The Division of Investment Management’s Disclosure Review and Accounting Office (DRAO) is responsible for reviewing fund disclosure filings. DRAO not only reviews filings on a one-by-one basis, but also looks at industry-wide data to detect disclosure issues.[1] As part of this effort, the staff observed several issues relating to performance and fee information. This ADI describes these observations and the related disclosure requirements.

DRAO’s objectives in publishing this ADI are to

• encourage funds to closely review their performance and fee disclosures prior to providing them to investors,
• flag certain disclosure issues the staff has observed, and
• inform the public about how we use some of the information we collect.
  Key Takeaway: Verify the accuracy of your performance and fee disclosures prior to filing them with the Commission and providing them to investors.
• Performance Presentations – Failing to Reflect Sales Loads: DRAO staff has observed multiple funds that failed to reflect sales loads in their average annual returns table.[2] For example, we found funds with maximum loads from 5.00% to 5.75% that were excluded, resulting in overstated performance. This error inflates the performance of these funds compared to other funds. The average annual returns table must reflect the deduction of the maximum sales load at the times, in the amounts, and under the terms disclosed in the fund’s prospectus.[3]
• Performance Presentations – Additional Issues: The staff has also observed other errors in the presentation of fees in the prospectus, such as:
  • Showing negative performance as positive performance (in both the bar chart and average annual return table); and
  • Transposing the performance of fund classes (e.g., showing class A performance as class B’s performance and vice versa) and transposing the performance of multiple benchmark indices.

  Given the importance of performance information to investors, funds should ensure that the performance information disclosed is accurate.

• Incorrectly Showing Net Expenses that Exceed Gross Expenses: A fund’s fee table must include the Total Annual Fund Operating Expense (often referred to as “gross expenses”). If a fund has a fee waiver that will reduce its fee for at least one year, it may include two additional line items showing the amount of the waiver and the Total Annual Fund Operating Expenses After Fee Waiver (often referred to as “net expenses”). Some fee waivers include provisions that permit the adviser to recoup expenses it previously waived. We have observed that some funds reflect recoupments as a positive fee waiver that causes their net expenses to be greater than their gross expenses. This approach is not consistent with the requirements of Form N-1A[4] because the two additional line items can only be shown if there is a reduction in gross fees. Instead, because recoupments are expenses to the fund, they should be reflected in the fee table as a separate line-item or included in Other Expenses and reflected in its gross expenses.
• Failing to Disclose Acquired Fund Fees and Expenses: The prospectus fee table must include the expenses associated with the fund’s investments in other funds (“Acquired Fund Fees and Expenses”).[5] DRAO staff has identified a number of funds that failed to reflect the appropriate amount of Acquired Fund Fees and Expenses in their fee table. Funds must ensure that the costs associated with their investments in other funds are appropriately reflected in their fee table and expense example.
• Failing to Correctly Calculate the Expense Example: The expense example is a hypothetical calculation that shows the estimated expenses that an investor will pay for investing in a fund over different time periods.[6] The staff has identified multiple funds that incorrectly calculate the expense example. These errors include what appear to be arithmetic errors, the failure to reflect fee waivers for only the term of the fee waiver,[7] and the failure to include certain fee items, such as Acquired Fund Fees and Expenses. Because the expense example helps illustrate for investors the amount of fees they may pay, it is important that this information be calculated accurately.
• Failing to Correctly Tag the Risk Return Summary: Mutual funds and exchange-traded funds are required to tag their risk/return summaries in XBRL.[8] DRAO staff has observed that some funds incorrectly tag their information by using the wrong tags, enter the data incorrectly, or associate the tagged information with the wrong fund or class. In order for this information to be most useful, the information must be tagged correctly. We remind funds that the tagged data files carry the same liability as the related official filings.[9]

In closing, we remind registrants that they are responsible for ensuring the accuracy of their disclosures.

* * * *

ADI are recurring publications that summarize the staff’s views regarding various requirements of the federal securities laws.

The statements in this ADI represent the views of the Division of Investment Management. This update is not a rule, regulation or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content. Future changes in rules, regulations, and/or staff no-action and interpretive positions may supersede some or all of the information in a particular ADI.

We hope that this ADI will assist registrants in preparing their filings. We also welcome feedback on this ADI and on any disclosure matters. If you have any questions or feedback, please contact:

Disclosure Review and Accounting Office

Phone: 202.551.6921

Email: IMDRAO@sec.gov