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News July 16, 2018 Issue

IM Division Pulls Back the Curtain a Bit on its Disclosure Thinking

The SEC’s Division of Investment Management is perceived by some, fairly or unfairly, as being something of a closed book when it comes to the transparency of some of its fund disclosure requirements. The agency may now be seeking to correct that perception, both through a new web page and through a request for comments.

The Investment Management Division recently created a new three-part web page, Fund Disclosure at a Glance, in its section of the SEC web site. The new page provides information about the Division and disclosure in the following three areas:

  • The Division’s Review and Accounting Office (DRAO), what it does, and contact information;
  • Accounting and disclosure information (ADI), including answers to questions the Division has received since 1994, and guidance it has issued, and is intended to be an aid to practitioners and others who are interested in the law and interpretations concerning disclosure; and
  • Disclosure reference material, including a "plain English" handbook on how to create clear SEC disclosure documents, and common fund disclosure forms. Among the latter are Form N-1A, the registration statement for mutual funds and ETFs; Form N-2, the registration statement for closed-end funds; and Schedule 14A, a proxy statement.

"The new web site is an effort to provide more public information about the Investment Management Division and its activities relating to mutual fund and ETF filings and disclosures," said Ropes & Gray counsel David Tittsworth. Looked at in the context of the agency’s request for comments, he suggested that "the new website could be a resource that may be useful as the Commission embarks on a longer-term initiative to improve mutual fund disclosure."

"I don’t think it is significant, but probably overall a positive thing," said Morgan Lewis partner John McGuire of the new web page. "It just provides another point of access to the staff’s views on disclosure issues, and disclosure related resources/reference material. This is all consistent with longstanding views that there should not be secret SEC staff positions – if the SEC staff is taking a position on something (e.g. a disclosure issue), the entire industry should have the opportunity to know that position."

"It’s a great thing that could be very valuable, but it all depends on the Division of Investment Management’s follow-through in building the site," said Stradley Ronon partner Lawrence Stadulis. Historically, he said, IM Division guidance on disclosure was provided to registrants over the phone and was very issuer-specific, creating a lot of statements on what would meet IM disclosure requirements. "It was a hodge-podge. You could go to one examiner and get one answer, then go to another and get another answer."

"Slowly, over time, there was a move toward more transparency," he said, and the new web page could be another step in that direction, "if there is follow-through."

"Clayton seems to be making a concerted effort to fix some of the image damage the SEC has had over the past five to 10 years," said Faegre Baker Daniels partner Jeffrey Blumberg.

Web site specifics

The Division, in announcing the new web site, made a point of noting its most recent ADIs – six of them issued in June 2018 – that provide guidance and are prominently listed on the right-hand column of each page.

The topics they cover are:

  • Requests for selective review (ADI 2018-06),
  • Use of rate sheet supplements in connection with variable insurance products (ADI 2018-05),
  • Marked copies of amendments to registration statements (ADI 2018-04),
  • Filing information statements in connection with multi-manager exemptive relief (ADI 2018-03),
  • Template filing relief (ADI 2018-02), and
  • Expanded use of draft registration statement review procedures for business development companies (ADI 2018-01).

"It’s good these are there, it took a lot of work to create them," said Stadulis. Further improvements to the site, he said, might include better contact information for specific areas, rather than general phone numbers and emails.

Request for comments

The SEC last month issued a request for comments on "fund retail investor experience and disclosure," with comments due by October 31 of this year. In its request, the agency said that it was "seeking public comment from individual investors and other interested parties on enhancing disclosures by mutual funds, exchange-traded funds, and other types of investment funds to improve the investor experience and to help investors make more informed investment decisions."

"Specifically," the SEC said, "we are seeking comment to learn how investors, like you, use these disclosures and how you believe funds can improve disclosures to help you make investment decisions. We are particularly interested in your input on the delivery, design and content of fund disclosures."

There is a subtle but important distinction between the request for comments, which is about what funds need to do in the way of disclosure, and the new Investment Management Division web site, which is more about transparency into the Division’s thinking on the subject, said Stadulis. That said, the two are related, since once it is clear what the Division wants, funds and their advisers will have a better idea of what they should put into their disclosure documents.

Delivery, design and more

The request for comments makes clear that the SEC is as interested in the appearance, format and delivery of disclosure documents as it is about the content.

"Today the Commission is continuing its efforts to enhance the information that is available to you, the investor, to help you make informed investment decisions," the SEC said in its request for comments. "We have previously taken steps to improve the effectiveness of mutual fund, exchange-traded fund, and other types of public investment fund disclosures. We are now requesting comment from you and other interested parties on ways to enhance fund disclosures, including the delivery, design, and content of fund disclosures, to improve the investor experience and help investors make more informed investment decisions."

The agency noted that it developed its current disclosure requirements at a time when investors received information primarily on paper, a mode of communication that is less used today. In addition, it said, "some have criticized fund prospectuses and other required disclosure documents for containing long narratives; generic, redundant, and even at times irrelevant disclosures; legalese; and extensive disclosure that may serve more to protect funds from liability rather than to inform investors."

"As technology evolves," the SEC said, "the Commission seeks to improve the fund disclosure system to reflect the way investors currently seek, receive, view, and digest information. Advances in technology have made available new, innovative, and effective ways to improve the delivery, design and content of fund disclosures. Electronic-based disclosures allow for more interactive, user-friendly design features tailored to meet individual investors’ needs and improve investor engagement. Technology could also improve the content of fund disclosures by, for example, allowing investors to customize certain fund disclosures, such as fees and expenses, based on an investor’s individual circumstances."

In particular, the agency said in its request for comments, it wants comments pertaining to the following:

  • How funds currently provide information;
  • How investors currently access and use this information; and
  • The potential costs and benefits of alternative approaches to our current fund disclosure framework.

Funds, advisers and others in the asset management community will need to keep an eye on how both the Division’s efforts at transparency in regard to its thinking about disclosures, and what the agency does with the public comments it receives, will affect the disclosures that funds make.