On November 8, 2024, the staff of the Disclosure Review and Accounting Office of the SEC’s Division of Investment Management issued an Accounting and Disclosure Information (ADI) publication to highlight common issues the SEC staff has observed in funds’ tailored shareholder reports (TSRs) filed with the SEC and to suggest certain fund practices that may assist investors. In January 2024, the staff of the SEC’s Division of Investment Management issued guidance on TSRs in the form of frequently asked questions (FAQs), as summarized here.

The ADI publication focuses on fund practices and recurring issues in the following areas.

• Expense Information. With respect to semi-annual reports, the staff stated that fund expense information in dollars must reflect the dollar cost over the period and therefore should not be annualized, whereas fund expense information as a percentage of investment must be shown on an annualized basis, and suggested that funds consider noting that expense information as a percentage of investment is shown on an annualized basis. The staff also clarified that fund expense information as a percentage of investment must be calculated based on the average account value over the period, rather than the initial investment amount (e.g., $10,000). In addition, the staff noted that fund expense information in dollars should be rounded to the nearest dollar.
• Management’s Discussion of Fund Performance (MDFP). The staff stated that a fund’s average annual total returns table must present performance based on the fund’s net asset value, observing that many ETFs also present performance based on market value, which is not permitted. With respect to the requirement to compare fund performance to an appropriate broad-based securities market index, the staff reminded funds 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 appropriate broad-based securities market indexes. The staff also reminded funds that they are required to include a “noticeable and prominent” statement to the effect that past performance is not a good predictor of the fund’s future performance.
• Fund Statistics. The staff observed that some funds disclose certain portfolio-level statistics, such as average maturity or average credit rating, under the heading “Graphical Representation of Holdings,” noting that such statistics should instead be disclosed under the heading “Fund Statistics.”
• Graphical Representation of Holdings. The staff noted that fund holdings disclosed as a percentage must specify if the percentage is based on net asset value, total investments, or total or net exposure. The staff also noted that if a fund categorizes its holdings based on credit quality, the fund must include a brief description of how the credit quality was determined, and if credit ratings from credit rating agencies are used, also include a concise explanation of how they were identified and selected.
• Material Changes. The staff observed that some funds disclosed material fund changes without including the corresponding required statement on the cover page that the report describes material fund changes, while other funds included the required statement but did not include disclosures describing the material fund changes.
• Availability of Additional Information Online. The staff observed funds including in their TSRs broken hyperlinks intended to direct investors to the fund’s website where additional information can be accessed, as well as hyperlinks that work but do not lead investors directly to the additional information or to a central site with prominent links to the referenced information. With respect to the information required by Items 7-11 of Form N-CSR, which is required to be made available on the fund’s website, the staff suggests that funds consider using a more descriptive label for the document that includes this information, such as “Annual Financial Statements and Additional Information,” rather than “annual reports,” “N-CSR” or “Financial Statements.”
• Inline XBRL Data Tagging. The staff notes that some funds have identified additional comparative performance indexes as “broad-based” indexes in their Inline XBLR tagging, rather than tagging the additional indexes with the separate tag intended for such indexes.
• Additional Issues. The staff observed that some funds have included disclosures that are not required or permitted, such as disclaimers or risk disclosures. The staff also reminded funds that they are required to disclose the information in their TSRs in the same order as is required under Item 27A of Form N-1A and that funds may omit disclosures that may be inapplicable, such as material fund changes and changes in and disagreements with accountants.

The ADI publication noted that the Disclosure Review and Accounting Office expects to update the publication from time to time to include additional information. The publication is available here.