Earlier this year, the Securities and Exchange Commission adopted a new rule intended to modernize the delivery of fund reports.

“At its highest level, Rule 30e-3 allows mutual funds to send shareholders a short notice alerting them to the issuance of a new shareholder report that is available on a website, instead of sending the complete paper report,” Jay Herold, Vice President and Senior Counsel at MFS, told NICSA members during a recent #WebinarWednesday event exploring key aspects of the rule.

Mary Corcoran, Senior Vice President at Invesco Investor Services, moderated the event, which featured tenured experts from Invesco, MFS, Morgan Stanley, and Broadridge.

Corcoran said the objectives of the SCC in adopting the rule were threefold:

1) To modernize the manner in which periodic information is transmitted to investors.

2) To improve the overall investor experience by driving shareholders to a website where they can not only access shareholder reports but also related documents.

3) To reduce expenses associated with printing and mailing shareholder reports that are the responsibility of the funds and ultimately investors.

From a fund perspective, Herold noted the major concern of understanding the rule. “As with any implementation, some questions aren’t entirely resolved by the text of the rule or the context of the release,” he said. “The other concern is really working through the finer points, and to do that, you have to leverage your network, both within and outside of your organization.”

Naadia Burrows, Vice President, Head of Mutual Fund Regulatory Communication Business at Broadridge, said many broker-dealers who lack in-house solutions are depending upon organizations such as Broadridge to capture elections associated with the distributions of annual reports, semi-annual reports, and prospectuses.

“Based upon conversations that I’ve had with our broker-dealer clients, they are 100 percent in support of collaborating with funds to make Rule 30e-3 a success,” Burrows said.

Philip Kolb, Managing Director, Head of Product Group Services at Morgan Stanley, said broker-dealers should prepare to field questions from clients and internal advisor networks.

“With aging populations, although this is certainly in the best interest of clients and everyone overall from an experience and fee perspective, there will be some natural concerns about giving up access to what was traditionally delivered in paper,” Kolb said. “Lastly, it’s important to have an eye on the financial implications: The build-out, the support network, and the integration of all of those systems.”

Preparatory Actions

Herold recommended focusing on disclosure language right off the bat. “While the verbiage for that disclosure is prescribed within the rule itself, you have to tweak it somewhat so it makes sense, of course not straying too far from what the SEC has prescribed,” he said.

Kolb said the manner in which the information ultimately gets delivered to the shareholder community will likely create some level of uncertainty. Therefore, broker-dealers should be prepared to communicate what they consider to be the impacts of the rule on shareholders and be sure to have the right support mechanisms in place to handle inquiries.

As a solutions provider, Burrows said Broadridge has been focused on educating staff, as well as funds and brokers, around the rule. “There are a lot of complexities; it’s not as straightforward as it seems,” she said. “This transition period is very different than other rules that have been passed previously.”

Burrows said Rule 30e-3 has the potential to change the shareholder experience. “As you begin transitioning shareholders to e-delivery, you have the ability to better engage with them, educate them, and improve the overall experience by highlighting key contents such as fund performance and portfolio holdings,” she said.

The Next Phases

Herold said the next two-year period will be the most critical.

“Funds should start thinking about getting involved with industry working groups and working with intermediaries, vendors, and even the SEC to make sure that the goals that are the foundation of Rule 30e-3 are ultimately met,” he said. “Five years from now, we could be looking back on Rule 30e-3 as a transitional rule, or as part of an evolution in the overall investor experience.”

Going into 2021, Burrows believes the SEC is challenging the industry to evolve disclosure and better engage with underlying shareholders.

“Funds have the flexibility — they can continue to distribute the reports as they do today, they can adopt a content-free notice, or they can do a content notice,” she said. “I suspect there will be variations of how funds choose to proceed, and once we resume our conversations with funds after the new year, we’ll gather that information and look for solutions to support the industry more holistically.”

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