SEC Proposes To Require Funds To Submit Risk/Return Summary Information In XBRL
[22631]
June 20, 2008
TO: BANK, TRUST AND RECORDKEEPER ADVISORY COMMITTEE No. 17-08BROKER/DEALER ADVISORY COMMITTEE No. 17-08 RE: SEC PROPOSES TO REQUIRE FUNDS TO SUBMIT RISK/RETURN SUMMARY INFORMATION IN XBRL
The Securities and Exchange Commission has proposed rules that would require all open-end management investment companies to submit the information contained in the risk/return summary section of their prospectuses using eXtensible Business Reporting Language (“XBRL”). [1] The information would be provided as an exhibit to funds’ registration statements. The rules would not alter the existing requirements to provide this and other information through traditional format filings. In addition, the proposed rules would permit investment companies to submit portfolio holdings information on a voluntary basis, without requiring them to submit other financial information. In a related release, the SEC proposed rules requiring companies other than investment companies to provide financial statement information in XBRL.
Background
XBRL is an international Internet-based language designed specifically for business information. XBRL provides machine-readable tags corresponding to business information concepts and data included in internal company reports and external reports distributed to stakeholders (e.g., revenue, earnings-per-share, portfolio turnover, investment performance, business and organizational description, income tax disclosures, etc.). Individual industries must reach consensus on tag sets that identify industry-specific concepts. Once agreed upon, tag definitions are made available to all market participants free of charge and without license fees.
In February 2005, the SEC instituted a voluntary XBRL filing program allowing registrants, including mutual funds, to file tagged financial information as an exhibit to certain filings made on the EDGAR system. [2] To date, over 75 companies have participated in the voluntary program. However, a limited number of mutual funds participated in the financial statement program. Unlike with operating companies, mutual fund financial statements do not provide the information that investors most commonly rely upon in making investment decisions.
To better serve mutual fund investors, an Institute-sponsored working group developed an XBRL taxonomy covering the information in the risk/return summary required at the beginning of every fund prospectus. In June 2007, the taxonomy was recognized by the XBRL International Standards Board as an acknowledged taxonomy, [3] and in July 2007, the SEC adopted rule amendments permitting investment company registrants to voluntarily submit XBRL-tagged risk/return summary information as an exhibit to an amendment of a previous filing on Form N-1A. As of the date the Proposing Release was issued, 20 funds representing 15 fund complexes had submitted risk/return summary information in XBRL.
Proposal to Mandate Submission of Risk/Return Summary in XBRL
Mechanics of the Program
The proposed rules would require mutual funds to provide a new exhibit containing risk/return summary information in XBRL format (“interactive data”), in conjunction with initial registration statements, and post-effective amendments that are annual updates to effective registration statements, that become effective after December 31, 2009. Funds would also have to post the tagged information on their web site, if they have one. The filing and posting would be required to be completed after the related filing becomes effective but not later than fifteen days after the effective date of the related filing. Failure to submit or post the tagged information would render a fund ineligible to file post-effective amendments under Rule 485(b) under the Securities Act, until the XBRL submission and posting are completed.
The proposed rules would require that the risk/return summary information be tagged primarily by using the taxonomy developed by the ICI working group. The Proposing Release explains that, to the extent changes are made to the risk/return summary as a result of the pending summary prospectus proposal, [4] the Commission will ensure that the taxonomy is updated.
Liability Provisions
Under the proposal, the Commission would no longer require or 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. In addition, the Commission is proposing to make “viewable interactive data” (human-readable interactive data viewed through software provided by the Commission) subject to the same liability under the federal securities laws as the corresponding portions of the traditional format filing. With respect to liability, the Proposing Release explains that interactive data would be:
- 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;
- not otherwise subject to the liabilities of these sections;
- subject to other liability under these Acts for the substantive content of the risk/return summary disclosures (e.g., investment objectives, strategies, costs, risks, and past performance), as distinct from compliance with the requirements related to the process of tagging and formatting the content of the risk/return summary for the interactive data file under proposed Rule 405 of Regulation S-T;[5]
- deemed filed for purposes of Rule 103 of Regulation S-T;[6] and
- protected from liability under these Acts for failure to comply with the requirements of proposed Rule 405 if the interactive data either:
- met the requirements of proposed Rule 405; or
- failed to meet those requirements but the failure occurred despite the fund’s good faith and reasonable effort and the fund corrected the failure as soon as reasonably practicable after becoming aware of it.
The Proposing Release indicates that none of the proposed liability-related provisions for interactive data submitted to the Commission would affect the application of the anti-fraud provisions under the federal securities laws, whether the interactive data is submitted to the Commission or posted on a fund’s web site.
Proposed Amendments to the Voluntary Filing Program
In connection with its proposal to require funds to tag the risk/return summary, the SEC proposes to amend the voluntary XBRL filing program to remove risk/return summary information as a category of information permitted to be submitted under the voluntary program. In addition, to encourage participation in the voluntary program for tagging investment company financial information, the SEC proposes 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. The Proposing Release states that, to facilitate this, the Commission anticipates entering into a contract to develop a list of tags that could be used to tag portfolio holdings. Consistent with the current voluntary program, the Commission would require cautionary disclosure to be tagged and included within the exhibits submitted to the voluntary program. [7]
Related Proposal Requiring Provision of Financial Statement Information in XBRL
In a related release, the SEC proposed rules requiring companies to provide financial statement information in XBRL. The rules would apply to domestic and foreign public companies that prepare their financial statements in accordance with U.S. GAAP, and foreign private issuers that prepare their financial statements using IFRS. As proposed, the rules would not apply to investment companies. However, the SEC has requested comment on whether investment companies should be subject to the proposed rules.
Mara Shreck
Associate Counsel
endnotes
[1] See Interactive Data for Mutual Fund Risk/Return Summary, SEC Release Nos. 33-8929, 34-57942,39-2457, IC-28298 (June 10, 2008) (“Proposing Release”), available at http://www.sec.gov/rules/proposed/2008/33-8929.pdf.
[2] See Institute Memorandum [18515], dated February 8, 2005. See also XBRL Voluntary Financial Reporting Program on the EDGAR System, SEC Release Nos. 33-8529, 34-51129, IC-26747 (Feb. 3, 2005), available at http://www.sec.gov/rules/final/33-8529.htm.
[3] See http://www.xbrl.org/Taxonomy/ici/ici-rr-summarydocument-20070516-acknowledged.htm. The taxonomy was released in draft form on January 4, 2007, and underwent a 45-day public comment period prior to being submitted for acknowledgment. For a discussion of the comments received, see Letter from Donald J. Boteler, Vice President – Operations, Investment Company Institute, to Andrew J. Donohue, Director, Division of Investment Management, U.S. Securities and Exchange Commission, dated May 18, 2007, available at http://www.sec.gov/comments/s7-05-07/s70507-21.pdf.
[4] See Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies, SEC Release Nos. 33-8861 and IC-28064 (Nov. 21, 2007) (“Proposing Release”), available at http://www.sec.gov/rules/proposed/2007/33-8861.pdf. As proposed, these amendments to disclosure rules and forms would change the order and content of the risk/return summary. See also Institute Memorandum [22002], dated November 30, 2007; Institute Memorandum [22290], dated March 3, 2008.
[5] Proposed Rule 405 would govern interactive data file submissions and web site postings.
[6] The Proposing 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.
[7] 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.