE in footnotes accompanying the fee table and fee summary.

Conversely, under the proposal, a fund that invests more than 10% of its total assets in acquired funds would continue to be required to disclose AFFE as a line item in its prospectus fee table and would continue to reflect this amount in its bottom line ongoing annual fees. We believe it is appropriate to retain the current AFFE disclosure requirement for this category of funds because, when investing in acquired funds is a significant component of a fund's investment strategy, AFFE can represent a significant part of the fund's ongoing annual fees and is more akin to an ongoing operating expense the fund would incur if it were managing the acquired fund's underlying portfolio investments directly. For example, we understand that certain funds, such as certain target date funds, have no, or very low, management fees at the acquiring fund level, with the majority of fees borne at the acquired fund level. For these funds, a fee table with no AFFE line item has the potential to confuse investors in that it could show 0 or close to 0 ongoing annual fees.

To determine whether a fund may omit AFFE from its prospectus fee table, the proposal would use a 10% threshold based on the average of the fund's investments in acquired funds (excluding money market funds) divided by the fund's total assets. To calculate the 10% threshold, a fund would:

• Divide the fund's investments in acquired funds (excluding money market funds) by the fund's total assets at the end of each of the 12 months that make up the prior fiscal year. This will produce 12 data items (or fewer if the fund has not been in operation for a full fiscal year).
• Calculate the average of the 12 data items. If this figure is 10% or less, the fund may omit AFFE from its prospectus fee table and instead include the prescribed footnote.

The 10% threshold is based on an average of month-end holdings, rather than holdings as of the end of the fiscal year or another single date, to smooth fluctuations, such as those related to market events and investor flows. It also would help mitigate any gaming concerns by limiting funds' ability to reduce their investments in other funds to stay below the 10% threshold only on a given date. The month-end calculation is also aligned with Form N-PORT requirements for month-end portfolio data, which may reduce the need for funds to collect new data under the proposal and facilitate verifications that a fund may disclose AFFE in a footnote. We also propose to omit all money market fund investments from the 10% calculation. We understand that funds, including funds that invest significantly in other funds, typically invest in money market funds for cash management purposes rather than to pursue the fund's investment objective through an investment in another fund.

While the calculation of the 10% threshold would be based on monthly data, the proposal would not require a fund to assess whether it may disclose AFFE in a footnote to the fee table on a monthly basis or to update its prospectus fee table based solely on such monthly assessments. Instead, a fund would assess whether it is below the 10% threshold when it otherwise must update its prospectus fee table (e.g., at the time of its annual prospectus update) based on information as of its prior fiscal year. However, if there is a material change to the amount a fund invests in other funds (such as due to a change to the fund's strategies) or its AFFE, we would expect the fund to update its prospectus to reflect the change just as it would for any other material changes to its annual ongoing fees. We propose to permit, rather than require, a fund with limited acquired fund investments to disclose AFFE in a footnote to limit burdens on funds that would prefer to consistently disclose AFFE in the fee table instead of monitoring the amount of acquired fund investments to determine eligibility for the footnote-based approach. Moreover, we recognize that a fund that tends to maintain acquired fund investments close to the 10% threshold may prefer to disclose AFFE in the fee table each year instead of moving the disclosure back and forth between the footnote and the fee table, which could lead to investor confusion.

The footnote that a fund eligible to use the new AFFE presentation would be permitted to use would have to include: (1) The amount of the fund's AFFE, and (2) a statement that the fund's total ongoing annual fees in the table and fee summary would be higher if these fees and expenses were included. We believe this requirement would provide investors with AFFE information they could use to compare funds and would help them understand the relevance of a fund's AFFE amount. The footnote to the fee table would be tagged using XBRL, so the AFFE amount would continue to be available not only to investors viewing the prospectus and summary prospectus, but also to data aggregators and other market participants.

In addition to amending the scope of funds that must disclose AFFE in the prospectus fee table and fee summary, we are proposing two technical amendments to AFFE disclosure requirements. First, we propose to correct the manner in which a fund that has been in operation for less than a full year calculates AFFE. Specifically, rather than calculating this figure using the number of days in the fund's fiscal year, we propose to require such a fund to use the number of days since the date the fund made its first investment. We believe this would result in a more accurate calculation for new funds. For example, if a fund made its first investment six months ago and owned other funds for that entire period, the current AFFE calculation would provide a figure that is half of the actual fees attributable to the underlying funds. This is because the numerator would be based on the six-month holding period (e.g., 182 days) and the denominator would be based on the full fiscal year (i.e., 365 or 366 days). Under our proposed revision, both the numerator and denominator would be based on the same period of time. We understand that some new funds already use the number of days since the fund made its first investment in the denominator.

Second, we propose to amend an optional footnote instruction. This instruction permits a fund to explain that the total ongoing annual fees in the fee table do not correlate to the ratio of expenses to average net assets provided in the fund's financial highlights. We propose to amend this instruction to permit funds to explain that the total ongoing annual fees in the fee table do not correlate to the expense presentation in the fund's shareholder reports. We believe the shareholder report would be a better point of comparison under the proposal because shareholders would receive the shareholder report directly, while a fund's financial highlights would be available online and delivered upon request.

We request comment on the proposed amendments to AFFE disclosure, including the following:

239. Should we amend AFFE disclosure requirements to allow funds that invest 10% or less of total assets in acquired funds to omit the AFFE amount from the fee table and instead disclose the amount of a fund's AFFE in a footnote to the fee summary and fee table, as proposed? If not, why not? Instead of permitting funds with limited acquired fund investments to disclose the amount of a fund's AFFE in a footnote, should we require all such funds to disclose AFFE in a footnote? Would a mandatory approach reduce, increase, or have no effect on the potential for investor confusion relative to the proposed approach? Should we permit or require all funds, regardless of the magnitude of their acquired fund investments, to include AFFE in a footnote?

240. Should we modify the proposed method for determining whether a fund may disclose AFFE in a footnote instead of in its bottom line ongoing annual fees in the fee table and fee summary? If so, how? Should we modify the 10% threshold? For example, instead of requiring a fund to measure the monthly average of its investments in acquired funds (excluding money market funds) during the prior fiscal year, should we base the 10% calculation on the amount of acquired fund investments as of the end of the fiscal year, at the time of acquiring a security issued by an acquired fund, at the time the fund amends its prospectus, or on some other basis? What are the advantages and disadvantages of these different approaches? Is it appropriate to exclude money market funds from the 10% threshold? If not, why not? Should we reduce or increase the 10% threshold? For example, should the threshold be 5%, 25%, or 50% of total assets? Alternatively, instead of using a threshold based on the percent of assets invested in acquired funds, should we use a different approach? Please explain.

241. Are there any gaming concerns associated with the proposed approach to AFFE disclosure that may potentially harm investors? For example, are there concerns that funds would hold large investments in acquired funds, but engineer their investments so that they are below the proposed 10% threshold at the time of calculation? If so, how would this harm investors, and how could we modify the proposed approach to mitigate gaming concerns?

242. Should we, as proposed, instruct new funds to base the 10% threshold on assumptions of the percent of acquired funds in which the new fund expects to invest? If not, what would be a more appropriate approach for new funds, and why?

243. Should the proposed footnote to the fee table and fee summary provide different or additional information than the amount of the fund's AFFE and a statement that the fund's total ongoing annual fees in the table and fee summary would be higher if these fees and expenses were included? If so, what information should the footnote provide? Should we require funds to provide quantitative or qualitative information about other performance costs, including securities lending costs and transaction costs of the fund buying and selling portfolio investments, in the same or similar footnotes (for example, taking an approach that is the same as or similar to the approach we are proposing for the shareholder report expense presentation)? Why or why not?

244. Should we amend the scope of acquired fund investments that AFFE reflects? Instead of requiring a fund to include fees and expenses from any investment in an investment company or a company that would be an investment company but for section 3(c)(1) or (c)(7) of the Investment Company Act, should we broaden or narrow the scope? For example, we understand that currently funds do not treat investments in the following vehicles that may rely on the exclusion in section 3(c)(7) as acquired fund investments: Structured finance vehicles, collateralized debt obligations, or other entities not traditionally considered pooled investment vehicles. Should some or all of these investment types be treated as acquired fund investments for purposes of AFFE disclosure requirements? Are there other categories of investments that AFFE should or should not include?

245. Instead of permitting funds that invest 10% or less of their total assets in acquired funds to omit the AFFE amount in the fee table and replace it with a footnote, should we permit or require all funds to exclude 10% of their total assets in acquired funds from the AFFE calculation in order to treat all funds consistently?

246. As another alternative, should we permit a fund to disclose AFFE in a footnote to the fee table, instead of in the fee table itself, if the amount of the fund's AFFE is below a certain threshold? If so, what threshold should we use for determining when a fund's AFFE is sufficiently small, relative to its other expenses, such that the fund does not need to include AFFE in the fee table? For example, should we permit a fund to disclose AFFE in a footnote to the fee table if the amount of its AFFE was less than a specific percentage of its annual ongoing fees (excluding AFFE) or average net assets? If so, what specific threshold should we use, and why? Would this approach improve the utility of the disclosure for investors? How would this approach affect the consistency of the fee table disclosure, relative to the proposed approach? For example, would it result in AFFE amounts moving in and out of the fund's ongoing annual fee figure at a greater or lesser frequency than the proposal?

247. Commenters have expressed particular concern about AFFE disclosure's impact on BDC investments. Would our proposed amendments address these concerns? Why or why not? If not, how could we address these concerns? Should we, as some commenters suggested, allow funds to exclude fees and expenses from BDC investments in AFFE disclosure? If so, why should BDC fees and expenses be excluded when other types of acquired funds that may have similar strategies, nature of expenses, and portfolio holdings are included?

248. Should we amend AFFE disclosure requirements in Forms N-2, N-3, N-4, and N-6 for other types of investment companies? If so, should we modify these requirements in the same manner as the proposed amendments to Form N-1A, or are there changes we should make to recognize differences between registrant types?

249. As proposed, should we remove the current instruction allowing funds to disclose AFFE under the “other expenses” line item of the fee table if the fund's AFFE does not exceed 0.01 percent of average net assets? If not, under what circumstances would this instruction be useful?

250. Would the proposed amendments to AFFE disclosure result in any unintended consequences for investors, funds, or other market participants? Please explain.

251. As proposed, should we modify the AFFE calculation for funds that have been in operation for less than a year to use the number of days since the date the fund made its first investment instead of the number of days in the fund's fiscal year? Is there a different approach we should use to improve the accuracy of the AFFE calculation for these funds? Should we similarly amend the AFFE instructions in Forms N-2 and N-3?

252. As proposed, should we permit funds that disclose AFFE in their fee tables to include a footnote distinguishing the fund's ongoing annual fees from its shareholder report expense presentation? Consistent with the proposal, should funds continue to be able to refer to differences between the prospectus fee table and financial highlights in this optional footnote as well? If not, why not?

h. Portfolio Turnover

In addition, we propose to include portfolio turnover disclosure in both the fee summary and the full fee table and to modify the narrative that accompanies the portfolio turnover rate to enhance clarity and provide for more concise disclosure. We believe that this disclosure helps investors understand the effect of portfolio turnover, and the resulting transaction costs, on fund expenses and performance. However, we believe the current disclosure is too lengthy, and that this length does not contribute to (and may detract from) investor understanding. Therefore, we propose to reduce the length of the prescribed disclosure without changing its meaning. We believe this change will make the portfolio turnover disclosure more inviting and usable by investors. We are including this disclosure in both the fee summary and the fee table because we continue to believe this information is necessary to understand the full context of fund fees and should therefore accompany any prospectus fee presentation. Below is a chart showing the current disclosure, along with its replacement.

We seek comment on the proposed approach to portfolio turnover disclosure, and specifically on the following issues:

253. Are the proposed changes to the portfolio turnover disclosure helpful? If not, what improvements, if any, would commenters recommend?

i. Structured Data Requirements

Finally, we are proposing minor amendments to the Form N-1A General Instructions regarding the requirements for funds to submit interactive data files (formatted XBRL) containing their risk/return summary information, which includes objectives, fees, principal strategies, principal risks, and performance disclosures. Because, as discussed above, we are proposing to move the current full fee table from Item 3 of Form N-1A to new Item 8A of Form N-1A, we are proposing a conforming change requiring funds to tag the data elements in Item 8A instead of in Item 3 (as they currently do). We continue to believe that market participants should have access to the full fee table in structured data format. We are not proposing to require that funds tag the proposed fee summary in addition to the full fee table because the fee summary is derived from the full fee table, so requiring funds to tag both presentations would be redundant.

We seek comment on the proposed amendments to the Form N-1A General Instructions regarding funds' structured data requirements, and specifically on the following issues:

254. Are the proposed amendments to the Form N-1A General Instructions regarding the use of structured data appropriate? Given that the full fee table in the fund's statutory prospectus would continue to be tagged, and the information included in the summary fee table would be the same as that in the statutory fee table, would it also be necessary to require a fund to tag the summary fee table? If so, why?

255. Funds must submit their prospectus fee tables in a structured format, but other fee information generally is not in a structured format. Is there any other fee-related information in fund disclosure, including in financial statements, that funds should submit in a structured format (such as in Form N-CEN)? If so, what are these items and what are the benefits of structured disclosure for these items?

2. Improved Prospectus Risk Disclosures

We are proposing to revise the current provisions and instructions in Form N-1A requiring that a fund disclose in its prospectus the principal risks of investing in the fund. Funds' prospectus disclosure requirements are designed to help promote informed investment decisions by providing investors with information that is easy to use and readily accessible. The revisions and additions we are proposing are designed to further improve fund prospectus risk disclosure by making this disclosure clearer and more specifically tailored to a fund.

Items 4 and 9 of Form N-1A address disclosure of the principal risks of investing in the fund. Both of these items are designed to provide user-friendly, clear and succinct disclosures. Item 4 requires that the fund summarize the principal risks in the summary section of the statutory prospectus (or the summary prospectus, to the extent the fund is relying on rule 498). The information that a fund currently provides in response to Item 4 must be based on the information that the fund provides in response to Item 9(c) of Form N-1A, which requires that the registrant disclose the principal risks of the fund. Item 9 was designed to allow for fuller information about fund risks, but still requires that a fund only disclose principal risks.

We believe that some funds are providing risk information in their prospectuses and summary prospectuses that is often long, but does not achieve the policy goals of these current disclosure requirements. This length may not contribute to (and may sometimes detract from) investors' understanding of the principal risks of an investment in a particular fund. Because of its length, this disclosure also may not be user-friendly, particularly to retail investors. Commission staff has recently published its observations regarding some of the issues that the staff has observed with respect to funds' risk disclosures. The staff document would be withdrawn if the Commission's proposal is adopted. The amendments that we are proposing are designed to respond to the issues that we have observed in some funds' prospectus risk disclosure and to promulgate additional requirements that we believe would be beneficial to funds and investors.

We are proposing to add to the General Instructions to Form N-1A a provision that would preclude a fund from disclosing non-principal risks in the prospectus. While Items 4 and 9 of Form N-1A currently specify that funds describe “principal risks,” there is not a requirement that risk disclosure appearing in the statutory prospectus be limited to the fund's principal risks. We believe that including this disclosure in the prospectus may overwhelm other important information. The proposed provision is designed to streamline risk disclosure in the prospectus, focus on essential information, and clarify current form requirements that emphasize the disclosure of “principal” risks. Funds would remain free to disclose non-principal risks in the SAI.

We are proposing several new requirements for principal risk disclosure that appears in the summary prospectus. First, we are proposing to insert the term “briefly” before the current requirement that the fund summarize the principal risks. This proposed change is designed to address the concern that, for some funds, principal risk disclosure in the summary prospectus is overly lengthy. We have observed significant variations in funds' approaches to principal risk disclosures in the summary. For example, some funds describe just a few principal risks in less than 200 words, while other funds in the same category list 20 or more principal risks using more than 2,500 words. Some of the longest disclosures the staff has seen in the summary section exceed 7,000 words. Indeed, the staff has observed that some funds simply repeat risk information that appears later in the statutory prospectus instead of summarizing it. The proposed change is designed to emphasize that principal risk disclosure that appears in the summary prospectus should be concise and succinct, with more detailed risk information to appear later in the statutory prospectus.

We are proposing an additional new instruction to the summary prospectus principal risk disclosure requirement stating that funds should describe principal risks in order of importance, with the most significant risks appearing first. We believe that this presentation would highlight for investors the risks that they should consider most carefully. We have observed that it is currently common for funds to describe their principal risks in alphabetical order. However, we believe that this approach could obscure the importance of key risks, especially when a fund discloses many principal risks. For example, a real estate fund that describes principal risks alphabetically may describe a number of less-relevant risks before describing the key risks of real estate investments. In some extreme cases, this presentation format could result in a fund's key risks being obscured to such an extent that it could render the disclosure potentially misleading. We understand that there are different ways of determining the relative significance of principal risks. The proposed new instruction therefore specifies that a fund may use any reasonable means of determining the significance of risks. For example, a fund could take an approach to ordering its principal risks in a way that considers the likelihood and possible severity of any loss resulting from each risk. This proposed new instruction would include an explicit statement that a fund should not describe principal risks in alphabetical order.

Finally, we are proposing an additional instruction to the summary prospectus principal risk disclosure requirement that instructs a fund to, where appropriate, tailor its risk disclosures to how the fund operates rather than rely on generic, standard risk disclosures. We have observed that some prospectuses for funds within a fund group commonly include generic, standardized risk disclosures for every fund in the group. Such standardized disclosure may be appropriate under certain circumstances. For example, “market risk,” could be a principal risk for all funds in a complex. However, there are other circumstances in which generic, across-the-board risk disclosures for all funds in a fund complex may not be appropriate. For example, we do not believe it would be appropriate for a fund to include credit risk disclosure that discusses the heightened risks associated with below-investment-grade or distressed securities when the fund does not hold, or expect to hold, these types of investments.

We are also proposing amendments that would affect funds' principal risk disclosures in the statutory prospectus, as well as the summary prospectus. Specifically, we are proposing to add three new instructions relating to Form N-1A Item 9(c), which requires a fund to disclose the principal risks of investing in the fund in its statutory prospectus. Because Item 4 of Form N-1A requires a fund to summarize the principal risks of investing in the fund, based on the information the fund provides in response to Item 9(c), the proposed new instructions to Item 9(c) would also affect the disclosure that a fund provides in the summary prospectus in response to Item 4.

Proposed Instruction 1 states that in determining whether a risk is a principal risk, a fund should consider both whether the risk would place more than 10% of the fund's assets at risk (“10% standard”) and whether it is reasonably likely that a risk will meet this 10% standard in the future. Today, funds may be using varying standards to determine whether a risk is a principal risk. This makes it difficult for an investor to compare risks among funds. This proposed instruction is designed to clarify the meaning of the term “principal risk” by providing quantitative guidance as to what a fund should consider when it determines whether a risk is a principal risk. For example, a fund that invests 10% or more of its assets in a particular sector, such as financial services or consumer staples, could determine that it should disclose a “principal risk” relating to its investments in that sector. A fund also could determine that it should disclose a “principal risk” in some circumstances when the fund uses less than 10% of its assets to make investments, when those investments may subject the fund to risk of loss of more than 10% of its assets, for example, a fund that engages in short sales or derivatives trading.

The “reasonably likely” language is designed to reflect that a risk may not be a principal risk when first disclosed but may become a principal risk over time, due to changing conditions or the fund changing its strategies. For example, interest rate risk for a fixed income fund could increase depending on government action that affects interest rates. As another example, a fund investing in U.S. equities may change its strategy to include foreign investments and thus may introduce foreign investment risk. Therefore, if the fund considers it reasonably likely that a risk will become a principal risk in the future, it should consider whether to include it in the prospectus to help ensure that when it becomes a principal risk, investors will be informed. On the other hand, the proposed “reasonably likely” language reflects our view that risks that are not likely to become principal risks should be excluded from a fund's principal risk disclosure, consistent with the purpose of streamlining the prospectus.

Proposed Instruction 2 is addressed to a fund investing in other funds (an “acquiring fund” and an “acquired fund,” respectively), commonly known as a “fund of funds.” We have observed that many acquiring funds disclose all of the principal risks of each of their acquired funds as part of their principal risk disclosure. In some cases, acquiring funds list over 70 principal risks. The proposed instruction states that, in the case of acquiring funds, risks should be included only if they are principal risks of the acquiring fund, and that a principal risk of an acquired fund should not be included unless it is a principal risk of the acquiring fund. In the case of an acquiring fund, disclosing the risks of acquired funds could obscure information relating to principal risks of the acquiring fund. We believe that the key consideration for an investor relates to the principal risks of the fund in which the investor is actually buying shares, i.e., the acquiring fund, and the proposed instruction is therefore designed to help an investor focus on principal risks that are most applicable to his or her investment. A principal risk of an acquired fund might be a principal risk of the acquiring fund when, for example, the acquiring fund invests a substantial portion of its assets in an acquired fund (or the risk is shared by multiple acquired funds).

Proposed Instruction 3 is addressed to funds whose strategy provides the freedom to invest in different types of assets at the manager's discretion. This could occur if, for example, the manager has discretion to change the fund's strategy. These funds are commonly known as “go anywhere” funds. This instruction would provide that, if the fund's strategy permits the manager discretion to invest in different types of assets, such fund must disclose that an investor may not know—and has no way to know—how the fund will invest in the future and the associated risks. This proposed instruction would make that principal risk explicit in the fund's disclosure.

We seek comment on the proposed amendments to prospectus disclosure requirements regarding funds' principal risks, and specifically on the following issues:

256. Is the proposed amendment in the General Instructions to Form N-1A to preclude disclosure of non-principal risks in the statutory prospectus appropriate? Would the proposed amendment further the goal of streamlining risk disclosure in the prospectus and focusing on essential information? Should the proposed amendment to the General Instructions instead use another standard in precluding the disclosure of certain less-central risks in the fund's prospectus, such as prohibiting the disclosure of “non-material” risks? If so, what should this alternative standard be and how should we define it?

257. Is the proposed amendment to Form N-1A Item 4(b)(1)(i), which specifies that a fund should “briefly” summarize principal risks, appropriate? Would this proposed amendment help emphasize the Commission's goal of making the principal risk disclosure in the summary prospectus concise and succinct?

258. Is the proposed new instruction to Item 4(b)(1)(i), providing that a fund in a complex should describe principal risks in order of importance, appropriate? Is it helpful to expressly provide in the proposed instruction that a fund may use any reasonable means to determine the significance of the risk? Should the proposed instruction be more prescriptive as to how a fund should determine the significance of risk, and if so, what method for determining risks' significance should the instruction specify (for example, should the proposed instruction specify ways in which a fund could—or must—quantify likelihood and severity of risk, and if so what methods for quantification should the instruction specify)? Should additional guidance be provided? Is it appropriate to expressly state in the proposed instruction that a fund should not list its principal risks in alphabetical order? Are there circumstances where an alphabetical order presentation may be appropriate and if so which ones?

259. Should the number of principal risks that funds disclose in the summary prospectus be subject to any limits? Should we require a minimum number of risks to be disclosed? For example, would five be sufficient? Should we impose a maximum number of risks that may be disclosed in the summary? For example, would more than twenty-five be too many?

260. Is the proposed new instruction to Item 4(b)(1)(i), providing that a fund should tailor its risk disclosure to how each particular fund in the complex operates, appropriate? Does this proposed instruction provide adequate guidance as to tailoring risk disclosure? Should additional guidance be provided?

261. With regard to Form N-1A Item 9(c), is the proposed new instruction on the factors a fund should consider in determining whether a risk is a principal risk useful and appropriate? Would it give investors adequate information regarding the risks they should consider in determining whether to purchase shares of the fund? Is the proposed standard for considering whether a risk is a principal risk—that the risk is one that would place more than 10% of the fund's assets at risk (or it is reasonably likely that it would place more than 10% of the fund's assets at risk in the future)—appropriate? Should the proposed 10% be more or less? For example, should the standard be 5% or 20% of the fund's assets at risk? If so, why? Should there be a numerical standard associated with the instruction for determining whether a risk is a principal risk, and if so, what quantitative or other criteria should inform this standard? Is the applicability of the 10% standard to the fund's assets appropriate? Would a 10% standard help achieve the goal of providing user-friendly, clear and succinct disclosures? If not, why not? Is the “assets at risk” standard clear and appropriate? If not, why not? Would the proposed instruction providing that a fund should consider whether it is “reasonably likely” that a risk will become a principal risk in the future give adequate notice of future risks? Is this provision sufficiently clear? Is the term “reasonably likely” clear? Should we provide guidance or a definition regarding this term? Are there other means of determining principal risks that would be more effective? Should there be guidance regarding consideration of non-investment related risks, such as cybersecurity risk and new fund risk, as principal risks?

262. Is the proposed instruction that addresses risk disclosure in fund-of-funds arrangements appropriate? Would this proposed instruction be effective in promoting the policy goal of helping investors focus on the principal risks of the fund in which the investor is purchasing shares?

263. Is the proposed instruction addressing the principal risks of “go-anywhere” funds appropriate? Would this instruction effectively convey the uncertainty of the fund's investments and the associated principal risks? If not, what amendments would improve the instruction?

264. Are there other changes we can make to risk disclosure to make this information more investor-friendly, clear and succinct?

265. The Commission recently adopted amendments to rule 8b-16(b) under the Investment Company Act, which would require registered closed-end funds that rely on this rule to include—among other things—new disclosure about their principal risks in their annual reports. Should we extend any of the proposed amendments to open-end funds' prospectus risk disclosure to closed-end fund prospectus disclosures or the new annual report risk disclosures required for certain closed-end funds? If so, how should we amend the risk disclosure requirements for these closed-end funds?

3. Prospectuses and SAIs Transmitted Under Rule 30e-1(d)

We are proposing to rescind rule 30e-1(d), which permits a fund to transmit a copy of its prospectus or SAI in place of its shareholder report, if it includes all of the information that would otherwise be required to be contained in the shareholder report. Shareholder report and prospectus disclosures have historically served different purposes, with each catering to the different informational needs of prospective fund investors and current shareholders. We understand that funds very rarely rely on rule 30e-1(d) to transmit a prospectus or SAI in place of a shareholder report. Additionally, we believe that allowing funds to consolidate their prospectus, SAI and shareholder report disclosures into a single document would result in shareholders receiving long, complex, and overlapping fund disclosures which could cause shareholder confusion and fatigue. This result would not be consistent with the goals of this rulemaking proposal.

We seek comment on our proposal to rescind rule 30e-1(d):

266. Do funds currently rely on rule 30e-1(d)? If so, which funds, and why?

267. Would investors benefit from receiving in the fund's prospectus or SAI the disclosure that would otherwise have to appear in the shareholder report? Would this cause investor confusion and/or overwhelm investors? If so, is there any way to preserve the ability of funds to rely on rule 30e-1(d) while mitigating these potential negative effects?

L. Investment Company Advertising Rule Amendments

As part of our proposed improvements to fund fee and expense information for investors, we are proposing to amend the Commission's investment company advertising rules (for purposes of this release, Securities Act rules 482, 156, and 433 and Investment Company Act rule 34b-1) to promote transparent and balanced presentations of fees and expenses in investment company advertisements. As investment companies increasingly compete and market themselves on the basis of costs, we are concerned that investment company advertisements may mislead investors by creating an inaccurate impression of the costs associated with an investment. The proposed advertising rule amendments would generally apply to all investment companies, including mutual funds, ETFs, registered closed-end funds, and BDCs. Under the proposed amendments, investment company fee and expense presentations in advertisements would have to include timely and prominent information about a fund's maximum sales load (or any other nonrecurring fee) and gross total annual expenses, based on the methods of computation that the company's Investment Company Act or Securities Act registration statement form prescribes for a prospectus. We also are proposing to amend rule 156 to provide factors an investment company should consider to determine whether representations in its advertisements about the fees and expenses associated with an investment in the fund could be misleading.

Investment company advertisements, including advertisements regarding registered investment companies and BDCs, typically are prospectuses for purposes of the Securities Act. These advertisements are typically subject to rule 482, which provides a framework in which investment company advertisements are deemed to be “omitting prospectuses” that may include information the substance of which is not included in a fund's statutory or summary prospectus. Rule 482 establishes certain content, legend, and filing requirements for investment company advertisements. Many of the rule's content requirements focus on advertisements that include performance data of certain types of funds, including mutual funds, ETFs, certain separate accounts, and money market funds. For example, the rule provides a standardized formula for these funds to calculate performance data included in their advertisements. Instead of relying on rule 482, registered closed-end funds and BDCs may use free writing prospectuses in accordance with rule 433 and certain other Commission rules for advertising purposes. Because both rule 482 advertisements and free writing prospectuses are treated as prospectuses under section 10(b) of the Securities Act, they are subject to liability under section 12(a)(2) of the Securities Act—which imposes liability for materially false or misleading statements in a prospectus or oral communications—as well as the antifraud provisions of the Federal securities laws.

Rule 34b-1 applies to supplemental sales literature (i.e., sales literature that is preceded or accompanied by a prospectus) by any registered open-end company, registered unit investment trust, or registered face-amount certificate company. Rule 34b-1 includes many of the same requirements as rule 482, including the same performance-related requirements. The Commission adopted rule 34b-1 to ensure that performance claims in supplemental sales literature would not be misleading and to promote comparability and uniformity among supplemental sales literature and rule 482 advertisements. Supplemental sales literature is subject to the general antifraud provisions of the Federal securities laws.

Rule 156 states that whether or not a particular description, representation, illustration, or other statement involving a material fact is misleading depends on evaluation of the context in which it is made. The rule discusses several pertinent factors that should be weighed in considering whether a particular statement involving a material fact is or might be misleading in investment company sales literature, including rule 482 advertisements and supplemental sales literature. Rule 156 applies to sales literature used by any person to offer to sell or induce the sale of securities of any investment company, including registered investment companies and BDCs.

Currently, the investment company advertising rules largely focus on performance-related information. Among other things, the performance-related provisions of these rules are designed to: (1) Address concerns that investors would be unable to compare fund performance when funds use different calculation methods in their advertisements; and (2) highlight areas that, based on the Commission's experience with investment company advertisements, have been particularly susceptible to misleading statements. The investment company advertising rules do not presently require information about an investment company's fees and expenses or limit how fee and expense information is presented, with one exception. Under the current rules, if an advertisement provides performance data of an open-end management investment company or a separate account registered as a unit investment trust offering variable annuity contracts, it also must include the maximum amount of the fund's sales load (i.e., purchase charge or exit charge) or any other nonrecurring fee that it charges.

Separately, FINRA rule 2210 requires fee and expense information in certain non-money market fund open-end management investment company advertisements that provide performance information. This includes: (1) The fund's maximum sales charge (i.e., purchase charge or exit charge); and (2) the total annual fund operating expense ratio, gross of any fee waivers or expense reimbursements (i.e., ongoing annual fees). Under FINRA's rule, a fund's standardized performance information, sales charge, and total annual fund operating expense ratio (gross of any fee waiver or expense reimbursement) must be set forth prominently.

To promote more consistent and transparent presentations of investment costs in investment company advertisements, we are proposing to amend rules 482, 433, and 34b-1 to require that investment company advertisements providing fee or expense figures for the company include certain standardized fee and expense figures. The proposed amendments would apply to advertisements of any registered investment company or BDC. We are not proposing to limit the scope of the proposed amendments to a subset of investment companies because we believe investors in any registered investment company or BDC would benefit from advertisements that provide consistent, standardized fee and expense information that is generally aligned with prospectus fee and expense information.

With respect to rule 482, we are proposing to amend the rule to require that investment company advertisements providing fee and expense figures include: (1) The maximum amount of any sales load, or any other nonrecurring fee; and (2) the total annual expenses without any fee waiver or expense reimbursement arrangement (collectively, the “required fee and expense figures”). Because we believe that these are important figures for assessing the fees and expenses of a fund investment, the proposal would require any advertisement presenting fee and expense figures to include these items. This proposed requirement would only apply if an investment company advertisement includes fee or expense figures, and therefore an advertisement would not need to include the required fee and expense figures if it only included general, narrative information about fee and expense considerations and did not include any numerical fee or expense amounts.

The proposed required fee and expense figures would be based on the methods of computation that the fund's Investment Company Act or Securities Act registration statement form prescribes for a prospectus. This proposed requirement is designed to promote consistent fee and expense computations across investment company advertisements, particularly within the same fund category, and to facilitate investor comparisons. We are proposing to require consistency with prospectus requirements because, like a fund's summary or statutory prospectus, advertisements are often designed for prospective investors and may influence an investment decision. Further, similar to associated prospectus requirements, if an advertisement covers only a subset of a fund's share classes, the advertisement could provide the required fee and expense information for those classes only.

While investment company advertisements could include other figures regarding a fund's fees and expenses, the advertisement would have to present the required fee and expense figures at least as prominently as any other included fee and expense figures. For example, under the proposed amendments, an advertisement could include a fund's fees and expenses net of certain amounts, such as a fee waiver or expense reimbursement arrangement, as we understand some fund advertisements do today. However, an advertisement could not present the net figure more prominently than the required fee and expense figures. In addition to meeting the proposed content and presentation requirements, advertisements that include a fund's total annual expenses net of fee waiver or expense reimbursement arrangement amounts would also need to include the expected termination date of the arrangement. We believe this proposed requirement would help investors better understand how a fee waiver or expense reimbursement arrangement may affect their investment costs by providing information about how long the arrangement would likely be in place (including that it may be terminated at any time).

The proposed amendments would also include timeliness requirements for fee and expense information in investment company advertisements. The proposed timeliness requirement would apply to fee and expense information and, thus, it would apply to fee and expense figures as well as relevant narrative information. Under the proposal, fee and expense information would need to be as of the date of the fund's most recent prospectus or, if the fund no longer has an effective registration statement under the Securities Act, as of its most recent annual report. A fund would, however, be able to provide more current information, if available. The proposed timeliness requirement is designed to prevent investment company advertisements from including stale, outdated information about a fund's fees and expenses. For instance, a registered open-end fund that maintains an effective Securities Act registration statement on Form N-1A would need to provide its maximum sales load (or other nonrecurring fee) and gross total annual expenses, as of the date of the fund's most recent prospectus. As another example, a registered closed-end fund that includes fee and expense figures in a rule 482 advertisement and that does not maintain an effective Securities Act registration statement would need to provide its gross total annual expenses, as of the date of the fund's most recent annual report.

We also are proposing to amend rules 34b-1 and 433 so that those rules incorporate rule 482's proposed content, presentation, and timeliness requirements for fees and expenses. This would help ensure that the same fee and expense-related requirements are applied consistently across all registered investment company and BDC advertisements and sales literature. The proposed amendments to rule 34b-1 would provide that any sales literature of a registered investment company or BDC would have omitted to state a fact necessary in order to make the statements therein not materially misleading unless the sales literature meets rule 482's proposed content, presentation, and timeliness requirements for investment company fees and expenses. That is, sales literature that would not otherwise be subject to rule 482 would have to meet rule 482's fee and expense requirements. The proposed amendments to rule 34b-1 would, for example, apply to sales literature that is excluded from the definition of “prospectus” in section 2(a)(10) of the Securities Act and thus is not subject to rule 482. Additionally, we propose to amend rule 433, which establishes conditions for the use of post-filing free writing prospectuses, to require a registered closed-end fund or BDC free writing prospectus to comply with the proposed content, presentation, and timeliness requirements of proposed rule 482, as applicable, if the free writing prospectus includes fee and expense information. As a result, regardless of whether a registered closed-end fund or BDC advertisement uses rule 482 or rule 433, the advertisement would be subject to the same requirements regarding fee and expense information. While the proposed amendments to rules 482, 34b-1, and 433 are similar to requirements that currently apply to a subset of fund advertisements under FINRA rule 2210 (i.e., certain non-money market fund open-end management investment company advertisements that provide performance information), our proposed amendments would apply more broadly to all investment company advertisements and supplemental sales literature.

In addition, we are proposing to amend rule 156 to address statements and representations about a fund's fees and expenses that could be materially misleading. Specifically, we would provide that, when considering whether a particular statement involving a material fact is or might be misleading, weight should be given to representations about the fees or expenses associated with an investment in the fund that could be misleading because of statements or omissions involving a material fact. As funds are increasingly marketed on the basis of costs, we are concerned that investment companies and intermediaries may in some cases understate or obscure the costs associated with a fund investment. The new proposed factor in rule 156 would provide that representations about the fees or expenses associated with an investment in the fund could be misleading because of statements or omissions involving a material fact, including situations where portrayals of such fees and expenses omit explanations, qualifications, limitations, or other statements necessary or appropriate to make the portrayals not misleading. Consistent with the current framework in rule 156, whether a particular description, representation, illustration, or other statement involving a fund's fees and expenses is materially misleading depends on evaluation of the context in which it is made. In addition, like current rule 156, the proposed amendments would apply to all investment company sales literature. We are not proposing to limit the scope of these amendments to a subset of investment companies because our concerns regarding materially misleading statements about fees and expenses are not limited to certain types of investment companies.

The proposed amendments to rule 156 are designed to address concerns that investment company advertisements may present a fund's fees and expenses in a way that materially misleads an investor to believe that the costs associated with a fund investment are lower than the actual investment costs. For example, we understand that it has become increasingly common for funds to market themselves, or attempt to market themselves, as “zero expense” or “no expense” funds based solely on information in their prospectus fee tables and without also disclosing that investors or the fund may incur other costs. However, in some cases a fund's prospectus fee table shows no transaction fees and no ongoing charges only because its adviser, the adviser's affiliates, or others are collecting fees elsewhere from these investors. For instance, an investor in a so-called “zero expense” fund may encounter other investment costs that can effectively reduce the value of his or her investment in a fund. For example, an investor may incur intermediary costs, such as wrap fees that an investor pays to the sponsor of a wrap fee program (which may be the fund's adviser or its affiliates) for investment advice, brokerage services, administrative expenses, or other fees and expenses. As another example, if a fund engages in securities lending, it generally pays certain fees or compensation to a securities lending agent (which may be affiliated with the fund's adviser), including through revenue sharing arrangements. Additionally, a fund may appear to be a “zero expense” fund because its adviser is waiving fees or reimbursing expenses for a period of time, but the fund will incur fees and expenses once that arrangement expires. In these and other cases where an investor may encounter other investment costs, we are concerned that, absent appropriate explanations or limitations, investors in these cases may believe incorrectly that there are no expenses associated with investing in the fund.

Similar issues can arise with respect to investment company advertisements that advertise low investment costs, based solely on a fund's prospectus fee table, and that do not reflect or recognize other categories of costs that may, for instance, be supplementing or replacing a more traditional management fee (e.g., intermediary costs, securities lending costs). As another example, an advertisement might be materially misleading if it presents one component of a fund's total operating expenses, such as the fund's management fee, without stating that there are other costs associated with a fund investment or providing the total operating expense figure.

Under certain circumstances, statements in advertisements about a fund's fees and expenses that would be materially misleading on their own may not be misleading if the advertisement includes appropriate explanations, qualifications, limitations, or other statements. To use this approach effectively to avoid materially misleading statements, we believe it would be appropriate for funds to avoid using lengthy and technical disclaimers in small font sizes.

These proposed content-related restrictions in rules 482, 433, and 34b-1 and the proposed amendments to rule 156 are designed to work together to promote balanced and transparent presentations of fee and expense information in investment company sales literature. We request comment on the proposed amendments to the Commission's investment company advertising rules, including the following:

268. Should the advertising rule amendments apply to all investment companies, as proposed? If not, what types of investment companies should the amendments cover? Are there fee and expense-related issues that are specific to certain types of investment company advertisements that we should take into account?

269. Should we amend rule 482 to require that an advertisement providing fee or expense figures for an investment company also include the maximum sales load (or any other nonrecurring fee) and the total annual expenses without any fee waiver or expense reimbursement arrangement, as proposed? If not, why not? Should we require investment company advertisements to include other fee and expense information, such as the fund's management fee? If so, what information should we require, and why? Should we, for example, require the same fee and expense information as the fund's prospectus fee table (or, in the case of mutual funds and ETFs, the proposed fee summary)?

270. As proposed, should we require that investment company advertisements present the required fee and expense figures using the methods of computation that the fund's Investment Company Act or Securities Act registration statement form prescribes for a prospectus? Should we allow some or all funds to use different computational methods? As another example, should registered closed-end funds that do not maintain an effective registration statement be able to show expense figures from their shareholder reports (e.g., financial highlights expense ratios) rather than computing total annual expenses in the manner required for a prospectus fee table? Why or why not? Are the shareholder report figures, which represent backward-looking information for the last fiscal year and do not include AFFE, appropriate for advertising materials absent other information? Instead should the required expense figure reflect estimated expenses for the current fiscal year and AFFE (as required in prospectus fee tables)? If we permit different computational methods among investment company advertisements, are there other ways we could promote more consistent fee and expense presentations and facilitate investor comparisons?

271. Beyond the required fee and expense figures, should we require an investment company advertisement to present any other fees or expenses the advertisement may include using the same computational method identified in a Commission form or rule, such as the relevant Investment Company Act or Securities Act registration statement form (e.g., for a prospectus or shareholder report), where available? If so, should this apply to particular fee or expense figures, or should it apply to all fee and expense figures that have identified computations in Commission forms or rules? Do funds already use standardized computational methods in advertisements that include fee information (e.g., for administrative ease or due to antifraud concerns)?

272. Should we require an investment company advertisement to present the required fee and expense figures at least as prominently as any other fee and expense figures, as proposed? If not, why not? Are there circumstances in which it would be appropriate for an advertisement to present a different fee or expense figure more prominently than the required fee and expense figures? Please explain.

273. Beyond the proposed prominence requirements, should we impose other presentation standards for fee and expense information in fund advertisements? For example, should we require advertisements to present fee and expense information in a format that aligns with the fee table (or fee summary) presentation the fund's registration form requires for prospectuses?

274. Should we require investment company advertisements to use specified terms to describe the required fee and expense figures? For example, should we require advertisements to use the same terms as those prescribed for prospectus fee tables in the fund's registration form? Alternatively, should we require all fund advertisements to use consistent, plain English terminology (such as “ongoing annual fees”)?

275. As proposed, should we allow investment company advertisements to include other fee and expense figures, beyond the required fee and expense figures? If not, why not? Alternatively, should we require advertisements that include fee and expense figures to include only figures that appear in the fee table of the fund's prospectus (or, additionally, in the fund's shareholder reports)? If so, how should we address the fact that these presentations do not reflect all potential investment costs, including intermediary costs, transaction costs, and securities lending costs? Should we, for instance, require that a legend or footnote accompany the presentation to explain that it may not reflect all costs associated with an investment?

276. As proposed, should we require an investment company advertisement to include the expected termination date of a fee waiver or expense reimbursement arrangement if the advertisement provides a fund's total annual expenses net of fee waiver or expense reimbursement arrangements? Is there other information we should require about a fee waiver or expense reimbursement arrangement, such as who can terminate the arrangement? Should we permit an advertisement to reflect any fee waiver or expense reimbursement arrangement, or should the arrangement have to meet certain conditions to appear in an advertisement? For example, should we allow such arrangements to appear in investment company advertisements only if they can appear in a fund's prospectus fee table (e.g., in the case of a registered open-end fund registered on Form N-1A, if the fee waiver or expense reimbursement arrangement would be in place for at least 1 year from the effective date of the fund's registration statement)? As another alternative, because prospectus-related requirements currently vary among different types of funds, should we require an arrangement to be in place for the same period of time for any fund that wishes to disclose its total annual expenses net of a fee waiver or expense reimbursement in an advertisement? If so, what period of time (e.g., 1 year), and how should we measure it (e.g., from the date the advertisement is first submitted for publication, published, or used; from the effective date of the fund's registration statement; or from the date of the fund's most recent annual report)? What are the advantages and disadvantages of any such approach? Are there other conditions that should determine when a fund may include fee waiver or expense reimbursement amounts in investment company advertisements and if so, what should these be?

277. Should we, as proposed, include timeliness requirements in rule 482 for fee and expense information in an investment company advertisement? Should fee and expense information be as of the fund's most recent prospectus or, if the fund no longer has an effective Securities Act registration statement, as of its most recent annual report, as proposed? If not, what baselines should we use to measure the timeliness of fee and expense information? Should the baseline differ among different types of funds, or is there a single baseline that would work for all funds? Should we allow advertisements to include fees and expenses that are more current than the fund's most recent prospectus (or as of the fund's most recent annual report), as proposed? Alternatively, should we require a fund with a current prospectus to always present the same fees and expenses in its advertisements as those shown in its current prospectus? Should the proposed timeliness requirement apply to any fee and expense information, as proposed, or should it apply more narrowly to particular subsets of fee and expense information (e.g., fee and expense figures)?

278. Should rule 34b-1 include the same fee and expense-related requirements as rule 482, as proposed? If not, why should different fee-related requirements apply to rule 482 advertisements and rule 34b-1 sales literature? What fee and expense-related requirements should rule 34b-1 include?

279. As proposed, given the breadth of the definition of “sales literature” in proposed rule 34b-1, should we amend rule 34b-1 to provide that the proposed fee and expense-related requirements for investment company advertisements in rules 34b-1, 482, and 433 do not apply to shareholder reports under section 30 of the Investment Company Act or to other reports pursuant to section 13 or 15(d) of the Exchange Act? If not, why not? Are there circumstances in which the proposed fee and expense-related content or timeliness requirements should apply to these reports?

280. As proposed, should we amend rule 433 to require registered closed-end fund or BDC free writing prospectuses that include fee and expense information to comply with applicable fee and expense-related requirements in rule 482? If not, why should we treat free writing prospectuses differently from rule 482 advertisements? Are there other amendments we should make to the free writing prospectus rules to more effectively implement the proposed requirements? For example, should we amend Securities Act rule 164 to provide that an immaterial or unintentional failure to comply with the proposed fee and expense requirements would not result in a violation of section 5(b)(1) of the Securities Act or the loss of the ability to rely on the free writing prospectus rules, similar to the provision that currently applies to the legend condition in rule 433? If so, why should we treat the substantive requirements regarding fee and expense information in the same manner as the required legend? Are the proposed amendments to rule 34b-1—which apply to any registered investment company or BDC advertisement, pamphlet, circular, form letter, or other sales literature addressed to or intended for distribution to prospective investors—sufficiently broad such that the proposed amendments to rule 433 would not be necessary?

281. Should we amend Securities Act rule 163 to apply fee and expense-related requirements to free writing prospectuses that a registered closed-end fund or BDC that is a well-known seasoned issuer may use before filing a Securities Act registration statement? If so, what requirements should apply to these pre-filing communications? Should we require such a fund to compute the required fee and expense figures in the manner required for a prospectus fee table before the fund has filed a registration statement? What are the advantages and disadvantages of such an approach?

282. Should the content requirements of rule 482, rule 34b-1, and rule 433 apply differently based on the audience for the advertisement (e.g., retail versus institutional investors)? For example, after filing a registration statement, do new funds or existing funds that are planning to conduct a new offering of securities need flexibility to rely on rule 482, rule 34b-1, or rule 433 to communicate with certain parties, such as intermediaries or institutional investors, about potential fee or expense amounts to determine the appropriate fee structure for a new fund or security? If so, why would a fund need to rely on rule 482, rule 34b-1, or rule 433 for these purposes instead of the Commission's new rule allowing test-the-water communications with certain institutional investors? If the content requirement should differ based on the audience, how should they differ, and what is the basis for these differences? How should we define the different categories of investors?

283. Should the amendments to rule 482, rule 34b-1, and rule 433 apply equally to new and existing funds? If not, why not? For example, do any of the proposed amendments present particular challenges for a new fund that has filed a registration statement but that does not have an effective registration statement? If so, what are those challenges, and how could we address them?

284. Should we amend rule 156 to address statements and representations about a fund's fees and expenses that could be materially misleading, as proposed? If not, why not? Are the proposed amendments overly broad or overly narrow? What impact would the proposed amendments have on current investment company marketing practices? Should the proposed amendments be requirements rather than a factor for consideration?

285. Is the proposed factor in rule 156 appropriately tailored to address potential materially misleading statements or representations regarding a fund's fees and expenses? If not, how could we modify the proposed factor to address potential materially misleading statements or representations without negatively affecting a fund's ability to provide the types of fee and expense information that investors want in fund advertisements?

286. Should we provide additional factors an investment company should consider to avoid potentially materially misleading statements regarding a fund's fees and expenses? If so, what factors and why? For instance, are there circumstances in which a fund might include statements in its advertisements that suggest or imply present or future levels of fees and expenses that would not be justified under the circumstances and that might be materially misleading to investors? Could this potentially occur, for example, if a fund that has performance fees or fulcrum fees advertises its current fees and expenses in a manner that suggests or implies that the fund's fees and expenses would remain the same in the future, even though the fund's fee and expenses could be significantly higher if the fund's future performance triggers the performance fee or fulcrum fee? What are the advantages or disadvantages of including a new factor in rule 156 related to statements that suggest or imply present or future levels of fees and expenses that would not be justified under the circumstances? Would the proposed amendments to rule 156 already appropriately address this concern?

287. Should we provide additional guidance on the types of explanations, qualifications, limitations, or other statements that funds that have zero-expenses (or close to zero expenses) based solely on information in their prospectus fee tables could include in their advertisements to address concerns about materially misleading statements or provide standardized statements for advertisements or prospectuses? For example, should such a statement provide that the fund, its adviser, or its affiliates may receive compensation from the fund that is not disclosed? Should the statement instead provide that there are other costs that will reduce the value of an investment in the fund? Are there other statements that would explain the issue more clearly to investors or that would be more accurate for different types of funds? Would standardized language be appropriate for different types of funds with zero expenses (or close to zero expenses) based solely on information in their prospectus fee tables, or should funds have discretion to tailor the language to address a particular fund's facts and circumstances? Would guidance of the type that this request for comment describes be appropriate for other scenarios related to the presentation of fees and expenses in fund advertisements, and if so, what other types of scenarios should the guidance address?

288. Would the proposed amendments to the investment company advertising rules create unintended incentives or results, such as an incentive for funds to no longer include fee and expense information in fund advertisements? If so, how could we reduce the impact of those unintended incentives or results while still promoting more balanced and transparent presentations of fund fees and expenses in advertisements?

M. Technical and Conforming Amendments

We are proposing technical and conforming amendments to various rules and forms. As discussed above, our proposal would revise rule 30e-3 to exclude investment companies registered on Form N-1A from the scope of the rule. As a conforming amendment, we propose to revise Form N-1A and rule 498 under the Securities Act to remove legends required by rule 30e-3. Likewise, as another conforming amendment, we propose to withdraw previously adopted amendments to Form N-1A and rule 498 that are scheduled to become effective on January 1, 2021 and that would reference requirements of rule 30e-3. As technical amendments, we also propose to update certain terminology in Form N-1A to reflect modern usage and presentation and to remove references to collect phone calls.

As discussed above, we are also proposing new rule 498B to address shareholders' continued receipt of annual prospectus updates in the years following their initial investment in a fund. As a conforming amendment, we propose to amend 17 CFR 200.800 to display control numbers assigned to information collection requirements for rule 498B by the Office of Management and Budget pursuant to the Paperwork Reduction Act. As discussed further below, an agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number.

Our proposal would also simplify the fee table currently included in Form N-1A and move the full fee table to a different location in Form N-1A. To ensure that forms cross-referencing the current fee table in Form N-1A continue to reference that same table, we propose to update cross-references in Schedule 14A and Form N-14.

Finally, as technical amendments, we also propose to update the current SAI requirement to provide the age and length of service for a fund's officers and directors to allow funds to instead disclose for each officer and director the birth year and the year their service began. We also are proposing a similar instruction for the length of service for portfolio managers that must be disclosed in the prospectus to permit a fund to disclose the year the portfolio manager's service began. We believe that permitting a fund to use a static date rather than updating this information annually will reduce a burden on funds that can arise in updating a previously disclosed age, for example, while providing investors equivalent information. We also have observed that some funds already disclose each officer and director's year of birth and the date the services of the officers, directors and portfolio managers began.

We request comment generally on these technical and conforming amendments, and specifically on the following issues:

269. Are these technical and conforming amendments appropriate in light of the other changes contemplated by our proposal?

270. Are there any additional technical or conforming amendments that should be made in order to fully implement the proposed changes in this rulemaking? For example, should we update cross-references in Forms N-4 and N-6 to the current fee table in Form N-1A (which would be revised under our proposal to become a summary table), even though those cross-references are with regard to the line-item “Total Annual Fund Operating Expenses” which would not be changed under our proposal and thus would be identical in both the summary fee table and the full fee table? If so, why?

271. Are there any proposed technical or conforming amendments that we should not make, or should modify? For example, should forms cross-referencing the current fee table in Form N-1A continue to reference that same fee table, even though that fee table would be revised under our proposal to become a summary fee table? If so, why?

N. Compliance Date

We propose to provide a transition period after the effective date of the amendments to give funds sufficient time to adjust their prospectus and shareholder report disclosure practices and to provide sufficient time to comply with the new fee and expense requirements for investment company advertisements, as described below. We are proposing generally a compliance date of 18 months after the amendments' effective date. Based on our experience, we believe the proposed compliance dates would provide an appropriate amount of time for funds to comply with the proposed rules.

• Shareholder reports and related requirements. All shareholder reports for funds registered on Form N-1A would have to comply with Item 27A of Form N-1A if they are transmitted to shareholders 18 months or more after the effective date. These funds also would have to comply with the amendments to rule 30e-1 and Form N-CSR no later than 18 months after the effective date by, among other things, meeting the website availability requirements for the new Form N-CSR items.
• Rule 30e-3 and related amendments. We propose that the amendments to the scope of rule 30e-3, and conforming amendments to Form N-1A and rule 498 to remove legends required by rule 30e-3, would be effective 18 months after final rules are adopted to provide time for funds relying on rule 30e-3 to transition to the proposed disclosure framework.
• Rule 498B. Funds could rely on rule 498B to satisfy prospectus delivery requirements for existing shareholders beginning on the effective date of the rule, provided the fund is also in compliance with the amendments to Item 27A of Form N-1A, rule 30e-1, and Form N-CSR.
• Amended prospectus disclosure. We propose that funds would have 18 months after the effective date to comply with the amendments to prospectus disclosure in Form N-1A, including the fee summary and revised principal risk disclosure.
• Amended advertising rules. We propose to provide 18 months after the effective date for investment company advertisements to comply with the amendments to rules 482, 433, and 34b-1. We do not propose to provide an additional compliance period for the amendments to rule 156 after the amended rule is effective.

We request comment on the proposed compliance and effective dates, including the following:

272. Are the proposed compliance dates appropriate? If not, why not? Is a longer or shorter period necessary to allow registrants to comply with one or more of these particular amendments? If so, which proposed amendments, and what would be an appropriate compliance date?

273. Is the proposed effective date for the rule 30e-3 amendments appropriate? Should the effective date of the rule 30e-3 amendments align with the proposed compliance date for the other shareholder report-related amendments, as proposed? If not, why not?

274. Should we allow funds to begin to rely on proposed rule 498B as soon as the rule is effective, provided they comply with the amendments to Item 27A of Form N-1A, rule 30e-1, and Form N-CSR? If not, why not?

III. Economic Analysis

O. Introduction

We are mindful of the costs imposed by, and the benefits obtained from, our rules. Section 3(f) of the Exchange Act, section 2(b) of the Securities Act, and section 2(c) of the Investment Company Act state that when the Commission is engaging in rulemaking under such titles and is required to consider or determine whether the action is necessary or appropriate in (or, with respect to the Investment Company Act, consistent with) the public interest, the Commission shall consider whether the action will promote efficiency, competition, and capital formation, in addition to the protection of investors. Further, section 23(a)(2) of the Exchange Act requires the Commission to consider, among other matters, the impact such rules would have on competition and states that the Commission shall not adopt any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The following analysis considers, in detail, the potential economic effects that may result from the proposed rule and amendments, including the benefits and costs to investors and other market participants as well as the broader implications of the proposal for efficiency, competition, and capital formation.

The proposed rule would affect the provision of information by funds to investors, including existing fund shareholders and new or prospective fund investors. For example, under the proposal funds would provide existing shareholders with more concise and visually engaging shareholder reports that highlight key information, including fund expenses, performance, and holdings. The proposed rule would also affect how funds transmit shareholder reports. Under the proposal, funds would not be permitted to deliver paper notices regarding the online availability of shareholder reports in reliance on rule 30e-3. Instead, funds would deliver the more concise shareholder report in full. Through a layered disclosure framework, additional information that may be of interest to market professionals and some shareholders, such as fund financial statements, would be available online and delivered in paper or electronic format upon request, free of charge. Further, instead of delivering annual prospectus updates to existing shareholders, funds would have the option to notify shareholders promptly of certain material changes to the fund, provided the prospectus is available online and delivered upon request, free of charge.

In addition to amendments that would primarily affect existing fund shareholders, the proposed rule would amend prospectus disclosure regarding fees and expenses and principal risk, which we expect to primarily affect new or prospective investors in a fund. Finally, to improve fee and expense information that is available to investors more generally, we propose to amend the investment company advertising rules to require that investors receive more transparent and consistent fee and expense information.

We expect the proposed rule to benefit investors by permitting them to make more efficient use of their time and attention, and by facilitating informed investment decisions and choice among financial products. We expect some funds to experience lower costs of delivering materials under the proposal, which may be passed on to investors as a further benefit of the proposal, while other funds may experience increased delivery costs that would be a cost of the proposal to the shareholders of those funds.

P. Economic Baseline and Affected Parties

1. Descriptive Industry Statistics

The proposed rule would affect funds and investors who receive fund disclosure under the current rules. Approximately 101.6 million individuals own shares of registered investment companies, representing 57.2 million (or 44.8%) of U.S. households. An estimated 99.5 million individuals own shares of mutual funds in particular, representing 56.0 million (or 43.9%) of U.S. households. The assets of all registered investment companies exceeded $21 trillion at year-end 2018, having grown from about $5.8 trillion at the end of 1998. Based on staff analysis of Form N-CEN filings, we estimate that, as of March 2020, the number of funds that could be affected by the proposed amendments to disclosure and delivery requirements for prospectuses and shareholder reports is 12,410, including 10,310 mutual funds and 2,100 ETFs that register on Form N-1A. As of March 2020, the 10,310 mutual funds (i.e., series of trusts registered on Form N-1A) had average total net assets of $25 trillion and 33,785 authorized share classes. The 2,100 ETFs (i.e., series, or classes of series, of trusts registered on Form N-1A) had average total net assets of $3.2 trillion as of March 2020.

Funds may invest in other funds under section 12(d)(1) of the Act and the rules thereunder. We estimate that approximately 30% of funds invest in such acquired funds. Most acquiring funds invest 10% or less of their total assets in acquired funds (excluding money market funds). For funds with more than 10% of their total assets in acquired funds, the majority invest more than 20% of their total assets in the acquired funds. We estimate that approximately 32% of funds that invest in acquired funds invest more than 10% of their total assets in acquired funds, and that approximately 28% invest more than 20% of their total assets in acquired funds. Thus, a large share (88%) of the funds with more than 10% invested have more than 20% of their total assets invested in acquired funds.

The scope of the proposed advertising rule amendments is broader than that of the other elements of the proposal. The advertising rule amendments would apply to other registered investment companies and to BDCs, in addition to mutual funds and ETFs. As of March 2020, there were 1,388 other registered investment companies, including 665 registered closed-end funds, 14 funds that could file registration statements or amendments to registration statements on Form N-3, and 709 UITs. As of March 2020, there were 87 BDCs with $139 billion in total assets.

The proposal would also affect financial intermediaries and other third parties that are involved in the distribution and use of the prospectus and shareholder reports, such as broker-dealers and third-party information providers. We understand that most fund investors are not direct shareholders of record, but instead engage an investment professional and hold their fund investments as beneficial owners through accounts with intermediaries such as broker-dealers. As a result, intermediaries commonly distribute fund materials to beneficial owners, including shareholder reports and annual prospectus updates. In the case of broker-dealers, self-regulatory organization (“SRO”) rules provide that broker-dealer member firms are required to distribute annual reports, as well as “interim reports,” to beneficial owners on behalf of issuers, so long as an issuer (i.e., the fund) provides satisfactory assurance that the broker-dealer will be reimbursed for expenses (as defined in SRO rules) incurred by the broker-dealer for distributing the materials. Based on information reported on Form BD, we estimate that 2,016 broker-dealers sell registered investment companies' shares and may deliver prospectuses or shareholder reports that would be affected by the proposal.

2. Fund Prospectuses

The prospectus is the main selling document of the fund and is designed to provide forward-looking information and certain historical information to new shareholders and prospective shareholders with no existing investment in the fund. Funds deliver a prospectus to new shareholders in connection with the initial purchase, and prospectuses are designed to inform investment decisions and help investors compare funds. Funds typically update their prospectuses annually within 120 days of fiscal year-end. Funds also may supplement or “sticker” their prospectuses to update the disclosure at other times during the year when material or other changes occur.

Funds (or intermediaries) are generally required to deliver a fund prospectus to an investor in connection with a purchase of fund shares. Rule 498 enables funds to deliver the summary prospectus rather than the statutory prospectus if they meet certain conditions. We estimate that 93 percent of funds deliver a summary prospectus in reliance on rule 498, and the remaining seven percent of funds deliver the statutory prospectus. According to one academic study, the average summary prospectus is 6.77 pages. Based on a review of fund websites, the staff has found similar page lengths in summary prospectuses. In a sample from 2020, for example, the staff found that summary prospectus page lengths varied around an average of 8 pages at the mean and median, and that summary prospectuses were shorter than statutory prospectuses, which varied in length around a mean of 128 pages and median of 75 pages. We estimate that currently the average summary prospectus length is 8 pages and the average statutory prospectus length is 128 pages.

In addition to sending prospectuses to new investors, funds typically send an annual prospectus update to ongoing shareholders each year, and may deliver prospectus stickers to shareholders to update the disclosure at other times. The form (i.e., summary prospectus or statutory prospectus) and length of the annual prospectus update a fund delivers to ongoing shareholders is the same as that of the prospectus it delivers to new investors. The annual prospectus update provides continuing shareholders with access to information about material fund changes, such as in the fund's fees or principal investment strategy. The disclosure format of the prospectus, however, does not highlight or explain the material changes. We estimate that funds, on average, deliver one annual prospectus update each year and one prospectus sticker every other year to disclose material changes to the fund. Funds also are required to file their prospectuses on EDGAR. In addition, funds often provide their prospectuses on their websites. The extent to which funds currently publish prospectuses to their public websites is influenced by Commission rules. If a fund delivers a summary prospectus under rule 498 (which an estimated 93 percent of funds do), then its summary and statutory prospectuses and its SAI must be available on the website identified at the beginning of the summary prospectus. As for the SAI, in addition to its typical availability online, funds must file it on EDGAR. Funds generally do not deliver SAIs to investors (although a fund must deliver it to an investor on request).

Among other things, prospectuses include information about a fund's investment objective, principal investment strategy, fees and expenses, principal risks, performance, investment adviser, and portfolio managers. Funds must provide certain of this information—including investment objectives, fees and expenses, principal investment strategies, principal risks, and performance—in a structured data format. With respect to principal risk disclosure in particular, the length of this disclosure has been growing over time, and funds sometimes order their risks alphabetically instead of by importance. One academic study found that fund risk disclosure in the summary prospectus had nearly doubled in length between 2010 and 2018. Based on staff analysis, the median number of principal risks listed in fund prospectuses grew from 11 in 2016 to 13 in 2018, and almost half of the principal risk disclosures generally were in alphabetical order.

Funds disclose their fees and expenses in the prospectus fee table. Some fees and expenses are directly attributed to the fund's operations, while others are indirect. For example, some fees and expenses are attributable to the fund only through its investments in other funds). These indirect fund expenses generally appear in a separate AFFE line item in the fee table. Currently, regardless of the size of a fund's investments in the acquired funds, AFFE is a component of the line items that, summed together, produce the fund's bottom-line annual fund operating expenses in its fee table. Differences in the operating expense disclosures of different funds may thus reflect differences in their operations or differences in the operations of their acquired funds.

3. Fund Shareholder Reports

Funds provide information about their past operations and activities to investors through periodic shareholder reports. Funds send shareholder reports to ongoing shareholders twice-annually. Thus, shareholders receive both a semi-annual and an annual report from the fund. Shareholder reports provide backward-looking information about a fund's performance (in the case of an annual report), expenses, holdings, and other matters (e.g., statements about the fund's liquidity management program, the basis for approval of an investment advisory contract, and the availability of additional information about the fund). These reports also include financial statements, which include audited financials in the annual report. Shareholder reports can be quite long. The average length of a shareholder report exceeds 100 pages. Based on staff analysis of shareholder reports available on fund websites, we estimate that the average annual report length is 134 pages and the average semi-annual report length is 116 pages, or 86% of the average length of a fund's annual report. The length and complexity of these materials can make them difficult for some shareholders to use and understand.

Funds must deliver the shareholder reports to shareholders. Funds also must file the shareholder reports on EDGAR on Form N-CSR. In addition, funds often provide their shareholder reports on their websites. The extent to which funds currently publish shareholder reports on public websites is influenced by Commission rules. All funds that rely on rule 498 to deliver summary prospectuses are required to make their shareholder reports available online at the website address identified at the beginning of the summary prospectus; as a result, we estimate that at least 93% of funds currently provide their shareholder reports on websites. Form N-CSR filings include information other than shareholder reports. This information is filed on EDGAR but is not required to be delivered or otherwise available online.

4. Delivery of Fund Prospectuses and Shareholder Reports

Under Commission rules and guidance, delivery of fund prospectuses and shareholder reports occurs by paper or email, depending on the investor's expressed preference. The Commission has provided guidance permitting electronic delivery of required disclosure materials under certain circumstances. Under this guidance, funds can transmit shareholder reports, prospectuses, or other materials electronically in lieu of paper delivery if they satisfy certain conditions relating to investor notice, access, and evidence of delivery. Funds (or intermediaries) relying on this guidance typically obtain an investor's informed consent to electronic delivery to satisfy the “evidence of delivery” condition. Fund investors that have elected electronic delivery typically receive an email that contains a link to where the materials are available online. The proportion of shareholders who elect to receive fund disclosure by email varies among funds. By one estimate, the average enrollment rate for electronic delivery is 19.35% for direct-held positions (i.e., shares purchased directly through an account with the fund) and 55% for beneficial positions (i.e., shares purchased through an account with an intermediary).

With respect to shareholder reports, there is also an alternative means of delivery. On June 5, 2018, the Commission adopted rule 30e-3 to provide an optional method for satisfying obligations to transmit shareholder reports by making them accessible online. Starting in 2021, under rule 30e-3, fund shareholders who would otherwise receive shareholder reports in paper may instead receive a short paper notice that a semi-annual or annual report is available online. Rule 30e-3 does not modify the delivery method for shareholders who request to receive reports in paper or elect to receive reports electronically. Funds that intend to rely on rule 30e-3 before 2022 must provide notice to shareholders in their prospectuses and shareholder reports. Under rule 30e-3, what shareholders see when they access the report does not vary in substance or length according to whether they view the report online or request a paper copy of the report. Yet delivery of the report tends to be less costly for funds that choose to rely on rule 30e-3 than funds that do not choose to rely on rule 30e-3 because printing and mailing costs are lower for a short paper notice as opposed to a full-length report.

We estimate that 86 percent of funds registered on Form N-1A plan to rely on rule 30e-3 before 2022. We understand that the number could increase or decrease over time, depending on fund and investor experience with the new practice. The Commission previously estimated aggregated costs of $11 million during the transition period for funds to add statements to their shareholder reports and prospectuses notifying shareholders of the fund's intent to rely on rule 30e-3. This includes costs of approximately $7.1 million in the first year and approximately $4.3 million in the second year. In addition, funds may have incurred costs in anticipation of relying on rule 30e-3 that include costs of tracking how many investors request continued delivery by paper mail under rule 30e-3. This is because rule 30e-3 allows shareholders to elect—at any time—to receive all future reports in paper, or request particular reports in paper on an ad hoc basis.

In adopting rule 30e-3, the Commission understood that it would reduce the allocation of resources to printing and mailing of reports, depending on how many funds choose to rely on the rule. At that time, the Commission estimated that annual printing and mailing costs (inclusive of processing fees) for shareholder reports were approximately $20,707.33 per fund absent rule 30e-3. Based on the current number of funds, the aggregate costs would be approximately $257.0 million. At the time of adoption, the Commission estimated that 90 percent of funds would choose to rely on rule 30e-3. Based on the current number of funds, this would result in reduced printing and mailing costs for funds of approximately $231.3 million. Under our current estimate of the proportion of funds relying on rule 30e-3, which is 86%, the annual savings in printing and mailing costs for funds will decline from approximately $231.3 million to $221.0 million. The estimated aggregate printing and mailing costs for funds' shareholder reports in 2021 depends on whether and how fully funds achieve the projected savings for rule 30e-1 by that year. We expect the aggregate printing and mailing costs (inclusive of processing fees) to range between $36.0 million and $257.0 million in 2021, without the proposal, depending on how fully funds have realized the projected savings from reliance on rule 30e-3. For example, we would expect the costs to be closer to the lower end of the range if most or all of the 86% of funds are able to rely on the rule to transmit annual and semi-annual reports in 2021, while we would expect the costs to be closer to the higher end of the range if many of these funds are still subject to rule 30e-3's transition period for some or all of 2021.

A summary of the delivery scenarios that would occur without the proposal, along with typical delivery outcomes, appears in table 7 below. As indicated, the baseline delivery outcomes vary across funds and shareholders, according to their expressed preferences and circumstances:

5. Investor Use of Fund Disclosure

Based on responses to the Fund Investor Experience RFC and results of prior investor testing and surveys, the Commission understands that investors find that the information currently provided to them is overly long and difficult to understand. Investors have expressed concern about the length of the materials. Many investors have also suggested that fund disclosure is too complex or technical. For example, one survey reported that 67% of surveyed investors found shareholder reports difficult to understand, and another found the number to be higher, 72%. Some investor surveys suggest that many investors review little, if any, of funds' shareholder reports.

In addition, some investors have expressed concern about the fee information that funds disclose. Many investors responding to the Fund Investor Experience RFC expressed the view that funds do not clearly disclose their fees and expenses. This may indicate that they do not make effective use of the fee information that is provided under the current requirements. Several of these investors expressed support for simplifying fee presentations by, for example, reducing the number of line items in the prospectus fee table or providing only one “bottom-line” number showing the fees associated with an investment in the fund. Some commenters suggested that funds should disclose fees in terms of dollars rather than percentages to make the disclosure more understandable to investors. Some commenters have suggested that disclosing AFFE in the fee table may confuse investors because the fee table does not reflect similar indirect expenses of the fund and combining the fund's operating expenses with indirect AFFE does not align with the fund's financial statements.

Investors also indicate that prospectus risk disclosures are difficult to understand, and this may mean that such disclosures currently are difficult to incorporate into investment decisions. For example, many investors responding to the Fund Investor Experience RFC suggested that disclosure about a fund's risks is too long. Some investors suggested that funds should order risks by importance or otherwise better focus their risk disclosures.

6. Fund Advertisements

The Commission rules on investment company advertising apply to all registered investment companies and BDCs. These rules largely focus on how certain types of funds present their performance in advertisements. This focus reflects the Commission's acknowledgement that investors use information about performance to choose among funds and concern that, absent requirements to standardize how funds present performance in advertisements, investors may be susceptible to basing their investment decisions on information that is inaccurate or creates an inaccurate impression of the fund's performance.

In recent years, many funds have reduced their fees they impose on investors. The staff has observed that some funds have highlighted low fees in their advertising materials as a salient factor for investors to consider when choosing among funds. For example, we understand that some funds are advertised as “zero expense” or “no expense” funds based on the information included in their prospectus fee tables, potentially leading investors to believe these funds impose no costs even though the adviser or an affiliate may be collecting fees (e.g., securities lending costs) from the investor's fund investment. As a result, investors may be more likely today to consider a fund's fees when making their investment choices than they were when the Commission last updated the investment company advertising rules. Also as a result, funds may face increased incentives to understate or obscure fees in their advertising materials.

Advertising can reduce information asymmetries with implications for investor search costs and effects on investor choices and investment outcomes. Lower search costs can lead to more efficient matches between investor preferences and choices. Advertising can also make investors worse off, however. It depends on the abilities of investors to make effective use of the information that the advertising conveys. On the one hand, a fund advertisement can convey information that reduces information asymmetry between the fund and the investor. The effects can be lower search costs for the investor and a lesser chance of a mismatch between the investor's preferences and the fund that is ultimately chosen. However, investors may respond to advertising in ways that are not consistent with their own interests. The effectiveness of the advertising in lowering search costs and improving match efficiency depends on the investor's ability to understand the information. For example, a positive relation between funds' marketing efforts and investor flows (cash investment from investors) is well-documented among mutual funds. In that context, the adviser to the fund bears marketing expenses as part of its total operating cost, and fund shareholders are found to bear some of that cost in the form of fund expenses—unless shareholders react by switching to a similar fund that has lower expenses. One study observed that funds charge higher fees to cover the marketing cost as they engage in an “arms race” for similar pools of investors. Some of this cost is passed on to investors according to their abilities to distinguish among funds. The authors suggest that as fees increase, investors with a high search cost would be more likely to be made worse off by the increase in fees and related marketing expenditures than those with low search costs. This is because the investors with the high search costs would be more likely to match with asset managers of poor ability, and because the higher fees would reduce returns.

Under current rules, fund advertising may influence investor choice in ways that depend on the ability of the investor to make effective use of the information in the advertisement. When the investor is able to make effective use of the information, advertising can reduce the investor's search cost and thereby improve the efficiency of the match between the investor's choices and preferences.

Q. Costs and Benefits

Where possible, we have attempted to quantify the costs, benefits, and effects on efficiency, competition, and capital formation expected to result from the proposed rule. We are providing both a qualitative assessment and quantified estimates of the potential economic effects of the proposed amendments where feasible. As explained in more detail below, because we do not have, and in certain cases do not believe we can reasonably obtain reliable quantitative evidence to use as a basis for our analysis, we are unable to quantify certain economic effects. For example, because the proposed rule would provide fund investors with more tailored, concise disclosure than they currently receive, it is possible that readership of fund disclosure may increase. We do not have reliable quantitative estimates of the extent to which the use of more concise disclosure would enhance readership compared to the baseline scenario in which funds continue to deliver the materials that investors now receive. Similarly, the format and content of the proposed annual and semi-annual reports could reduce the amount of time and effort shareholders require to monitor their fund investments and make portfolio decisions (that is, whether to buy additional shares, continue to hold, or sell a fund investment). We also do not have reliable quantitative estimates of the extent to which the delivery of these more concise, tailored reports would reduce the amount of time and effort investors require to make portfolio decisions, or the value of that time and effort to investors. Nor do we have such estimates for the baseline conditions without the proposed rule. In those circumstances in which we do not have the requisite quantitative evidence, we have qualitatively analyzed the economic impact of the proposed rule and the baseline environment. Our inability to quantify these costs, benefits, or other effects does not imply these effects are less significant from an economic perspective. We request that commenters provide any information, including relevant data or supporting quantitative evidence, that may help inform our analysis and understanding of the economic consequences of the proposed rule and amendments.

1. Broad Economic Considerations

In addition to the comments we received in response to the Fund Investor Experience RFC, discussed in Section I.B, academic studies have documented potential benefits of providing more concise and tailored disclosure. While some of these studies apply only to certain elements of our proposal, others apply broadly to the framing of our analysis of the economic impacts of the proposed rule. In particular, some of this research has identified characteristics that may increase the effectiveness of a disclosure document to consumers, as discussed below.

Research suggests that, because individuals can exhibit limited ability to absorb and understand the implications of the disclosed information, for example due to limited attention or low level of financial sophistication, more targeted and simpler disclosures may be more effective in communicating information to investors than more complex disclosures. Academic studies suggest that costs, such as from increased investor confusion or reduced understanding of the key elements of the disclosure, are likely to increase as disclosure documents become longer, more complex, or more reliant on narrative text. Consistent with such findings, other empirical evidence suggests that disclosure simplification may benefit consumers of disclosed information. In general, academic research appears to support the notion that shorter and more focused disclosures could be more effective at increasing investors understanding than longer, more complex disclosures. For example, a concise shareholder report or a prospectus fee summary could more effectively communicate information to investors than current shareholder reports or prospectus fee tables.

Another characteristic of effective disclosures documented in academic research is disclosure salience. Salience detection is a key feature of human cognition allowing individuals to focus their limited time and attention on a subset of the available information and causing them to over-weight this information in their decision-making processes. Within the context of disclosures, information disclosed more saliently, such as information presented in bold text, or at the top of a page, would be more effective in attracting attention than less saliently disclosed information, such as information presented in a footnote. Limited attention also increases the importance of an individual's focusing on salient disclosure signals. Some research finds that more visible disclosure signals are associated with stronger stakeholder response to these signals. Moreover, research suggests that increasing signal salience is particularly helpful to consumers with lower education levels and financial literacy. There is also empirical evidence that visualization improves individual perception of information. For example, one experimental study shows that tabular reports lead to better decision making and graphical reports lead to faster decision making (when people are subject to time constraints). Overall these findings suggest that problems such as limited attention may be alleviated if key information in shareholder reports is emphasized, is reported closer to the beginning of the document, and is visualized in some manner (e.g., tables, graphs, bullet lists). However, it is also important to note that given a choice, registrants may opt to emphasize elements of the disclosure that are most beneficial to themselves rather than investors, while deemphasizing elements of the disclosure that are least beneficial to them. The proposed instructions for shareholder reports include requirements that are designed to mitigate this risk. For example, the proposed instructions require disclosure items to appear in a prescribed order, which mitigates funds' ability to provide disclosure opportunistically.

There is also a trade-off between allowing more disclosure flexibility and ensuring disclosure comparability (e.g., through standardization). Greater disclosure flexibility potentially allows the disclosure to reflect more relevant information, as disclosure providers can tailor the information to firms' own specific circumstances. Although disclosure flexibility allows for disclosure of more decision-relevant information, it also allows registrants to emphasize information that is most beneficial to themselves rather than investors, while deemphasizing information that is least beneficial to the registrants. Economic incentives to present one's operations and performance in better light may drive funds to deemphasize information that may be relevant to retail investors. Moreover, although standardization makes it harder to tailor disclosed information to a firm's specific circumstances, it also comes with some benefits. For example, people are generally able to make more coherent and rational decisions when they have comparative information that allows them to assess relevant trade-offs. The proposed rule is intended to strike a balance between the relative benefits and costs of disclosure standardization versus disclosure flexibility; for example, by requiring a prescribed order of disclosure topics and providing standardized instructions for each of those disclosures but allowing some flexibility for certain disclosure presentations (e.g., fund statistics, graphical representation of holdings) to account for different fund types.

In addition, studies have found that the structure or format of disclosure may improve (or decrease) investor understanding of the disclosures being made. Every disclosure document not only presents new information to retail investors but also provides a particular structure or format for this information that affects investors' evaluation of the disclosure. This “framing effect” could lead investors to draw different conclusions depending on how information is presented. For example, if the liquidity risk management program information is presented first in a shareholder report, it could affect the way investors perceive all subsequent disclosures in the shareholder report and, possibly, discount more heavily the information provided by funds that disclose issues regarding liquidity risk management over the period. If, instead, liquidity risk management information were provided near the end of the shareholder report, the effect of the information could be moderated because it would no longer frame the other information provided to investors. Because of such framing effects, it is important that the structure of a disclosure document supports the intended purpose of the disclosure.

2. Modified Disclosure Framework for Existing Fund Shareholders

a. Summary of Economic Effects

The proposal would provide fund shareholders with more concise disclosure that highlights information that is key to retail shareholders for the purpose of monitoring fund investments and informing portfolio decisions, while providing layered access to other information that shareholders now receive that may be of interest to market professionals and some fund shareholders. To promote disclosure that highlights key information for shareholders further, the proposal would permit funds to notify shareholders promptly if certain material changes occur to the fund (provided the summary prospectus, statutory prospectus, and additional information is available online and delivered upon request), instead of delivering annual prospectus updates and prospectus stickers each year. Funds (and intermediaries) would have the option to continue sending the annual prospectus update under the rule.

The following sections discuss the potential costs and benefits of the proposed modifications to the disclosure framework. In summary, we expect the proposed rules to benefit retail shareholders by providing information that is easier to use and that highlights key information for purposes of monitoring fund investments and making informed portfolio decisions. As a result, the proposed amendments could result in shareholders making more informed investment decisions by reducing obstacles that the Commission believes have limited readership of fund shareholder reports—namely, that the reports are too lengthy and not sufficiently tailored for retail shareholders. The proposed rules are also likely to reduce expenses associated with delivering disclosures for some funds, and to the extent that funds pass these savings on to shareholders, fund shareholders would benefit from these cost savings. We discuss two principal types of costs associated with the proposed approach. First, we expect fund and fund shareholders to incur transition costs of adapting to the new disclosure framework. Second, we anticipate some shareholders may sustain costs beyond the transition period arising from the possibility of mismatch between the preferences of the shareholders and the design of the rule proposal.

b. Benefits to Investors

It is difficult to quantify the effects of the proposed modified disclosure framework on investors. The delivery of more concise disclosures by funds through the proposed layered framework may reduce the investor effort required to monitor existing fund investments or to make subsequent portfolio decisions. Key information provided in a concise, user-friendly presentation could allow investors to understand information about a fund's operations and activities or compare information across products more easily or efficiently, and as a result, may lead investors to make decisions that better align with their investment goals.

For example, the proposed rule requires funds to distill certain key information—such as expenses, performance, and holdings—and use graphs, tables, and other more visually engaging presentations in their shareholder reports. As another example, because the proposal would require fund registrants to prepare separate shareholder reports for each series, a shareholder would be able to more quickly identify information about the fund in which she or he invests, instead of having to find his or her fund in a long report that covers multiple funds. Further, by providing additional flexibility for funds to use technology to provide interactive or user-friendly features in electronic versions of their shareholder reports, the proposal may provide shareholders with access to information that is more tailored to their individual needs and circumstances (e.g., performance or expense information based on their individual investment amounts), which may facilitate better monitoring of fund investments or more informed investment decisions.

There is evidence to suggest that consumers benefit from disclosures that highlight key information. One study finds that the use of summary prospectuses helps investors spend less time and effort to make investment decisions without reduction in the quality of those decisions. This research is consistent with the 2012 Financial Literacy Study, which showed that at least certain investors favor a layered approach to disclosure with the use, wherever possible, of tailored disclosures containing key information about an investment product or service. We understand that investors may prefer a layered approach simply to save time in reaching similar investment decisions, or to make better decisions, or both.

Further, investors allocate their attention selectively, and the sheer volume of disclosure that investors receive about funds may discourage investors from reading the materials that are currently delivered to them. For example, in connection with the development of the summary prospectus, the observations of a 2008 telephone survey conducted on behalf of the Commission with respect to mutual fund statutory prospectuses are consistent with the view that the volume of disclosure may discourage investors from reading disclosures. That survey observed that many mutual fund investors did not read statutory prospectuses because they are long, complicated, and hard to understand. Investor surveys submitted by commenters on the Fund Investor Experience RFC similarly suggest that shareholders may be more likely to read more concise shareholder reports. To the extent that the proposed rule would increase readership of fund shareholder reports, they could improve the efficiency of portfolio allocations made on the basis of disclosed information for those shareholders who otherwise would not have read the disclosures that the funds deliver currently.

In addition, other information that shareholders currently receive under the baseline, including financial statements, financial highlights, and annual prospectus updates, would be available online and delivered upon request to those shareholders who are interested in more-detailed information. As a result, shareholders who use this information to monitor their fund investments or inform portfolio decisions could continue to access and use this information.

Further, by allowing funds to deliver prompt notices of material funds changes to existing shareholders instead of annual prospectus updates, the proposed rule would help shareholders focus on information that is designed to meet their needs, rather than the needs of new or prospective investors. This aspect of the proposal would also reduce the amount of duplicative disclosure that fund shareholders currently receive. This is because annual prospectus updates include some of the same types of information as shareholder reports, including expense and performance information. Reducing duplicative disclosure could help shareholders more easily focus on salient information and could reduce the potential for shareholder confusion when a shareholder receives multiple disclosure materials close in time to one another and that include similar information, but with different presentations of that information.

By tailoring the information that funds deliver to shareholders to meet the needs of retail shareholders, the proposed rule could facilitate better or more efficient monitoring of fund investments and overall investment decision-making. The magnitude of this effect will depend on the extent to which investors review the disclosures directly, as a basis for their choices.

In addition, by excluding funds from rule 30e-3, fund shareholders may receive key information to monitor their fund investments or inform their investment decisions more directly as compared to the baseline. To the extent that direct delivery of a concise shareholder report that highlights key information for retail shareholders—including annual report disclosure that better identifies material changes to the fund than current annual prospectus update disclosure—may increase how informed shareholders are about funds, this could potentially increase shareholders' ability to allocate capital efficiently across funds and other investments.

The proposed changes are intended to make the disclosures easier to use by highlighting key information for shareholders in a concise, visually appealing format. As described above, shareholders responding to the Fund Investor Experience RFC indicated that shareholder reports are currently too lengthy and technical, and expressed a preference for receiving summary disclosures, including visual tools such as tables and charts. Given this, we expect that the proposed rule could reduce obstacles limiting shareholder readership of fund shareholder reports.

We note that the magnitude of the effect would depend on how many shareholders rely on the reports that are the subject of the proposal to monitor their funds. It would also depend on the extent to which those who use the reports would monitor differently in response to the tailored disclosures and, for other shareholders, how many would choose to rely on the reports under the rule that would not otherwise do so. We are requesting comment on this appraisal, and also comments on what sources might be available for consideration by the Commission of quantitative estimates of the likely future difference in shareholder use of the disclosure under the proposal relative to what would occur in the future under the current framework.

c. Costs to Investors

Fund shareholders could experience certain transition costs under the proposal, and some shareholders may experience other ongoing costs. Transition costs would include the costs of the inconvenience to some shareholders of adapting to the new materials and to the changes in the presentation of information. While the more concise shareholder reports required by the proposal would likely reduce investor comprehension costs, investors would nevertheless bear a one-time cost of the inconvenience of adjusting to the changes in the disclosures they receive. These costs are likely to be relatively lower for less experienced shareholders and relatively greater for the more seasoned shareholders who are accustomed to existing fund practices.

Shareholders in funds that rely on rule 30e-3 to deliver paper notices to notify shareholders that a shareholder report is available online, or shareholders in funds that were planning to rely on rule 30e-3 and that included statements in their shareholder reports and prospectuses notifying shareholders of the upcoming change to shareholder report delivery, may experience greater transition costs. For example, those shareholders who were receiving rule 30e-3 notices or who expected to begin receiving rule 30e-3 paper notices in the future may experience some confusion when a fund begins to deliver concise shareholder reports. However, shareholders receiving the annual and semi-annual reports that this proposal contemplates would be receiving tailored information more directly than they would through the rule 30e-3 notice. We believe the benefit of making this tailored information more accessible to shareholders would justify any potential short-term confusion that may result from the transition. In addition, a fund that relied on rule 30e-3 would be able to communicate to investors about these shareholder report changes.

Beyond transition costs, the proposal would also impose costs on shareholders who prefer to receive the baseline disclosure as opposed to the more concise and tailored disclosure they would receive under the proposal. These shareholders may experience costs associated with locating additional information online or requesting delivery of materials they would no longer automatically receive. Some shareholders may rely on information that is currently included in the annual and semi-annual report but would, under the proposed amendments, be located in other documents, such as Form N-CSR or the SAI. Those shareholders would incur the cost of reviewing multiple disclosure documents to locate the information that was previously located in a single document. The significance of this cost would likely depend on several factors, including the delivery method and relative importance of each piece of information to the individual shareholder. For those shareholders who prefer to receive disclosures in paper, the proposal provides an option for the shareholder to request the mailing of a paper copy of the new Form N-CSR items, such as financial statements, that would no longer appear in shareholder reports.

In addition, for funds that rely on proposed rule 498B, shareholders who prefer paper delivery of the annual prospectus update would face the choice of adjusting to using the online version of the prospectus or making ad hoc requests for paper delivery. For those shareholders, the effect of either of these choices would be a cost of disutility or inconvenience from the loss of the automatic access to their preferred option that they have under the current framework but would not have under the proposal.

To illustrate, we note that, for some shareholders, the cost of making requests for additional information would be small and therefore, the cost of losing their preferred option as the default under the proposal would be small. This is because those shareholders would likely react to the proposal by making the effort to request continued mailing of more-detailed semi-annual information or prospectuses. For those shareholders, the cost of the proposal would include the cost of the inconvenience from having to make the request. Shareholders who find it relatively burdensome to make a request for continued mailing, however, would be migrated over to the new delivery framework and face disutility from migrating to the new tailored disclosures. By providing a mechanism for shareholders to continue to receive the more-detailed information, the proposal would limit the extent to which shareholders who prefer the current disclosures would end up facing disutility from receiving the proposed disclosures instead. Thus, the overall cost of inconvenience or disutility to those shareholders who prefer the delivery framework under the current rules to the proposed framework would depend on how easy it is for shareholders to request continued mailings of more-detailed semi-annual information or prospectuses by funds after the rule goes into effect. We do not have access to reliable estimates of the opportunity cost to investors associated with this effect of the proposed rule; we are therefore requesting comment on this, as well as the effects on the use of investor time and attention, as further described at the end of this section.

In addition to transition costs and information search or request costs, fund shareholders would bear the costs of the proposed modified disclosure framework through the increased expenses that funds would incur to implement the proposal. We discuss those expenses in the section on “other costs,” below.

d. Other Benefits

The proposal would reduce some of the costs to funds of delivering information to shareholders. As the owners of the fund assets, shareholders could benefit from this cost reduction in proportion to their holdings of those assets. The magnitude of this cost savings would be more significant to the extent that a fund would deliver shareholder reports or prospectus updates to investors by paper mail in the absence of the proposed rule. The amount of the cost savings would vary across funds, depending on the expressed preferences of the fund and its shareholders for paper versus electronic delivery under Commission guidance on electronic delivery (and, with respect to shareholder reports, rule 30e-3 notices) and on fund practices between delivery of the summary prospectus under rule 498 versus the statutory prospectus. The scenarios where delivery costs may decline significantly under the proposal, relative to the baseline scenario, are indicated in table 8 and discussed below.

Delivery Cost Savings for Shareholder Reports

The proposal would reduce the cost of delivering a shareholder report by a larger per-fund amount for funds that do not rely on rule 30e-3 (deliver the full report) than for funds that rely on rule 30e-3 (deliver a notice) at the time any final rule goes into effect. Thus, we consider separately the delivery-cost savings from the proposed rule for funds under each of these two baseline delivery scenarios. For funds that do not rely on rule 30e-3, the proposal would reduce delivery costs by replacing the cost of sending current annual and semi-annual reports with the smaller cost of sending concise reports to those shareholders who do not request e-delivery. This is because the cost of printing and mailing (including processing fees) would be lower for the concise reports. We estimate that funds could deliver annual and semi-annual reports as trifold mailings (3-4 pages) under the proposal instead of annual reports that are approximately 134 pages on average and semi-annual reports that are approximately 116 pages on average. One commenter on the Fund Investor Experience RFC estimated that delivering a concise shareholder report instead of current shareholder reports would reduce the per unit cost of delivery from $0.50 to $0.33 annually, which is a decline of $0.17 per unit or 34 percent. The commenter's per unit delivery cost estimates assume that 3 out of 10 fund shareholders receive a shareholder report by mail. We understand that these costs may or may not be representative of the costs for all funds. For example, the commenter's estimates are based on costs for delivering shareholder reports to shareholders who hold their shares in beneficial accounts and may not reflect any differences in costs for direct-held accounts. Nevertheless, we believe that the estimate of 34 percent is a reasonable estimate of the likely decline in the per unit cost of delivering the concise report for funds that do not rely on rule 30e-3 under the proposal. Thus, for these funds, we estimate that the proposed rule would reduce their current shareholder report delivery costs by 34 percent on average, resulting in an average annual cost savings of approximately $7,040 per fund that does not rely on rule 30e-3. For funds that rely on rule 30e-3, the proposal would reduce delivery costs because it would be less costly to deliver the concise report than the rule 30e-3 notice. That is, while the cost of printing the concise report may be greater than the cost of printing the notice (see table 8), the overall cost of delivery that includes the costs of printing, mailing, and processing fees would likely be lower for the concise report. One commenter estimated that delivering a concise shareholder report instead of a rule 30e-3 notice would reduce the delivery cost from $0.36 to $0.33 annually, which is a decrease of $0.03 per unit or approximately 8 percent. This is assuming that 3 out of 10 fund shareholders receive a shareholder report by mail and is based on the commenter's experience processing shares held in beneficial accounts. We understand that this estimate may or may not be representative of the average costs for all funds. For example, the average enrollment rate for electronic delivery may be lower for direct-held accounts, which would result in higher per unit costs than the commenter provided. As another example, to the extent a fund would share a single, consolidated rule 30e-3 notice with other funds to notify a shareholder of the website address(es) for each fund's report, and the fund has many shareholders who are invested in those other funds, the fund may not experience the same extent of cost savings under the proposal. Nevertheless, we believe that the estimate of approximately 8 percent is a reasonable estimate of the likely decline in the per-unit cost of delivering the concise report rather than rule 30e-3 notices. Specifically, for funds that rely on rule 30e-3, we estimate that the proposed rule would reduce their current shareholder report delivery costs by approximately 8 percent, on average, and that the average annual cost savings would be approximately $1,243 per fund that relies on rule 30e-3.

The total shareholder report delivery cost savings from the proposal would be a weighted combination of the savings in delivery costs for funds that rely on rule 30e-3 and the savings for funds that do not rely on rule 30e-3. For example, if 86 percent of funds deliver rule 30e-3 notices before the proposal is in effect, the delivery cost savings from the proposal would be an estimated $13.26 million from those funds. In addition, if 14 percent of funds do not rely on rule 30e-3 before any final rules are in effect, the delivery cost savings would be $12.23 million from those funds. Thus, the aggregate delivery costs savings for shareholder reports from the rule would be $25.49 million.

We understand that the estimated cost savings for shareholder reports would depend on factors in addition to those discussed above. These include the fraction of funds that would deliver notices under rule 30e-3 before any final rules are in effect and the extent to which those funds actually experience a delivery cost savings under the proposal. For example, if the cost of delivering a concise shareholder report were about the same as the cost of delivering a notice under rule 30e-3, then our estimated cost savings would decline from $25.49 million to $12.23 million. As another example, if fewer than 86 percent of funds began to deliver notices under rule 30e-3 before any final rules are in effect, then our estimated aggregate cost savings would be greater than $25.49 million. This is because a larger number of funds would experience higher delivery cost savings in that instance.

Delivery Cost Savings for Prospectuses

Funds that rely on rule 498B would experience cost savings from delivering prompt notices of certain material changes to existing shareholders instead of the annual prospectus updates and interim prospectus stickers that they delivery currently. The proposal would allow funds to consolidate some of their current disclosures so that they would generally deliver fewer disclosure materials to shareholders.

We estimate that, on average, funds make 1.5 material changes per year that they currently disclose in annual prospectus updates and interim prospectus stickers and that the proposal would require them to disclose in their annual reports or through prompt notices under rule 498B. Of these material changes, we estimate that an average of 1 material change is made in the annual prospectus update. Under the proposal, a fund would disclose this material change in its annual report and generally would not need to send a separate notice under proposed rule 498B. We estimate that the remaining average of 0.5 material changes per year would be disclosed separately in rule 498B notices.

As a result, we estimate that proposed rule 498B would reduce fund delivery costs by reducing the number of separate prospectus-related deliveries to existing shareholders from an average of 1.5 deliveries to an average of 0.5 deliveries per year. The total cost savings would depend on factors that include: (1) Whether a fund currently delivers annual prospectus updates to all shareholders or tracks which shareholders purchase additional shares during the year; (2) how many shareholders have elected electronic delivery and how many shareholders receive prospectus materials in paper; (3) how many material changes a fund makes each year; and (4) whether a fund delivers prospectus stickers separately or consolidates this delivery with delivery of other materials, such as semi-annual reports. We are unable to estimate the aggregate cost savings across all funds. However, we are able to estimate that the current costs of printing and mailing summary prospectus annual updates is approximately $0.55 per summary prospectus and that the proposal would eliminate at least part of this cost. That is, under proposed rule 498B, funds would no longer incur the costs of delivering annual prospectus updates by mail. Additionally, funds would no longer incur processing fees for delivering annual prospectus updates electronically such as by email currently.

We understand funds that currently deliver statutory prospectuses to existing shareholders would likely experience greater delivery cost savings if they were to rely on proposed rule 498B because of higher printing and mailing costs for statutory prospectuses than for shorter summary prospectuses. However, we assume that only funds that deliver summary prospectuses would rely on proposed rule 498B. We believe that funds that deliver summary prospectuses are more familiar with using layered disclosure concepts to satisfy prospectus delivery obligations and would incur fewer transition costs to comply with proposed rule 498B, as discussed in Section III.C.2.e.

Benefits of Proposed Form N-CSR Requirements

Beyond delivery-related cost savings from the proposal, there are benefits associated with the proposed requirement that funds continue to file on Form N-CSR certain information, such as financial statements and financial highlights, that would no longer appear in shareholder reports, relative to the alternative of not continuing to require such filings. The continued availability of this information, including on a historical basis on EDGAR, would allow financial professionals and other market participants to continue to analyze this information over time. This historical information also may facilitate the Commission's performance of fund monitoring responsibilities that benefit investors. Finally, a fund's principal executive and financial officer(s) would continue to be required to certify the financial and other information included on Form N-CSR and would be subject to liability for material misstatements or omissions on Form N-CSR, so there would be no change in this contribution to the maintained accuracy and completeness of this information for investors, market professionals, and others who use this information.

e. Other Costs

Some of the proposed changes in delivery would cause fund shareholders to face greater fund expenses than without the proposal. The likelihood and extent of these increases would depend on the fund's baseline delivery scenario, as follows. For funds that rely on rule 30e-3, the costs of printing and mailing shareholder reports would be higher under the proposal. We generally believe these additional printing and mailing costs would be small. For example, we anticipate that funds may be able to deliver the proposed shareholder reports as a trifold mailing, which would only incrementally increase the printing and mailing costs of a rule 30e-3 notice. One commenter estimated that a concise shareholder report would be approximately $0.01 more expensive to print than a rule 30e-3 notice. We estimate that this cost increase would be less than the estimated decline in the cost of processing fees, as discussed in Section III.C.2.d, above. Moreover, to the extent a fund shareholder invests in multiple of a registrant's funds and these funds would use a single shareholder report absent the proposal, the amendments may increase printing and mailing costs a negligible amount in some instances if certain disclosures across the funds otherwise are the same. In addition, some funds that choose to rely on proposed rule 498B may send more notices of material changes to certain prospectus items in some years than the number of annual prospectus updates and stickers they would deliver to shareholders without the proposal. Since funds would have the option to rely on proposed rule 498B, however, we expect that funds would likely rely on 498B where it would reduce their average annual costs. That is, we understand that cost is a consideration for funds and that the cost differences may be sufficient in this instance to influence their choice.

As a further delivery-related cost, funds would incur costs under the proposed requirements in rule 30e-1 and rule 498B to deliver certain materials to shareholders upon request. The extent of these costs would depend on how many shareholders prefer the current delivery framework in which they receive additional shareholder report information or annual prospectus updates, how many of these shareholders would prefer to request these materials directly (e.g., in paper) instead of accessing them online, and whether the shareholders request paper or electronic copies of these materials. We estimate that funds would incur average annual printing and mailing costs of $500 per fund to deliver materials upon request under the proposed amendments to rule 30e-1. For funds that choose to rely on proposed rule 498B, we estimate average annual printing and mailing costs of $500 per fund to deliver prospectuses and related materials upon request under that rule.

In addition to delivery-related costs, fund would experience other costs under the proposal, including both transition costs and ongoing costs. These other costs would result from proposed changes to the scope and contents of shareholder reports, new Form N-CSR items, new website availability requirements, amendments to the scope of rule 30e-3, and preparation of notices of material changes under proposed rule 498B. The compliance costs associated with proposed rule 498B would only affect funds that choose to rely on that rule, and the compliance costs associated with the amendments to rule 30e-3 would only affect funds that rely on that rule or were planning to rely on that rule. The other categories of compliance costs would affect all funds. These different categories of costs could be reflected in fund expenditures that funds could pass on to shareholders, likely in proportion to their participation in the fund. The expenditures could be to procure the services of third parties for the purpose of implementing the changes to fund disclosure and delivery practices under the proposal, as we understand some funds utilize outside providers for these compliance responsibilities.

Funds would experience transition costs to modify their current shareholder report disclosures. Specifically, funds would incur costs to modify their shareholder reports to comply with the proposed scope and content requirements. We estimate that the initial costs to funds of modifying their annual shareholder report disclosure would be $150,111,360 in aggregate costs and $41,697,600 annually thereafter. We estimate that the initial costs to funds of modifying their semi-annual shareholder report disclosure would be $75,055,680 in aggregate costs and $20,848,800 annually thereafter. Initial costs would include costs associated with designing the concise shareholder reports, amending the scope of shareholder reports to cover a single fund series, implementing any operational changes needed to prepare and deliver separate shareholder reports for different fund series, revising existing disclosure practices for shareholder report items that the proposal would amend (e.g., management's discussion of fund performance, including the proposed clarification of the term “appropriate broad-based securities market index,” as well as the expense presentation), and developing disclosures for the proposed new shareholder report items (i.e., fund statistics and material fund changes). The ongoing costs would largely be attributed to the costs of preparing new shareholder report disclosure items under the proposal, since funds already incur the costs of preparing the other shareholder report disclosures today. To the extent that the proposed clarification of the term “appropriate broad-based securities market index” causes funds to select a new index for this disclosure purpose, this could result in additional costs to funds in the form of index-licensing fees. Funds also would incur costs of complying with the new Form N-CSR disclosure items. As funds already prepare the disclosure that the proposed N-CSR items would cover for purposes of current shareholder reports and disclose that information on Form N-CSR as part of their shareholder reports, we do not believe the costs of the new N-CSR disclosure would be significant. However, we recognize that funds may face some costs of rearranging their disclosures within Form N-CSR. We estimate that the costs of the proposed new Form N-CSR items would initially be $75,055,680 and $20,848,800 annually thereafter.

In addition, funds would be required to provide additional information online under the proposed amendments to rule 30e-1 and under proposed rule 498B. With respect to rule 30e-1, this would include online availability of the disclosure that the proposal would remove from shareholder reports, including financial statements and financial highlights, as well as quarterly portfolio holdings. In addition, funds that rely on proposed rule 498B would be required to provide certain information online, including summary and statutory prospectuses, SAIs, and shareholder reports. While the vast majority of funds already provide fund information on websites, they may not currently provide the same information that the proposed rule would require.

For instance, under the proposed amendments to rule 30e-1, funds would likely incur costs associated with providing online access to the new Form N-CSR disclosure items (i.e., the information that the proposal would remove from shareholder reports). Funds that do not rely on rule 30e-3 would also incur costs to provide their quarterly portfolio holdings online. We estimate that the initial costs of complying with the website availability requirements in rule 30e-1 would be $35,591,880, with ongoing annual costs of $11,863,960.

With respect to the online information that proposed rule 498B would require, we estimate that funds generally would not incur additional transition or ongoing costs associated with these requirements. This is because we anticipate that only funds that rely on rule 498 to deliver summary prospectuses—and that are already required under that rule to provide the same information on websites—would rely on proposed rule 498B. Only these funds are likely to choose to rely on proposed rule 498B because, unlike other funds, they already deliver summary prospectuses under rule 498 and so have experience using layered disclosure. In addition, they are already subject to similar website availability requirements under rule 498. Therefore, they would be more likely than other funds to experience overall cost savings under rule 498B.

However, if a fund that does not deliver summary prospectuses under rule 498 chose to rely on proposed rule 498B, the fund would be required to begin providing the relevant information on a website and to continue to update the website materials as needed. We estimate that the compliance costs of proposed rule 498B for funds that do not currently rely on rule 498 to deliver summary prospectuses initially would be $12,948 per fund to begin to comply with the relevant requirements in proposed rule 498B and would reduce to annual costs of $4,316 per fund thereafter.

In addition to website availability requirements, funds that choose to rely on proposed rule 498B could incur costs to prepare prompt notices of material changes that the rule would require. The proposed rule does not specify the form of this notice. Therefore, a fund could satisfy this requirement, for example, by sending existing shareholders the prospectus supplement filed with the Commission, an amended prospectus which reflects the material change, or another form of notice that discusses the change. The costs of preparing a notice under proposed rule 498B would depend on the approach a particular fund uses. For example, we expect that preparation costs would be fairly minimal if a fund delivers a prospectus supplement or amended prospectus, which the fund would have already prepared for other purposes. However, funds that choose to prepare separate notices under the proposed rule would likely experience higher preparation costs. We estimate that the average annual costs of preparing notices of material changes under proposed rule 498B would be $1,344 per fund, after an initial compliance cost of $4,032 per fund. If 90 percent of funds rely on proposed rule 498B, this would result in aggregate ongoing annual costs of $15,011,136 and initial costs of $45,033,408.

Further, to the extent that affected funds have changed their operations in anticipation of relying on rule 30e-3, those funds would bear the costs associated with the proposed amendment's prohibition on open-end funds relying on rule 30e-3. These costs could include, among others, changes to internal systems and adjustments to agreements with third-party vendors contracted to provide relevant services. In addition, if the proposed amendments to rule 30e-3 are implemented by certain funds before January 1, 2022, funds that were planning to rely on rule 30e-3 would experience transition costs associated with removing statements in their shareholder reports and prospectuses indicating that the fund would be transitioning to the rule 30e-3 framework for transmitting shareholder reports. Moreover, funds that choose to take additional steps to inform their shareholders about the modified approach to delivering shareholder reports under the proposal would likely incur additional transition costs. We lack data to quantify these costs because we do not have information about how many funds would provide discretionary notices or other information to their shareholders to explain the proposed changes to shareholder report delivery.

3. Prospectus Disclosure Amendments

a. Summary of Economic Effects

The proposal would simplify the initial prospectus disclosure to investors in a layered approach where other information would continue to be available online and delivered upon request, free of charge. The proposal requires a new fee summary that includes bottom-line numbers from the current prospectus fee table, and would appear in the summary section of the prospectus (as well as in a summary prospectus if a fund uses that form of prospectus). The fee summary would also express the bottom-line numbers in dollar terms, in addition to the current presentation of an amount in terms of fund net assets, and describe fee and expense items in plain English. In addition, funds would simplify their disclosures of principal risk, ranking them by importance and highlighting those that are truly principal to the particular fund.

The following sections discuss the potential costs and benefits of these proposed modifications to prospectus disclosures. In summary, the benefits of the proposal would accrue through better use of the prospectus disclosure materials by investors. The tailored disclosures would enable investors to make more efficient use of their scarce time and attention and, potentially, more informed investment decisions. The costs of the proposal would accrue to fund shareholders through a short-term, transition-related increase in fund expenses required to prepare the new disclosures, and to fund investors in adapting to the new style of prospectus disclosure.

b. Benefits to Investors

The direct effect of the proposed amendments to fund prospectuses would be to simplify the presentation of fee- and risk-related information that funds deliver to investors. This would improve investors' understanding of key information, and this improved understanding could result in more efficient investment decisions. Also the proposed amendments may improve investor understanding with respect to funds that invest 10% or less of total fund assets in acquired funds by reducing emphasis on AFFE as a discrete category of performance expenses where the fund does not invest significantly in acquired funds and by improving consistency between the fund's prospectus fee table disclosures and financial statement disclosures under these circumstances, while also retaining investors' access to information about the potential layering of fees through a fund's investments in acquired funds.

The proposal would enable investors to locate and use key information more easily, requiring less time and attention to process key available information than under current rules. For example, rather than listing different expense types that comprise a fund's total annual operating expenses and then presenting the total annual figure, the fee summary would only provide the total. This would make it easier for retail investors to locate the total amount in the prospectus quickly. Similarly, the proposal would shorten the principal risk disclosure to focus on risks that are truly principal to the particular fund; this would make information about those risks easier to locate and use. We believe that making information easier to locate and use can make the information easier to understand.

In addition, the proposed amendments would result in disclosure that is easier for investors to understand. By providing clearer descriptions of certain fee and expense concepts, the proposal would reduce the chance of retail investors misinterpreting this key information. For example, a fund would describe a charge an investor incurs when purchasing a fund's shares as a “purchase charge” instead of as a “maximum sales charge (load) imposed on purchases.” Further, by providing fee and expense information in dollar terms, the effect of the fees and expenses may be more understandable to investors. In addition, providing principal risks in order of importance would help investors more readily identify and understand a fund's principal risks relative to the baseline, where funds may order risks alphabetically or in other ways that do not show a risk's relative importance.

Providing more user-friendly and concise information in the prospectus can lower the cost to the investor of gathering key information needed to make choices among funds. The proposal may thus enable investors more easily to evaluate and monitor fund investments and make choices among competing funds than under the current requirements. Some investors may read disclosures that they would not otherwise have read. Others may consider the information they receive more carefully. In each instance, the consequence may be choices among investment alternatives that reflect a better alignment between the circumstances of the investor and the available products. The ultimate impact on investment outcomes depends on the extent to which investors find the amended disclosure easier to access and use and the extent to which they rely on the amended disclosure to inform their investment decisions and actions. As discussed above, there is evidence to suggest that consumers benefit from disclosure that highlights key information.

The proposal to allow funds with limited investments in acquired funds to move the disclosure of AFFE into a footnote, and eliminate it from the bottom-line total expense disclosure in the prospectus fee table and fee summary, may benefit some investors by making it easier for them to compare and choose among funds to meet their investment objectives. That is, the proposal may enhance the salience of disclosures in the prospectus fee table and fee summary that reflect the fund's main investment strategy relative to the disclosure of its AFFE. As the information on the AFFE amount would be retained in a footnote, investors' access to AFFE information would not change under the proposal. In addition, investors would continue to see a bottom-line number that reflects AFFE where the fund substantially invests in other funds such that the fund is, in essence, managed significantly at the acquired fund level. Maintaining this requirement for these funds is designed to prevent investors from being confused by expense ratios that do not fully reflect the cost of the fund's investments.

c. Costs to Investors

We understand that some investors may prefer the current level of detail about a fund's fees or principal risks, and therefore, the advantages associated with tailored disclosure, as described in this section, may not apply to those investors. For example, if the fund uses a summary prospectus, and an investor would prefer to see the breakdown of fees and expenses among various line items (or wants longer narrative discussions about principal risks), the proposal would require the investor to take the additional step of finding the statutory prospectus online or requesting a copy of it. The rule would make it more difficult for the investor who prefers the more detailed information to obtain and use that information than under the current rule baseline. We recognize that, under these circumstances, the proposal would impose some costs of inconvenience to these investors in the form of requiring more time and attention to find the statutory prospectus online or to request a copy of the statutory prospectus.

For investors who prefer the current disclosure format and are aware that a fund has moved the AFFE disclosure into a footnote, there may be some inconvenience even without any change in access to information. For example, the investor would need to take an extra step of obtaining the AFFE amount from the footnote and combining it with the expense information from the fee table to recover the same total expense information that is disclosed currently. However, investors would have access to the information necessary to recover this information under the proposal.

We also recognize that some investors may not recognize that certain funds' AFFE disclosures have moved into a footnote of the fee table under the proposal. If an investor does not realize that the expense disclosure in these funds' prospectus fee tables (i.e., funds that have 10% or less of their total assets invested in acquired funds) no longer includes these indirect fund expenses, such an investor could under-estimate the expenses of these funds. Such underestimation could lead to a distortion of some investors' choices relative to their preferences and investment objectives. Relatedly, an investor may be less able to compare funds under the proposal to the extent that any funds continue to include AFFE amounts in their bottom line ongoing annual expenses even though they are eligible to disclose their AFFE in a footnote. Because reliance on the AFFE amendment would be optional, investors may receive expense disclosures from the same types of funds (i.e., those that have 10% or less of their total assets invested in acquired funds) that treat AFFE differently. This could make it more difficult for investors to compare these expenses between funds.

The costs from any potential underestimation of AFFE would depend on how many funds rely on the AFFE amendment. This number would depend, in turn, on fund incentives and on whether funds believe that any benefit from relying on the AFFE amendment would outweigh any costs incurred in moving AFFE disclosure into a footnote. Funds that believe that relying on the amendment would be beneficial by, for example, providing a more consistent fee and expense presentation for investors, may have a greater incentive to rely on the amendment than other funds. In addition, some funds that are slightly above the 10% threshold may have an incentive to reduce their investments in acquired funds to the extent that they believe there would be sufficient benefit from providing AFFE disclosure in a footnote. We believe that few funds would do so. As discussed above, we estimate that approximately 88% of the funds with more than 10% of their total assets invested in acquired funds invest more than 20% of their total assets in acquired funds. Based on this estimate, we would expect that any incentive to reduce investments in acquired funds that is driven by the proposed AFFE amendment would be limited to the other 12% of funds, which is 4% of acquiring funds.

In addition, fund investors could bear the costs of the prospectus amendments through the increased expenses that funds would incur to implement the proposal. We discuss those expenses in the section on “other costs,” below.

d. Other Costs

The proposed amendments would impose costs on funds (which they may pass on to their shareholders) to amend their disclosure practices. For example, the proposal would require funds to review their principal risk disclosure and assess whether the risks they are currently disclosing are principal to the fund under the proposed amendments. Among other things, this may require fund groups to modify their current practices for principal risk disclosure, including where they use many of the same risk disclosures across various funds in the fund group. Funds also would need to determine an appropriate method for ordering a fund's principal risks by importance and implement this approach. We estimate that the proposed amendments to principal risk disclosure would result in initial aggregate costs of $75,055,680 and $16,679,040 annually thereafter. In addition, funds would need to modify their disclosure templates to revise the terms they currently use in prospectus fee tables and to add fee summaries to their disclosure, although the content of the fee summary would largely consist of information that funds already disclose in their prospectus fee tables. We estimate that the costs of the proposed amendments to prospectus fee and expense disclosure would be $37,527,840 initially and $8,339,520 annually thereafter.

Some of these costs would be incurred by funds that make limited investments in other funds as a result of our proposal to allow such funds to disclose AFFE in a footnote to the fee table and fee summary. While only funds that invest 10% or less of their total assets in acquired funds would be allowed to rely on this proposal, we believe that these costs would also be incurred by funds with investments slightly above 10% in other funds because such funds would likely spend time considering whether they would qualify for the proposal. Therefore, for purposes of our analysis, we assume that the bulk of the costs associated with this proposal would be incurred by funds that invest less than 20% of their total assets in other funds. These funds would incur costs of (1) establishing and implementing procedures they may choose to adopt to monitor the percent of the fund's acquired fund investments relative to total assets; (2) calculating their investments in acquired funds to determine whether they would be permitted to modify their disclosure pursuant to the proposal; and (3) updating their prospectus fee table to modify their AFFE disclosure if they choose to present AFFE in accordance with the proposal, and they are eligible to do so. We estimate that approximately 30%, or 3,723 open-end funds, have investments in other funds. Of those, we estimate that approximately 70%, or 2,606 open-end funds, invest less than 20% of their total assets in other funds (excluding money market funds). Therefore, we estimate that the transition costs associated with this proposed amendment would be $4,378,080.

We understand that changes in the prospectus also could affect data aggregators that rely on the information in the prospectus fee table as a basis for the services they provide to investors and other parties. We have considered that changes in the prospectus can make it easier or more difficult for them to provide this service. In this instance, the proposal is unlikely to have an effect on data aggregators because the full fee table would still be structured. We believe that the information available to data aggregators about the current line items would not change under the proposal accordingly.

4. Advertising Rule Amendments

a. Summary of Economic Effects

The proposed advertising rule amendments would enhance the transparency of the fees and expenses that are associated with investing in a particular investment company. To obtain this improvement in transparency, the proposal would require specific changes to how mutual funds, ETFs, other registered investment companies, and BDCs present information about fund fees and expenses in fund advertisements. That is, the proposed amendments would require that the fee and expense presentations prominently include timely information about a fund's maximum sales load (or any other nonrecurring fee) and gross total annual expenses, computed in a manner that is consistent with relevant prospectus requirements. Further, if an advertisement included an investment company's total annual expenses net of a fee waiver or expense reimbursement amount in addition to the required gross annual expense figure, the advertisement would need to disclose the expected termination date of that arrangement. We also propose to provide specific factors an investment company should consider as part of its determination of whether representations in its advertisements about the fees and expenses associated with an investment in the fund could be materially misleading.

Below we discuss the likely effects of the proposed amendments to the advertising rules. We expect that the proposed amendments would lower investor search costs and reduce the risk of a mismatch between investor preferences and investor choice while also imposing certain costs on investors and third parties who participate in the production and delivery of fund advertising to investors. Additionally, we discuss how the effects of the proposed amendments to the advertising rules may vary across investors and funds according to the conditions of their participation in the market for financial products.

b. Benefits to Investors

The effect of the proposal would be to reduce the likelihood that investors misinterpret investment company advertisements. For example, the recent experience of the Commission is that funds sometimes market themselves as “zero expense” or “no expense” funds based solely on information in their prospectus fee tables. In some cases a fund's prospectus fee table may show no transaction costs and no ongoing charges only because the fund adviser, the adviser's affiliates, or others are collecting fees elsewhere from these investors. In such cases, an investor in a so-called “zero expense” fund may encounter other investment costs, including intermediary costs (e.g., through wrap account fees), securities lending costs (e.g., through revenue sharing with a securities lending agent), or future costs associated with the fund once an underlying fee waiver or expense reimbursement arrangement expires. These additional costs and expenses can reduce the value of a shareholder's investment in a fund. As a result, absent appropriate explanations or limitations, referring to such a fund as a “zero expense” fund can materially mislead investors and cause them to believe incorrectly that there are no expenses associated with investing in the fund.

More generally, the proposed rules would require more consistent fee and expense presentations across investment company advertisements, and thus facilitate investor comparisons of important fee and expense figures. By reducing the chance of misleading information being presented to investors—e.g., so that useful information faces less competition for investor attention with other information—the proposal may increase the salience of relevant fee and expense figures to investors and reduce the chance of a mismatch between the investor's preferences and their choice of investment product among the various alternatives, thereby increasing the efficiency of investors' investment decisions. The extent to which increasing the salience of fee and expense information in advertisements benefits an investor considering an investment in a fund depends on the importance of this information contained in fund advertising materials relative to the other information that is available to the investor for the purpose of monitoring fund investments and choosing between the fund and other financial products.

To the extent that the advertising rule amendments reduce fund incentives to understate or obscure their fees, they may enable investors more easily to distinguish funds according to their actual fees. In this instance, the indirect effect would be that funds with lower (higher) fees would attract more (less) investor dollars and, in anticipation, the higher-fee funds would have a greater incentive to lower their fees than without the rule amendments. Thus, some funds may put even more effort into lowering their fees and expenses than they would do in the absence of the proposal, and otherwise find ways to differentiate themselves to attract and retain investment business.

c. Costs to Investors

Investment companies and third parties involved in preparing or disseminating investment company advertisements may incur costs to comply with the proposed advertising rule amendments. Investors could bear the costs of these amendments through increased expenses that funds would incur to implement the proposal. We discuss those expenses below.

In addition, if the cost of compliance with these proposed amendments were significant, some advertisers might cease advertising rather than incur the extra costs of compliance, which could affect investors. Investors who rely on advertisements to make investment decisions or compare funds might have less complete information for these purposes. However, we believe this is unlikely because, as discussed below, we do not anticipate that the compliance costs would be significant in general or significant enough relative to the benefit that most funds would expect from continuing to advertise.

d. Other Costs

The cost of our proposal to amend the advertising rules would include the direct cost of modifying advertising materials to bring them into compliance with the proposed advertising rule amendments. This may require internal review and approval of advertisements beyond what occurs under the current rule, particularly where an advertisement is not already required to present certain fee and expense figures under existing FINRA rules. For example, while many investment company advertisements are subject to timeliness requirements related to performance, they currently are not subject to similar timeliness requirements for fee and expense information. We expect some of these costs to be borne in the first year after the rule adoption. That is, they would be transition costs and not sustained beyond the first year. We estimate that the transition costs associated with the proposed advertising rule amendments would be $201,353,040. These costs would be borne by funds (including their shareholders), intermediaries, and other third parties who prepare investment company advertisements.

The overall costs of the proposed advertising rule amendments would be greater for some types of fund advertisements than others. For example, the proposed rule would require the fee and expense figures to be calculated in the manner the registrant's Investment Company Act or Securities Act registration form prescribes for a prospectus. This proposed requirement could make it more burdensome to prepare advertisements for some types of registrants, such as closed-end funds that do not maintain updated prospectuses and, thus, may not currently calculate current fees and expenses in the manner the proposed amendments would require. As a result, it would be more costly to prepare these advertisements (if they include fee and expense information) because of the need to develop new procedures for annually calculating these registrants' fees and expenses in accordance with prospectus fee table requirements. In addition, the cost of compliance would be greater for funds, intermediaries, or others that react to the proposed advertising rule amendments by initiating or enhancing a compliance program after previously having no such program or only a very limited program in place. It would be smaller for those who periodically obtain compliance advice and continually update their advertising materials in response to changing market conditions or changing investor demand. Overall, we estimate that the ongoing annual costs of the proposed advertising rule amendments would be $67,117,680.

R. Effects on Efficiency, Competition, and Capital Formation

This section describes the effects we expect the proposed rule to have on efficiency, competition, and capital formation. Key to this analysis are the concepts of efficiency in the use of investor time and attention and in the use of fund resources from the real economy to meet disclosure delivery obligations. We regard changes and amendments that reduce these costs as increasing economic efficiency, with changes and amendments that increase these costs having the opposite effect. Also key is the concept of “information asymmetry”—in this case, the lack of information that investors may have about funds and other investment products—and the difficulties that some investors may face in using the information that is available to them in reducing that information asymmetry.

Efficiency. The proposed rules and amendments would enable investors to use their time and attention more efficiently. To investors, the costs of investing in a fund are more than just the dollar cost, and include the value of an individual's time and attention that is spent gaining an understanding of the fund and its fees, expenses, risks, and other characteristics, both before and after the initial fund investment. Further, for those investors who do not gain a full understanding of the fund and its risks, there could be a cost stemming from a potential mismatch between the investor's goals and the fund risk profile and fee structure. Depending on the size of an individual's position in a fund, certain of these additional costs could be considerable in comparison to the monetary costs associated with the investment and could discourage investors from gathering information about different investment alternatives and evaluating existing investments even in circumstances where reviewing prospectuses and available shareholder reports could be beneficial.

The overall efficiency gains from the effect the proposal and amendments have on how investors allocate their time and attention would depend on the extent to which individual investors find it easy to transition from the current framework to the new framework and find disclosure and other materials under the new framework genuinely easier to use. Some individuals may prefer the current framework. Their time and attention may be used less efficiently under the proposed rules, which would require them to go to the trouble of requesting their preferred materials rather than receiving them automatically as would occur in the current framework, and these investors would indeed not find the new framework preferable to current practice. However, despite these potential limitations, we expect the efficiency gain and cost reduction from changes in the use of investor time and attention resulting from the proposed rule to be positive, because the proposed disclosure framework is specifically designed to make the disclosures easier for retail investors to use while continuing to provide access to more detailed information for the market professionals and other investors who wish to access them, as discussed in Section III.C.2.b.

While not the primary source of efficiency gain, changes in the delivery of disclosures to shareholders under the proposed rules would cause a decline in the real-resource costs of delivering disclosures to investors. This could be an efficiency gain from the proposal. Specifically, by effectively consolidating two deliveries—the annual report and the annual prospectus update—into a single delivery of a concise annual report, the proposal would promote efficiency by reducing the cost of printing and delivering disclosures to retail shareholders. Here, efficiency gains would depend on the preferences of individual shareholders, who would have the option of requesting that the two disclosures instead continue to be sent separately. They also would depend on the preferences of funds. We discuss these efficiency gains from reduced delivery costs as benefits of the proposal in Section III.C.2.d.

In addition, efficiency gains may arise from the proposed improvements to prospectus disclosure about fund fees. For example, investors may find it easier to compare the fees and expenses of funds under the proposal. The proposal may therefore contribute to the efficient use of those investors' time and attention, and lead to more efficient matches between investor preferences and the available investments. To the extent the proposed amendments would affect funds' investment behavior, it could result in funds investing in acquired funds where the adviser believes this would contribute to the fund's investment objective and would be in the interest of shareholders. This could result in the fund allocating its investments more efficiently because it would reduce a potential impediment to investments in acquired funds, even while it may result in other funds reducing their investments in acquired funds for the purpose of moving or staying below the proposed eligibility threshold. We discuss the efficiency gains from changes in the prospectus fee table as benefits of the proposal in Section III.C.3.b.

In addition, the proposal may affect economic efficiency through changes in disclosure content. The proposed amendments to the content of shareholder report disclosure and the presentation of advertising materials would increase the consistency of the presentation of their contents across funds (and, in the advertising rule change, across a wider range of investment opportunities) and thereby promote their comparability. This may make it easier for investors to make comparisons across funds, and between funds and other investment products. As a result, investors may face lower information asymmetry and lower search costs in choosing among funds, and among investment opportunities more generally. In addition, investors and other market participants may be more easily able to monitor their fund and other investments. Finally, investors may be more likely to react to actual differences in fund fees, expenses, principal risks, and other fund characteristics than under the current framework to the extent that those differences are more easily identified. Thus, the proposed rules and amendments that reduce information asymmetry and search costs may reduce barriers that funds and intermediaries face in supplying investment opportunities to investors, and that investors may face in comparing and evaluating the suitability of the investments initially and, as fund shareholders, over the period of the investment. The proposed advertising amendments would have similar effects, by deterring potentially misleading statements by funds.

These increases in efficiency and related cost reductions could manifest as a higher likelihood that investors make use of the disclosures that funds provide through their prospectus and shareholder reports, and thus lead to investment decisions that are informationally efficient. First, it may increase the likelihood that investors choose a mix and level of fund investments that are consistent with their overall financial preferences and objectives—a level that may be higher or lower than would occur presently. The proposal may help promote investment in funds by investors who would benefit from them. Second, an increase in the informational efficiency of investor decisions could make it more likely that those investors who choose to invest in funds make choices that are consistent with their preferences and needs and reject those that are not. Third, making it easier for investors to use the information that is disclosed under the rule provisions that require concise, tailored prospectus and shareholder report disclosures could facilitate more efficient investor allocation of assets across funds. These effects on efficiency would be limited, however, to the extent that investors rely on third parties for advice in selecting among financial products, where that third party uses more information than the proposed shareholder reports and amended prospectus disclosure.

Competition. The proposed rules and amendments that affect information asymmetry between investors and funds may, by reducing investor search costs, affect competition. For example, the proposed rules and amendments make changes to shareholder reports, prospectus disclosures, and fund advertisements that would enable investors to compare fees and expenses and other information more easily across funds, and between funds and other financial products, could affect competition among funds by making it easier for lower-fee funds to distinguish themselves from other funds. This could lead investors to shift their assets from higher-fee funds to lower-fee funds. It also could lead funds, in anticipation of this, to lower their fees or otherwise take steps to draw investor flows away from competing funds or avoid outflows to competing funds under the modified disclosure framework. It could lead funds to exit that are not as easily able to compete on the basis of fees and expenses as a result of the modified disclosure framework, and other funds to enter and compete for investor assets more efficiently than would currently occur. The effect on competition among funds may be limited, however, to the extent that investors rely on third parties who are not affected by the rule for advice in selecting among financial products.

As discussed above, the proposed clarification of the term “appropriate broad-based securities market index” in the management's discussion of fund performance section of the shareholder report could result in additional costs to funds in the form of index-licensing fees. The amount of these costs would depend, among other things, on market competition among index providers. If the proposed clarification were to result in a sufficient reduction in the number of index providers producing indexes that are “appropriate broad-based securities market indexes” or increased demand by funds to license indexes from a sufficiently small number of competing suppliers, index-licensing fees could increase.

The proposed amendments to prospectus disclosure requirements could have similar competitive effects as enhanced fee and expense disclosures. If these proposed amendments have the intended effect of making the disclosure of principal risks more usable for investors and cause each fund to highlight those risks that are truly principal to the particular fund, they may also induce funds to compete more intensively on the basis of risk exposures. For example, some funds may choose to hedge certain risks, such as foreign currency risks, or otherwise manage risks, in an effort to offer investors a narrower set of risk exposures.

Finally, we noted earlier in Section III.C.4.c that certain funds may respond to the proposed amendments to the advertising rule by limiting their advertising. Reduced advertising could affect the way in which funds compete for investor assets, causing funds to focus competition more narrowly on dimensions that are disclosed in prospectuses, such as fees, expenses, and principal risks. At the same time, if investors respond to fewer fund advertisements by making fewer comparisons between funds or searching less intensively for funds that match their preferences, the proposed amendments to the advertising rule could blunt competition between funds.

Capital Formation. The proposed rules and amendments could lead to an increase in capital formation. First, to the extent they increase the efficiency of exchange in markets for funds and other financial products, the proposed rules and amendments could lead to changes in fund investment in these products. Greater investment in ETFs, mutual funds, and other products, for example, could lead to increased demand for their underlying securities. The increased demand for those securities could, in turn, facilitate capital formation. Diminished investment could have the opposite effect, although we do not have any reason to believe that the proposal would decrease capital formation. In addition, changes in the prospectus fee disclosure could affect the willingness of index providers to include funds in their indexes or of funds to invest in other funds, as some commenters have indicated. If the proposed amendments increase fund investments in certain other funds, they could in turn result in additional capital formation for the particular types of companies in which the acquired funds invest. For example, to the extent the proposal would result in funds investing more in BDCs, the proposal could enable BDCs to make additional investments in small- and mid-sized companies.

We further note that, to the extent that increased or decreased investment in these financial products reflects substitution from other investment vehicles, the effect on capital formation would be attenuated because this would reduce the net change in the overall amount of investment in the capital markets.

The proposed rules that would lower the cost of delivering disclosures to fund shareholders could have a positive effect on fund performance and attract new investors or additional capital from existing investors. If so, the rule could promote capital formation benefits. We are unable to estimate precisely the magnitude of capital formation effects that may result from our projected cost savings under the rule because the magnitude of such effects may be affected by the extent of pass-through cost savings and by other factors that affect the flow of investor capital into mutual funds and ETFs, including other components of fund returns, overall market returns, and returns on investments other than funds. To the extent that any proposed rule or amendment would increase the delivery cost, we would anticipate the opposite effect.

The proposed rule changes and amendments are designed to make shareholder reports and prospectus disclosures easier for shareholders to use and to help investors better understand fees and expenses through fund prospectuses or advertisements. To the extent that it becomes easier for investors to use fund disclosure or to understand investment fees and expenses, the effect may improve retail investors' understanding about, and confidence in, the market for funds and other investment products, which may increase participation in this market by investors that previously avoided it. Such additional entry by new investors could increase the level of total capital across markets and increase the demand for new investment products and securities, which could lower the cost of capital for operating companies, precipitate capital formation in aggregate across the economy, and facilitate economic growth. These effects on capital formation would be limited, however, to the extent that investors rely on third parties who are not affected by the rule for advice in selecting among financial products. Overall, we do not have reason to believe that the proposed rules or amendments would have significant effects on capital formation.

S. Reasonable Alternatives

1. More or Less Frequent Disclosure

The proposal would maintain a fund's obligation to deliver an annual and a semi-annual report to shareholders. Alternatively, we could consider increasing or reducing the frequency of reports that funds would be required to deliver to shareholders.

As one alternative, the Commission could propose to increase the required frequency of delivery of reports to shareholders beyond what occurs under the current disclosure framework. For example, the Commission could require funds to deliver shareholder reports on a quarterly basis, rather than on a semi-annual basis as would continue to be the case under the proposal. To the extent shareholders review these additional reports, receiving the reports more frequently could keep shareholders better informed about their fund investments and could enhance shareholders' familiarity and comfort with reviewing shareholder report disclosures, since they would encounter such disclosures more frequently. As a result, investors may make more informed investment decisions. However, increasing the frequency of reports would require greater allocation of fund resources to preparing and delivering shareholder reports, which would increase fund (and shareholder) costs. In addition, receiving more frequent shareholder reports would place greater demands on shareholder time and attention compared to the proposal, which could decrease the likelihood that shareholders review the reports and rely on them to inform their investment decisions.

The Commission could also propose alternatives to transmitting the semi-annual report, such as permitting the requirement to transmit semi-annual reports to be satisfied by a fund filing certain information on Form N-CSR or by making information available on a website (either semi-annually or more frequently). Relative to the proposal, funds would benefit from cost savings associated with no longer being required to deliver the semi-annual report. Funds also could experience lower costs associated with preparing disclosures, particularly if the information they were required to provide on websites largely replicated information that many funds already provide online in monthly or quarterly fact sheets. Shareholders could benefit from these cost savings to the extent funds pass them through. However, shareholders who prefer to receive information more frequently than annually, as they currently do, would incur costs associated with the reduced frequency of delivery, such as costs of locating information online instead of in the delivered semi-annual report. In addition, to the extent this was an optional framework (e.g., funds could either provide certain information online or deliver semi-annual reports), the alternative framework may lead to shareholders in some funds receiving less direct information than those in other funds.

2. More or Less Information in Shareholder Reports

The proposal would make the disclosures that funds send to shareholders more concise, without materially changing the overall amount or scope of information that funds provide to their shareholders (either in shareholder reports or separately online). Instead, the Commission could propose to require more (or less) information in fund shareholder reports and less (or more) information online or upon request only, relative to the proposed amendments. We could further propose to reduce the overall amount of disclosure funds are required to prepare and provide, e.g., by no longer requiring funds to provide disclosure regarding the basis for the board's approval of investment advisory contracts.

The benefits of requiring more information to be included in shareholder reports (with less information online or upon request only) are that fewer investors may need to take any additional steps needed to access the information online, which would reduce burdens on those investors. However, this alternative also has certain costs. For example, requiring more information in shareholder reports may reduce the likelihood that shareholders review the reports because they may be more likely to feel overwhelmed by the length of the reports. Shareholder reports that include more information than the proposed content may also make it harder for shareholders to find key information within the report. Moreover, increasing the length of shareholder reports by requiring additional content could also increase delivery costs for funds (which could also be passed on to shareholders), particularly with respect to printing and mailing costs.

As another alternative, we could further limit the content of shareholder reports. This alternative could result in shareholder reports that are easier for shareholders to review and could reduce costs associated with the preparation and delivery of shareholder reports. However, this alternative may reduce the utility of shareholder reports for many if not most shareholders if the reports do not include the key information those shareholders tend to use to monitor their fund investments or make portfolio decisions. If, as part of this alternative, we required funds to provide the information removed from shareholder reports to shareholders upon request or online, those shareholders would face the burden of requesting the information or locating it online. If we instead removed certain disclosure requirements entirely, the costs to funds of preparing disclosure would decline. This approach would, however, reduce access to information for all market participants, which may result in less informed monitoring or investment decisions by shareholders or by the market professionals they rely on for investment advice.

3. Retaining Rule 30e-3 Flexibility for Open-End Funds Registered on Form N-1A

The Commission is proposing to exclude funds registered on Form N-1A from current rule 30e-3. Under the proposal, affected funds would be required to deliver concise shareholder reports directly to shareholders in order to meet their delivery obligations. Funds would not have the flexibility to instead deliver a paper notice with information about the online location of the shareholder report, as is the case under current rule 30e-3.

As an alternative, the Commission could continue to permit these funds to rely on rule 30e-3 to satisfy their shareholder report delivery obligations. This alternative would provide optionality to funds to determine their preferred method for delivering shareholder reports where shareholders have not expressed a clear preference for electronic delivery or paper delivery of the report and could reduce costs for some funds compared to the proposal, such as for those funds that have already begun to prepare to rely on rule 30e-3. It also could reduce the potential for shareholder confusion where funds have notified shareholders of their intent to rely on rule 30e-3 and of the associated upcoming changes to shareholder report delivery. However, given that we do not expect the proposed shareholder reports to be much longer than a paper notice under rule 30e-3, we do not believe that excluding relevant funds from rule 30e-3 as proposed would significantly increase the costs of delivering shareholder reports relative to the baseline. For instance, the proposed amendments may reduce processing fees associated with delivering shareholder reports through intermediaries and should not significantly increase printing and mailing costs. Moreover, we believe that delivering a concise shareholder report to shareholders directly may help them more efficiently monitor their fund investments. This is because shareholders who would otherwise receive paper notices under rule 30e-3 could avoid the additional step of finding the report online.

In addition, we recognize that if a fund could rely on both rule 30e-3 and proposed rule 498B, shareholders may no longer directly receive substantive disclosure about a fund investment, beyond notices of material changes under proposed rule 498B. This could result in shareholders being less informed, compared to the proposal. If, instead, funds were provided the option to rely on either rule 30e-3 or proposed rule 498B, a shareholder in a fund that chooses to rely on rule 30e-3 instead of proposed rule 498B would receive direct disclosure that may be less well-suited to his or her needs than a shareholder of a fund that relies on proposed rule 498B (or on neither rule), given that prospectus disclosure is designed more for the needs of new or prospective investors than for the needs of existing shareholders.

4. Limiting the Advertising Rule Amendments to ETFs and Mutual Funds

The proposed advertising rule amendments would apply to all registered investment companies and BDCs. The scope of entities affected by these amendments would therefore be broader than under the proposed rule and other proposed amendments, which apply only to open-end funds, such as mutual funds, and to ETFs. As an alternative, we could also limit the scope of the proposed amendments to the advertising rules to apply only to open-end funds.

Under this alternative, the advertising rule amendments would apply to a narrower class of entities than is proposed. The effect would be to reduce both the cost and benefits of the proposed advertising amendments that are discussed in Section III.C.4, as these costs and benefits would accrue only to shareholders and issuers of the narrowed class of entities, and would no longer accrue to shareholders and issuers of any entities that would be excluded under the alternative. In addition, the alternative could lead to a disparity in the quality of the information that is available to market participants about funds that would be covered by the advertising rule amendments under the alternative and the entities that would be outside its scope. This could lead to reduced comparability and distortions in investor choice across registered investment companies and BDCs, relative to the approach the Commission is proposing, which would apply the standards across all of these entities evenly.

5. Amending Prospectus Fee, Expense, and Principal Risk Disclosure in a Different Manner

The proposed prospectus fee summary disclosure would require funds to provide certain fee and expense information both as a percent of a fund investment and in dollar figures based on a $10,000 investment, while the presentation of those numbers in the full fee table would remain only in percentage figures. Alternatively, we could require funds to express fees and expenses in the fee summary as a percent of a fund investment only, similar to the current fee table presentation. This alternative would streamline the fee summary and could make it more visually appealing by reducing the amount of detail. It also could marginally reduce costs of preparing disclosures for funds. However, as discussed above, a fee summary that excludes dollar-based figures may be more difficult for some investors to understand.

The proposed amendments are designed to promote more concise principal risk disclosure in the summary section of the statutory prospectus (or in summary prospectuses for funds that use summary prospectuses), but the proposal does not limit the number of principal risks a fund may disclose. As an alternative, we could limit the number of principal risks a fund may disclose (e.g., only 25 principal risks). This would streamline principal risk disclosure in a way that may make it easier for investors to digest and understand the most central risks of a fund investment. At the same time, this approach could potentially result in a fund understating its principal risks in some instances, which could mislead investors about the risks associated with an investment in the fund.

The proposed rule would provide that a principal risk is one that would place more than 10% of the fund's assets at risk (or it is reasonably likely that it would place more than 10% of the fund's assets at risk in the future). Alternatively, we could establish different numerical thresholds in the proposed instruction. For example, we could provide a lower percentage threshold of 5% or a higher percentage threshold of 15% for determining whether a risk is principal. Compared to the proposed approach, a higher percentage threshold would result in funds disclosing fewer principal risks and reduce the costs to funds of providing these disclosures, while a lower percentage threshold would result in funds disclosing more principal risks and increase the costs to funds of providing these disclosures. Fewer principal risks being disclosed could lead to disclosure that is overall more concise and that may require less time and resources for investors to understand, while more principal risks being disclosed could lead to disclosure that is overall less concise and that may require more time and resources for investors to understand. At the same time, decreasing the number of principal risks a fund discloses may increase the potential for an investor to be misled about the risks of investing in a particular fund, while increasing the number of principal risks a fund discloses may decrease the potential for an investor to be misled.

As another alternative, we could provide a qualitative standard or a “materiality” standard for funds to determine whether a risk is principal instead of a numerical-based standard. These alternatives may allow funds to tailor and adapt their principal risk disclosure better to different facts and circumstances, which could lead to more accurate identification of a fund's principal risks and may better account for non-investment related risks, such as cybersecurity risks and new fund risks. However, these alternatives may be less effective than the proposed approach in promoting more concise and focused principal risk disclosure. These alternatives also could lead to greater variation in principal risk disclosure across funds than the proposed approach, which may make it more difficult for investors to compare funds effectively when making investment decisions. In addition, it may be more costly for funds to evaluate whether a principal risk is material compared to evaluating whether the principal risk meets the proposed quantitative standard.

6. Amending Shareholder Report Requirements for Variable Insurance Contracts or Registered Closed-End Funds

The proposed shareholder report amendments apply only to funds registered on Form N-1A. The proposed amendments to shareholder reports do not apply to other registered management investment companies that transmit annual and semi-annual reports under rule 30e-1. Alternatively, we could extend the shareholder report disclosure amendments to other registered management investment companies, including closed-end funds that register on Form N-2 and variable annuity separate accounts that register on Form N-3. Like shareholders in open-end funds registered on Form N-1A, shareholders in these other funds could benefit from more concise shareholder reports. However, the Commission has recently amended the disclosures that shareholders in these funds receive. For example, the recently adopted changes to closed-end fund disclosures include multiple changes to these funds' shareholder report disclosure. Similarly, while the recently adopted changes to the variable insurance contract disclosure framework are focused more on prospectus disclosure and not shareholder report disclosure, we anticipate that these amendments would significantly change investors' experience with variable contract disclosure. Because we lack information about shareholders' experiences with these new disclosure requirements, we would like to assess the impact of these changes prior to proposing additional disclosure changes for variable contracts or closed-end funds.

7. Requiring Funds to Comply With Proposed Rule 498B

Proposed rule 498B allows funds the option to deliver a notice of material changes to shareholders in lieu of delivering annual prospectus updates and prospectus stickers. Instead of providing funds with the option to rely on proposed rule 498B, we could require all affected funds to comply with the proposed rule.

This alternative would have the benefit of creating a more consistent disclosure framework across funds and would result in fund shareholders generally receiving the same types of information from all funds. Under the proposal, prospectus delivery practices of funds would vary across funds depending on whether they choose to rely on rule 498B. We believe that the funds that choose not to rely on the rule would generally continue to deliver the annual prospectus update, while the funds that rely on rule 498B would not deliver the annual prospectus update and would instead provide to fund shareholders timely notification of material changes. Under this alternative, all fund shareholders would receive prompt notices of material changes to a fund and would not receive separate annual prospectus updates directly. This may benefit the shareholders of funds that otherwise would decline to rely on rule 498B, to the extent that delivery of the more concise materials may allow them to make better-informed investment decisions.

However, this alternative may impose burdens on funds that would not otherwise choose to rely on the proposed rule. For example, funds that do not currently use summary prospectuses, including some smaller funds, may determine that the benefits of proposed rule 498B do not justify its costs since the rule would require funds to provide summary and statutory prospectuses and other information online. As a result, the alternative approach may impose greater costs on those funds, including some smaller funds, than on other funds. In addition, under the proposed amendments, all fund shareholders would receive information in the annual report about material fund changes. This uniform annual report disclosure would promote more consistent information for fund shareholders and thus facilitate better-informed investment decisions. In addition, we believe this proposed requirement would not lead to increased costs because of the optional nature of rule 498B for two reasons. First, funds currently tend to disclose more material changes in the annual prospectus update, and disclosure of these changes would generally appear in the proposed annual report for all funds. Second, for material changes that funds disclose through prospectus stickers, we expect that funds that do not rely on proposed rule 498B would continue to deliver prospectus stickers to notify shareholders of material changes.

8. Requiring Form N-CSR To Be Tagged in Inline XBRL Format

The proposal would not change the format requirement for Form N-CSR, which is not required to be filed in a structured machine-readable format. Alternatively, we could require management investment companies (including open-end funds, registered closed-end funds, and some variable annuity separate accounts) to tag some or all of Form N-CSR in the structured machine-readable Inline XBRL format. This requirement could include numerical detail tagging of the financial statements that would be included in Form N-CSR, as is currently required for operating company financial statements. The requirement could also include text block tagging for narrative disclosures (such as the discussion of prior-year performance that is proposed to be included in the annual report for open-end funds and would thus be filed as part of Form N-CSR), as is currently required for principal risk disclosures in open-end fund prospectuses.

Compared to the baseline (under which Form N-CSR is not required to be submitted in a structured machine-readable format), an Inline XBRL tagging requirement for Form N-CSR could benefit investors by enabling efficient retrieval, aggregation, and analysis of the information in Form N-CSR and by facilitating comparisons of that information across investment companies and time periods. There are studies suggesting that XBRL requirements increase the information content of prices, reduce the informational advantages held by insiders over public investors, heighten the relevance, understandability, and comparability of financial information for non-professional investors, and enhance the reports and recommendations published by financial analysts, thereby indirectly benefitting retail investors for whom such analysts represent a significant source of investment information.

Requiring Inline XBRL tagging of Form N-CSR would impose additional filing preparation costs on management investment companies compared to the baseline. Currently, management investment companies are not required to tag their Form N-CSR filings in the Inline XBRL format. As such, this alternative would impose on management investment companies the incremental costs of tagging Form N-CSR disclosures, whether implemented using internal staff or external service providers. Such costs would be partially mitigated by the fact that management investment companies will be subject to Inline XBRL tagging requirements in other filings, independent of this proposal. Consequently, the alternative of tagging Form N-CSR would not impose on management investment companies the Inline XBRL implementation costs that are often associated with being subject to an Inline XBRL requirement for the first time (such as the cost of training in-house staff to prepare filings in Inline XBRL, and the cost to license Inline XBRL filing preparation software from vendors).

However, as noted above, the primary objective of the proposed disclosure framework is to promote shareholder reports that assist existing shareholders in monitoring their fund investments, leaving information that is more useful for new and prospective investors to compare funds and make investment decisions to be retained in the fund prospectus. Because facilitating fund comparisons is one of the chief benefits of the Inline XBRL format, Inline XBRL requirements are likely more beneficial to investors in the context of prospectus disclosures rather than disclosures in periodic reports such as Form N-CSR. As such, the Commission has determined not to propose an Inline XBRL tagging requirement for Form N-CSR.

9. Modifying the AFFE Amendment

The proposal would allow some funds to disclose AFFE, the fees and expenses associated with acquired fund investments, in a footnote to the fee table and fee summary instead of reflecting the AFFE in the bottom line annual expenses in the fee table (as funds do today). Funds with investments in acquired funds that are limited to 10 percent or less of their total assets would be eligible to disclose AFFE in a footnote. Moving the AFFE information to a footnote to the fee table would enable the eligible funds to provide disclosures that investors may find easier to use in comparing the fees and expenses of funds with comparable investment strategies.

As alternatives, we could consider allowing more funds to move the AFFE disclosure into a footnote to the fee table by increasing the proposed eligibility threshold above 10%, such as to 50% or some other level, or by allowing all funds to move the AFFE disclosure into a footnote to the fee table, which may improve the salience of the expenses of the acquiring fund to investors. On the other hand, some funds may follow an investment strategy that leads them to incur significant expenses at a lower fund level, even where the fund does not have a majority of its assets invested in acquired funds. For those funds, moving the AFFE expenses into a footnote to the fee table may provide for expense disclosures that are less closely related to the expenses associated with the top-level fund's investment strategy. For example, some funds (such as certain target date funds) follow an investment strategy in which the acquiring fund has very low, or no, management fees. For those funds, a fee table that does not include the AFFE amount may confuse investors as to the expenses associated with investment in the fund. Therefore, we are proposing to limit eligibility for the proposed AFFE amendment to the more limited share of funds with 10% or less invested in acquired funds.

As another alternative, we could consider requiring all eligible funds to rely on the proposed AFFE amendments. This could make it easier for investors to compare similar funds because funds with acquired fund investments below the 10% threshold would all disclose AFFE in a footnote. It also could reduce investor uncertainty about how a fund is disclosing AFFE information. On the other hand, allowing funds to opt into reliance on the amendment would enable funds that have relatively low, or negative, net benefit from migrating to the footnote-based approach to opt out. Moreover, a mandatory approach could require funds that maintain acquired fund investments close to the 10% threshold to move AFFE disclosure back-and-forth between the fee table and an associated footnote over time, which could contribute to investor confusion. Therefore, we are proposing to allow voluntary reliance on the proposed AFFE amendments.

T. Request for Comment

We seek comment on the economic analysis, including whether the analysis has: (1) Identified all benefits and costs, including all effects on efficiency, competition, and capital formation; (2) given due consideration to each benefit and cost, including each effect on efficiency, competition, and capital formation; and (3) identified and considered reasonable alternatives to the proposed rules. We request and encourage any interested person to submit comments regarding the proposed rules, our analysis of the potential effects of the proposed rules, and other matters that may have an effect on the proposed rules. We request that commenters identify sources of data and information as well as provide data and information to assist us in analyzing the economic consequences of the proposed rules and proposed amendments. We also are interested in comments on the qualitative benefits and costs we have identified and any benefits and costs we may have overlooked. In addition to our general request for comments on the economic analysis associated with the proposed rules and proposed amendments, we request specific comment on the following aspects of the proposal:

275. What effect would the proposal have on funds' delivery costs? Is our assessment correct that funds could use a trifold self-mailer, or a similar approach, to deliver a proposed shareholder report by mail? Why or why not? What alternatives to a trifold self-mailer might funds consider for delivering the proposed shareholder reports in paper to relevant shareholders? How would the planned mailing device affect the estimated benefits and costs of the proposal? Please provide quantitative information, if available.

276. We request comment on the costs to funds of the proposed requirement to prepare separate shareholder reports for each fund series. How would this requirement affect the cost to funds of preparing shareholder reports? Please answer this question separately for the transition cost and the ongoing costs of complying with this proposed requirement. Also please provide information on the additional costs to funds and other parties of delivering separate reports for separate fund series to shareholders, beyond any costs of report preparation.

277. We request comment on the costs of the Commission's proposed clarification of the term “appropriate broad-based securities market index” for funds that are required to present their performance in relation to an “appropriate broad-based securities market index” in the management's discussion of fund performance section of the shareholder report. Would this proposed clarification result in increased index-licensing fees? To what extent would competition among index providers limit or otherwise affect these fees?

278. What fraction of shareholders currently request electronic delivery of fund disclosure? Would the proposal cause an increase or decrease in this fraction relative to what would occur without the proposal? If so, explain and indicate the likely change. Provide supporting quantitative evidence, if available.

279. The proposal would affect financial intermediaries and other third parties that are involved in the distribution and use of the prospectus and shareholder reports, such as broker-dealers and third-party information providers. For each type of intermediary or third party, we are requesting comment on how many would be affected by the rule, the characteristics of those affected, and the consequences for retail investors. Please provide quantitative information, if available.

280. The effect of changes in disclosure under the proposal would be limited to the extent that retail investors rely on third parties for information and advice in selecting among financial products, where those third parties use more information than the proposed shareholder reports and amended prospectus disclosure. We are requesting comment on how many, or what fraction, of retail investors rely on advice from such third parties in choosing among funds or in monitoring fund investments. We are also requesting comment on whether the presence of third parties whose advice is unaffected by the proposal would reduce the impact of the proposal. Please explain and provide empirical facts to support your response.

281. How frequently do funds currently deliver prospectus stickers to shareholders on average? Do funds typically deliver prospectus stickers separately, or together with other materials (e.g., semi-annual reports)? What effects would proposed rule 498B, including the requirement to deliver prompt notices of certain material changes, have on funds' delivery costs?

282. Are our estimates of the compliance costs associated with the proposed amendments reasonable?

283. Is our assessment of the relative costs and benefits of the proposal to exclude open-end funds registered on Form N-1A from the scope of rule 30e-3 correct? Please provide qualitative or other information about the expected costs of delivering rule 30e-3 notices or complying with that rule more generally in light of funds' additional experience with the rule after its adoption. How do these costs compare to the expected costs of preparing and delivering the proposed shareholder reports?

284. We seek information that would help us quantify or otherwise qualitatively assess the benefits of the proposed rule, particularly the benefits for retail investors. Please provide any data, studies, or other evidence that would allow us to quantify some or all of the benefits.

285. The proposal is designed to conserve the time and attention of retail investors, and other market participants, in using the disclosures that funds provide through prospectuses and shareholder reports. We do not, however, have reliable estimates of the value to investors of being able to use their time more efficiently under the proposal or being able to make more informed investment decisions. We are requesting comment on the effects of the proposal on the use of investor time and attention, the ability of investors to make informed investment decisions, and on the proposal's likely effects on welfare of retail investors. Please provide explanations to support your comments. Please also provide examples, where appropriate, and supporting evidence from analysis of quantitative data, where available.

286. The proposal is designed to increase the use of disclosures by retail investors. We seek comment on whether the benefit in terms of investor comprehension of the disclosures is likely to vary according to the disclosure format and, in particular, according to whether delivery occurs in the form of digital media. What is the empirical evidence? Please explain and provide documentation of any quantitative evidence that includes an explanation of the data sources and analysis methods.

287. We seek comment on whether, and to what extent, funds that have the option would choose to rely on the AFFE amendments that we are proposing. For example, for purposes of the economic analysis, we have assumed that all funds that are eligible for the AFFE amendment would choose to move their AFFE disclosure to a footnote of the fee table, if allowed to do so. It is possible that not all such funds would rely on the amendment, however. Are there conditions under which a fund that could move AFFE out of the fee table would choose not to do so? Please explain. Also please provide data or examples to support your answer.

288. The effects on investors of fund reliance on the proposed AFFE amendments would depend on how many funds rely on the AFFE amendment, and under what conditions. For example, we estimate that only funds with investments in acquired funds of less than 20% of total assets would likely spend time considering whether they would qualify for the AFFE amendment. We are requesting comment on the effects of the proposed amendment on funds and investors.

289. The effects on investors of the proposed change in the AFFE disclosure would depend on whether, and under what conditions, investors currently rely on the fund AFFE disclosure information. We are requesting comment on how investors and other market participants use the AFFE information that is disclosed currently. What is the evidence that investors and others rely on AFFE disclosures in making choices among funds? What is the evidence that the proposed changes would cause any difference in the way this information is used or the ease of its use by investors or other market participants? Please explain and provide supporting cites (or other background documentation).

290. We are requesting comments on whether there are any disparities between the likely effects of the advertising rule amendments on different financial products or investments that could lead to differences in the effects of the proposed advertising rule amendments across products. We specifically seek comments on differences in the effects of the proposed advertising rule amendments between ETFs or mutual funds, on the one hand, and other types of registered investment companies, on the other.

291. We are not proposing to require Form N-CSR to be submitted in a structured machine-readable format. Should we require funds to submit some or all of Form N-CSR in a structured machine-readable format such as the Inline XBRL format? What would be the benefits and costs of such a requirement? Would any resulting benefits accrue to all types of investors (e.g., retail investors and institutional investors)? Are there any particular disclosures which investors would benefit most from having access to in structured machine-readable format? Should a structured machine-readable format other than Inline XBRL, such as a custom XML format, be required for Form N-CSR?

292. Form N-CSR currently requires funds to disclose their name and Investment Company Act file number on the Form N-CSR cover page. Unlike the Investment Company Act file number, which is a Commission-specific identifier, the Legal Entity Identifier (“LEI”) is used by numerous domestic and international regulatory regimes and could facilitate collection of information about a fund beyond the information disclosed in Commission filings. Should we require a fund that has an LEI to disclose its LEI on the Form N-CSR cover page? What would be the costs and benefits of such an approach for investors and for funds? If the approach would provide informational benefits for investors, would retail investors realize such benefits? By making additional information available outside of the shareholder reports, would the added LEI requirement contribute to the layered disclosure framework discussed above?

293. Form N-CSR currently requires funds that disclose divested securities under Item 6.b of the Form to include the Committee on Uniform Securities Identification Procedures (“CUSIP”) number for each divested security listed. Should we consider omitting Form N-CSR's requirement to provide a CUSIP number for each divested security? Why or why not? Should we permit funds to provide, in lieu of a CUSIP number, other identifiers such as a Financial Instrument Global Identifier (FIGI) for each security? Why or why not? Would permitting voluntary use of an alternate identifier have a beneficial effect for investors, funds, or users of the data?

IV. Paperwork Reduction Act Analysis

U. Introduction

Certain provisions of the proposed amendments contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”). We are submitting the proposed collections of information to the Office of Management and Budget (“OMB”) for review in accordance with the PRA. The titles for the existing collections of information are: (1) “Form N-1A, Registration Statement under the Securities Act and under the Investment Company Act for Open-End Management Investment Companies” (OMB Control No. 3235-0307); (2) “Rule 30e-1 under the Investment Company Act, Reports to Stockholders of Management Companies” (OMB Control No. 3235-0025) (3) “Form N-CSR, Certified Shareholder Report under the Exchange Act and under the Investment Company Act for Registered Management Investment Companies”(OMB Control No. 3235-0570); (4) “Rule 30e-3 under the Investment Company Act, internet Availability of Reports to Shareholders” (OMB Control No. 3235-0758); (5) “Rule 31a-2, Records to be Preserved by Registered Investment Companies, Certain Majority-Owned Subsidiaries thereof, and other Persons Having Transactions with Registered Investment Companies” (OMB Control No. 3235-0179); (6) “Rule 498 under the Securities Act of 1933, Summary Prospectuses for Open-End Management Investment Companies” (OMB Control No. 3235-0648); (7) “Rule 34b-1 under the Investment Company Act, Sales Literature Deemed to be Misleading” (OMB Control No. 3235-0346); (8) “Rule 433 under the Securities Act of 1933” (OMB Control No. 3235-0617); and (9) “Rule 482 under the Securities Act of 1933 Advertising by an Investment Company as Satisfying Requirements of Section 10” (OMB Control No. 3235-0565). We are also submitting a new collection of information for proposed rule 498B under the Securities Act to allow funds to rely on a new layered disclosure framework for prospectus delivery to existing shareholders, subject to certain conditions. The title for this new collection of information would be “Delivery of Prospectuses to Existing Shareholders of Open-End Management Investment Companies.”

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.

We discuss below the collection of information burdens associated with proposed amendments to Form N-1A, rule 30e-1 under the Investment Company Act, and Form N-CSR. We also discuss proposed rule 498B and proposed amendments to rule 482 under the Securities Act, rule 34b-1 under the Investment Company Act, rule 433 under the Securities Act, and rule 30e-3 under the Investment Company Act. The Commission also intends to use two Feedback Fliers to obtain information from investors and funds about the proposed rule. The Feedback Fliers are included in this proposal as Appendix B and Appendix C hereto.

V. Form N-1A

In our most recent Paperwork Reduction Act submission for Form N-1A, we estimated for Form N-1A a total hour burden of 1,662,190 hours, and the total annual external cost burden is $131,338,208. Compliance with the disclosure requirements of Form N-1A is mandatory, and the responses to the disclosure requirements will not be kept confidential.

The table below summarizes our PRA initial and ongoing annual burden estimates associated with the proposed amendments to Form N-1A.

W. Proposed New Shareholder Report Requirements Under Rule 30e-1

We have previously estimated that it takes a total of 1,028,658 hours, and involves a total external cost burden of $147,750,391, to comply with the collection of information associated with rule 30e-1. Compliance with the disclosure requirements of rule 30e-1 is mandatory. Responses to the disclosure requirements are not kept confidential.

The table below summarizes our PRA initial and ongoing annual burden estimates associated with the proposed amendments to rule 30e-1.

X. Form N-CSR

In our most recent Paperwork Reduction Act submission for Form N-CSR, we estimated the annual compliance burden to comply with the collection of information requirement of Form N-CSR is 179,443 burden hours with an internal cost burden of $57,723,571, and an external cost burden estimate of $3,129,984. Compliance with the disclosure requirements of Form N-CSR is mandatory, and the responses to the disclosure requirements will not be kept confidential.

The table below summarizes our PRA initial and ongoing annual burden estimates associated with the proposed amendments to Form N-CSR.

Y. Proposed Rule 498B

Proposed rule 498B would address shareholders' continued receipt of annual prospectus updates in the years following their initial investment in a fund and uses layered disclosure concepts to tailor funds' required disclosures to the informational needs of different types of investors. Under the proposed rule, investors would continue to receive a prospectus in connection with their initial fund investment, as they do today. Thereafter, a shareholder would no longer receive annual prospectus updates, in light of the fact that the shareholder would be receiving tailored shareholder reports (which would include, in the annual report, a summary of material changes that occurred over the prior year), and timely notifications to shareholders pursuant to proposed rule 498B regarding material fund changes as they occur. Reliance on the rule is voluntary; however, compliance with the rule's conditions is mandatory for funds relying on the rule. Responses to the information collections would not be kept confidential.

Because a fund's reliance on proposed rule 498B would be voluntary, the percentage of funds that would choose to rely on the rule is uncertain. We generally anticipate that the proposed rule would provide costs savings to funds, and so we assume that the vast majority of funds would rely on rule 498B to satisfy their prospectus delivery obligations. For purposes of this estimate, we assume that funds that currently rely on rule 498 generally would rely on proposed rule 498B. We believe this assumption is appropriate because funds that rely on rule 498 are funds that have already chosen to rely on a rule that provides an alternative means of satisfying prospectus delivery obligations, and because certain of the conditions of proposed rule 498B overlap with similar conditions to rely on rule 498. Therefore, we assume that these funds would experience some efficiencies in coming into compliance with proposed rule 498B. Based on these assumptions, we estimate that 90% of mutual funds and ETFs would choose to rely on rule 498B.

The table below summarizes the proposed estimates for internal and external burdens associated with this new requirement under rule 498B:

Z. Rule 482

In our most recent Paperwork Reduction Act submission for rule 482, we estimated the annual burden to comply with rule 482's information collection requirements to be 278,161 hours, with a time cost of $76,702,895, and with no annual external cost burden. Compliance with the requirements of rule 482 is mandatory, and responses to the information collections would not be kept confidential.

We estimate that 36,994 responses to rule 482 are filed annually. We estimate that approximately 96% of the rule 482 responses provide fee and expense figures in qualifying advertisements and would, therefore, be required to comply with the proposed amendments regarding such information (for example, ensuring that the fee and expense figures are presented in accordance with the prominence and timeliness requirements in the proposed amendments to rule 482). Similarly, we estimate that 96% of the responses to rule 482 provide advertisements that include information regarding a fund's total annual expenses and would, therefore, have to comply with the proposed amendments regarding such information.

The table below summarizes the proposed estimates for internal burdens associated with this new requirement under rule 482:

AA. Rule 34b-1

To apply the same fee and expense-related requirements consistently across all registered investment company and BDC advertisements and supplemental sales literature, we are proposing to amend rules 34b-1 in a manner that mirrors our proposed amendments to rule 482.

We estimate that 351 responses to rule 34b-1 are filed annually. We estimate that approximately 96% of the rule 34b-1 responses provide fee and expense figures in qualifying advertisements and would, therefore, be required to comply with the proposed amendments regarding such information. Similarly, we estimate that 96% of the responses to rule 34b-1 provide advertisements that include information regarding a fund's total annual expenses and would, therefore, have to comply with the proposed amendments regarding such information.

In our most recent Paperwork Reduction Act submission for rule 34b-1, we estimated the annual compliance burden to comply with the collection of information requirement in rule 34b-1 is 26,008 hours, with an internal cost burden of $7.3 million. There is no annual external cost burden attributed to rule 34b-1. Compliance with the requirements of rule 34b-1 is mandatory and the responses to the information collections would not be kept confidential. The table below summarizes the proposed estimates for internal burdens associated with this new requirement under rule 34b-1.

BB. Rule 433

We are proposing to amend rule 433 to require a registered closed-end fund or BDC free writing prospectus to comply with the proposed content, presentation, and timeliness requirements of proposed rule 482, as applicable, if the free writing prospectus includes fee and expense information. As a result, regardless of whether a registered closed-end fund or BDC advertisement uses rule 482 or rule 433, the advertisement would be subject to the same requirements regarding fee and expense information. Compliance with the requirements of rule 433 is mandatory and the responses to the information collections would not be kept confidential.

In our most recent Paperwork Reduction Act submission for rule 433, we estimated the annual compliance burden to comply with the collection of information requirement rule 433 is 6,391 hours, at a time cost of $7,668,800, and an external cost burden estimate of $7,669,017. As part of that rulemaking, we also estimated that there will be 791 closed-end funds and BDCs filing approximately 4,271 free writing prospectuses.

We estimate that approximately 96% of the 4,271 responses provide fee and expense figures in free writing prospectuses and would, therefore, be required to comply with the proposed amendments regarding such information. Similarly, we estimate that 96% of these responses would include information regarding a fund's total annual expenses and would, therefore, have to comply with the proposed amendments regarding such information.

The table below summarizes the proposed estimates for internal burdens associated with this new requirement under rule 433:

CC. Rule 30e-3

We are proposing to amend the scope of rule 30e-3 to exclude investment companies registered on Form N-1A. Because our proposed amendment would decrease the number of funds that would be able to rely on rule 30e-3, we are updating the PRA analysis for rule 30e-3 to account for any burden decrease that would result from this decrease in respondents. We are not updating the rule 30e-3 PRA analysis in any other respect. Reliance on the rule is voluntary; however, compliance with the rule's conditions is mandatory for funds relying on the rule. Responses to the information collections would not be kept confidential.

Under current PRA estimates for rule 30e-3, we estimated that complying with the information collection requirements of rule 30e-3 would impose an average total annual hour burden of about 8,866 hours and an external cost burden estimate of $76,038 on funds that choose to rely on rule 30e-3. Of those costs, we estimated that 24,459.4 hours, at a time cost of $8,674,306, and an external cost of $69,965,020, were attributed to the compliance costs of open-end funds registered on Form N-1A. The table below summarizes these revisions to the estimated annual responses, burden hours, and burden-hour costs based on the proposed amendment to the scope of rule 30e-3.

DD. Rule 498

Rule 498 under the Securities Act permits funds to satisfy their prospectus delivery obligations under the Securities Act by sending or giving investors the fund's summary prospectus and providing the statutory prospectus on a website. Reliance on the rule is voluntary; however, compliance with the rule's conditions is mandatory for funds relying on the rule. Responses to the information collections would not be kept confidential.

We are proposing to amend the scope of rule 30e-3 to exclude investment companies registered on Form N-1A. Because our proposed amendments would decrease the number of funds that would be able to rely on rule 30e-3, we are updating the PRA analysis for rule 498 to account for that change. We are not updating the rule 498 PRA analysis in any other respect.

Under current PRA estimates for rule 498, we estimated that complying with the information collection requirements of rule 498 would impose an average total annual hour burden of about 20,327 burden hours, at a time cost of $5.8 million, and an annual external cost burden of $167,458,800. Of those costs, we estimated that the amortized aggregate annual hour burden associated with the rule 30e-3 amendments to rule 498 was 4,529 hours, at a time cost of $1,286,236. We estimated that the external costs of rule 498 did not change as a result of the rule 30e-3 amendments. The table below summarizes our proposed revisions to the estimated burden hours, and burden-hour costs based on the proposed amendment to the scope of rule 30e-3.

EE. Request for Comment

We request comment on whether these estimates are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (1) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (2) evaluate the accuracy of the Commission's estimate of the burden of the proposed collection of information; (3) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (4) determine whether there are ways to minimize the burden of the collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.

Persons wishing to submit comments on the collection of information requirements of the proposed amendments should direct them to the OMB Desk Officer for the Securities and Exchange Commission, MBX.OMB.OIRA.SEC_desk_officer@omb.eop.gov, and should send a copy to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File No. S7-09-20. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this release; therefore a comment to OMB is best assured of having its full effect if OMB receives it within 30 days after publication of this release. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-09-20, and be submitted to the Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736.

V. Initial Regulatory Flexibility Act Analysis

This Initial Regulatory Flexibility Analysis (“IRFA”) has been prepared in accordance with section 3 of the Regulatory Flexibility Act (“RFA”). It relates to: The proposed amendments to funds' annual and semi-annual report requirements, proposed new Form N-CSR requirements, and proposed new website posting requirements; the treatment of annual prospectus updates for existing fund shareholders under proposed rule 498B; the proposed amendments to fund prospectus disclosure requirements; the proposed investment company advertising rule amendments; and the proposed technical and conforming amendments.

FF. Reasons for and Objectives of the Proposed Actions

The Commission is proposing a new rule, rule amendments, and form amendments that would create a simplified disclosure framework for mutual funds and exchange-traded funds to highlight key information for investors. Under the proposed amendments, fund investors would continue to receive fund prospectuses in connection with their initial investment in a fund, as they do today. On an ongoing basis thereafter, the investors would receive more concise and visually engaging annual and semi-annual reports designed to highlight information that we believe is particularly important for retail shareholders to assess and monitor their ongoing fund investments. The fund's shareholder reports would serve as the primary fund disclosures that existing shareholders receive each year, in addition to notices of certain material changes if they occur during the year. The proposal would promote a layered disclosure framework that would complement the shareholder reports by continuing to make available additional information that may be of interest to some investors, including the fund's financial statements. This information would be available online, reported on Form N-CSR, and delivered to an investor on request, free of charge. We also propose to provide funds the flexibility to make electronic versions of their shareholder reports more user-friendly and interactive. Under the proposal, mutual funds and exchange-traded funds would no longer be permitted to rely on rule 30e-3 to satisfy shareholder report transmittal requirements, in order to promote the provision of consistent disclosure that we believe is best tailored to investors' informational needs. While it is currently common for fund shareholders to receive an updated annual prospectus each year, the proposal's layered disclosure approach would instead rely on shareholder reports (which, in the case of the annual report, would include a summary of material changes that occurred over the prior year), as well as the online availability of the fund prospectus and timely notifications to shareholders regarding material fund changes as they occur, to keep investors informed about their ongoing fund investments. In addition, we are proposing amendments to certain mutual fund and ETF prospectus disclosure requirements, which are designed to improve the presentation of fund fees and expenses and principal risks to help investors better understand this important information. To improve fee- and expense-related information more broadly, we further propose to amend investment company advertising rules to promote more transparent and balanced statements about investment costs. The proposed advertising rule amendments would affect all registered investment companies and BDCs.

GG. Legal Basis

The Commission is proposing the rules and forms contained in this document under the authority set forth in the Securities Act, particularly, section 19 thereof [15 U.S.C. 77a et seq.], the Exchange Act, particularly, sections 13, 23, and 35A thereof [15 U.S.C. 78a et seq.], the Investment Company Act, particularly, sections 8, 24, 30, and 38 thereof [15 U.S.C. 80a et seq.], and 44 U.S.C. 3506, 3507.

HH. Small Entities Subject to the Rule

For purposes of Commission rulemaking in connection with the Regulatory Flexibility Act, an investment company is a small entity if, together with other investment companies in the same group of related investment companies, it has net assets of $50 million or less as of the end of its most recent fiscal year. Commission staff estimates that, as of June 2019, approximately 50 open-end funds (including 8 ETFs), 33 closed-end funds, and 16 BDCs are small entities.

II. Projected Reporting, Recordkeeping, and Other Compliance Requirements

1. Annual and Semi-Annual Reports

We propose to tailor the disclosure requirements for funds' annual and semi-annual reports to help shareholders focus on key information that we believe is most useful for assessing and monitoring fund investments on an ongoing basis, including information about a fund's expenses, portfolio holdings, and performance. Among other things, shareholder reports would be revised to include new disclosures (such as material changes and fund statistics in annual reports), simplify certain disclosures (such as the MDFP in annual reports), and remove certain disclosures (such as financial statements currently found in semi-annual and annual reports). We also propose to improve the design of funds' shareholder reports by, for example, encouraging funds to use features that promote effective communications (e.g., tables, charts, bullet lists, question-and-answer formats) and permitting funds to use technology to enhance an investor's understanding of material in electronic versions of shareholder reports.

We estimate that approximately 50 funds are small entities that are required to prepare and transmit shareholder reports under the proposed rules. We expect the proposed amendments would result in some initial implementation costs but, going forward, would reduce the burdens associated with these existing disclosure requirements related to shareholder reports. We estimate that preparing amended annual report disclosure would cost $12,096 for each fund, including small entities, in its first year of compliance, and $3,360 for each subsequent year. We further estimate that preparing amended semi-annual report disclosure would cost $6,048 for each fund, including small entities, in its first year of compliance, and $1,680 for each subsequent year.

2. New Form N-CSR and Website Availability Requirements

We propose a layered disclosure framework that would complement the proposed shareholder report requirements by continuing to make available to investors additional, less retail-focused information, including the fund's financial statements. This additional information, which we believe would primarily benefit financial professionals and other investors who desire more in-depth information, would be available online, reported on Form N-CSR, and delivered to an investor on request, free of charge. This new Form N-CSR disclosure also would need to be available on the website specified on the cover page or at the beginning of the fund's annual report and delivered in paper or electronically upon request, free of charge.

We estimate that approximately 50 funds are small entities that would be required to comply with the proposed new Form N-CSR and website posting requirements. We further estimate that complying with the new Form N-CSR and website posting requirements would cost $8,916 for each fund, including small entities, in its first year of compliance, and $2,636 for each subsequent year.

3. Proposed Rule 498B, and Treatment of Annual Prospectus Updates Under Proposed Disclosure Framework

Proposed rule 498B uses layered disclosure concepts to tailor funds' required disclosures to the informational needs of different types of investors. Under the proposed rule, investors would continue to receive a prospectus in connection with their initial fund investment, as they do today. Thereafter, a shareholder would no longer receive annual prospectus updates, in light of the fact that the shareholder would be receiving a tailored shareholder report (which in the case of the annual report would include a summary of material changes that occurred over the prior year), and timely notifications to shareholders regarding material fund changes as they occur, which would be required under rule 498B.

We estimate that approximately 50 funds are small entities that are required to send or give prospectuses to satisfy prospectus delivery obligations under the Securities Act. A fund's reliance on proposed rule 498B would be voluntary, so the percentage of funds that would choose to rely on the rule is uncertain. Because we generally anticipate that the proposed rule would provide costs savings to funds, we assume that the vast majority of funds would rely on rule 498B to satisfy their prospectus delivery obligations. For purposes of this estimate, we assume that 90% of funds, including small funds, would rely on proposed rule 498B, which is roughly the same percentage of funds that currently rely on rule 498. We believe this assumption is appropriate because funds that rely on rule 498 are funds that have already chosen to rely on a rule that provides an alternative means of satisfying prospectus delivery obligations, and because certain of the conditions of proposed rule 498B overlap with similar conditions to rely on rule 498. Therefore, we assume that these funds would experience some efficiencies in coming into compliance with proposed rule 498B. Based on these assumptions, we estimate that approximately 45 small funds would choose to rely on proposed rule 498B.

We estimate that preparing notices of material changes under proposed rule 498B would cost $4,032 for each fund, including small entities, in its first year, and $1,344 per year for each subsequent year. Further, if a fund does not currently rely on rule 498, we estimate additional compliance costs with the website availability requirements and the requirement to prepare a summary prospectus of $12,948 per fund in its first year and $4,316 per fund for each subsequent year.

4. Amendments to Scope of Rule 30e-3

Subject to conditions, rule 30e-3 generally permits investment companies to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of the reports' online availability instead of directly mailing the report (or emailing an electronic version of the report) to shareholders. We are proposing to amend the scope of rule 30e-3 to exclude investment companies registered on Form N-1A, which would be sending tailored shareholder reports under the proposal. This proposed amendment to the scope of the rule is designed to help ensure that all investors in these funds experience the anticipated benefits of the proposed new disclosure framework.

5. Proposed Amendments To Fund Prospectus Disclosure Requirements

We are proposing amendments to funds' prospectus disclosure that are designed to help investors more readily understand a fund's fees and risks, and that use layered disclosure principles that tailor disclosures of these topics to different types of investors' informational needs. Specifically, we are proposing amendments to Form N-1A that would create a more concise, easier-to-understand presentation of fund fees for the summary prospectus or summary section of the statutory prospectus, while maintaining the existing fee table in the statutory prospectus for investors that would like more detail. We are also proposing changes in some terminology that funds would use to describe fees in the prospectus. In addition, we are proposing Form N-1A amendments that are designed to make it easier for investors to identify and understand the principal risks of a fund investment by requiring funds to briefly disclose principal risks in general order of importance and providing funds with additional guidance for determining whether a risk is a principal risk.

We are also proposing to rescind rule 30e-1(d), which permits a fund to transmit a copy of its prospectus or SAI in place of its shareholder report, if it includes all of the information that would otherwise be required to be contained in the shareholder report. We understand that funds very rarely rely on rule 30e-1(d) to transmit a prospectus or SAI in place of a shareholder report. Additionally, we believe that allowing funds to consolidate their prospectus, SAI, and shareholder report disclosures into a single document would result in shareholders receiving long, complex, and overlapping fund disclosures that could cause shareholder confusion and fatigue.

We estimate that approximately 50 funds are small entities that prepare prospectuses pursuant to the requirements of Form N-1A. We estimate that compliance with the proposed Form N-1A amendments affecting funds' prospectus disclosure, in the aggregate, would entail initial costs of $9,072 for each fund, including small entities, and $2,016 per year for each subsequent year.

6. Investment Company Advertising Rules

We are also proposing to amend the Commission's investment company advertising rules (for purposes of this release, Securities Act rules 482, 156, and 433 and Investment Company Act rule 34b-1) to promote transparent and balanced presentations of fees and expenses in investment company advertisements. As investment companies increasingly compete and market themselves on the basis of costs, we are concerned that investment company advertisements may mislead investors by creating an inaccurate impression of the costs associated with an investment. The proposed advertising rule amendments would generally apply to any investment company, including mutual funds, ETFs, registered closed-end funds, and BDCs.

Specifically, we are proposing to amend Securities Act rules 433 and 482 and Investment Company Act rule 34b-1 to promote transparent and balanced presentations of fees and expenses in investment company advertisements. We also are proposing to amend Securities Act rule 156 to provide factors an investment company should consider to determine whether representations about the fees and expenses associated with an investment in the fund could be materially misleading.

We estimate that 50 open-end funds (including 8 registered ETFs), 33 closed-end funds, and 16 BDCs are small entities that would be affected by our proposed amendments to investment company advertising rules. As discussed above, we estimate that compliance with these proposed amendments would cost $5,040 for each advertisement, including small entities, in the first year, and $1,680 per year for each subsequent year.

JJ. Duplicative, Overlapping, or Conflicting Federal Rules

Filing, Posting, and Delivery-Upon-Request of Certain Information That Currently Appears in Funds' Shareholder Reports

Funds currently prepare and transmit annual and semi-annual reports to investors and file those reports, along with other information, on Form N-CSR. Under our proposal, funds would transmit tailored annual and semi-annual reports to investors. Certain information currently contained in funds' shareholder reports would no longer be included in the reports that are transmitted to investors but would instead be included in funds' semi-annual filings on Form N-CSR. Funds would also make that same information available on the website specified on the cover page or at the beginning of the fund's shareholder reports and deliver that information in paper or electronically upon request, free of charge. We acknowledge that filing that information with the Commission, posting it online, and delivering it upon request could result in some investors receiving or being able to access the same information multiple times, which could be duplicative. However, each one of those different requirements would serve a unique purpose. We believe it is important for regulatory disclosures to be filed with the Commission for oversight and compliance purposes. The website posting requirement would provide investors with broad access to the additional information and conforms with evolving investor preferences regarding document delivery. Finally, the delivery-upon-request requirements would allow investors to choose the format in which regulatory disclosures are provided, which could be especially important for investors who might not have reliable access to the internet or who might prefer paper disclosures.

We also considered whether the information regarding remuneration paid to funds' directors and officers, which we propose to remove from funds' shareholder reports and instead require funds to file on Form N-CSR and make available online, would duplicate the detailed disclosures regarding compensation paid to each of the fund's directors, members of any advisory board, and certain officers and affiliates that are required to appear in a fund's SAI. We do not believe that the proposed new Form N-CSR and website availability requirement for remuneration-related information inappropriately duplicates the current SAI requirement. The different disclosure requirements vary in terms of scope and presentation requirements, and thus serve different informational needs.

Prospectus Delivery Requirements

Under proposed new rule 498B, funds would have the option of satisfying prospectus delivery requirements with respect to existing shareholders by making certain information, including summary and statutory prospectuses, publicly accessible on the fund's website; delivering this information in paper or electronically upon request, free of charge; and complying with certain other conditions. This proposed rule is modeled in part on rule 498 and contains certain similar provisions, including website posting and delivery-upon-request requirements with regard to largely the same documents. However, compliance obligations under rules 498B and 498 apply under different circumstances (satisfying prospectus delivery requirements with respect to existing shareholders, and satisfying prospectus delivery requirements by using a summary prospectus, respectively). Furthermore, proposed rule 498B is designed to avoid duplication and instead create efficiencies for funds that currently rely on rule 498, because we believe these funds would already be familiar with the website posting and delivery-upon-request conditions and would have compliance processes in place related to these conditions.

Shareholder Report Transmission Requirements

We are proposing to revise rule 30e-3 to exclude investment companies registered on Form N-1A from the scope of the rule. Rule 30e-3 currently allows a fund to satisfy its obligation to transmit the shareholder reports that rule 30e-1 and rule 30e-2 require if the fund complies with certain conditions. These conditions generally relate to: (1) Making the fund's shareholder report and certain other materials available on a website; (2) providing notice to investors of the website availability of the shareholder report; and (3) delivering paper copies of the materials that appear online, upon a shareholder's request. If we do not revise rule 30e-3 to exclude funds from the scope of the rule, a fund (or intermediary) could rely on both rule 30e-3 and proposed rule 498B. In that case, existing shareholders would not receive the shareholder report pursuant to proposed rule 30e-3 and furthermore would not be sent or given prospectus updates pursuant to proposed rule 498B. This would contradict our goal of ensuring consistent disclosure requirements with respect to existing fund shareholders, and also could prevent these investors from experiencing the anticipated benefits of the new tailored disclosure framework. Thus, we are proposing to amend rule 30e-3 to avoid overlapping and conflicting Federal rules.

We are also proposing to rescind rule 30e-1(d), which permits a fund to transmit a copy of its prospectus or SAI in place of its shareholder report, if it includes all of the information that would otherwise be required to be contained in the shareholder report. We believe that allowing funds to consolidate their prospectus, SAI, and shareholder report disclosures into a single document would result in shareholders receiving long, complex, and overlapping fund disclosures which could cause shareholder confusion and fatigue and would conflict with the goals of this rulemaking.

Fee Table

Proposed amendments to Form N-1A are designed to create a more concise, easier-to-understand presentation of fund fees for the summary prospectus or summary section of the statutory prospectus, while maintaining the existing fee table in the statutory prospectus for investors that would like more detail. Although this layered disclosure approach would result in some duplicative information (i.e., certain transaction fees, ongoing annual fees, and an expense example would appear in both the summary prospectus as well as in the statutory prospectus), we believe that both the nature and structure of each of the proposed fee-related disclosures are sufficiently different to justify overlapping information requirements. The goal of the simplified fee summary is to streamline presentation of fees, which would allow investors to more easily and rapidly understand the total costs of investing in a fund. The current, full fee table presentation would be moved to the statutory prospectus, where it could be used by financial professionals or other investors who seek additional details about fund fees to supplement the fee summary.

KK. Significant Alternatives

The RFA directs the Commission to consider significant alternatives that would accomplish its stated objective, while minimizing any significant economic impact on small entities. The Commission considered the following alternatives for small entities in relation our proposed amendments: (1) Establishing different reporting, recordkeeping, and other compliance requirements or frequency, to account for resources available to small entities; (2) exempting funds that are small entities from the proposed reporting, recordkeeping, and other compliance requirements, to account for resources available to small entities; (3) clarifying, consolidating, or simplifying the compliance requirements under the proposal for small entities; and (4) using performance rather than design standards.

As discussed above, our proposal contemplates amendments to shareholder report content and disclosure requirements, proposed new rule 498B to address existing shareholders' receipt of annual prospectus updates, amendments to the scope of rule 30e-3 to exclude funds registered on Form N-1A, amendments to fund prospectus fee and risk disclosures, and rescission of rule 30e-1(d) (which currently permits a fund to transmit a copy of its prospectus or SAI in place of its shareholder report under certain conditions). Collectively, these amendments would tailor the disclosures that funds provide by using layered disclosure principles to create a new disclosure framework designed to meet the informational needs of different investors (i.e., initial investors versus existing shareholders, and retail investors versus those who desire more information). The proposed amendments are designed to focus on key information different investors need to make informed investment decisions and, for existing shareholders, to assess and monitor their fund investments. In addition, our proposal would amend investment company advertising rules to promote transparent and balanced presentations of fees and expenses in investment company advertisements.

We do not believe it would be appropriate to establish different reporting, recordkeeping, and other compliance requirements or frequency, to account for resources available to small entities. Small entities currently follow the same requirements that large entities do when preparing, transmitting, and filing shareholder reports; preparing and sending or giving prospectuses to investors; and preparing investment company advertisements and supplemental sales literature. If the proposal included different requirements for small funds, it could raise investor protection concerns for investors in small funds to the extent that investors in small funds would not receive the same disclosures as investors in larger funds.

For example, to the extent that small funds may have fewer resources to invest in investor education or marketing materials, investors in small funds may have fewer opportunities outside of regulatory disclosures to obtain key information needed to make informed investment decisions and assess and monitor their fund investments. For this reason, it is important that the regulatory disclosures that small funds provide to investors are consistent in terms of content and frequency with the disclosures that larger funds provide to investors, so that all investors have the tools they need to meet their informational needs. More generally, our proposed disclosure requirements are tailored to meet the informational needs of different groups of investors, and to implement a layered disclosure framework that would benefit all investors. Permitting different disclosure requirements for small funds would result in small fund investors not experiencing the anticipated benefits of the new tailored disclosure framework. Furthermore, uniform prospectus fee and risk disclosure requirements would allow all investors to compare funds reporting the same information on the same frequency, and help all investors to make informed investment decisions based upon those comparisons.

Similarly, we do not believe it would be appropriate to exempt small funds from the proposed amendments. As discussed above, our contemplated disclosure framework would be disrupted if investors in smaller funds received different disclosures than investors in larger funds. We believe that investors in all funds should benefit from the Commission's proposed disclosure amendments, not just investors in large funds.

We do not believe that clarifying, consolidating, or simplifying the compliance requirements under the proposal for small funds would permit us to achieve our stated objectives. Many of the amendments we are proposing are based on existing rules or disclosure frameworks. We anticipate that building on existing regulatory frameworks and concepts should help to ease certain compliance burdens for funds, including small funds. For example, the website availability and delivery-upon-request provisions in proposed rules 498B and 30e-1 are modeled on parallel provisions in rule 498, which we estimate that more than 90% of all funds, including small funds, currently rely on to satisfy prospectus delivery obligations. We believe that this would create efficiencies for small funds relying on proposed rules 498B or 30e-1, because these funds would likely be familiar with these conditions and would already have compliance processes in place pursuant to rule 498.

Finally, we do not believe it would be appropriate to use performance rather than design standards. As discussed above, we believe the regulatory disclosures that small funds provide to investors should be consistent with the disclosures provided to investors in larger entities. Our proposed disclosure requirements are tailored to meet the informational needs of different investors, and to implement a layered disclosure framework. We believe all fund investors should experience the anticipated benefits of the new tailored disclosure framework. Finally, we believe that prospectus fee and risk disclosure requirements should be uniform and standardized in order to allow investors to compare funds reporting the same information on the same frequency, and to help all investors to make informed initial investment decisions based upon those comparisons.

LL. General Request for Comment

The Commission requests comments regarding this IRFA. We request comments on the number of small entities that may be affected by our proposed rules and guidelines, and whether the proposed rules and guidelines would have any effects not considered in this analysis. We request that commenters describe the nature of any effects on small entities subject to the rules, and provide empirical data to support the nature and extent of such effects. We also request comment on the proposed compliance burdens and the effect these burdens would have on smaller entities.

VI. Consideration of Impact on the Economy

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 (“SBREFA”), the Commission must advise OMB whether a proposed regulation constitutes a “major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results in or is likely to result in:

• An annual effect on the economy of $100 million or more;
• A major increase in costs or prices for consumers or individual industries; or
• Significant adverse effects on competition, investment, or innovation.

We request comment on whether our proposal would be a “major rule” for purposes of SBREFA. We solicit comment and empirical data on:

• The potential effect on the U.S. economy on an annual basis;
• Any potential increase in costs or prices for consumers or individual industries; and
• Any potential effect on competition, investment, or innovation.

Commenters are requested to provide empirical data and other factual support for their views to the extent possible.

VII. Statutory Authority

The Commission is proposing the rules and forms contained in this document under the authority set forth in the Securities Act, particularly, section 19 thereof [15 U.S.C. 77a et seq.], the Exchange Act, particularly, sections 13, 23, and 35A thereof [15 U.S.C. 78a et seq.], the Investment Company Act, particularly, sections 8, 24, 30, and 38 thereof [15 U.S.C. 80a et seq.], and 44 U.S.C. 3506, 3507.

List of Subjects

17 CFR Part 200

• Administrative practice and procedure
• Organization and functions (Government agencies)

17 CFR Parts 230 and 239

• Reporting and recordkeeping requirements
• Securities

17 CFR Part 240

• Brokers
• Reporting and recordkeeping requirements
• Securities

17 CFR Parts 270 and 274

• Investment companies
• Reporting and recordkeeping requirements
• Securities

Text of Proposed Rules and Form Amendments

For reasons set forth in the preamble, title 17, chapter II of the Code of Federal Regulations is proposed to be amended as follows:

PART 200—ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND REQUESTS

Subpart N—Commission Information Collection Requirements Under the Paperwork Reduction Act: OMB Control Numbers

1. The authority citation for subpart N of part 200 continues to read as follows:

Authority: 44 U.S.C. 3506; 44 U.S.C. 3507.

2. Amend § 200.800 in paragraph (b) by adding an entry in numerical order by section number for “Rule 498B” to read as follows:

PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

3. The authority citation for part 230 continues to read in part as follows:

Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78 l, 78m, 78n, 78 o, 78 o-7 note, 78t, 78w, 78 ll (d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 Stat. 313 (2012), unless otherwise noted.

Sections 230.400 to 230.499 issued under secs. 6, 8, 10, 19, 48 Stat. 78, 79, 81, and 85, as amended [15 U.S.C. 77f, 77h, 77j, 77s].

4. Amend § 230.156 by adding paragraph (b)(4) to read as follows:

5. Amend § 230.433 by adding paragraph (c)(3) to read as follows:

6. Amend § 230.482 by revising paragraph (b)(3)(i) and adding paragraphs (i) and (j) to read as follows:

7. Amend § 230.498 by removing paragraph (b)(1)(vii).

8. Add § 230.498B to read as follows:

PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

9. The general authority citation for part 239 is revised to read as follows:

Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77sss, 78c, 78 l, 78m, 78n, 78 o (d), 78 o-7 note, 78u-5, 78w(a), 78 ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-29, 80a-30, 80a-37, and sec. 71003 and sec. 84001, Pub. L. 114-94, 129 Stat. 1321, unless otherwise noted.

10. Amend Form N-14 (referenced in § 239.23) by removing in Item 3(a) “Item 3 of Form N-1A” and adding in its place “Item 8A of Form N-1A”.

PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

11. The general authority citation for part 240 continues to read as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78 l, 78m, 78n, 78n-1, 78 o, 78 o-4, 78 o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78 ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, secs. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.

12. Amend § 240.14a-101 by removing the phrase “Item 3 of Form N-1A” and adding in its place “Item 8A of Form N-1A” in paragraph (a)(3)(iv) and Instruction 4 of Item 22.

PART 270—RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

13. The authority for part 270 continues to read in part as follows:

Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.

Section 270.30e-1 is also issued under 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78l, 78m, 78n, 78o(d), 78w(a), 80a-8, 80a-29, and 80a-37.

14. Amend § 270.30e-1 by:

a. Removing paragraph (d);

b. Redesignating paragraphs (b) and (c) as paragraphs (c) and (d);

c. Adding a new paragraph (b); and

d. Revising newly redesignated paragraphs (c) and (d) and paragraphs (f)(2)(ii)(F) and (f)(4).

The addition and revisions read as follows:

15. Amend § 270.30e-3 by revising paragraph (h)(2) to read as follows:

16. Amend § 270.31a-2 by:

a. Removing the word “and” at the end of paragraph (a)(5);

b. In paragraph (a)(6), removing the period and adding “; and” in its place; and

c. Adding paragraph (a)(7).

The addition reads as follows:

17. Amend § 270.34b-1 by revising the introductory text and paragraph (b)(3) and adding paragraph (c) to read as follows:

PART 274—FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

18. The authority for part 274 continues to read in part as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78 l, 78m, 78n, 78 o (d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.

19. Revise Form N-1A (referenced in §§ 239.15A and 274.11A) to read as follows:

Note:

The text of Form N-1A will not appear in the Code of Federal Regulations.

United States

Securities and Exchange Commission

Washington, DC 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No. __[ ]

Post-Effective Amendment No. __[ ]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. __[ ]

Registrant Exact Name as Specified in Charter

Address of Principal Executive Offices (Number, Street, City, State, Zip Code)

Registrant's Telephone Number, including Area Code

Name and Address (Number, Street, City, State, Zip Code) of Agent for Service

Approximate Date of Proposed Public Offering

It is proposed that this filing will become effective (check appropriate box)

[ ] immediately upon filing pursuant to paragraph (b)

[ ] on (date) pursuant to paragraph (b)

[ ] 60 days after filing pursuant to paragraph (a)

[ ] on (date) pursuant to paragraph (a)

[ ] 75 days after filing pursuant to paragraph (a)(2) on (date)

[ ] pursuant to paragraph (a)(2) of rule 485

If appropriate, check the following box:

[ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment.

Omit from the facing sheet reference to the other Act if the Registration Statement or amendment is filed under only one of the Acts. Include the “Approximate Date of Proposed Public Offering” and “Title of Securities Being Registered” only where securities are being registered under the Securities Act of 1933.

Form N-1A is to be used by open-end management investment companies, except insurance company separate accounts and small business investment companies licensed under the United States Small Business Administration, to register under the Investment Company Act of 1940 and to offer their shares under the Securities Act of 1933. The Commission has designed Form N-1A to provide investors with information that will assist them in making a decision about investing in an investment company eligible to use the Form. The Commission also may use the information provided on Form N-1A in its regulatory, disclosure review, inspection, and policy making roles.

A Registrant is required to disclose the information specified by Form N-1A, and the Commission will make this information public. A Registrant is not required to respond to the collection of information contained in Form N-1A unless the Form displays a currently valid Office of Management and Budget (OMB) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. 3507.

Contents of Form N-1A

GENERAL INSTRUCTIONS

A. Definitions

B. Filing and Use of Form N-1A

C. Preparation of the Registration Statement

D. Incorporation by Reference

PART A: INFORMATION REQUIRED IN A PROSPECTUS

Item 1. Front and Back Cover Pages

Item 2. Risk/Return Summary: Investment Objectives/Goals

Item 3. Risk/Return Summary: Fee Summary

Item 4. Risk/Return Summary: Investments, Risks, and Performance

Item 5. Management

Item 6. Purchase and Sale of Fund Shares

Item 7. Tax Information

Item 8. Financial Intermediary Compensation

Item 8A. Fee Table

Item 9. Investment Objectives, Principal Investment Strategies, Related Risks, and Disclosure of Portfolio Holdings

Item 10. Management, Organization, and Capital Structure

Item 11. Shareholder Information

Item 12. Distribution Arrangements

Item 13. Financial Highlights Information

PART B: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION

Item 14. Cover Page and Table of Contents

Item 15. Fund History

Item 16. Description of the Fund and Its Investments and Risks

Item 17. Management of the Fund

Item 18. Control Persons and Principal Holders of Securities

Item 19. Investment Advisory and Other Services

Item 20. Portfolio Managers

Item 21. Brokerage Allocation and Other Practices

Item 22. Capital Stock and Other Securities

Item 23. Purchase, Redemption, and Pricing of Shares

Item 24. Taxation of the Fund

Item 25. Underwriters

Item 26. Calculation of Performance Data

Item 27. Financial Statements

Item 27A. Annual and Semi-Annual Shareholder Report

PART C: OTHER INFORMATION

Item 28. Exhibits

Item 29. Persons Controlled by or Under Common Control with the Fund

Item 30. Indemnification

Item 31. Business and Other Connections of Investment Adviser

Item 32. Principal Underwriters

Item 33. Location of Accounts and Records

Item 34. Management Services

Item 35. Undertakings

SIGNATURES

General Instructions

A. Definitions

References to sections and rules in this Form N-1A are to the Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] (the “Investment Company Act”), unless otherwise indicated. Terms used in this Form N-1A have the same meaning as in the Investment Company Act or the related rules, unless otherwise indicated. As used in this Form N-1A, the terms set out below have the following meanings:

“Class” means a class of shares issued by a Multiple Class Fund that represents interests in the same portfolio of securities under rule 18f-3 [17 CFR 270.18f-3] or under an order exempting the Multiple Class Fund from sections 18(f), 18(g), and 18(i) [15 U.S.C. 80a-18(f), 18(g), and 18(i)].

“Exchange-Traded Fund” means a Fund or Class, the shares of which are listed and traded on a national securities exchange, and that has formed and operates under an exemptive order granted by the Commission or in reliance on rule 6c-11 [17 CFR 270.6c-11] under the Investment Company Act.

“Fund” means the Registrant or a separate Series of the Registrant. When an item of Form N-1A specifically applies to a Registrant or a Series, those terms will be used.

“Market Price” has the same meaning as in rule 6c-11 [17 CFR 270.6c-11] under the Investment Company Act.

“Master-Feeder Fund” means a two-tiered arrangement in which one or more Funds (each a “Feeder Fund”) holds shares of a single Fund (the “Master Fund”) in accordance with section 12(d)(1)(E) [15 U.S.C. 80a-12(d)(1)(E)].

“Money Market Fund” means a registered open-end management investment company, or series thereof, that is regulated as a money market fund pursuant to rule 2a-7 [17 CFR 270.2a-7] under the Investment Company Act of 1940.

“Multiple Class Fund” means a Fund that has more than one Class.

“Registrant” means an open-end management investment company registered under the Investment Company Act.

“SAI” means the Statement of Additional Information required by Part B of this Form.

“Securities Act” means the Securities Act of 1933 [15 U.S.C. 77a et seq.].

“Securities Exchange Act” means the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.].

“Series” means shares offered by a Registrant that represent undivided interests in a portfolio of investments and that are preferred over all other series of shares for assets specifically allocated to that series in accordance with rule 18f-2(a) [17 CFR 270.18f-2(a)].

B. Filing and Use of Form N-1A

1. What is Form N-1A used for?

Form N-1A is used by Funds, except insurance company separate accounts and small business investment companies licensed under the United States Small Business Administration, to file:

(a) An initial registration statement under the Investment Company Act and amendments to the registration statement, including amendments required by rule 8b-16 [17 CFR 270.8b-16];

(b) An initial registration statement under the Securities Act and amendments to the registration statement, including amendments required by section 10(a)(3) of the Securities Act [15 U.S.C. 77j(a)(3)]; or

(c) Any combination of the filings in paragraph (a) or (b).

2. What is included in the registration statement?

(a) For registration statements or amendments filed under both the Investment Company Act and the Securities Act or only under the Securities Act, include the facing sheet of the Form, Parts A, B, and C, and the required signatures.

(b) For registration statements or amendments filed only under the Investment Company Act, include the facing sheet of the Form, responses to all Items of Parts A (except Items 1, 2, 3, 4, 8A, and 13), B, and C (except Items 28(e) and (i)-(k)), and the required signatures.

3. What are the fees for Form N-1A?

No registration fees are required with the filing of Form N-1A to register as an investment company under the Investment Company Act or to register securities under the Securities Act. See section 24(f) [15 U.S.C. 80a-24(f)] and related rule 24f-2 [17 CFR 270.24f-2].

4. What rules apply to the filing of a registration statement on Form N-1A?

(a) For registration statements and amendments filed under both the Investment Company Act and the Securities Act or only under the Securities Act, the general rules regarding the filing of registration statements in Regulation C under the Securities Act [17 CFR 230.400-230.497] apply to the filing of Form N-1A. Specific requirements concerning Funds appear in rules 480-485 and 495-497 of Regulation C.

(b) For registration statements and amendments filed only under the Investment Company Act, the general provisions in rules 8b-1—8b-32 [17 CFR 270.8b-1—270.8b-32] apply to the filing of Form N-1A.

(c) The plain English requirements of rule 421 under the Securities Act [17 CFR 230.421] apply to prospectus disclosure in Part A of Form N-1A. The information required by Items 2 through 8 must be provided in plain English under rule 421(d) under the Securities Act.

(d) Regulation S-T [17 CFR 232.10-232.903] applies to all filings on the Commission's Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”).

C. Preparation of the Registration Statement

1. Administration of the Form N-1A Requirements

(a) The requirements of Form N-1A are intended to promote effective communication between the Fund and prospective investors. A Fund's prospectus should clearly disclose the fundamental characteristics and investment risks of the Fund, using concise, straightforward, and easy to understand language. A Fund should use document design techniques that promote effective communication. The prospectus should emphasize the Fund's overall investment approach and strategy.

(b) The prospectus disclosure requirements in Form N-1A are intended to elicit information for an average or typical investor who may not be sophisticated in legal or financial matters. The prospectus should help investors to evaluate the risks of an investment and to decide whether to invest in a Fund by providing a balanced disclosure of positive and negative factors. Disclosure in the prospectus should be designed to assist an investor in comparing and contrasting the Fund with other funds.

(c) Responses to the Items in Form N-1A should be as simple and direct as reasonably possible and should include only as much information as is necessary to enable an average or typical investor to understand the particular characteristics of the Fund. The prospectus should avoid: Including lengthy legal and technical discussions; simply restating legal or regulatory requirements to which Funds generally are subject; and disproportionately emphasizing possible investments or activities of the Fund that are not a significant part of the Fund's investment operations. Brevity is especially important in describing the practices or aspects of the Fund's operations that do not differ materially from those of other investment companies. Avoid excessive detail, technical or legal terminology, and complex language. Also avoid lengthy sentences and paragraphs that may make the prospectus difficult for many investors to understand and detract from its usefulness.

(d) The requirements for prospectuses included in Form N-1A will be administered by the Commission in a way that will allow variances in disclosure or presentation if appropriate for the circumstances involved while remaining consistent with the objectives of Form N-1A.

2. Form N-1A Is Divided Into Three Parts

(a) Part A. Part A includes the information required in a Fund's prospectus under section 10(a) of the Securities Act. The purpose of the prospectus is to provide essential information about the Fund in a way that will help investors to make informed decisions about whether to purchase the Fund's shares described in the prospectus. In responding to the Items in Part A, avoid cross-references to the SAI or shareholder reports. Cross-references within the prospectus are most useful when their use assists investors in understanding the information presented and does not add complexity to the prospectus.

(b) Part B. Part B includes the information required in a Fund's SAI. The purpose of the SAI is to provide additional information about the Fund that the Commission has concluded is not necessary or appropriate in the public interest or for the protection of investors to be in the prospectus, but that some investors may find useful. Part B affords the Fund an opportunity to expand discussions of the matters described in the prospectus by including additional information that the Fund believes may be of interest to some investors. The Fund should not duplicate in the SAI information that is provided in the prospectus, unless necessary to make the SAI comprehensible as a document independent of the prospectus.

(c) Part C. Part C includes other information required in a Fund's registration statement.

3. Additional Matters

(a) Organization of Information. Organize the information in the prospectus and SAI to make it easy for investors to understand. Notwithstanding rule 421(a) under the Securities Act regarding the order of information required in a prospectus, disclose the information required by Items 2 through 8 in numerical order at the front of the prospectus. Do not precede these Items with any other Item except the Cover Page (Item 1) or a table of contents meeting the requirements of rule 481(c) under the Securities Act. Information that is included in response to Items 2 through 8 need not be repeated elsewhere in the prospectus, other than fee information required in both Item 3 and Item 8A. Disclose the information required by Item 12 (Distribution Arrangements) in one place in the prospectus. Only principal risks should be disclosed in the prospectus, in accordance with Items 4 and 9.

(b) Other Information. A Fund may include, except in response to Items 2 through 8A, information in the prospectus or the SAI that is not otherwise required. For example, a Fund may include charts, graphs, or tables so long as the information is not incomplete, inaccurate, or misleading and does not, because of its nature, quantity, or manner of presentation, obscure or impede understanding of the information that is required to be included. Items 2 through 8A may not include disclosure other than that required or permitted by those Items.

(c) Use of Form N-1A Registration Statement by More Than One Registrant, Series, or Class. A Form N-1A registration statement may be used by one or more Registrants, Series, or Classes.

(i) When disclosure is provided for more than one Fund or Class, the disclosure should be presented in a format designed to communicate the information effectively. Except as required by paragraph (c)(ii) for Items 2 through 8, Funds may order or group the response to any Item in any manner that organizes the information into readable and comprehensible segments and is consistent with the intent of the prospectus to provide clear and concise information about the Funds or Classes. Funds are encouraged to use, as appropriate, tables, side-by-side comparisons, captions, bullet points, or other organizational techniques when presenting disclosure for multiple Funds or Classes.

(ii) Paragraph (a) requires Funds to disclose the information required by Items 2 through 8 in numerical order at the front of the prospectus and not to precede Items 2 through 8 with other information. Except as permitted by paragraph (c)(iii), a prospectus that contains information about more than one Fund must present all of the information required by Items 2 through 8 for each Fund sequentially and may not integrate the information for more than one Fund together. That is, a prospectus must present all of the information for a particular Fund that is required by Items 2 through 8 together, followed by all of the information for each additional Fund, and may not, for example, present all of the Item 2 (Risk/Return Summary: Investment Objectives/Goals) information for several Funds followed by all of the Item 3 (Risk/Return Summary: Fee Summary) information for several Funds. If a prospectus contains information about multiple Funds, clearly identify the name of the relevant Fund at the beginning of the information for the Fund that is required by Items 2 through 8. A Multiple Class Fund may present the information required by Items 2 through 8 separately for each Class or may integrate the information for multiple Classes, although the order of the information must be as prescribed in Items 2 through 8. For example, the prospectus may present all of the Item 2 (Risk/Return Summary: Investment Objectives/Goals) information for several Classes followed by all of the Item 3 (Risk/Return Summary: Fee Summary) information for the Classes, or may present Items 2 and 3 for each of several Classes sequentially. Other presentations of multiple Class information also would be acceptable if they are consistent with the Form's intent to disclose the information required by Items 2 through 8 in a standard order at the beginning of the prospectus. For a Multiple Class Fund, clearly identify the relevant Classes at the beginning of the Items 2 through 8 information for those Classes.

(iii) A prospectus that contains information about more than one Fund may integrate the information required by any of Items 6 through 8 for all of the Funds together, provided that the information contained in any Item that is integrated is identical for all Funds covered in the prospectus. If the information required by any of Items 6 through 8 is integrated pursuant to this paragraph, the integrated information should be presented immediately following the separate presentations of Item 2 through 8 information for individual Funds. In addition, include a statement containing the following information in each Fund's separate presentation of Item 2 through 8 information, in the location where the integrated information is omitted: “For important information about [purchase and sale of fund shares], [tax information], and [financial intermediary compensation], please turn to [identify section heading and page number of prospectus].”

(d) Modified Prospectuses for Certain Funds.

(i) A Fund may modify or omit, if inapplicable, the information required by Items 6, 11(b)-(d) and 12(a)(2)-(5) for funds used as investment options for:

(A) A defined contribution plan that meets the requirements for qualification under section 401(k) of the Internal Revenue Code [26 U.S.C. 401(k)];

(B) a tax-deferred arrangement under sections 403(b) or 457 of the Internal Revenue Code [26 U.S.C. 403(b) and 457]; and

(C) a variable contract as defined in section 817(d) of the Internal Revenue Code [26 U.S.C. 817(d)], if covered in a separate account prospectus.

(ii) A Fund that uses a modified prospectus under Instruction (d)(i) may:

(A) Alter the legend required on the back cover page by Item 1(b)(1) to state, as applicable, that the prospectus is intended for use in connection with a defined contribution plan, tax-deferred arrangement, or variable contract; and

(B) modify other disclosure in the prospectus consistent with offering the Fund as a specific investment option for a defined contribution plan, tax-deferred arrangement, or variable contract.

(iii) A Fund may omit the information required by Items 4(b)(2)(iii)(B) and (C) and 4(b)(2)(iv) if the Fund's prospectus will be used exclusively to offer Fund shares as investment options for one or more of the following:

(A) A defined contribution plan that meets the requirements for qualification under section 401(k) of the Internal Revenue Code [26 U.S.C. 401(k)], a tax-deferred arrangement under section 403(b) or 457 of the Internal Revenue Code [26 U.S.C. 403(b) or 457], a variable contract as defined in section 817(d) of the Internal Revenue Code [26 U.S.C. 817(d)], or a similar plan or arrangement pursuant to which an investor is not taxed on his or her investment in the Fund until the investment is sold; or

(B) persons that are not subject to the Federal income tax imposed under section 1 of the Internal Revenue Code [26 U.S.C. 1], or any successor to that section.

(iv) A Fund that omits information under Instruction (d)(iii) may alter the legend required on the back cover page by Item 1(b)(1) to state, as applicable, that the prospectus is intended for use in connection with a defined contribution plan, tax-deferred arrangement, variable contract, or similar plan or arrangement, or persons described in Instruction (d)(iii)(B).

(e) Dates. Rule 423 under the Securities Act [17 CFR 230.423] applies to the dates of the prospectus and the SAI. The SAI should be made available at the same time that the prospectus becomes available for purposes of rules 430 and 460 under the Securities Act [17 CFR 230.430 and 230.460].

(f) Sales Literature. A Fund may include sales literature in the prospectus so long as the amount of this information does not add substantial length to the prospectus and its placement does not obscure essential disclosure.

(g) Interactive Data File.

(i) An Interactive Data File (§ 232.11 of this chapter) is required to be submitted to the Commission in the manner provided by rule 405 of Regulation S-T (§ 232.405 of this chapter) for any registration statement or post-effective amendment thereto on Form N-1A that includes or amends information provided in response to Items 2, 4, or 8A.

(A) Except as required by paragraph (g)(i)(B), the Interactive Data File must be submitted as an amendment to the registration statement to which the Interactive Data File relates. The amendment must be submitted on or before the date the registration statement or post-effective amendment that contains the related information becomes effective.

(B) In the case of a post-effective amendment to a registration statement filed pursuant to paragraphs (b)(1)(i), (ii), (v), or (vii) of rule 485 under the Securities Act [17 CFR 230.485(b)], the Interactive Data File must be submitted either with the filing, or as an amendment to the registration statement to which the Interactive Data Filing relates that is submitted on or before the date the post-effective amendment that contains the related information becomes effective.

(ii) An Interactive Data File is required to be submitted to the Commission in the manner provided by rule 405 of Regulation S-T for any form of prospectus filed pursuant to paragraphs (c) or (e) of rule 497 under the Securities Act [17 CFR 230.497(c) or (e)] that includes information provided in response to Items 2, 4, or 8A that varies from the registration statement. The Interactive Data File must be submitted with the filing made pursuant to rule 497.

(iii) The Interactive Data File must be submitted in accordance with the specifications in the EDGAR Filer Manual, and in such a manner that will permit the information for each Series and, for any information that does not relate to all of the Classes in a filing, each Class of the Fund to be separately identified.

D. Incorporation by Reference

1. Specific Rules for Incorporation by Reference in Form N-1A Registration Statement

(a) A Fund may not incorporate by reference into a prospectus information that Part A of this Form requires to be included in a prospectus, except as specifically permitted by Part A of the Form.

(b) A Fund may incorporate by reference any or all of the SAI into the prospectus (but not to provide any information required by Part A to be included in the prospectus) without delivering the SAI with the prospectus.

(c) A Fund may incorporate by reference into the SAI or its response to Part C, information that Parts B and C require to be included in the Fund's registration statement.

2. General Requirements

All incorporation by reference must comply with the requirements of this Form and the following rules on incorporation by reference: Rule 411 under the Securities Act [17 CFR 230.411] (general rules on incorporation by reference in a prospectus); rule 303 of Regulation S-T [17 CFR 232.303] (specific requirements for electronically filed documents); and rule 0-4 [17 CFR 270.0-4] (additional rules on incorporation by reference for Funds).

Part A—Information Required in a Prospectus

Item 1. Front and Back Cover Pages

(a) Front Cover Page. Include the following information, in plain English under rule 421(d) under the Securities Act, on the outside front cover page of the prospectus:

(1) The Fund's name and the Class or Classes, if any, to which the prospectus relates.

(2) The exchange ticker symbol of the Fund's shares or, if the prospectus relates to one or more Classes of the Fund's shares, adjacent to each such Class, the exchange ticker symbol of such Class of the Fund's shares. If the Fund is an Exchange-Traded Fund, also identify the principal U.S. market or markets on which the Fund shares are traded.

(3) The date of the prospectus.

(4) The statement required by rule 481(b)(1) under the Securities Act.

Instruction. A Fund may include on the front cover page a statement of its investment objectives, a brief (e.g., one sentence) description of its operations, or any additional information, subject to the requirement set out in General Instruction C.3(b).

(b) Back Cover Page. Include the following information, in plain English under rule 421(d) under the Securities Act, on the outside back cover page of the prospectus:

(1) A statement that the SAI includes additional information about the Fund, and a statement to the following effect:

Additional information about the Fund's investments is available in the Fund's annual and semi-annual reports to shareholders and in Form N-CSR. In the Fund's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. In Form N-CSR, you will find the Fund's annual and semi-annual financial statements.

Explain that the SAI, the Fund's annual and semi-annual reports to shareholders, and Form N-CSR are available, without charge, upon request, and explain how shareholders in the Fund may make inquiries to the Fund. Provide a toll-free telephone number for investors to call: To request the SAI; to request the Fund's annual or semi-annual report; to request the Form N-CSR; to request other information about the Fund; and to make shareholder inquiries. Also, state the Fund makes available its SAI, annual and semi- annual report, and Form N-CSR, free of charge, on or through the Fund's website at a specified address. If the Fund does not make its SAI and shareholder reports available in this manner, disclose the reasons why it does not do so (including, where applicable, that the Fund does not have a website).

Instructions

1. A Fund may indicate, if applicable, that the SAI, annual and semi-annual report, Form N-CSR, and other information are available by email request.

2. A Fund may indicate, if applicable, that the SAI and other information are available from a financial intermediary (such as a broker-dealer or bank) through which shares of the Fund may be purchased or sold. When a Fund (or financial intermediary through which shares of the Fund may be purchased or sold) receives a request for the SAI, the annual report, the semi-annual report, or Form N-CSR, the Fund (or financial intermediary) must send the requested document within 3 business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

3. A Fund that has not yet been required to deliver an annual or semi-annual report to shareholders under rule 30e-1 [17 CFR 270.30e-1] or to file a Form N-CSR report may omit the statements required by this paragraph regarding the report.

4. A Money Market Fund may omit the sentence indicating that a reader will find in the Fund's annual report a discussion of the market conditions and investment strategies that significantly affect the Fund's performance during its last fiscal year.

(2) A statement whether and from where information is incorporated by reference into the prospectus as permitted by General Instruction D. Unless the information is delivered with the prospectus, explain that the Fund will provide the information without charge, upon request (referring to the telephone number provided in response to paragraph (b)(1)).

Instruction. The Fund may combine the information about incorporation by reference with the statements required under paragraph (b)(1).

(3) State that reports and other information about the Fund are available on the EDGAR Database on the Commission's website at http://www.sec.gov , and that copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov.

(4) The Fund's Investment Company Act file number on the bottom of the back cover page in type size smaller than that generally used in the prospectus (e.g., 8-point modern type).

Item 2. Risk/Return Summary: Investment Objectives/Goals

Disclose the Fund's investment objectives or goals. A Fund also may identify its type or category (e.g., that it is a Money Market Fund or a balanced fund).

Item 3. Risk/Return Summary: Fee Summary

Include the following information, in plain English under rule 421(d) under the Securities Act, after Item 2:

Your Investment Costs

These are the amounts you could pay to buy, hold, and sell shares of the Fund. These costs reduce the value of your investment. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and example below.

Example

This example may help you understand the costs of investing in the Fund. The example assumes that: (1) You invest $10,000 in the Fund; (2) your investment has a 5% return each year; and (3) the Fund's operating expenses are based on the table above.

The example does not reflect purchase charges on reinvested dividends [and other distributions]. If these purchase charges were included, your costs would be higher.

Portfolio Turnover

Portfolio turnover measures how often a fund buys and sells its investments. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes. The Fund's annual portfolio turnover rate is __%.

Instructions

1. General.

(a) Round all dollar figures to the nearest dollar and all percentages to the nearest hundredth of one percent.

(b) Include the narrative explanations in the order indicated. A Fund may modify the narrative explanations if the explanation contains comparable information to that shown.

(c) Footnotes and other extraneous disclosure are not permitted, except that a footnote is permitted in a case where omitting it would cause the disclosure to be materially misleading, in that fees borne by the investor would be materially higher than fees presented in the fee summary.

(d) If the Fund offers sales charge discounts, include “up to” before the maximum transaction fee amount in the table.

(e) If the prospectus offers more than one Class of a Multiple Class Fund or more than one Feeder Fund that invests in the same Master Fund, provide a separate response for each Class or Feeder Fund.

(f) If the Fund is an Exchange-Traded Fund, exclude any fees charged for the purchase and redemption of the Fund's creation units.

2. Transaction Fees. Based on the information given in response to Item 8A, provide the maximum purchase charge, maximum exit charge, maximum purchase charge on reinvested dividends and other distributions, early exit fee, and exchange fee. Also disclose the dollar value of the maximum purchase charge, maximum exit charge, maximum purchase charge on reinvested dividends and other distributions, early exit fee, and exchange fee, based on a $10,000 investment. Any transaction fees equaling $0 should not be included and the applicable line item should be omitted. However, a Multiple Class Fund that shows a charge and line item because one Class imposes a charge may show 0 as the charge for the other Classes.

3. Maximum Account Fee. Based on the information given in response to Item 8A, provide the maximum account fee. Also disclose the dollar value of the maximum account fee based on a $10,000 investment. Any account fee equaling $0 should not be included and the maximum account fee line item should be omitted.

4. Ongoing Annual Fees.

(a) Based on the information given in response to Item 8A, provide the total Ongoing Annual Fees. If the Fund is a New Fund, include a parenthetical after the total Ongoing Annual Fees to state that the amount is estimated.

(b) If there are expense reimbursement or fee waiver arrangements that will reduce any Fund operating expenses for no less than one year from the effective date of the Fund's registration statement, a Fund may also show the Fund's net expenses after subtracting the fee reimbursement or expense waiver from the total Ongoing Annual Fees under a caption titled “Ongoing Annual Fees with Temporary Discount.” The Fund should place this additional caption directly below the “Ongoing Annual Fees” caption of the table. If the Fund provides this disclosure, provide in a footnote the expected termination date of the expense reimbursement or fee waiver arrangement.

(c) Also disclose the dollar value of the total Ongoing Annual Fees and, as applicable, the dollar value of the total Ongoing Annual Fees with Temporary Discount based on a $10,000 investment.

(d) If the Fund is including disclosure responsive to instruction 4(f)(ii) of Item 8A, provide the footnote required by that instruction.

5. Example.

(a) Calculate the example in accordance with Instruction 5 to Item 8A for 1- and 10-year periods. If the Fund is a New Fund, as described in Instruction 7 to Item 8A, provide information for 1- and 3-year periods in the Example and estimate any shareholder account fees collected.

(b) Include the second 1- and 10-year periods and related narrative explanation only if an exit charge or other fee is charged upon redemption.

6. Portfolio Turnover. Disclose the portfolio turnover rate provided in response to Item 13(a) for the most recent fiscal year (or for such shorter period as the Fund has been in operation). Disclose the period for which the information is provided if less than a full fiscal year. A Fund that is a Money Market Fund may omit the portfolio turnover information required by this Item.

Item 4. Risk/Return Summary: Investments, Risks, and Performance

Include the following information, in plain English under rule 421(d) under the Securities Act, in the order and subject matter indicated:

(a) Principal Investment Strategies of the Fund.

Based on the information given in response to Item 9(b), summarize how the Fund intends to achieve its investment objectives by identifying the Fund's principal investment strategies (including the type or types of securities in which the Fund invests or will invest principally) and any policy to concentrate in securities of issuers in a particular industry or group of industries.

(b) Principal Risks of Investing in the Fund.

(1) Narrative Risk Disclosure.

(i) Based on the information given in response to Item 9(c), briefly summarize the principal risks of investing in the Fund, including the risks to which the Fund's portfolio as a whole is subject and the circumstances reasonably likely to affect adversely the Fund's net asset value, yield, and total return. Unless the Fund is a Money Market Fund, disclose that loss of money is a risk of investing in the Fund.

Instructions

1. A Fund may, in responding to this Item, describe the types of investors for whom the Fund is intended or the types of investment goals that may be consistent with an investment in the Fund.

2. A Fund should describe principal risks in order of importance, with the most significant risks appearing first. A Fund may use any reasonable means of determining the significance of risks. A Fund should not describe principal risks in alphabetical order.

3. A Fund should, where appropriate, tailor risk disclosures to how the Fund operates rather than rely on generic, standard risk disclosures.

(ii) Statements Provided by Money Market Funds.

(A) If the Fund is a Money Market Fund that is not a government Money Market Fund, as defined in § 270.2a-7(a)(16) or a retail Money Market Fund, as defined in § 270.2a-7(a)(25), include the following statement:

You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

(B) If the Fund is a Money Market Fund that is a government Money Market Fund, as defined in § 270.2a-7(a)(16), or a retail Money Market Fund, as defined in § 270.2a-7(a)(25), and that is subject to the requirements of §§ 270.2a-7(c)(2)(i) and/or (ii) of this chapter (or is not subject to the requirements of §§ 270.2a-7(c)(2)(i) and/or (ii) of this chapter pursuant to § 270.2a-7(c)(2)(iii) of this chapter, but has chosen to rely on the ability to impose liquidity fees and suspend redemptions consistent with the requirements of §§ 270.2a-7(c)(2)(i) and/or (ii)), include the following statement:

You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

(C) If the Fund is a Money Market Fund that is a government Money Market Fund, as defined in § 270.2a-7(a)(16), that is not subject to the requirements of §§ 270.2a-7(c)(2)(i) and/or (ii) of this chapter pursuant to § 270.2a-7(c)(2)(iii) of this chapter, and that has not chosen to rely on the ability to impose liquidity fees and suspend redemptions consistent with the requirements of §§ 270.2a-7(c)(2)(i) and/or (ii), include the following statement:

You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

Instruction. If an affiliated person, promoter, or principal underwriter of the Fund, or an affiliated person of such a person, has contractually committed to provide financial support to the Fund, and the term of the agreement will extend for at least one year following the effective date of the Fund's registration statement, the statement specified in Item 4(b)(1)(ii)(A), Item 4(b)(1)(ii)(B), or Item 4(b)(1)(ii)(C) may omit the last sentence (“The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.”). For purposes of this Instruction, the term “financial support” includes any capital contribution, purchase of a security from the Fund in reliance on § 270.17a-9, purchase of any defaulted or devalued security at par, execution of letter of credit or letter of indemnity, capital support agreement (whether or not the Fund ultimately received support), performance guarantee, or any other similar action reasonably intended to increase or stabilize the value or liquidity of the fund's portfolio; however, the term “financial support” excludes any routine waiver of fees or reimbursement of fund expenses, routine inter-fund lending, routine inter-fund purchases of fund shares, or any action that would qualify as financial support as defined above, that the board of directors has otherwise determined not to be reasonably intended to increase or stabilize the value or liquidity of the fund's portfolio.

(iii) If the Fund is advised by or sold through an insured depository institution, state that:

An investment in the Fund is not a deposit of the bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Instruction. A Money Market Fund that is advised by or sold through an insured depository institution should combine the disclosure required by Items 4(b)(1)(ii) and (iii) in a single statement.

(iv) If applicable, state that the Fund is non-diversified, describe the effect of non-diversification (e.g., disclose that, compared with other funds, the Fund may invest a greater percentage of its assets in a particular issuer), and summarize the risks of investing in a non-diversified fund.

(2) Risk/Return Bar Chart and Table.

(i) Include the bar chart and table required by paragraphs (b)(2)(ii) and (iii) of this section. Provide a brief explanation of how the information illustrates the variability of the Fund's returns (e.g., by stating that the information provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for 1, 5, and 10 years compare with those of a broad measure of market performance). Provide a statement to the effect that the Fund's past performance (before and after taxes) is not a good predictor of the Fund's future performance. If applicable, include a statement explaining that updated performance information is available and providing a website address and/or toll-free telephone number where the updated information may be obtained.

(ii) If the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart.

(iii) If the Fund has annual returns for at least one calendar year, provide a table showing the Fund's (A) average annual total return; (B) average annual total return (after taxes on distributions); and (C) average annual total return (after taxes on distributions and redemption). A Money Market Fund should show only the returns described in clause (A) of the preceding sentence. All returns should be shown for 1-, 5-, and 10- calendar year periods ending on the date of the most recently completed calendar year (or for the life of the Fund, if shorter), but only for periods subsequent to the effective date of the Fund's registration statement. The table also should show the returns of an appropriate broad-based securities market index as defined in Instruction 6 to Item 27A(d)(2) for the same periods. A Fund that has been in existence for more than 10 years also may include returns for the life of the Fund. A Money Market Fund may provide the Fund's 7-day yield ending on the date of the most recent calendar year or disclose a toll-free telephone number that investors can use to obtain the Fund's current 7-day yield. For a Fund (other than a Money Market Fund or a Fund described in General Instruction C.3.(d)(iii)), provide the information in the following table with the specified captions: