Summary

On June 4, 2018, the SEC adopted new Rule 30e-3 under the Investment Company Act of 1940 (1940 Act) which creates an optional “notice and access” method for delivering shareholder reports. The new Rule allows certain registered investment companies—including mutual funds, exchange-traded funds, closed-end funds and certain registered unit investment trusts—to satisfy requirements to transmit shareholder reports by making them publicly accessible on a website, free of charge, and sending investors a paper notice of each report’s availability, with instructions for requesting a paper or email copy. The SEC is adopting an extended transition period for  Rule 30e-3 with staged effective dates; the earliest that a fund may rely on the Rule is January 1, 2021. The new Rule is intended to modernize the manner in which funds deliver periodic information to investors and follows other recently adopted SEC rules, forms and amendments to modernize the reporting and disclosure of information by funds.

New Rule 30e-3

Rule 30e-3 creates an optional “notice and access” method for delivering shareholder reports. In order to rely on the Rule, funds will be required to make their reports and other required materials publicly accessible, free of charge, at a website address specified in a short form paper notice to shareholders (a Notice), and meet certain other conditions, including protections for investors who continue to prefer paper reports or lack Internet access. To this end, Rule 30e-3 provides that investors may elect to receive paper reports on a per-report basis or through a one time request to receive all future reports in paper.

Other elements of Rule 30e-3 are as follows:

Required Information

The Notice must: (1) be in plain English; (2) contain a prominent legend in bold-face type stating that an important report to shareholders is available online and in paper by request; (3) state that the report contains important information about the fund, including its portfolio holdings and financial statements; (4) state that the report is available on the Internet or, upon request, by mail, and encourage shareholders to access and review the report; (5) include the website address where the shareholder report and other required portfolio information is posted (i.e., the “landing page” to those materials); and (6) include a toll-free telephone number to contact the fund or the shareholder’s financial intermediary and (A) provide instructions describing how a shareholder may request, at no charge, a paper or email copy of the shareholder report or other materials required to be made accessible online and an indication that the shareholder will not receive a paper or email copy of the report unless requested, (B) explain that the shareholder can at any time in the future elect to receive paper reports and provide instructions describing how a shareholder may do so, and (C) if applicable, provide instructions describing how a shareholder can elect to receive shareholder reports or other documents and communications by electronic delivery.

Optional Content

The Notice may include: (1) information identifying the fund, its sponsor (including any investment adviser or sub-adviser to the fund), a variable annuity or variable life insurance contract or insurance company issuer thereof or a financial intermediary through which shares of the fund are held; (2) a brief listing of other types of information contained in the shareholder report, such as fund performance, portfolio manager commentary and expense information; (3) a QR code or other methods to access the website; and (4) any information needed to identify the shareholder—such as control numbers or account numbers—“so that shareholders may express their shareholder report transmission preference with ease.”¹

In addition to the optional content noted above, the Rule’s adopting release states that the SEC is “permitting additional flexibility regarding the content of the Notice,” so long as it is limited to content from the shareholder report for which a Notice is being given. The adopting release identifies the following as information contained in shareholder reports that “may be communicative and appropriate—albeit not required” to be included in the Notice: graphical representations of fund holdings; a list of the fund’s top holdings; performance information; a brief statement of the fund’s investment objectives and strategies; the expense ratio or an expense example; and the name and title of the fund’s portfolio manager(s). Pictures, logos or other designs may also be included “so long as the design is not misleading and the information is clear.”

Three Business Day Delivery Requirement

Funds must send, at no cost to the investor and by U.S. first-class mail or other “reasonably prompt means,” paper copies of the most recent annual and semi-annual reports of the fund and portfolio holdings of the fund as of its most recent first and third fiscal quarters to any person requesting copies of any such documents within three business days after receiving a request.

Notice May Accompany Account Statements

The Notice may be sent to an investor along with other materials, including a shareholder’s account statement.

Required Mailing Period for Notice

The Notice must be sent to investors within 70 days after the close of the period covered by the related report.

Permitted Use of Consolidated Notices

A single, consolidated Notice may be used to alert shareholders to the online availability of shareholder reports for multiple funds. The Notice must incorporate all elements required by Rule 30e-3 with respect to each report covered by the Notice.

Availability of Quarterly Holdings

The Fund’s quarterly holdings for the last fiscal year must also be publicly accessible on the website.

Elements Dropped from the Proposal

After considering industry comments, the SEC determined, among other things, not to require funds to mail a reply card with the Notice for investors to indicate their delivery preferences. The SEC also determined to eliminate from the final rule the proposed requirement that the Notice include the website address (URL) for each individual shareholder report.

Extended Transition Period Rule 30e-3 is being implemented with “an extended transition period with staged effective dates” in order “[t]o inform investors in advance of the change of transmission method, and to accommodate systems and operations changes by funds, intermediaries and service providers necessary to implement the new optional transmission regime.” In general, before relying on the Rule, funds will be required to provide two years of notice to shareholders through disclosures which alert them to the change in transmission method and allow them to express their delivery preference. (See “Related Amendments” below.)

The earliest that a fund may rely on the Rule to satisfy shareholder report transmittal requirements is January 1, 2021; funds wishing to do so must begin notifying shareholders at the start of 2019.

Funds newly offered during the period from January 1, 2019 through December 31, 2020 may rely on Rule 30e-3 starting on January 1, 2021 if they provide notice to shareholders starting with their first public offering. New funds offered on or after January 1, 2021 could rely on the Rule immediately without providing advance notice. All other funds may not rely on the Rule until they have completed a full two-year notice period or until January 1, 2022, whichever comes first.

Related Amendments

The SEC also adopted amendments to Rule 498 under the Securities Act of 1933 (1933 Act) and certain fund registration forms to require that funds intending to rely on Rule 30e-3 prior to January 1, 2022 provide prominent disclosures on the cover page or at the beginning of their summary prospectuses, and on the cover pages of their statutory prospectuses, and annual and semi-annual reports, informing investors of the upcoming change in delivery format options. These amendments to Rule 498 and Forms N-1A, N-2, N-3, N-4 and N-6 will be effective January 1, 2019 for a temporary period of three years (i.e., between January 1, 2019 and December 31, 2021).

Other amendments to Rule 498 will: (1) require funds relying on Rule 30e-3 to include as part of the legend on the cover page or beginning of the fund’s summary prospectus the website address required to be included in the Notice; and (2) include the Notice among the materials that are permitted to have equal or greater prominence when accompanying a summary prospectus. Similarly, the SEC amended Rule 14a-16 under the Securities Exchange Act of 1934 to include a Notice among the materials that are permitted to accompany a Notice of Internet Availability of Proxy Materials. Additionally, Rule 498 is amended to permit the inclusion of information about electronic delivery of prospectuses and other fund documents and communications.

Request for Comment on Fund Retail Investor Experience and Disclosure

The SEC is also seeking public comment on other ways to modernize and enhance fund information. Pursuant to a separate release, the SEC is soliciting input from individual investors and others regarding the delivery, design and content of fund disclosures, including shareholder reports, prospectuses, proxy statements and fund advertisements.

Request for Comment on Processing Fees Intermediaries

Charge for Forwarding Fund Materials Additionally, the SEC is seeking public comment and additional data on the current framework for processing fees that broker-dealers and other intermediaries charge funds for delivering fund shareholder reports and other materials to investors. This request for comment responds to concerns about the rules of the New York Stock Exchange and other self-regulatory organizations (SROs) under which intermediaries are permitted to seek reimbursement for forwarding shareholder reports and other fund materials to investors that are beneficial owners of fund shares held in “street name” through the intermediaries. The SEC’s request for comment states that  “[w]ith the adoption of rule 30e-3, we believe it is appropriate to consider more broadly the overall framework for the fees that broker-dealers and other intermediaries charge funds, as reimbursement for distributing Fund Materials to investors.” Among other things, the SEC requested comment on the clarity of SRO rules governing processing fees  and related out-of-pocket expenses and on the transparency and reasonableness of these fees.

Comments on either of the SEC’s two requests for comment described above must be submitted by October 31, 2018.

The adopting release for new Rule 30e-3 under the 1940 Act and amendments to Rule 498 under the 1933 Act and fund registration forms is available at: https://www.sec.gov/rules/final/2018/33-10506.pdf

The request for comment on fund retail investor experience and disclosure is available at: https://www.sec.gov/rules/ other/2018/33-10503.pdf

The request for comment on processing fees associated with delivery of fund materials is available at: https://www. sec.gov/rules/other/2018/33-10505.pdf

_{1 The adopting release for Rule 30e-3 cautions that if a fund were to choose to include information in the Notice such as control numbers, account numbers, etc., to identify the shareholder, “the fund should take appropriate measures to protect this information just as funds do today regarding other mailings, like account statements, that may contain sensitive information.”}