SEC Adopts Rules Requiring Funds To Submit Risk/Return Summary Information In XBRL
[23272]
February 24, 2009
TO: ACCOUNTING/TREASURERS MEMBERS No. 12-09ETF ADVISORY COMMITTEE No. 4-09
SEC RULES MEMBERS No. 22-09
SMALL FUNDS MEMBERS No. 15-09
TECHNOLOGY COMMITTEE No. 6-09
XBRL WORKING GROUP RE: SEC ADOPTS RULES REQUIRING FUNDS TO SUBMIT RISK/RETURN SUMMARY INFORMATION IN XBRL
The Securities and Exchange Commission has adopted rules that will require all open-end management investment companies to submit the information contained in the risk/return summary section of their prospectuses to the SEC – and post it on their web sites – in interactive data format, using eXtensible Business Reporting Language (“XBRL”). [1] The information must be submitted to the SEC as an exhibit to a fund’s registration statement or an exhibit to a prospectus with risk/return summary information that varies from the registration statement. The new rules, which are summarized below, do not alter the existing requirements to provide risk/return summary and other information through traditional format filings.
Mechanics of Mandatory XBRL Rules
The rules require mutual funds to submit electronically a new exhibit containing risk/return summary information in XBRL format (“interactive data file”), for any registration statement or post-effective amendment thereto on Form N-1A that includes or amends information in response to Items 2, 3, or 4. [2] The first required submissions will be for initial registration statements and post-effective amendments that are annual updates to effective registration statements that become effective after January 1, 2011. An interactive data exhibit, which can be submitted under Rule 485(b) under the Securities Act of 1933, must be completed after the related filing becomes effective but not later than fifteen business days after the effective date of the related filing. [3]
In response to comments on the Commission’s proposal, an interactive data file also must be submitted for any form of prospectus filed pursuant to Rule 497(c) or (e) under the Securities Act that includes information in response to Items 2, 3, or 4 of Form N-1A that varies from the registration statement. [4] Such a submission is required either with, or up to 15 business days subsequent to, the filing made pursuant to Rule 497. In addition, funds must post the interactive data files on their web site, if they have one. Posting is required by the end of the calendar day an interactive data file is submitted to the Commission or is required to be submitted, whichever is earlier. [5]
Failure to submit or post interactive data as required will render a registrant ineligible to file post-effective amendments under Rule 485(b) under the Securities Act, until the submission and posting are completed. [6] The suspension does not apply to post-effective amendments filed before the suspension became effective or post-effective amendments filed solely for the purpose of submitting interactive data. A fund may apply in writing for a continuing hardship exemption if it cannot submit or post interactive data without undue burden or expense. If a fund fails to submit or post the required information by the end of the period for which an exemption is granted, the registrant’s ability to file post-effective amendments under Rule 485(b) will be suspended.
The rules require that the risk/return summary information be tagged using the most recent list of tags released by XBRL U.S. for risk/return summary information, as approved for use by the Commission. The Adopting Release notes that XBRL U.S. has updated the architecture of the list of tags initially developed by an Institute-sponsored working group and has conformed the list to recent changes to Form N-1A intended to enhance fund disclosure. Interactive data will be required to comply with Regulation S-T and the EDGAR Filer Manual (which is currently being updated).
Liability Provisions
With respect to liability, the Adopting Release explains that, under new Rule 406T, an interactive data file is:
- subject to the anti-fraud provisions of Section 17(a)(1) of the Securities Act, Section 10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934, and Section 206(1) of the Investment Advisers Act of 1940 except as provided below;
- deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act, deemed not filed for purposes of Section 18 of the Securities Exchange Act and Section 34(b) of the Investment Company Act of 1940, and otherwise not subject to liability under these sections;
- deemed filed for purposes of Rule 103 of Regulation S-T;[7] and
- subject to liability for a failure to comply with Rule 405 of Regulation S-T, but deemed to have complied with Rule 405 and would not subject to anti-fraud or any other liability if the electronic filer:
- makes a good faith attempt to comply with Rule 405; and
- after the electronic filer becomes aware that the interactive data file fails to comply with Rule 405, “promptly” amends the file to comply with Rule 405. [8]
In a noteworthy change from the proposal, the liability provisions of Rule 406T will apply only until October 31, 2014. [9] The Adopting Release states that the Commission believes that “limiting the modified application of the federal securities laws to a specified period improves the balance between avoiding unnecessary cost and expense and encouraging accuracy in regard to interactive data because it recognizes that issuers and service providers likely will grow increasingly skilled at and comfortable with the tagging requirements.” [10]
As the Commission had proposed, the new rules will neither require nor permit the cautionary disclosure that is used in the voluntary program, which states that investors should not rely on the interactive data information in making investment decisions. Based on concerns expressed by commenters including ICI, however, the Commission’s data viewer, which is being upgraded, [11] will include a legend that: (1) informs users that the information is derived from a portion of the fund’s prospectus; (2) explains that the prospectus contains additional information about the mutual fund; and (3) states that a fund’s prospectus should be read carefully before investing. The Adopting Release states that the Commission urges third-party viewers also to include this legend. It notes, however, that the liability provisions adopted by the Commission attach only to interactive data viewed on the Commission’s viewer. [12]
The Adopting Release indicates that interactive data in viewable form that are displayed on web sites other than the Commission’s will be subject to general anti-fraud principles applicable to republication of another person’s statements. It notes that some commenters requested that mutual funds be able to incorporate by reference their full prospectus and statement of additional information into the viewable interactive data exhibit. In response, it states that the Commission does not believe it is necessary to provide this ability, “given that liability is not imposed separately upon interactive data in viewable form.” [13]
Voluntary Filing Program
In connection with adopting rules that require funds to tag the risk/return summary, the SEC is modifying the voluntary XBRL filing program to remove risk/return summary information as a category of information permitted to be submitted under the voluntary program as of January 1, 2011. The Adopting Release states that this change makes clear that funds can continue to experiment with the submission of risk/return summary information in interactive data format until the compliance date for the rule amendments. Funds will continue to have the option of submitting tagged financial statements under the voluntary program thereafter.
In addition, to encourage participation in the voluntary program for tagging investment company financial information, the SEC adopted, substantially as proposed, its proposal to enable registered investment companies and business development companies to submit exhibits containing a tagged schedule of portfolio holdings, without having to submit any other tagged financial information. Funds may submit tagged portfolio holdings information any time after July 15, 2009, at which time an updated EDGAR Filer Manual incorporating a new list of tags for portfolio holdings information will be available. Consistent with the current voluntary program, the Commission will require cautionary disclosure to be tagged and included within the exhibits submitted to the voluntary program. [14]
Frances M. Stadler
Deputy Senior Counsel
endnotes
[1] See Interactive Data for Mutual Fund Risk/Return Summary, SEC Release Nos. 33-9006, 34-59391,39-2462, IC-28617 (February 11, 2009) (“Adopting Release”), available at http://www.sec.gov/rules/final/2009/33-9006.pdf. The rule text for some of the new requirements is set forth in a related release. See Interactive Data to Improve Financial Reporting, SEC Release Nos. 33-9002, 34-59324, 39-2461, IC-28609 (January 30, 2009), available at http://www.sec.gov/rules/final/2009/33-9002.pdf.
[2] As noted in the Adopting Release, the Commission recently adopted amendments to Form N-1A under which the risk/return summary information formerly contained in Items 2 and 3 was reconfigured in Items 2, 3, and 4. See Enhanced Disclosure and New Prospectus Delivery Option for Open-End Management Investment Companies, SEC Release Nos. 33-8998, IC-28584 (January 13, 2009), available at http://www.sec.gov/rules/final/2009/33-8998.pdf.
[3] The Adopting Release indicates that such an exhibit “will only need to contain the new exhibit, a facing page, a signature page, a cover letter explaining the nature of the amendment, and a revised exhibit index.” Adopting Release at p. 28.
[4] A fund is not required to comply with this requirement until after it has first submitted an exhibit with its registration statement.
[5] Interactive data must remain posted on a fund’s web site as long as the registration statement to which it relates remains current.
[6] The Adopting Release notes that ICI and other commenters expressed concerns over the application of this provision to any “registrant” in the case of series funds. It states that the Commission does not believe clarifying that “registrant” is the specific series at issue is workable because “multi-series funds are generally contained within the same prospectus in a registration statement, and post-effective amendments are typically filed concurrently for multiple series.” Adopting Release at pp. 36-37.
[7] The Adopting Release explains that, as a result, a fund generally would not be subject to liability for electronic transmission errors beyond its control if the fund corrects the problem through an amendment as soon as reasonably practicable after the fund becomes aware of the problem.
[8] The Commission has added a definition of “promptly” to Rule 11 under Regulation S-T. Rule 11 defines “promptly” as “as soon as reasonably practicable under the facts and circumstances at the time.” Under a non-exclusive safe harbor, a correction made by the later of 24 hours or 9:30 a.m. the next business day after the filer becomes aware of the need for the correction will be deemed promptly made.
[9] Rule 406T(d) provides that Rule 406T applies to an interactive data file submitted to the Commission less than 24 months after the electronic filer first was required to submit an interactive data file pursuant to Rule 405, not taking into account any grace period, but no later than October 31, 2014. After those dates, an interactive data file is subject to the same liability provisions as the related official filing.
[10] Adopting Release at p. 47.
[11] The Adopting Release states that the upgraded viewer will permit filers to conduct test filings and view rendered documents prior to submitting their exhibits. It indicates that the Commission expects these upgrades to be completed during mid-2009. Adopting Release at p. 44.
[12] Adopting Release at n.107.
[13] Id. at 49-50.
[14] The cautionary disclosure indicates that the financial information is “unaudited” or “unreviewed,” as applicable, and that the purpose of submitting the tagged exhibits is to test the related format and technology and, as a result, investors should not rely on the exhibits in making investment decisions.