Mutual fund reports may switch to electronic delivery

The SEC is planning to adopt a rule in the spring of 2018 to let mutual funds provide shareholder reports electronically unless a paper copy is requested, according to the latest semiannual update to the agency’s rulemaking agenda.

The SEC proposed to amend Rule 30e-3 of the Investment Company Act of 1940 in May 2015 in Release No. 33-9776, Investment Company Reporting Modernization, as part of a broader effort to strengthen its supervision of the asset management industry, which has grown in size and complexity in the past several years.

If the rule is adopted, it would represent a victory for the fund industry, which has been lobbying for the switch. Rule 30e-3 requires mutual funds to mail the reports by paper unless shareholders opt to receive them electronically.

The industry’s main lobbying group, the Investment Company Institute (ICI), said the switch will save about $200 million annually in printing and mailing costs that can be passed on to shareholders. Moreover, the ICI said the move will be environmentally sound because fewer trees will be cut down to print paper copies.

The fund industry said it will also improve the overall quality of information provided to investors.

Trustees of Fidelity Equity and High Income Funds said Fidelity’s new features allow shareholders to access on-demand consolidated or additional information through hyperlinks, pop-up boxes, and layered disclosure. “These features encourage regular investor interaction and education in a way that cannot be accomplished by traditional paper disclosures and reports,” Ned Lautenbach, chairman of Fidelity’s independent trustees, wrote in an April 24, 2017, comment letter to the SEC.

However, some consumer and investor protection advocates have been urging the SEC not to flip the default option for delivery. They said electronic delivery will harm individual investors who lack ready internet access, especially the elderly, minorities and those with disabilities. Moreover, they cited studies showing a general preference for paper documents because they heighten the ability to absorb and understand information.

Almost 450 individuals also sent form comment letters to the SEC to voice their opposition.

When it was proposed, Release No. 33-9776 proved to be controversial, and the SEC, under the direction of then-Chair Mary Jo White, decided to sidestep the decision about the method for delivering fund reports when other parts of Release No. 33-9776 were adopted in October 2016. Release No. 33-10231, Investment Company Reporting Modernization, requires funds to file with the agency new forms that include prices of securities in a portfolio, securities lending activities and exposures to trading partners.

Now that Jay Clayton is the SEC’s chairman, the agency may be ready to give fund distributors want they want. Clayton was appointed by President Trump, who has promised to lighten the regulatory load on industry.

SEC Commissioner Michael Piwowar has urged adoption of electronic delivery and was disappointed when White avoided the issue.

“There have been a number of discussions with individuals representing various [groups] about a potential path forward on that,” Piwowar said at an April 2017 conference. “I hope we take it up sooner rather than later.”

The Consumer Federation of America, which has been especially vocal about preserving the current default mechanism, supported the SEC’s decision not to switch the default option for fund reports. Barbara Roper, the group’s director of investor protection, emphasized that there is nothing preventing fund companies from providing shareholder reports and portfolio information on fund websites right now.

“The proposal would permit funds to default to electronic delivery of disclosures based on negative consent,” Roper said in October 2016. “That is a very different thing. Instead of improving ‘the overall accessibility of reports,’ it would have decreased readership of documents the commission has previously deemed important to informing investors.”

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.

We have partnered with Thomson Reuters to issue our monthly SEC Accounting Update. Please feel free to contact Baker Tilly at if you have any questions related to these articles or Baker Tilly's Accounting and Assurance Services. © 2017 Thomson Reuters/Tax & Accounting. All Rights Reserved.