Sep. 14, 2020
SEC, I largely agree with the changes you are making to the Shareholder Report and prospectus. Below are some questions and suggestions for your consideration. · Performance 1. I agree with the changes to the appropriate broad-based securities market index definition. I think it would be helpful if you could clarify a few things: § Can a fund use a country specific index? Previously a Commission release would have permitted funds to use the Nikkei (Of course, back them Japan was he 2nd largest world economy). § How does the definitional apply to indices of a particular capitalization? Can all funds use a large cap index (such as S&P 500) since on a capitalization basis, they comprise most of the market? What about a small-cap index? § Can funds use a government bond fund or an investment-grade bond fund? § Can a fund use an ESG index? (We understand that for purposes of the Names Rule, the staff does not consider ESG to be a strategy.) § Perhaps you can publish a list of the most common indices currently used and let the public know which you think re broad-based and which do not. 2. Please clarify when performance begins. Is it at effectiveness, when a fund commences operations, or when investors first allocate money to a fund. The forms vaguely state it is after effectiveness, but many funds do not commence operations until some later date. Also, codify the requirements of the MassMutual letter that permits funds to show predecessor performance. · Fund Statistics – I am concerned that funds will cherry pick statistics that make the fund look more favorable. If a fund wants to change a statistic (other than because the statistic cannot be reasonably calculated), it should be require to show that statistic for one additional year. This is similar to the treatment of changes in a broad-based index. Also, if a fund shows statistics for only a single class, it should be subject to the same requirements funds that apply to the line graph. (Otherwise, funds will show the cheapest/best performing classes.) Alternatively, they should be allowed to show the largest class. · Names Rule – The proposal will let the annual shareholder report serve as the 60-days notice for purposes of the Names Rule. Currently, the Names Rule requires the notice to be in a “separate document”, though most funds include it in a supplement describing many changes to the fund. It seems you are backing off the “separate document” requirement. My question is, can the notice of material changes under rule 498B also satisfy the Names Rule (assuming it is provided 60-days in advance of the change)? · Principal Strategies and Risks – I agree with another commenter that noted that the staff is often the source of disclosure creep asking for more and more disclosure in the summary section. Many disclosure examiners do not seem to understand the concept of layered disclosure. The Disclosure office also need to work on comment consistency and consistent treatment of funds. For example, funds often get pushback in areas (areas that do not implicate blackline regulatory considerations) where they can point do any other funds doing the same thing. If you want to draw a line in the sand, do so consistently. Also, do not tell one fund something is wrong and potentially misleading just to let another fund do the same thing without objection 3 months later. · Fees 1. I do not like the new cost presentation in the annual report. Performance has no place in a cost presentation. Also, showing both NAV and market performance for ETFs will add to the confusion. Just use NAV performance (as you do in the prospectus/482 performance presentation). 2. I do not like the change to the AFFE presentation. The prior disclosure was effective; do not make it more complex and more confusing for investors. Also, do not let funds obfuscate fees. Also, the footnote approach makes it difficult to compare fund fees. Isn’t the entire point of the summary fee table to summarize the all-in cost? Why are you carving a piece out for some, but not all funds. · Liquidity Risk Management – This disclosure is currently worthless and even with your changes will continue to be worthless. For most funds, this is just not a concern. · Frequency – A single shareholder report once a year is sufficient. If you do require a semi-annual report, I suggest that all figures be annualized. · Other suggestions: 1. Make closed-end fund annual reports more useful to holders of fund debt and preferred shares. It is currently geared toward common shares and not other investors. 2. Clarify if there is a prospectus delivery obligation with respect to the reinvestment of dividends. 3. Make it easier for ETF investors to reinvest dividends. Currently, investors are sitting on cash because they do not realize ETFs are throwing off cash. Perhaps you can raise this concern with the IRS and they can change their regs so funds need not actually distribute dividends, and instead keep the money in the fund and still pay taxes as though dividends were actually paid out. 4. Find ways to decrease audit costs. These costs continue to go up while the required level of effort has gone down given that it is now easier than ever to cross-reference, test and validate data. Let’s get rid of the Big 4 oligopoly. The PCAOB standards is supposed to level the playing field and establish consistent standards. Why are fund board hiring the most expensive auditors in town? If they also must follow GAAP and PCAOB auditing standards what extra service are the fund getting? FYI: Fund accounting really isn’t that difficult for that vast majority of funds. 5. Let’s decrease the costs associated with legal opinions. Do we need legal opinions for well-settled areas. Do we need an opinion that Blackrock’s 500th fund is validly and legally issued? If it isn’t, it is fraud… and Blackrock has deeper pockets than any law firm anyway. Also, most opinions rely on the word of funds anyway. 6. Require shareholder approval before significantly changing a fund’s objective or strategies. Boards and Advisers are taking too many liberties in changing the nature of a fund. Funds should also be required to get a vote before converting from a mutual fund to an ETF. The ETF structure deprives investors of NAV, funds should not be able to make this change on their own. Market price is somewhat of a proxy for redeemability, but not quite…especially for small funds. 7. If a fund is announces its liquidation, it should immediately escrow fees to pay for the liquidation. Investors left behind should not solely bear the costs of a liquidation. 8. The SEC should reconsider when notices and prospectuses should be delivered to investors. 498B goes a long way, but that is optional. Material changes should immediately be pushed to all affected investors. Many funds do this as best practice. However, others file a change and that’s it. There is no meaningful notice to investors. 9. The various web posting rules for funds are getting out of hand. Please take a fresh look at what must be posted and how it must be posted. A fund landing page should not have links to 20 more fund documents. 10. Can we get rid of the requirement to make a 497J filing if we sell off the version of a prospectus filed in a 485(b) filing? Seems like an extra unnecessary burden. 11. Please reconsider the representations required by the staff to request rule 485(b)(1)(vii) relief. Disclosure examiners are often draconian in application of these representations. If we do not have assures that we can reasonably rely on this relief, it serves little purpose (which is supposed to be to promote efficiencies). 12. Funds should not be required to disclose beneficial owners that are individual investors. Often times a new fund or a fund with a small class may have individual investors holding more than 5% of that class. You should not be disclosing the identity of an individual investor in a public filing. The investor likely had no notice or no reason to think their information would be publicly disclosed. 13. Can we get rid of the requirement to file marked copies of filings? I am not sure the staff uses it and if they did, they can certainly create one themselves. 14. What happens if a new investor buys into the fund between delivery of the shareholder report and the 10(a)(3) update? These investors will not get a prospectus and will not receive the notice of material changes in the prospectus. Perhaps you can revise the definition of existing investor as one that has held the fund for at least 120 days. 15. Consider clarifying what is a material change to fees for purposes of updating the prospectus. Do we only need to calculate it semi-annually when we generate financials or must we monitor and update fees more regularly? 16. Provide more guidance about the NAST analysis considerations in fund mergers. The staff often takes a hardline on their analysis even when we disagree. 17. Clarify if material fund changes is at all related to a materiality determination under rule 485(b). 18. Please remove the requirement to include a certification to use rule 485(b). Law firms charge a fortune for this certification. If it is an SEC rule, we should not need to certify compliance, we need to just comply with the law. 19. The disclosure staff pushed for lots of AP-related risks for ETFs. Has this been an issue yet? Is it really a principal risk? Stop adding to disclosure overload. Also, if a problem did exist, more APs would come in to the market which would solve the problem and bring the fund back to an equilibrium. 20. There is also a lot of disparity in the types and amount of disclosure expected from disclosure examiners. I think the Commission should take steps to encourage consistency and fair treatment of funds. 21. The Disclosure Office and Office of Chief Counsel in Investment Management seems to have lost much of its intellectual rigor. In the past these offices new the statues, rules, regulations and form inside and out. Now the of OCC analysis is did you use the exact same language a prior applicant used. In Disclosure, it does not seem that all the staff are even familiar with all of the product types and form requirements reviewed by the office. Since, disclosure is its only focus, it should have greater expertise, as it did 5 and 10 years ago. The disclosure office’s current motto appears to be, put everything in the summary section or on the cover page and let god sort it out. If counsel asks for any clarification, it must be run past a branch chief first. This is particularly the case for the less common fund types such as non-traded closed-end funds, non-common stock offerings of closed-end funds, business development companies, and insurance products. Consider creating a focused group of disclosure staff for these fund types. These offering could benefit from folks with mastery over these funds. 22. The Division of Corporation Finance publishes hundreds of pages of staff guidance. I understand that IM has similar disclosure guidance its staff uses. Please make this guidance available to all. It will improve transparence and efficiency in the disclosure review process. 23. You should merge the N-CSR and SAI into a single annual document. 24. You should merge many of the various forms together. For example, Form 24f-2 should be merged into form N-CEN. There are too many filing requirements that need to be consolidated. 25. If an N-CSR is expected to be posted to a website, please rename it to something more meaningful. Perhaps “N-IGMA.” 26. Boards § The SEC should re-evaluate the roll of fund directors. The SEC has been overburdening boards changing their role from oversight to being more involved in the daily operation of a fund. § The 1940 Act should impose a more stringent vote requirement for directors (since it does require that a minimum number be elected. Currently, a nominee often needs a plurality of votes. That means if the director is unopposed (as is almost always the case) if one investor votes in favor of the director, the director is deemed elected (regardless of how many investors abstain or vote against the director). § The SEC needs to re-evaluate what is in “interested director”. An adviser putting his frat brothers or childhood friends into the role of director suggests to me that those individuals are not disinterested. § Boards make too much money which comes out of the pocket on fund investors. In many cases Board members are retired professionals and in some cases, make more money as a director working one or two days a quarter than they did as a full-time professional. Given how lucrative it can be to be a director, this makes it unlikely that a board member will vote against management. This is why funds in the 90th percentile of (poor) performance and fees still have the same management. 27. Fund chief compliance officers need to be more independent. They should not be officers of the adviser, portfolio managers, or directors. CCOs with other roles cannot be impartial or objective. 28. The SEC should clarify when an N-14, proxy statement, information statement or prospectus supplement is necessary to inform investors about a fund merger (particularly when no vote is required). 29. Modernize the current Commission guidance on electronic delivery. We learned from COVID that electronic delivery can be safer and more reliable. 30. Do not let fund’s say they are not responsible if someone steals your identity and empties your account. They should be the ones with appropriate controls in place. You shouId even allow a delay in redeemability if a fund reasonably needs extra time to confirm the identity of an investor. Thank you. -Ubiquity