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Bipartisan Politics Alive and Well at the SEC

Both Investors and fund managers win with clearer, easier communications.

Bipartisan Politics Alive and Well at the SEC

This article appeared on Forbes.com on November 14, 2018

These days, it’s hard to find people working together, toward a common cause that will make life better for millions of people. But that’s exactly what we’ve seen recently at the Securities and Exchange Commission.

The SEC has been actively engaged in finding the best ways to improve regulatory communications, such as mutual fund reports and annual meeting communications that enhance the shareholder experience, while lowering industry costs by communicating electronically.

On June 5, the SEC adopted rule 30e-3, allowing funds to mail investors simple notices instead of complete reports — unless a shareholder requests one.  The notices provide a website for online reports, saving printing and postage costs. (The rule does not impact the two thirds of investors who already receive their fund reports electronically.)

The change is the first step by SEC Chairman Jay Clayton to modernize shareholder communications and engage investors with digital technology.  “The new rule significantly modernizes delivery options for fund information while preserving the right of fund investors to receive information in paper form as they do today,” Clayton said in announcing the rule. In the coming months, the SEC is soliciting ideas about how the industry can “modernize and improve the content of fund disclosures”. The potential of this new rule received encouragement from the Democratic side of the SEC. Even though Commissioner Robert Jackson did not vote in favor of 30e-3, because of disagreement with the default, he noted, “That’s why I’m delighted that Rule 30e-3 so explicitly encourages funds to consider new ways of presenting information to investors. And I urge commenters to respond to our call for information on retail investors’ experience with these disclosures—and how technology can help improve that experience.” The SEC will also host a proxy roundtable discussion on topics to improve retail investor participation, requirements for shareholder proposals, and end-to-end vote confirmation.

Using technology to engage investors is the future and has broad bipartisan and industry support. The initial goal of this effort is to vastly improve how mutual funds and ETFs disseminate vital information on performance, expenses and portfolio holdings. That’s a worthwhile effort: Studies by the SEC and FINRA show that most investors look at some but not all of the information in these reports.  And the SEC has noted, “Some have criticized fund prospectuses and other required disclosure documents for containing long narratives; generic, redundant, and even at times irrelevant disclosures; legalese; and extensive disclosure that may serve more to protect funds from liability rather than to inform investors.”

New technologies vastly improve the experience for investors — getting rid of the tedious legalese that can glaze the eye of even the most dedicated investor and instead focusing on clearly communicating the most vital information. Paperless, interactive, digital reports are being developed by the industry with the SEC’s encouragement. Investors can cast proxy votes on smart phones — devices are central in so many other aspects of our increasingly digital lives. Communications are being provided via emails, text messages, social media platforms, audio messages, chatbots, and personal cloud solutions.

This is also a great opportunity for fund managers. There are more than 10,000 mutual and exchange traded funds in the marketplace competing for investors. With lower fees, the rising popularity of passive investments, and the advent of robo advisors there are opportunities as well as threats. There is also the subtler, but no less real, problem of marketing. To avoid their products being commoditized, funds must convince investors that their service has value. For the vast majority of funds with higher fees, there is now an opportunity to use reports with simpler disclosures to show investors that their strategy is smart and worth sticking with in light of its performance against stated objectives and index benchmarks.

“We believe digital enhanced content will be a strong first step towards creating a better, more efficient, compelling way to support our value proposition,” says Michael Woodall, chief of operations at Putnam Investments.  

Rule 30e-3 also has the potential to save fund managers money. The SEC estimates that 30e-3 will provide “gross annual cost savings of $230.6 million, based on 11,367 funds (90% of all funds are expected to use 30e-3).” 

Fund companies save hundreds of millions of dollars annually due to technology driven suppression via e-delivery, managed accounts, consolidation and house holding. In 2018, beneficial side suppression rates were 68% which resulted in annual savings of $440 million in print and postage costs for funds.

Granted it’s not easy to apply technology on a massive scale in this regulatory environment but the SEC implementation period gives fund managers two years to educate people on the benefits of these new disclosures. The upcoming roundtable will also unearth better ways for issuers to create and distribute communications and devise ways to deal with any potential hurdles before they present themselves. There is a real opportunity here to use technology to create a far better and more engaging experience for the retail investor while at the same time providing companies with cost saving and stronger branding opportunity.

“At the SEC there appears to be a true spirit of working together on this subject, embracing the promise of technology while protecting investors who still want paper reports. This has resulted in a balanced solution that is positive for both investors and companies,” says Roel Campos, former SEC Commissioner and partner at Hughes Hubbard & Reed. “The Commissioners are working in lock step to make investor information both more effective and less costly, creating a more efficient and engaging process for investors.”

It’s been an inspiring process. When people work together, listen to one another and compromise, it’s amazing what they can accomplish.