In October of 2022, the Securities and Exchange Commission (“SEC”) adopted rule and form amendments related to Tailored Shareholder Reports (“TSRs”) for mutual funds and exchange-traded funds. “TSR” refers to the requirement that funds prepare and transmit streamlined annual and semi-annual reports. In the SEC’s view, the use of TSRs will enhance shareholder communication and engagement by providing more relevant and targeted information. TSRs must include summary information on expenses, performance, holdings, material changes, and other basic fund information. Funds will be required to comply with these changes by July 24, 2024. The first impacted funds will be those with May 31, 2024, fiscal period-ends for annual and semi-annual reports.

As the compliance date for TSRs draws closer, the significance of the changes with respect to shareholder reporting will be ever more apparent. The SEC’s rule and form amendments specify the design and content of TSRs and actually limit the information that funds can include in TSRs.

A separate TSR will be required for each share class offered by a fund and the TSR must be distributed and posted online within 60 days after the reporting period-end date. TSRs are required to be provided directly to shareholders via traditional mail or can be distributed electronically if a shareholder has elected to receive their fund reports electronically.

What progress should an administrator have made by now with the new TSR requirements?

• Some administrators may contract with an existing third-party service provider to extract the required data from its accounting system and other applications into a new application designed to produce the TSRs. In this scenario, initial testing and proof of concept work around the data extraction should be well in hand at this time.

• Another aspect to consider is the availability and use of process automation and exception reporting tools that can compare the extracted data for the TSRs to the data included in funds’ traditional, long-form financial statements. Again, if this type of tool is available, testing should be fully considered and scheduled by now.

• Because of the very specific requirements regarding the contents of the TSR, template TSRs should be available from your fund administrator. Most fund managers will utilize one of several standard templates. Each template should be customizable for color and print style and allow for the addition of client fund logos. Typically, customization beyond that scope would be subject to surcharges.

What do fund managers need to focus on as the TSR deadline approaches?

• Review the TSR templates from your administrator and communicate any initial requirements to your administrator. Your administrator may select the template best suited for your fund if you do not have a preference.

• Begin making decisions on the benchmark index that your fund(s’) must include with the TSRs. Along with the rules that mandate the content of the TSR, there is a requirement to utilize a broad-based benchmark with specific, new criteria detailed in the overall rule release. As such, an evaluation of your fund(s’) benchmark(s) should occur in consultation with trust counsel.

• If you are concerned about additional mailing costs, begin encouraging your fund(s’) shareholders to change their account profile or delivery preferences to elect to receive their fund documents electronically.

• Funds need to comply with new requirements for linking, storing, and hosting TSRs and other related regulatory documents online. Review your fund(s’) website and the process for posting and maintaining documents online to determine whether enhancements will be required.

Will the creation of TSRs change my funds’ existing annual and semi-annual shareholder reporting requirements?

• The new rule did not eliminate the requirement to continue producing, filing, and delivering (upon request) the traditional, long-form annual and semi-annual reports to shareholders. A small subset of items, such as the management discussion of fund performance and the tabular listing of assets by industry sector, may now be reported only in the TSR and will be excluded from the long-form annual and semi-annual reports.

Will an administrator charge funds for complying with the new TSRs’ requirements?

• After examining the rule and its requirements and determining the effort to compile and publish TSRs in addition to still preparing the long-form annual and semi-annual reports, it is inevitable that more time and resources are required to comply with the rule. Fees may vary from administrator to administrator. Some administrators may charge a base fee and charge more per CUSIP, others may charge a flat fee per fund. Any additional work required by significant customization would likely come with additional costs.

• There may be an option for fund managers to receive only the data required for the TSR from their administrator so that they can prepare the TSR independently. It is important to understand that extracting the data takes time and that it cannot be done simultaneously for multiple share classes. That technology is inherent within the tools provided by vendors. Additionally, there would be a point in time for the TSR to be incorporated into the Form N-CSR that your administrator files with the SEC on your behalf. At that time, the administrator still has to confirm that all data matches the data within the long-form annual or semi-annual report. As such, there will likely be fees that apply for a data-only extract solution. Any additional work required after the extract has occurred would likely come with additional costs.

• As with long-form semi-annual and annual reports, edgarization, typesetting, printing, and mailing related costs still apply to TSRs.

• There could be other potential costs, which could consist of the following:
  • Potential fund website development or customization fees
  • Additional third-party costs depending on the level of auditor and legal counsel involvement
  • Potential costs levied by index benchmark providers for the use of their product’s names in TSRs

Overall, implementing the TSR requires careful planning, attention to detail, and a commitment to ongoing communication and engagement with shareholders. By taking these steps, fund managers can enhance the effectiveness of their shareholder reporting and build stronger relationships with their investors.

There are various moving parts to comply with the new TSR requirements. If your administrator has not reached out to you about the status of their TSR solution, time is running out. At Ultimus, our appointed steering committee for this initiative has been proactively planning, coordinating with partners, communicating with clients, implementing in stages, and testing along the way. Ultimus developed an educational webinar that was shared with fund managers in early Q2 2024.

Please reach out to us with any questions or to discuss this in more detail.

COD00000019 04/22/2024