Alert January 20, 2009

SEC Adopts Mutual Fund and ETF Disclosure Changes

The SEC issued the formal release (the “Adopting Release”) adopting final rules (the “Final Rules”) modifying the disclosure requirements for registered open-end management investment companies (“mutual funds”).  The Final Rules include three principal changes to mutual funds’ current disclosure obligations.  First, the Final Rules require each mutual fund statutory prospectus to begin with a brief, self-contained presentation of key fund characteristics.  Second, the Final Rules amend Rule 498 under the Securities Act of 1933, as amended (the “1933 Act”), to permit satisfaction of certain mutual fund prospectus use and delivery requirements in the form of a “Summary Prospectus,” which replaces the “profile prospectus” currently permitted by the Rule.  Importantly, the contents of a Summary Prospectus must conform to the key fund characteristics that appear at the beginning of the fund’s statutory prospectus.  Third, the Final Rules permit mutual funds that are exchange-traded funds (“ETFs”) generally to limit disclosure in their prospectuses to disclosure that is relevant to investors who purchase ETF shares in the secondary markets rather than the financial institutions that purchase and redeem shares, typically “creation units,” directly from ETFs.  In each case, the SEC adopted these changes largely as proposed.

The proposing release (the “Summary Prospectus Proposing Release”) relating to the presentation of the fund characteristics and the Summary Prospectus were discussed in the December 5, 2007 Goodwin Procter Client Alert, and the release describing the proposed disclosure changes relating specifically to ETFs (together with the Summary Prospectus Release, the “Proposing Releases”), among other things, was discussed in the April 1, 2008 Alert.

This article summarizes the principal provisions of the Final Rules under the following broad topic headings:

  • Presentation of Key Fund Characteristics – Statutory Prospectus and Summary Prospectus
  • Rule 498 Amendments – the Summary Prospectus
  • ETF Prospectus Disclosure Changes

Under each heading is a description of the new requirements in that area followed by a listing of principal differences between those requirements as adopted in the Final Rules and as proposed in the Proposing Releases.  The article concludes with a description of the Final Rules’ effective and compliance dates.

Presentation of Key Fund Characteristics – Statutory Prospectus and Summary Prospectus

The Final Rules revise Form N-1A, the form of registration statement applicable to mutual funds that includes the disclosure requirements applicable to mutual fund statutory prospectuses.  The Final Rules mandate a plain English presentation of information on specified topics in a prescribed order at the front of the statutory prospectus following the cover page and any table of contents.  For the most part, those same disclosure requirements dictate the exclusive contents of the Summary Prospectus.  The topics specified for this “summary disclosure” and their prescribed order are as follows:

  1. Investment objectives;
  2. Risk/Return Summary and Fee Table;
  3. Principal investment strategies, risks and performance;
  4. Investment advisers and portfolio managers;
  5. Purchase and sale information;
  6. Tax information; and
  7. Financial intermediary compensation.

The disclosure provided in response to these requirements may not include information in addition to the information specifically requested or permitted.  Information presented in response to the proposed requirements does not, however, have to be repeated elsewhere in the statutory prospectus.

The Final Rules do not permit multi-fund presentations of the summary disclosure except in a multi-fund prospectus, and then only with respect to purchase and sale information, tax information and financial intermediary compensation when that information is identical for all funds covered by the prospectus.  In other words, for funds offered together in a multi-fund prospectus, each fund generally must have its own separate, self-contained presentation of the summary disclosure.  Multi-fund presentations of any sort are not permitted in Summary Prospectuses because a Summary Prospectus may describe only one fund.  In each case, however, a fund’s summary disclosure may reflect multiple classes of the fund.  (As discussed in more detail below, other information about a fund may accompany its Summary Prospectus, but might, under certain circumstances, limit how the Summary Prospectus could be used.)

Investment Objective .  The summary disclosure must begin with a mutual fund’s investment objectives or goals.  A mutual fund also may identify itself by type or category (for example, as a money market fund or balanced fund).

Risk/Return Summary and Fee Table .  The Final Rules make a number of changes to the requirements governing the fee table that currently appears in statutory prospectuses. 

>    Changed Location – The Final Rules make the fee table the second item in the summary disclosure presentation (that is, after the investment objective), moving it forward from its current location in the statutory prospectus, where it follows information about investment strategies, risks and past performance. 

>    Breakpoint Availability – For mutual funds that offer sales charge breakpoints (that is, discounts based on the amount of fund shares purchased), the Final Rules require a brief narrative disclosure added to the fee table mentioning their availability.  The disclosure required by the Final Rules, which also requires specification of the minimum level of investment qualifying for a sales charge discount, must read as follows:  “[y]ou may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $[_________] in [name of fund family] funds.  More information about these and other discounts is available from your financial professional and in [identify section heading and page number] of the Fund’s prospectus and [identify section heading and page number] of the Fund’s statement of additional information.”  A fund may substitute a different explanation that offers comparable information.

>    Revised Descriptive Parenthetical – The Final Rules revise the explanatory parenthetical following the heading “Annual Fund Operating Expenses” in the fee table to read “expenses that you pay each year as a percentage of the value of your investment” rather than “expenses that are deducted from Fund assets.”

>    New Portfolio Turnover Item – The Final Rules add portfolio turnover as an item in the fee table.  A mutual fund, other than a money market fund, must disclose its portfolio turnover rate accompanied by a prescribed explanation of the effect of portfolio turnover on transaction costs, fund performance and taxation of the fund when fund shares are held in a taxable account.  The Adopting Release reiterates that turnover rate should be calculated in the manner currently required by Form N-1A, that is, without reference to securities whose maturities or expiration dates at the time of acquisition are one year or less.

>    Revised Treatment of Expense Reimbursement/Fee Waiver Arrangements – The Final Rules revise Form N-1A’s requirements governing the presentation of expense reimbursements and fee waivers in the fee table.  A new instruction provides that if there are expense reimbursement or fee waiver arrangements that reduce a mutual fund’s operating expenses for no less than one year from the effective date of the mutual fund’s registration statement, the mutual fund may add two additional captions and related expense information.  One caption may show the amount of the expense reimbursement or fee waiver, and it should be placed directly below “Total Annual Fund Operating Expenses” and use an appropriate descriptive caption.  The other caption may show the fund’s net expenses after subtracting the fee waiver or expense reimbursement from the total fund operating expenses, and it should be placed directly below “Total Annual Fund Operating Expenses After Fee Waiver [and/or Expense Reimbursement].”  It, too, should be identified with an appropriate descriptive caption.

If a mutual fund provides those captions, the Final Rules also require disclosure of the period for which the fee waiver or expense reimbursement is expected to continue, including the expected termination date, and a brief description of who may terminate the arrangement and under what circumstances. 

Principal Investment Strategies, Risks and Performance .  The Final Rules require a fund to provide the same disclosure regarding its principal investment strategies, risks and performance as required in the current statutory prospectus, including the bar chart and table illustrating the variability of returns and showing the fund’s past performance.  If a mutual fund makes updated performance information available on its website or at a toll-free telephone number, the Final Rules require the fund to include a statement following the bar chart and performance table stating that such information is available and give the appropriate website address and telephone number.

Management .  The Final Rules require the summary disclosure to include information regarding a mutual fund’s investment adviser(s) and portfolio manager(s) similar to the information currently required in the statutory prospectus, that is, the name of each investment adviser and sub-adviser and the name, title and length of service of the fund’s portfolio managers.  The Final Rules also provide that a mutual fund is not required to identify in its summary disclosure: (i) a sub-adviser whose sole responsibility is limited to day-to-day management of the fund’s cash instruments, unless the fund is a money market fund or a fund with a principal investment strategy of regularly holding cash instruments; and (ii) if the mutual fund has three or more sub-advisers, each managing a portion of the fund’s portfolio, each sub-adviser, except for any sub-adviser that is (or is reasonably expected to be) responsible for managing a significant portion of the fund’s net assets (which for this purpose is defined as 30% or more of the fund’s net assets).  (Note that the statutory prospectus must continue to contain the other disclosures regarding investment advisers and portfolio managers currently required by Form N-1A, including information regarding sub‑advisers responsible for day-to-day management of cash instruments for a non-money market fund, if they are not provided in the summary disclosure section.)

Purchase and Sale of Fund Shares .  The Final Rules require a mutual fund to disclose its minimum initial and subsequent investment requirements, the fact that its shares are redeemable and the procedures for redeeming shares (for example, on any business day by written request, telephone or wire transfer).

Tax Information .  The Final Rules require a mutual fund to state, as applicable, that it intends to make distributions that may be taxed as ordinary income or capital gains or that it intends to distribute tax-exempt income.  A mutual fund that holds itself out as investing in securities generating tax-exempt income must provide, as applicable, a general statement to the effect that a portion of the fund’s distributions may be subject to federal income tax.

Financial Intermediary Compensation .  The Final Rules require that the summary disclosure conclude with the following statement discussing the compensation of financial intermediaries, which may be modified provided the modified statement contains comparable information:

Payments to Broker-Dealers and Other Financial Intermediaries

If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services.  These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment.  Ask your salesperson or visit your financial intermediary’s Web site for more information.”

The Final Rules allow a mutual fund to omit the disclosure concerning financial intermediary compensation if neither the fund nor any of its related companies pay financial intermediaries for the sale of fund shares or related services.  The Adopting Release notes, however, that a no-load mutual fund or a directly sold fund is required to include the narrative disclosure if, for example, the fund pays servicing fees to a fund supermarket.

Principal Differences between the Final Rules as Adopted and as Proposed

  • The cover page of a statutory prospectus or a Summary Prospectus must include the mutual fund’s exchange ticker symbol, or if the prospectus or summary disclosure relates to more than one class of shares, the exchange ticker symbol relating to each share class;
  • The summary disclosure is not required to include portfolio holdings information;
  • A multi-fund presentation of purchase and sale information, tax information and financial intermediary compensation is permissible in the summary disclosure section of a multi-fund prospectus if the information is identical for all the funds covered.  The multi-fund presentation must immediately follow the separate individual fund information in the summary disclosure.  Also, a prescribed statement must appear at the end of each individual fund summary directing the reader to the multi-fund presentation.  (Multi-fund presentations are not permitted in Summary Prospectuses);
  • Mutual funds that are used as investment options for retirement plans and variable insurance contracts may modify or omit the information relating to the purchase and sale of fund shares;
  • The disclosure relating to breakpoint availability has been modified in the Final Rules to include a statement on additional information about breakpoint discounts and where that information may be found;
  • The new portfolio turnover information included as an item in the fee table also requires a statement that adverse tax consequences may result from a higher turnover rate when fund shares are held in a taxable account;
  • The Final Rules require a mutual fund that includes expense reimbursements and fee waivers in its calculations of fund expenses to disclose the expected termination date of the fee waiver or expense reimbursement in addition to the period for which the fee waiver or expense reimbursement is expected to continue and provide a brief description of who may terminate the arrangement and under what circumstances;
  • If a mutual fund makes updated performance information available on its website or at a toll-free telephone number, the Final Rules require the fund to include a statement following the bar chart and performance table stating that such information is available and give the appropriate website address and telephone number; and
  • A mutual fund is not required to include the new financial intermediary compensation disclosure if neither the fund nor its related companies pay financial intermediaries compensation for the sale of fund shares or related services.  In addition, the narrative disclosure relating to compensation to financial intermediaries has been changed to clarify that payments to financial intermediaries may create a conflict of interest with respect to the financial intermediaries’ recommendations.

Rule 498 Amendments - the Summary Prospectus

The Final Rules include amendments to Rule 498 under the 1933 Act that permit the use of a Summary Prospectus to meet certain requirements under the 1933 Act governing the offer and sale of mutual fund shares, some of which may currently be met only through use of the statutory prospectus.  The Final Rules do not mandate the use of a Summary Prospectus.

Prospectus Delivery in Connection with Mutual Fund Sales.  The Final Rules permit a mutual fund to use a Summary Prospectus to satisfy its obligation under Section 5(b)(2) of the 1933 Act to deliver a prospectus in connection with a sale of its shares, provided that (i) the Summary Prospectus is sent or given no later than the time of the carrying or delivery of the mutual fund security, (ii) the Summary Prospectus generally is not bound together with, or less prominent that, any materials that accompany it, (iii) the Summary Prospectus meets the requirements of Rule 498 at the time of the carrying or delivery of the fund security, and (iv) the conditions of Rule 498 relating to investor access to various fund documents (including the Summary Prospectus and statutory prospectus) via the Internet are satisfied.

Supplemental Mutual Fund Sales Literature.  The Final Rules permit a mutual fund to deliver its Summary Prospectus to an investor with other communications offering the fund’s shares (“supplemental sales literature”) without those communications being deemed “prospectuses” within the meaning of the 1933 Act and subjecting the fund to potential liability to the investor under Section 12(a)(2) of the 1933 Act, provided that (i) the Summary Prospectus is sent or given to the investor no later than the time the supplemental sales literature is sent or given to the investor, (ii) the Summary Prospectus generally is not bound together with, or less prominent than, any materials that accompany it, (iii) the Summary Prospectus that is sent or given meets the requirements of Rule 498 at the time of the communication and (iv) the conditions of Rule 498 relating to investor access to various fund documents (including the statutory prospectus) via the Internet are satisfied.

Contents.  The Final Rules provide that a fund’s Summary Prospectus must include the summary information contained in the statutory prospectus in order to satisfy prospectus delivery requirements relating to mutual fund sales and supplemental sales literature.  A Summary Prospectus also may incorporate information by reference from its statutory prospectus, statement of additional information (“SAI”) and most recent shareholder reports.  A Summary Prospectus may not include information other than that required or permitted by Rule 498. 

Cover Page/Beginning - The cover page or beginning of a Summary Prospectus must include specified identifying information about a fund, the approximate date of the document’s first use and specified legends regarding the availability of the statutory prospectus and how to access via the Internet, or otherwise receive (via telephone or e-mail request), a copy of the statutory prospectus and other fund documents.  If applicable, the legend also should indicate that the statutory prospectus 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.  The legend also should indicate if the Summary Prospectus is intended for use in connection with a 401(k), 403(b) or 457 plan, or a variable life or annuity contract, and is not intended for use by other investors.  The cover page/beginning also must including the exchange ticker symbol for each class of fund shares that is offered in the Summary Prospectus.

Performance Information – The Final Rules provide that if a fund makes available updated performance information on a website or by toll-free number, the Summary Prospectus must include a statement explaining the availability of such information and provide the website address/telephone number.

Electronic Delivery.  The Adopting Release states that a fund may provide a Summary Prospectus in electronic form consistent with existing SEC guidance, which typically requires affirmative consent from the recipient.

Internet Access to Fund Documents.  The Final Rules require that in order to meet the condition regarding investor access to fund documents via the Internet in connection with certain uses of the Summary Prospectus, the fund’s current Summary Prospectus, statutory prospectus and SAI, and its most recent annual and semi-annual reports to shareholders must be accessible, free of charge, at the website address specified on the cover page or at the beginning of the Summary Prospectus.

Website Address for Required Fund Documents - This website address, which may not be the SEC website address, must be specific enough to lead investors directly to the statutory prospectus and other required fund documents, rather than to the home page or another section of the website on which the materials are posted.  A fund may meet this requirement by maintaining a central site with prominent links to each required document. 

Timing of Document Availability - The required fund documents must be accessible on or before the time that the Summary Prospectus is sent or given.  In addition, current versions of the required documents must remain available on the website for at least 90 days after (i) the date the mutual fund security in question is carried or delivered if a Summary Prospectus is being relied on to meet prospectus delivery requirements in connection with mutual fund sales or (ii) the date that the supplemental sales literature in question is sent or given if a Summary Prospectus is being relied on in connection with the delivery of supplemental sales literature.

Presentation - The fund documents made available on the Internet must be presented in a format that:

  • is human-readable and capable of being printed on paper in a human-readable format;
  • is convenient for both reading online and printing on paper (although failure to meet this standard results only in a violation of Rule 498 and does not by itself prevent reliance on the Rule to satisfy a person’s delivery obligations under Section 5(b)(2) of the 1933 Act);
  • permits persons accessing the statutory prospectus or SAI to move directly back and forth between that document’s table of contents and each section in the body of that document referenced in the table of contents; and
  • permits persons accessing the Summary Prospectus to move directly back and forth between each section of the Summary Prospectus and (i) any section of the statutory prospectus and SAI that provides additional detail concerning that section of the Summary Prospectus or (ii) tables of contents of the statutory prospectus and SAI (which may be outside those documents, e.g., displayed in a separate frame) that prominently display the sections within those documents that provide additional detail concerning that section of the Summary Prospectus.

Ability to Retain Permanent Copies of Fund Documents – The Final Rules require that an investor accessing a website to review the Summary Prospectus, the statutory prospectus, SAI or shareholder reports for a fund must be able not only to review those documents online as described above, but also to permanently retain, through downloading or otherwise, free of charge, an electronic version of each document.  The documents must be in a format that meets the same requirements as their online versions in terms of being (i) human-readable and capable of being printed on paper in a human-readable format and (ii) allowing the reader to move directly back and forth between the tables of contents of the statutory prospectus and SAI and the sections in those documents that they reference.  The electronic version of a required fund document retained by an investor would not need to meet the second condition applicable to online versions of those documents regarding navigation between documents.

Safe Harbor - Amended Rule 498 includes a safe harbor provision under which a fund is deemed to have met the Rule’s condition regarding investor access to required fund documents via the Internet even though the documents are not in fact continuously available during the necessary timeframe, provided the following conditions are met:

  • The fund has reasonable procedures in place to ensure that the documents are available in the required manner; and
  • The fund takes prompt action to ensure that the documents become available in the required manner as soon as practicable following the earlier of the time at which it knows or reasonably should have known that the documents are not available in the required manner.

Incorporation by Reference.  The Final Rules allow a Summary Prospectus to incorporate by reference information contained in a fund’s statutory prospectus, SAI and its most recent shareholder reports.  Under amended Rule 498, information properly incorporated by reference into a Summary Prospectus is treated as having been conveyed to a person who received the Summary Prospectus not later than the time of receipt for purposes of Rule 159 under the 1933 Act.  Rule 159 addresses the scope of information treated as having been provided to the purchaser of a security when determining whether there has been a material misstatement or omission resulting in liability under the anti-fraud provisions of Section 12(a)(2) and Section 17(a)(2) of the 1933 Act.[1]  The Adopting Release also indicates that the SEC believes that a person that provides an investor with a Summary Prospectus in good faith compliance with amended Rule 498 is able to rely on Section 19(a) of the 1933 Act against a claim that a fund’s Summary Prospectus does not include information disclosed in the fund’s statutory prospectus, whether or not the Summary Prospectus incorporates the statutory prospectus by reference.  Section 19(a) provides that the liability provisions of the 1933 Act do not apply to any act done or omitted in good faith in conformity with any SEC rule.

Limits on Incorporation by Reference – The Final Rules provide that a Summary Prospectus may not incorporate by reference any of the information required to be included in its cover page/opening disclosures or in response to the summary disclosure requirements.  It also may not incorporate information from any source other than those enumerated above.  Information may be incorporated by reference only to the specific document containing that information, and not by reference to a document that incorporates by reference to a second document containing the information in question (that is, a Summary Prospectus may not incorporate by reference a fund’s SAI simply by incorporating by reference the fund’s statutory prospectus that incorporates the SAI by reference, but must separately incorporate the SAI by reference).

Conditions for Incorporation by Reference – The Final Rules require that in order for a Summary Prospectus to incorporate information by reference from a permitted source, it must (i) include legends on its cover or at the beginning that explain the use of incorporation by reference and how to access the documents from which information was incorporated, (ii) specify in those legends the type of document from which the information is incorporated and the date of the document and (iii) provide Internet access to the required fund document in the manner discussed above.  A fund that meets all the conditions for incorporation by reference into its Summary Prospectus does not have to send or give the incorporated information together with the Summary Prospectus.  The Adopting Release indicates that although a mutual fund incorporating information by reference into its Summary Prospectus is required to send a paper or electronic copy of the incorporated information upon request, failure to do so, while a violation of SEC rules, does not preclude or nullify the incorporation by reference. 

Delivery of Paper and Electronic Copies of Statutory Prospectus and Other Fund Documents.  The Final Rules require that a mutual fund (or a financial intermediary through which mutual fund shares may be purchased or sold) send, at no cost to the requestor and by U.S. first class mail or other reasonably prompt means, a paper copy of the fund’s statutory prospectus, SAI and most recent annual and semi-annual shareholder reports (the fund documents covered by amended Rule 498’s Internet access requirements) to any person requesting one, within three business days after receiving the request.  A corresponding requirement applies to a request for an electronic copy of those documents.  The Adopting Release clarifies that the requirement to send an electronic copy of a document may be met by sending a direct link to the document on the Internet, provided that the current version of that document is accessible through that link at the time the email is sent and for the six-month period thereafter, and the email explains both how long the link is available and that if the recipient desires to retain a copy of the document, he or she should access and save the document.

Similar to the situation for incorporation by reference, the Adopting Release notes that failure to meet these requirements to send paper or electronic copies of fund documents upon request, although a violation of SEC rules, does not prevent the use of a Summary Prospectus to (i) satisfy 1933 Act prospectus delivery requirements in connection with mutual fund sales or (ii) enable the delivery of supplemental sales literature.

Filing a Summary Prospectus with the SEC.  The Summary Prospectus must be filed with the SEC on EDGAR no later than the date that it is first used.  The Summary Prospectus must be filed as part of the fund’s registration statement, but the Summary Prospectus itself is not deemed part of the registration statement for purposes of Section 11 of the 1933 Act.  Section 11 addresses liability for a false registration statement.  Corresponding information in the statutory prospectus (that is, the summary disclosure section, excluding the performance and portfolio holdings disclosures in the case of a subsequently updated Summary Prospectus) is, however, part of the registration statement. 

Elimination of Option to Provide Separate Purchase and Redemption Procedures Documents.  The Final Rules eliminate the Form N-1A provisions that allow a mutual fund to present the requested information about purchase and redemption procedures in separate documents rather than in its statutory prospectus and SAI.  The Final Rules do not otherwise change the information that Form N-1A requires about a mutual fund’s purchase and redemption procedures (except as to location in the case of the information that must appear in the summary disclosure section of the statutory prospectus).

Principal Differences between the Final Rules as Adopted and as Proposed

  • The condition that, when bound and delivered with supplemental sales materials, the Summary Prospectus must be given “greater prominence” than the accompanying materials is a requirement of Rule 498 and not a condition to satisfying the delivery obligations of Section 5(b)(2);
  • A Summary Prospectus, when bound and delivered with other documents, need not be given “greater prominence” than other Summary Prospectuses or statutory prospectuses that also accompany the Summary Prospectus;
  • The Summary Prospectuses and statutory prospectuses of multiple underlying funds of a variable insurance contract may be bound with each other and the statutory prospectus for the contract as well as Summary Prospectuses and statutory prospectuses for other investment options under the contract, provided that (i) all of the funds to which the Summary Prospectus and statutory prospectuses relate are available to the person to whom such documents are sent or given and (ii) there is a table of contents at the beginning or immediately after a cover page to the bound documents that identifies each Summary Prospectus and statutory prospectus given;
  • Information contained in a Summary Prospectus that is used to satisfy prospectus delivery requirements must be the same as the information contained in the summary section of the fund’s statutory prospectus;
  • Summary Prospectus performance disclosure is not subject to quarterly updating but, if applicable, a fund’s summary disclosure must state that the fund makes updated performance information available on its website or by calling a toll-free number, and provide directions allowing the reader to obtain that information through the applicable medium;
  • The summary disclosure requirements do not include portfolio holdings information;
  • A mutual fund that incorporates information by reference from a permitted source must specify in the legend on the cover or at the beginning of the Summary Prospectus the type of document from which the information is incorporated and the date of the document;
  • The standard applicable to the presentation of the Summary Prospectus, “human-readable and capable of being printed on paper in a human-readable format,” has replaced the proposed standard “convenient both for reading online and for printing on paper;” and
  • The Summary Prospectus must be filed with the SEC on EDGAR no later than the date that it is first used, rather than the fifth business day after first use as proposed.

Changes in Disclosure Requirements Relating to ETFs

The Final Rules modify the requirements in N-1A to focus the disclosure provided in ETF prospectuses on the needs of secondary market investors rather than financial institutions that purchase “creation units” directly from ETFs. 

Disclosure Relating to Purchase and Sale Information.  The Final Rules eliminate the provisions currently in Form N-1A that require ETF prospectuses to disclose information on how investors may buy and redeem shares directly from the ETF.  Specifically, the Final Rules:

  • Require an ETF statutory prospectus to state the number of shares contained in a creation unit, that individual shares only may be purchased and sold on a secondary market through a broker-dealer, and that shareholders may pay more than net asset value when they buy ETF shares, or receive less than net asset value when they sell shares; and
  • Amend the fee table disclosure in Form N-1A to exclude fees and expenses for purchases and redemptions of creation units, as well as the narrative explanation preceding the example in the fee table to state that investors in ETF shares may pay brokerage commissions that are not reflected in the example.

ETFs, however, are still required to disclose in the SAI how creation units are offered to the public.  Moreover, ETFs may not rely on either of the above provisions if they have creation units of less than 25,000 shares.

Premium/Discount Information.  Each ETF must disclose to investors information about the extent and frequency with which market prices of fund shares have tracked the fund’s net asset value.  An ETF may disclose premium and discount information in its prospectus or, alternatively, it may omit the information from its prospectus or annual report if it provides the information on its Internet site, discloses in its prospectus or annual report the Internet address where investors may find the information, and discloses in its prospectus that ETF shares may trade at a premium or discount.

For purposes of calculating premium and discount information, the “market price” against which the net asset value per share is compared is the closing price on the principal market on which ETF shares trade or a price within a range between the highest and lowest bid if that latter price more accurately reflects the current market value of the fund’s shares.

Principal Differences between the Final Rules as Adopted and as Proposed:

  • Proposed provisions that ETFs include disclosure of market price returns in addition to returns based on net asset value were not adopted as part of the Final Rules (in other words, ETFs must continue to disclose only returns based on net asset value);
  • Proposed provisions that would have required an index-based ETF to compare its performance to its underlying index rather than its benchmark index also were not adopted as part of the Final Rules (the SEC acknowledged, however, that this change would be better addressed for all index funds); and
  • The “market price” against which net asset values per share is compared for purposes of calculating premium and discount information may be a price within a range between the highest and lowest bid, rather than the closing price on the principal market on which ETF shares trade, if the former price more accurately reflects the current market value of the fund’s shares.

Effective and Compliance Dates

The effective date for the Final Rules is March 31, 2009.  A mutual fund or ETF may, at its option, prepare documents in accordance with the Final Rules at any time after the effective date; provided, however, that no one may rely on Rule 498 to satisfy its obligations to deliver a mutual fund statutory prospectus unless the mutual fund’s registration statement also is in compliance with the Final Rules.  All initial registration statements on Form N‑1A, and all post-effective amendments that are annual updates to effective registration statements on Form N-1A, must comply with the Final Rules if they are filed on or after January 1, 2010.  Any post-effective amendment on Form N-1A that adds a new series must comply with the Final Rules with respect to the new series if it is filed on or after January 1, 2010.  The final compliance date for filing amendments to effective registration statements to comply with the Final Rules is January 1, 2011.  Post-effective amendments to existing registration statements being filed to comply for the first time with the Final Rule’s disclosure requirements for statutory prospectuses must be filed under 1933 Act Rule 485(a), which permits an effective date on the sixtieth day (the seventy-fifth day for a new series) after filing at the earliest (subject to acceleration at the SEC staff’s discretion), prior to which time the SEC staff typically reviews and comments on the filing.



[1] Under Section 12(a)(2) of the 1933 Act, the seller of a security has liability to purchasers of that security for offers or sales by means of a “prospectus” (any prospectus, notice, circular, advertisement, letter or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security) or oral communication that includes an untrue statement of material fact or omits to state a material fact that makes the statements made, based on the circumstances under which they were made, not misleading.  Section 17(a)(2) of the 1933 Act, which is typically cited in SEC enforcement proceedings, is a general antifraud provision that makes it unlawful for any person in the offer and sale of a security to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.