A compendium of regulatory matters for Q4 2024 and Q1 2025.

SEC Provides Feedback on Tailored Shareholder Report Common Issues

In October 2022, the U.S. Securities and Exchange Commission (the “SEC” or “Commission”) adopted rule and form amendments requiring mutual funds and exchange-traded funds (“ETFs”) that are registered on Form N-1A to prepare and transmit concise and visually engaging annual and semi-annual reports (collectively, “tailored shareholder reports”) designed to highlight certain information that is particularly important for retail shareholders to assess and monitor their fund investments on an ongoing basis. As of July 24, 2024, these new requirements applied to all fund shareholder reports.

These tailored shareholder reports include disclosures related to fund expenses, performance, and portfolio holdings. In addition, funds are required to tag the information in their shareholder reports using Inline XBRL structured data language.

The Division of Investment Management’s Disclosure Review and Accounting Office (“DRAO”) is responsible for reviewing fund disclosures. As part of its monitoring of tailored shareholder report implementation, the DRAO staff observed several recurring issues. In November 2024, DRAO published Account and Disclosure Information 2024-14 (“ADI 2024-14”) to remind funds of certain requirements and to flag common issues to ensure a smooth transition to these new requirements and to ensure investors receive the required information to help them make informed investment decisions and monitor their fund investments.

Key Takeaway: Funds should review their shareholder reports and associated website disclosures to ensure compliance with Rule 30e-1 under the Investment Company Act of 1940, as amended (the “Investment Company Act” or “1940 Act”), Item 27A of Form N-1A and Form N-CSR.

1. Expense Information. A fund must include a simplified expense presentation in its annual and semi-annual shareholder report in a specified format. The staff observed certain recurring issues with the content and calculation of certain disclosures. Such disclosures should follow the Instructions to Item 27A(c) of Form N-1A.

2. Management’s Discussion of Fund Performance (MDFP). A fund (other than a money market fund) is required to include MDFP in its annual shareholder reports and is permitted to include it in their semi-annual shareholder reports. The MDFP disclosure requirements are designed to provide a streamlined and visually engaging presentation of the key factors affecting fund performance. The staff has observed the following recurring issues in its review of MDFP disclosures:

• The performance table presenting average annual total returns for the past 1-, 5-, and 10-year periods should be based on a fund’s net asset value. ETFs are not permitted to include their performance based on market value.
• ADI 2024-14 reminds registrants that industry-focused indexes, indexes with characteristics such as “growth,” “value,” or “small- or mid-cap”, and other indexes that comprise only a subset of the overall applicable market, do not qualify as an appropriate broad-based securities market index, nor would commodity indexes.
• The statement to the effect that past performance is not a good predictor of the fund’s future performance must be noticeable and prominent.

3. Fund Statistics. The DRAO observed that some funds include portfolio-level statistics, such as average maturity or average credit rating, under the heading “Graphical Representation of Holdings.” These holdings-based statistics should instead be disclosed under the heading “Fund Statistics.”

4. Graphical Representation of Holdings. The tables, charts, or graphs depicting the fund’s portfolio holdings by category are permitted to present holdings based on the percentage of (1) net asset value, (2) total investments, (3) total exposure, or (4) net exposure attributable to each category. The DRAO staff observed that some funds disclose holdings as a percentage but do not specify if the percentage is based on net asset value, total investments, or total or net exposure.

5. Material Changes. A fund’s annual shareholder report must include a brief description of certain material changes that have occurred since the beginning of the reporting period. If there have been such changes, the cover page (or beginning) of the shareholder report must prominently state that the report describes material fund changes. The DRAO staff have observed that some funds disclose material fund changes while omitting the required cover page disclosure. Other funds include the cover page disclosure but do not include any disclosures about material fund changes.

6. Availability of Additional Information Online. A fund’s annual and semi-annual shareholder reports must include a statement that informs investors about certain additional information that is available on the fund’s website. In addition, rule 30e-1 under the Investment Company Act requires a fund to make the disclosures required by Items 7-11 of Form N-CSR and its complete portfolio holdings as of the close of the fund’s most recent first and third fiscal quarters publicly accessible, free of charge, at the website address specified at the beginning of the fund’s shareholder report. The staff has observed the following recurring issues:

• Some funds have included broken links in their shareholder reports.
• A fund is required to provide a link to the additional information on its website (or a QR code, or other means of facilitating access to such information). The link must be specific enough to lead investors directly to the particular information, rather than to the home page or a section of the fund’s website other than on which the information is posted. The link may be to a central site with prominent links to the referenced information.
• A fund is required to make the disclosures required by Items 7-11 of Form N-CSR available on a website. Many funds include this information as a single PDF file on their websites. To further assist investors, funds might consider referring to this information by a term that is more descriptive of the collective information required by Items 7-11 of Form N-CSR. For example, some funds refer to these disclosures as “Annual Financial Statements and Additional Information.”

7. Additional Issues.

a. Some funds include extraneous and sometimes lengthy disclosures such as disclaimers or risk disclosures that are not required or permitted by Item 27A of Form N-1A. A fund is permitted to add information to the shareholder report that is necessary to make the required disclosure items not misleading and the Commission stated that disclosure in response to this provision generally should be brief. The contents of shareholder reports are restricted to information which is required or permitted under Item 27A of Form N-1A.

b. Funds are reminded that they are required to present the information in shareholder reports in the same order as is required under Item 27A of Form N-1A.

c. Funds are reminded that they may omit disclosures that may be inapplicable (such as material fund changes and changes in and disagreements with accountants).

Your Ultimus financial administration team has reviewed the findings noted in ADI 2024-14 and are comfortable that the policies and procedures that have been developed for the preparation of the tailored shareholder reports are reasonably designed to prevent the issues highlighted in the report.

ADI 2024-14 can be found here: https://www.sec.gov/about/divisions-offices/division-investment-management/accounting-disclosure-information/adi-2024-14-tailored-shareholder-report-common-issues

The DRAO staff also published frequently asked questions on shareholder reports that are available at: https://www.sec.gov/investment/tailored-shareholder-reports-faqs.

SEC Describes Examination Process and Highlights Examination Observations in Risk Alert

In November 2024, the SEC’s Division of Examinations released a Risk Alert entitled: “Registered Investment Companies: Review of Certain Core Focus Areas and Associated Documents Requested.” The Risk Alert provides insight regarding the examination process for funds and highlights exam observations related to certain core review areas, including compliance programs, fund governance, and disclosures and regulatory reports.

The Risk Alert highlighted the following areas as those that may be reviewed during examinations:

• Compliance policies and procedures of funds and their service providers for their effectiveness and whether they address certain risks, such as the risks associated with allocating expenses between the adviser and the fund(s), or among funds/advisory clients.
• Funds’ board governance processes and the efficacy of board oversight of funds’ compliance programs (e.g., whether boards are getting information necessary to exercise their oversight responsibilities, boards are requesting and reviewing information necessary to understand the issues and make associated approvals, and funds and their advisers are accurately disclosing information to the boards related to the funds’ fees, expenses, performance, conflicts of interest, or relevant risks).
• Funds’ investment advisory agreement approval process and the thoroughness of the board’s review of fund fees for consistency with disclosures (e.g. whether fund boards compared the services to be rendered and amounts to be paid under the contract to those under other advisory contracts with the adviser or other advisers to RICs, such as peer groups, or other types of clients).
• Fund disclosures in regulatory filings and investor communications for their consistency and appropriateness relative to fund operations, conflicts of interest, and actual portfolio management activities

The Risk Alert also presents examples of deficiencies or weaknesses observed by the SEC staff related to the core areas.

• Funds did not perform required oversight or reviews as stated in their policies and procedures or perform required assessments of the effectiveness of their compliance programs.
• Funds did not adopt, implement, update, and/or enforce policies and procedures.
• Policies and procedures were not tailored to the funds’ business model or were incomplete, inaccurate, or inconsistent with actual practices.
• Funds’ Codes of Ethics were not adopted, implemented, followed, enforced, or did not otherwise appear adequate.
• CCOs did not provide requisite written annual compliance reports to fund boards.
• Fund registration statements, fact sheets, annual reports, and semi-annual reports contained incomplete or outdated information or contained potentially misleading statements.
• Sales literature, including websites, appeared to contain untrue statements or omissions of material fact.
• Fund board approvals of advisory agreements appeared to be inconsistent with the Investment Company Act and/or the funds’ written compliance procedures.
• Fund boards did not receive certain information to effectively oversee fund practices.
• Fund boards did not perform required responsibilities.
• Fund board minutes did not fully document board actions.

CCOs are advised to take these topics seriously and analyze to strength of their funds’ policies and procedures and determine the effectiveness of their implementation. The SEC has taken notice and will be focusing on these areas in their examinations.

https://www.sec.gov/files/risk-alert-registered-investment-companies.pdf

SEC Issues FAQ on Names Rule

On January 8, 2025, the staff of the Division of Investment Management of the Commission prepared responses related to the SEC’s 2023 adoption of amendments to Rule 35d-1 under the 1940 Act, which addresses certain broad categories of investment company names that are likely to mislead investors about an investment company’s investments and risks. The names rule was originally adopted by the Commission in 2001.

When the Commission issued the 2023 Adopting Release, it stated in the release that staff would be reviewing its no-action letters and other statements addressing compliance with the names rule to determine which letters and other staff statements, or portions thereof, should be withdrawn in connection with the final amendments. Among the statements that the Commission listed for review is the names rule FAQ document that the staff published in 2001. The Commission stated in the release that portions of this document may be moot, superseded, or otherwise inconsistent with the final amendments and, therefore, may be withdrawn by the staff. The staff has compiled a chart showing the 2001 FAQs that staff has determined to withdraw (for example, because the FAQ addresses circumstances particular to the 2001 adoption of the names rule, or because the 2023 Adopting Release addresses the topic the 2001 FAQ covers). The staff is retaining the balance of the 2001 FAQs, with modifications, as set forth below.

The staff may update this information from time to time to include responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not rules, regulations, or statements of the Commission, and the Commission has neither approved nor disapproved these FAQs or the answers to these FAQs. The FAQs, like all staff statements, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

https://www.sec.gov/divisions/investment/guidance/rule35d-1faq.htm

SEC Provides Guidance on Issues Related to Website Posting Requirements

On January 16, 2025, the DRAO issued an Accounting and Disclosure Information (ADI) publication to highlight issues the SEC staff has observed relating to website posting requirements under various SEC rules and certain exemptive orders. The ADI publication focuses on issues related to summary prospectuses, ETFs and money market funds (“MMFs”), as further described below.

The DRAO is responsible for reviewing fund disclosures. In addition to reviewing filings made with the Commission, DRAO periodically reviews other disclosures that are required under the Commission’s rules or exemptive orders. As part of this effort, the staff recently observed several issues relating to the website posting requirements under various Commission rules and certain exemptive orders, including those related to the use of summary prospectuses, ETFs, and money market funds (“MMFs”). These website requirements acknowledge the important role that the internet plays in providing investors with information. DRAO’s objective in publishing this ADI is to remind registrants of the website disclosure obligations that are required when operating under these rules or exemptive orders, and flag certain issues the staff has observed.

https://www.sec.gov/about/divisions-offices/division-investment-management/accounting-disclosure-information/adi-2025-15-website-posting-requirements

White House Executive Order – Regulatory Freeze

On January 20, 2025, President Donald J. Trump issued an Executive Order (the “EO”) affecting all executive department and agencies. In summary, the EO specified the following for all executive departments and agencies;

• No proposals or issuances of rules in any manner until a Trump appointed or designated department or agency head reviews and approves the rule.
• Executive departments and agency heads are to immediately withdraw any rules that have been sent to the Federal Register (the “OFR”) so that these rules can be reviewed and approved by Trump appointed or designated department or agency heads.
• For 60 days, executive agencies and departments should consider postponing the effective date of any rules that have been published in the OFR or any rules that have been issued in any manner but have not taken effect. The purpose of the postponement should be to review any questions of fact, law, and policy that the rules may raise.
• After the 60 day postponement discussed above, (1) if no substantive questions of fact, law, or policy are raised during the 60 day postponement period, then no further action is necessary, or (2) if substantive questions of fact, law, or policy are raised, executive departments and agencies should notify and take further action in consultation with the Director or Acting Director of the Office of Management and Budget (the “OMB Director”).
• Comply with any applicable EOs concerning regulatory management.

https://www.whitehouse.gov/presidential-actions/2025/01/regulatory-freeze-pending-review/

SEC Forms Crypto Task Force

On January 21, 2025, the Commission announced that it was launching a task force dedicated to developing “clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously.” The crypto industry has criticized the approach taken in recent years in which the regulator, in lieu of proposing new rules, relied primarily on enforcement actions to retroactively regulate crypto. “The result has been confusion about what is legal, which creates an environment hostile to innovation and conducive to fraud,” the SEC said in a statement announcing the task force. The task force is expected to clarify how existing securities laws apply to digital assets, as well as explore temporary relief measures for crypto tokens and exchanges, supporting a pathway towards compliance. In early February, Commissioner Peirce announced the Crypto Task Force webpage, which provides an overview of topics being looked at, as well as details on how members of the public can engage with them.

The task force is already at work. Commissioner Peirce has issued two separate statements as head of the new task force, one on February 4, 2025, and one more recently on February 21, 2025. In her first statement, Peirce noted the legal imprecision and commercial impracticality of how the commission handled issues related to crypto assets and highlighted the intent of the task force to create a regulatory framework that both protects investors and preserves the industry’s ability to offer products and services. The focus of these statements, however, was on highlighting some of the current and future projects and issues for the task force and, in this regard, Commissioner Peirce has noted that the task force will be looking for input from all interested parties.

https://www.sec.gov/newsroom/speeches-statements/peirce-journey-begins-020425?utm_medium=email&utm_source=govdelivery

SEC Staff Issues New Guidance Regarding Schedule 13D and 13G

On February 11, 2025, the SEC staff published updates to two Compliance and Disclosure Interpretations (“C&DIs”) regarding the availability of Schedule 13G to certain investors, specifically concerning activities that could preclude an investor from reporting on Schedule 13G in certain circumstances. The C&DIs have been updated to revise Question 103.11 and include a new Question 103.12.

https://www.sec.gov/rules-regulations/staff-guidance/compliance-disclosure-interpretations/exchange-act-sections-13d-13g-regulation-13d-g-beneficial-ownership-reporting

White House Executive Order – Federal Agencies

On February 18, 2025, President Donald J. Trump signed an EO, entitled, “Restoring Democracy and Accountability in Government,” which asserts greater authority over all federal agencies, including those established by Congress as independent from direct presidential control. The EO specifically lists the SEC, the Federal Trade Commission (FTC), the Federal Communications Commission (FCC), the National Labor Relations Board (NLRB), and the Federal Reserve Board as relevant agencies.

The EO could lead to delays, if not cancellations, of pending and proposed regulations at those agencies. At a minimum, it introduces uncertainty as it newly subjects all of their “significant regulatory actions” to White House review. Moreover, the EO reflects an intent (or represents an effort) to fundamentally change the current regulatory environment.

https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-reins-in-independent-agencies-to-restore-a-government-that-answers-to-the-american-people/

SEC Announces Cyber and Emerging Technologies Unit to Protect Retail Investors

On February 20, 2025, the SEC announced the creation of the Cyber and Emerging Technologies Unit (“CETU”) to focus on combatting cyber-related misconduct and to protect retail investors from bad actors in the emerging technologies space. The CETU, led by Laura D’Allaird, replaces the Crypto Assets and Cyber Unit and is comprised of approximately 30 fraud specialists and attorneys across multiple SEC offices.

“Under Laura’s leadership, this new unit will complement the work of the Crypto Task Force led by Commissioner Hester Peirce. Importantly, the new unit will also allow the SEC to deploy enforcement resources judiciously,” said Acting Chairman Mark T. Uyeda. “The unit will not only protect investors but will also facilitate capital formation and market efficiency by clearing the way for innovation to grow. It will root out those seeking to misuse innovation to harm investors and diminish confidence in new technologies.”

Specifically, the CETU will utilize the staff’s substantial fintech and cyber-related experience to combat misconduct as it relates to securities transactions in the following priority areas:

• Fraud committed using emerging technologies, such as artificial intelligence and machine learning
• Use of social media, the dark web, or false websites to perpetrate fraud
• Hacking to obtain material nonpublic information
• Takeovers of retail brokerage accounts
• Fraud involving blockchain technology and crypto assets
• Regulated entities’ compliance with cybersecurity rules and regulations
• Public issuer fraudulent disclosure relating to cybersecurity

https://www.sec.gov/newsroom/press-releases/2025-42#:~:text=The%20Securities%20and%20Exchange%20Commission%20today%20announced%20the,from%20bad%20actors%20in%20the%20emerging%20technologies%20space.

ICI Unveils Blueprint to Support Middle-Class Wealth Creation: Reimagining the 1940 Act

On March 17, 2025, the Investment Company Institute (the “ICI”) unveiled the ICI’s blueprint to reform the 1940 Act, “Reimagining the 1940 Act: Key Recommendations for Innovation and Investor Protection”. The ICI presented the white paper at its Investment Management Conference in California and is calling on the SEC to address the recommendations as part of its mission of capital formation, investor protection, and orderly markets. The 1940 Act, which regulates investment companies including mutual funds, ETFs, and closed-end funds (“CEFs”), has not been comprehensively reviewed in more than 30 years.

ICI’s blueprint to modernize the 1940 Act seeks to foster ETF innovation, expand retail investors’ access to private markets, strengthen closed-end funds, eliminate unnecessary regulatory costs and burdens, and better leverage the expertise and independence of fund directors.

“Last year, we celebrated the enduring success of the mutual fund at its centennial. This investment product helped create a pathway to the middle class for millions of Americans. To ensure continued success for these products and the investors they serve, the SEC should update the 1940 Act regulatory framework,” said ICI President and CEO Eric J. Pan. “When the framework was last updated, ETFs did not exist, and now millions of Americans own ETF shares. Mobile technology, which many funds use to communicate with investors, had yet to be developed. The 1940 Act was crafted to change over time as markets evolved. We are hopeful that SEC leadership, including Acting Chairman Uyeda and the president’s nominee, Paul Atkins, will be receptive to our calls to modernize the 1940 Act.”

ICI developed its blueprint over the past three years. Two principles have guided ICI’s work: first, that the core 1940 Act regulatory framework remains fundamentally sound; and second, that any proposed changes must advance the interests of individual investors.

ICI worked extensively with its members to consider potential ways to modernize the regulatory framework for 1940 Act funds. ICI also worked in close collaboration with leading law firms with deep expertise developed through their representation of funds, fund advisers, and independent directors. Several of the law firm partners most involved with this project previously served in senior positions in the SEC’s Division of Investment Management.

ICI’s blueprint includes selected recommendations such as:

• The SEC should enable a new or existing fund to offer both mutual fund and ETF share classes and expand permissible asset classes for semi-transparent ETFs.
• The SEC should adopt reforms to strengthen closed-end funds, including by giving them additional tools to combat harmful predatory activists, and expand their flexibility to invest in private market assets, without sacrificing investor protection.
• The SEC should adopt electronic delivery of information as the default delivery option and streamline the shareholder approval process.
• The SEC should permit fund boards to appoint a greater number of new independent directors and update requirements for in-person voting by directors.

https://www.ici.org/system/files/2025-03/25-ppr-reimagining-the-40-act.pdf