Other
Importance of Delivering Timely and Material Information to Investment Company Investors
April 14, 2020
Staff Statement
Division of Investment Management
April 14, 2020
The Division of Investment Management[1] continues to closely monitor the impacts of the coronavirus disease 2019 (“COVID-19”) and consider the interests of long-term Main Street investors, who access the capital markets mainly through investment companies.[2] In that regard, we are focused on ensuring that investment companies continue to meet their obligations under the federal securities laws to provide material and timely information to investors. In light of the current uncertainties and market disruptions, investors need high-quality financial information more than ever.[3] We are committed to promoting the updating and delivery of such information, which is particularly important to keep Main Street investors up to date about their investments.
Over the past several weeks, the staff and the Commission have provided guidance and targeted, conditional, and temporary relief as appropriate and as circumstances warrant.[4] Some of the relief issued was responsive to the operational challenges faced by funds and other market participants as a result of the shifts to remote business operations. We are issuing this statement to emphasize the ongoing importance to update and deliver required information to investors in a timely manner consistent with investment companies’ disclosure obligations, even during this period of operational challenge.
Updating Prospectuses and Financial Statements
We remind investment company issuers of their obligations under section 10(a)(3) of the Securities Act of 1933 to update the information in their prospectuses, including the required underlying certified financial statements.[5] We are reminding investment companies with a December 31 fiscal year end of this obligation as they approach May 1, 2020, so that they may plan accordingly to ensure that they have updated their prospectuses in order to continue to sell shares to new investors and sell additional shares to existing investors.[6]
We also encourage investment companies to consider whether their disclosures, including risk disclosures, should be revised based on how COVID-19-related events may affect the investment company and its investments.
Delivering Information to Fund Investors
As part of its COVID-19 response efforts, the Commission stated that it would not provide a basis for enforcement action if an investment company does not physically deliver to existing investors the current prospectus of the investment company where the prospectus is not able to be timely delivered because of circumstances related to COVID-19, as long as certain conditions are met.[7]
With respect to sales of investment company shares to new purchasers, however, investment companies must continue to deliver the fund’s prospectus or summary prospectus in a timely manner, based on the delivery preferences that have been expressed by the investor.
Investment companies generally deliver required materials to investors in paper unless an investor consents to electronic delivery.[8] Given the current circumstances of COVID-19, however, investors may prefer electronic delivery of investment company materials rather than at-home, paper-based delivery. We encourage investment companies to communicate with investors about their delivery preferences.
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These are unprecedented times raising unique and often previously unconsidered issues. We recognize circumstances may evolve, and some investment companies may encounter particularized obstacles. To the extent that an investment company is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, the investment company should engage with the Division of Investment Management. While the Division will consider appropriate assistance regarding such challenges, we also remain committed to our bedrock principle of making timely and relevant information available to investors. We welcome input on how we can continue to meet that principle while addressing the challenges presented in the current COVID-19 environment.
[1] This statement represents the views of the staff of the Division of Investment Management. It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”). The Commission has neither approved nor disapproved its content. This statement, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
[2] As of the end of 2018, over 100 million individuals representing nearly 57 million households, or 45 percent of U.S. households, owned funds (generally ETFs or mutual funds). See Investment Company Institute, 2019 Investment Company Factbook, available at https://www.ici.org/pdf/2019_factbook.pdf.
[3] Statement from the Chief Accountant, available at https://www.sec.gov/news/public-statement/statement-teotia-financial-reporting-covid-19-2020-04-03 (“As we face these challenging times, investors and other stakeholders need high-quality financial information more than ever. The proper functioning of our capital markets depends on a regular supply of high-quality financial information that enables investors, lenders, and other stakeholders to make informed decisions.”).
[4] See SEC Coronavirus (COVID-19) Response – Guidance and Targeted Regulatory Assistance and Relief, available at https://www.sec.gov/sec-coronavirus-covid-19-response. See also Statement from Chairman Jay Clayton, available at https://www.sec.gov/news/public-statement/statement-clayton-investors-rbi-form-crs.
[5] Section 10(a)(3) of the Securities Act of 1933; Rule 496 under the Securities Act of 1933. This is particularly relevant for investment companies that continuously offer their shares, such as open-end funds as well as variable insurance products. In addition, we remind investment companies of their general ongoing duty to update prospectuses promptly for material changes in their disclosures.
[6] Approximately one-third of investment companies and virtually all variable annuity and variable life insurance contracts have a December 31 fiscal year end. Investment companies also are reminded of their obligation to make appropriate, timely filings with updated financial and related information through the EDGAR system.
[7] See Order Under Section 6(c) and Section 38(a) of the Investment Company Act of 1940 Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder; Commission Statement Regarding Prospectus Delivery (March 13, 2020), available at https://www.sec.gov/rules/other/2020/ic-33817.pdf; Order Under Section 6(c) and Section 38(a) of the Investment Company Act of 1940 Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder; Commission Statement Regarding Prospectus Delivery (March 25, 2020), available at https://www.sec.gov/rules/other/2020/ic-33824.pdf (extending the Commission’s prospectus delivery statement to investment company prospectuses required to be delivered to existing investors on or before June 30, 2020).
The conditions include that the investment company (1) notify Commission staff that it is relying on the relief; (2) publish on its public website that it intends to rely on the relief; and (3) publish its current prospectus on its public website. In addition, the prospectus must be delivered as soon as practicable, but not more than 45 days after the date originally required.
[8] See Use of Electronic Media for Delivery Purposes, Exchange Act Release No. 36345 (Oct. 6, 1995); Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples Under the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940, Exchange Act Release No. 37182 (May 9, 1996); Use of Electronic Media, Exchange Act Release No. 42728 (Apr. 28, 2000).