Planning Guide for the SEC’s Tailored Shareholder Report Rule

View our recorded webinar (8/2/23):

Are Your Systems Ready? 6 Questions to Answer About Implementing the Tailored Shareholder Rule

 

---

In a Hurry? Download this

Tailored Shareholder Report Planning Guide Here

---

Who is this guide for?

Fund Company teams, including:

• Fund Treasury/Accounting
• Financial Reporting
• Client Service
• Marketing
• Design
• Data Managers
• Legal/Compliance

---

What you’ll learn:

 

What is the Tailored Shareholder Rule?

1. How will it change existing reporting regimens?

2. What are the key elements of TSR planning?

• Establishing an operating model
• Automation
• Ensuring the system is governed by internal business rules
• Design
• Production

3. What to ask vendors in the due diligence process

---

What is the final Tailored Shareholder Report rule?

 

Beginning in 2024, the SEC is mandating that investment companies subject to the Investment Company Act of 1940 (‘40 Act mutual funds and ETFs) transmit “concise and visually engaging annual and semi-annual reports to shareholders.”

 

The old reports ran dozens of pages in length and have traditionally been of limited use to retail shareholders because of their opacity. Thus, they are being replaced by something far more useful for the average fund investor, but it does add another mandate for ‘40 Act funds to manage, unfortunately.

 

According to the SEC press release:

“Shareholder reports are amongst the most important documents that fund investors receive… These reports, however, often are more than 100 pages in length. As a result, a retail investor looking to understand the performance, fees, and other operations…may need to sift through extensive financial information. Today’s final rules will require fund companies to share a concise set of materials that get to the heart of the matter.”

 

Beginning in July 2024, mutual fund and ETF shareholders will begin receiving “Tailored Shareholder Reports.” These will be shorter, with a “visually engaging” format, and a stricter focus on the information that would be most relevant and of interest to the average shareholder.

 

This rule change will allow retail shareholders to more easily assess and monitor their fund investments via documents that are concise, relevant, and written in plain (read: non-jargony) English.

 

These new reports are in addition to existing filing and disclosure requirements – not a replacement of them.

 

Full shareholder reports, the SAI, and comprehensive financial statement disclosure are still required and will continue to be available online via EDGAR and the asset manager’s website. Financial professionals, accredited investors, and others who want or need in-depth information will thus be able to access this detailed data online.

 

When people ask us, “what is the new rule for mutual funds in 2023,” we direct them to this excellent synopsis from Washington D.C.-based law firm Morgan Lewis, as they have a comprehensive overview of the SEC’s mandate here.

---

 

How will the Tailored Shareholder Rule change existing reporting regimens?

While every fund has its own unique policies and procedures, we believe Tailored Shareholder Reports present an opportunity for ‘40 Act fund companies to rethink their approach to shareholder communications.

 

A plain language standard

Over the years, shareholder reports grew longer and longer as the regulatory and compliance requirements grew more onerous. Eventually, the de facto attitude towards these sorts of regulatory mandates became, “Oversharing is the path of least resistance to regulatory compliance.”

 

The TSRs are clearly an effort by the SEC rectify these developments in the name of shareholder transparency. By equating “transparency” with “clearly understood,” this does offer fund management companies to revisit the reporting culture of jargon-fueled opacity, and opt for a more conversational, direct approach; one that does not simply describe, but helpfully explains fund performance, structure, fees, and the like.

 

A professional approach need not be overly formal and jargon-driven. A more direct tone, style, and conversational approach not only fits the bill as it relates to the SEC’s guidance, but it’s also a highly differentiated client service approach.

 

What’s in it?

With the new TSR mandate comes clearer guidance from the SEC about what is actually “important” to fund investors. The requirement categories of note include:

 

• Fund/Class Name and Ticker Symbol
• Statement on Material Fund Changes in the Report
• Expenses
• Management’s Discussion of Fund Performance
• Fund Statistics
• Graphical Representation of Holdings
• Availability of Additional Information
• Householding Disclosure (optional)

 

The challenge(s): While this list is not onerous (though we understand, for example, that selecting appropriate indices might be tricky), it will present design challenges: how to incorporate each of these components, along with any additional ones that help to differentiate a fund from its peers, into a 2-4 page document with strong, aesthetically-pleasing design. (more on that later…).

 

Additionally, as part of the 10-year “Growth of $10,000” performance chart, funds will also be required to select and use a new, broad—based market index for benchmarking purposes. The intent is that all funds should compare their performance to the overall market and that including a broad-based index in performance disclosure gives investors readily-accessible contextual information about market performance.

 

For better or worse, the SEC leaves the nuances of index selection to individual fund companies to work out.

 

Each Share Class is an Island

One of the biggest changes to fund company reporting, vis-à-vis the TSR, is with respect to share classes.

 

The SEC mandate requires each share class of each fund to have its own TSR – fund companies can no longer consolidate multiple share classes into one document, with footnotes or additional graphs or tables that delineate the differences between each share class.

 

Insofar as the TSR is concerned, fund companies must consider each share class of each fund as a discrete investment, for client reporting purposes

The challenge: This gets into data management and publishing (which we will discuss in more detail below), but to generate a full complement of TSRs, fund companies will need systems for data:

• warehousing,
• automation, and
• publishing systems…

that can manage the

• intake,
• initial verification, and
• distribution of all the qualitative and quantitative data to the design and publishing platforms.

 

For too many fund companies, legacy client reporting systems (either internal ones or those of existing vendors) are too “clunky,” slow, and are generally ill-equipped to handle the end-to-end requirements of the TSR because, quite frankly, it is not what they were designed to do.

 

And relying on them to do what they are not designed for is a massive risk.

 

Print is (not) dead

This is one of the more curious aspects to the TSR rule: the revocation of SEC Rule 30e-3. With The TSR, unless a shareholder opts IN to receiving a digital copy, ‘40 Act fund companies must print and mail each TSR to shareholders. In this day and age, it is a bizarre requirement that not only drives budgets higher, but it is also environment-unfriendly.

 

The challenge: Balancing the expected relative efficiency of digital distribution with a old-school print-and-mail process.

 

XBRL & Edgar

The TSR will need to have iXBRL tags in order to facilitate aggregation, comparison, filtering, and other analysis, in accordance with rule 405 of Regulation S-T and the EDGAR Filer Manual .

 

The use of Inline XBRL will allow investors and other researchers to use automated tools to find and extract whatever information is wanted, from wherever it may be located within a filing.

 

ADA Compliance

As it relates to sales, marketing, and client reporting materials, the regulatory environment is moving swiftly towards another mandate requiring that all these documents are compliant with the Americans With Disabilities Act (ADA). As such, ‘40 Act funds should adopt reporting practices that ensure compliance with the ADA. Essentially, it’s already here, so establishing compliant practices now simply makes sense.

---

 

Take the Tailored Shareholder Planning Guide with you. Click Here.

 

---

Here’s a question: What are the Key Elements of Tailored Shareholder Report Planning?

When it comes time for planning the TSR strategy execution, we would suggest looking to our experience in the fund fact sheet world to help guide the decisions surrounding 5 key areas.

 

1. Establishing an Efficient Operating Model

Developing an operating model for a new regulatory responsibility requires careful planning and consideration of several key factors. Here are some steps that ‘Act 40 fund companies can take to develop an effective operating model for a new regulatory responsibility.

 

Obviously, the first two steps are to 1). understand the regulatory requirements and 2). be able to assess the impact on existing processes and systems and make sure that they can be handled reliably.

 

In all likelihood, compliance with the TSR mandate will require changes to operational processes, additional IT systems, and, potentially, additional staffing (though as we will see below, automation can mitigate this potential need).

 

Based on the impact assessment, ’40 Act fund companies can begin to define the new operating model that will enable them to meet the regulatory requirements.

 

This should include the creation of detailed processes, procedures, and controls that are designed to ensure compliance with the relevant regulations.

 

The operating model should also identify the roles and responsibilities of key stakeholders (i.e.: fund accounting team, marketing, legal/compliance, and the data team), as well as a roadmap for implementation that includes vendor selection, technical installation, and all required training.

 

2. Automation

We earlier noted that the TSR was an opportunity to rethink existing approaches to shareholder communications, as it relates to tone, style, and language. But it also presents an opportunity to better integrate the sales, marketing, and reporting data management systems, writ large.

 

Our magic equation is: Automation = Scale = Efficiency.

 

Taking advantage of the TSR planning project to improve data warehousing, management, publishing, and distribution cannot be neglected.

 

With a thoughtful design and implementation, automation systems can provide efficiency and lower costs while providing fund management companies the ability to scale the use of internal qualitative and quantitative data to their advantage.

 

We argue that end-to-end operational efficiency demands that wherever data is stored, it should be available to all business functions that could benefit from it, be it marketing, sales, compliance, or client service or reporting.

 

No Silo

A siloed data management systems in today’s competitive environment makes little sense, as it prevents the sharing of data, and thus makes scaling impossible. If a reasonable business case can be made for maintaining separate data automation systems for factsheets, pitchbooks, SEC filings, reporting and related client service, we would like to hear it.

 

It also means that the legal/compliance team has multiple places to police to ensure all regulatory burdens and internal business rules are being met.

 

And if these are all being managed manually (as opposed to discrete automated systems), it’s a disaster waiting to happen.

 

Tag, You’re It

As we noted above, iXBRL and ADA tagging are (or will be shortly) required standard reporting procedure. Many fund companies outsource this time-consuming, labor-intensive sort of work.

 

We recommend working with a partner (or an internal team) that has fully automated the tagging procedure, as it saves time, improves accuracy, and results in a better, more reliable end product. Additionally, that team must be well-versed in the requirements around iXBRL tagging and filing with EDGAR.

 

This requirement is new and incredibly important: TSRs must be tagged so investors can compare performance across their portfolios. The data needs to be 100% tagged, comprehensively managed, and reliably consistent.

 

Put this is on your TSR development agenda, as it is not going away.

3. Business Rules!

In our whitepaper, Business Rules: The Secret Sauce of Investment Marketing Content Automation, we write,

We use the term business rules to describe the rules or logic applied during the data loading and data rendering stages. In other words, business rules tell the automation system how to consume and display your data.

 

The importance of business rules in automation cannot be understated.

 

If business rules did not exist within the fact sheet production process, it would fall to individual teams to remember which charts, data files, and disclosures should appear on the various kinds of marketing content. A big benefit of automation is the ability to program these rules into the process, reducing the risk of human error.

 

This matters for the Tailored Shareholder Reports because the form and function are much more closely aligned with a traditional fact sheet than anything else, so it stands to reason that many of the same best practices should dictate how the TSRs are conceived, drafted, and ultimately produced.

 

But what makes this combination of automation and appropriate business rules especially salient with the TSRs is that the SEC requires a separate TSR for each share class. Accounting for multiple share classes can exponentially increase the number of TSRs a fund company will have to produce.

 

Then, consider the requirements for XRBL tagging, ADA compliance, and any increased, complex web-hosting requirements.

 

And this is all in addition to updating existing products such as fact sheets, pitch books, brochures, website, investment databases, required SEC filings, and other digital endpoints.

 

Viewed from this perspective, clearly-defined business rules and reliable automation systems are essential.

 

4. By Design

As we suggested earlier, the TSR is essentially a fact sheet for fund investors.

 

So given our deep experience in the data/content automation world, we believe our prescriptions, vis-à-vis the production of data-driven collateral (fact sheets, pitch books, etc.), can allow ’40 Act fund companies to sidestep many of the hazards and pitfalls that bedevil the uninitiated.

 

As we know, the SEC is mandating a “visually engaging” format: fonts, colors, layouts, and graphics. However, those elements must be expressed within the context of a fully automated, functional “living” document. The final design must support all the variations that are found across product lines, disclosures, quantitative data, and branding, as well as have the ability to adjust to changes in character count and content length without breaking the template.

 

Template construction is, then, one of the most important parts of the process.

 

Testing the template

We recommend that fund companies use real data from their actual products to test it across numerous historical reporting periods to ensure the data fits as it should, irrespective of performance or market conditions, and doesn’t wreck the formatting.

 

5. Production Values

The Tailored Shareholder Report is a new requirement, but it does share many similarities with other data-driven collateral, such as fund fact sheets.

 

It stands to reason, then, that new production processes should be explored in an effort to scale the investments being made in TSR development across multiple products.

For fund companies that rely on external partners, we note that:

“Consistent beginning-to-end procedures of data management, content automation, client reporting, and distribution [are all vital]. If a company traditionally utilizes several partners to handle these steps, it is essential all systems are capable of full integration and can provide seamless transfer of data from start to finish. And all must be accomplished within a strict rules-based platform that ensures all internal business and compliance rules are followed without exception.”

 

 

Print preview

The TSR’s mandate is for physical printing of each document (unless a shareholder specifically opts out), which adds an additional, final step to the production process.

 

Here, we defer to a fund company’s existing print vendors for best practices.

---

People are asking “What questions do we pose to vendors?”

To determine just how prepared a partner is to handle the strategy, planning, design, and execution of a TSR strategy, ask the following questions:

• Who owns the process: the asset manager or the partner? How much flexibility is there in the relationship? And what can the fund manager expect to devote, in terms of manpower and related resources?

 

• How easily can the fund manager’s brand be communicated on the partner’s platform? Given that Synthesis helps our partners every day to manage and promote their brand through data-driven collateral, we think this is an important point to consider.

 

• How adaptable is the template? Can it handle extremes in data reporting without breaking the formatting?

 

• Can managing the TSRs be part of the company’s larger document production strategy? Can the data feeds be scaled to include fact sheets, pitchbooks, website updates – basically all digital endpoints?

 

• How efficient is the technology? What is the turnaround time on updates and changes to both the templates and the data? And how fast can the TSRs be brought to market?

 

• Are the templates duplicable? Understand the ease with which a template can be copied and saved for use on another share class, for example.

---

The Next Steps for your Tailored Shareholder Report plan

 

Tailored Shareholder Reports are fact sheets for fund investors. In order to efficiently and effectively comply with the SEC’s TSR mandate, ’40 Act fund companies should put in place many of the same systems that enable consistent, reliable production of data-driven collateral.

 

Ideally, these systems should:

• manage data integration,
• streamline content sharing,
• create charts and graphs from that data and content,
• enforce business rules for content creation, and
• generate polished, professional, and consistently accurate reports that comply with the mandate

 

For 25 years, Synthesis has been the industry leader in automating and designing high-quality, data-driven sales and marketing collateral. Our peerless industry experience lends a unique understanding of how best to strategize, plan, and execute a data-driven document strategy.

---

 

Download the Tailored Shareholder Report Planning Guide Here

 

---

 

$26 Billion Asset Manager Diamond Hill Finds Efficiency and ‘Peace of Mind’ with Automated Investment Data Solutions by Synthesis

“I can’t stress enough how responsive the Synthesis team has been at every stage of our relationship, from kick-off and implementation, through the products’ launch. Even today, their team’s knowledge of the asset management industry, combined with their experience working with asset managers like us, has saved immeasurable time, money, and frustration. Synthesis arrived with solutions that were industry-tested and ready to go. The only questions were clarifying in nature; in other words, how could they best tailor their solutions to our needs. Once those were answered, the process was seamless.”

~ Lynette Hart, Director of Marketing, Diamond Hill

 

Overview:

Diamond Hill, a multi-asset class investment management firm, was increasingly challenged by their quarter-end, data-related processes. The issues? Timeliness, accuracy, and resource allocation roadblocks during the busy quarter-end period.

After working closely with the firm’s marketing, compliance, and data teams, Synthesis:

• Provided an efficient data management system that streamlined the quarterly data verification process;
• Automated quarterly updates to the firm’s market-leading, institutional quality marketing collateral and website; and
• Significantly reduced opportunity costs, vis-à-vis the investment of internal employee resources every quarter, enabling the Marketing team to focus more exclusively on its core function of marketing.

The Client:

Diamond Hill is a mid-sized investment manager with a focus on both retail and institutional markets. The firm offers more than a dozen products with approximately $26B in AUM (as of 8/31/22).

The Needs:

• Sales and marketing materials needed to be updated, verified, and prepped for distribution as quickly as possible with 100% accuracy;
• The process for verifying quarterly data was slow and needed improvement;
• Data-related workflow processes had to account for the scarcity of internal resources.

A solution that addressed these concerns in the most time-efficient manner was an imperative.

The Story:

Like most asset management firms, Diamond Hill’s data management and distribution processes were long managed in-house. But as the firm grew its product offerings, data management and the quarter-end production process continued to increase in complexity making it more time intensive and cumbersome. It became clear that automating the process was the only long-term solution to the challenge, according to the firm’s director of marketing.

After exploring several options and working with different vendors, true automation remained elusive.

The software and process implemented by prior vendors did not match expectations, and the firm’s marketing team found itself continuing to invest significant time and capital manually verifying the data on marketing and sales collateral and ensuring previously made changes to fact sheet and pitchbook data sets and designs remained in place from quarter to quarter, which was not always the case.

These tasks sapped crucial firm resources from the compliance, sales, and marketing teams during the critical quarterly reporting period.

The Synthesis Solution:

Synthesis provided Diamond Hill with a time-tested, organized, hands-on and high-touch implementation process.

Over the course of the approximate 4-5 month implementation process for its fund and composite fact sheets, the initial 6-week period was the only time that meaningful internal resources had to be allocated to the implementation process:

 

“Kicking it off was probably [the most] burdensome [part] because we had to involve several people… this person over here had these data files, those people over there had those data files the technology team needed to be aware of what was happening. We had to get everybody in the same room and go over what data and files were used where and how Synthesis would need to receive the data so their systems could consume it. There were third parties involved as well including our CMS partner who needed to be involved.”

 

The firm’s marketing team noted that once Synthesis was able to establish connectivity between its systems and those of their data sources (to ensure a flawless movement of data across systems) minimal time was required from other departments.

Full automation occurred in tranches – the firm’s website and fact sheets were the top priority, with pitch books and sales aids coming later. At each stage of the automation process, trial runs were conducted to ensure data was consistently and accurately delivered to the firm’s collateral and website.

The Outcome:

The number of individuals involved in reviewing data, materials and website pages at quarter-end has been reduced by nearly 30% and the timeline for completing the quarter-end process has been condensed meaningfully. The reliability, consistency and quality of Synthesis’ work enables the entire firm to feel more confident in the data and overall quality of materials being produced. And with automated data feeds to the website as well, the marketing team can be more hands-off when it comes to quarterly data management.

Lynette summarized Synthesis’ value proposition thusly:

 

“Peace of mind and the fact that we are so much more productive. We (marketing) were sales support before – there was minimal time to work on marketing priorities. The reduced stress and removal of the late nights during quarter-end also helps with retention and creates a better work life balance.

With the time freed up by automation, the firm’s marketing team was able prioritize and focus on value-add marketing initiatives, strengthening its position within the firm. Today, the team’s size has more than doubled compared to when Synthesis first partnered with them including adding resources in digital, content, and analytics. Lynette declared, thanks to Synthesis and the size of our team, “We are now a marketing machine.”

 

When asked if they recommend Synthesis to colleagues, she replied,

“Every day… I don’t know how you can afford not to partner with Synthesis.”

 

Learn more about Synthesis & the benefits of Marketing Content Automation

 

Client Success Story: A Marketing Team That Can Now Market

 

Synopsis: $27+ billion asset manager engaged Synthesis to automate their fact sheet production after failed attempts at automation with other vendors. The result?

• Quarterly time-to-market with updated collateral fell by 70%, with a corresponding decline in internal resource allocation
• Because they were no longer focused on sales product support for 24 weeks a year (the total length of time spent managing quarter-end data production), the Marketing team could focus on core marketing functions
• They were able to fully invest themselves in projects which added significant value to the firm’s overall brand
• As a result, management approved higher budgets, more staffing, and a significantly broadened project portfolio.

 

It is easy for asset management marketing and sales teams to understand the benefits of data and marketing collateral automation.

Why? Because automation:

• Saves time
• Improves efficiency
• Reduces opportunity costs, and
• Enables stronger alignment across the marketing, sales, and compliance departments.

Understanding is one thing, but convincing upper management to add budget line items for new relationships is often tough – especially when their impact often escapes the usual bottom-line KPIs.

Synthesis has an asset management client with $27+ billion AUM, whose marketing director faced exactly this sort of pushback when the relationship was initiated. Here’s their story:

Read More

Jack Zimnavoda Joins Synthesis as new Director of Client Success

Synthesis Technology recently announced that it has hired Jack Zimnavoda as its new Director of Client Success. With his background in fintech and recent experience leading client-facing teams at eVestment and Eigen Technologies, Jack will leverage his passion for technology and client advocacy to take the Synthesis client experience to a new level. We sat down with Jack to understand his vision for the client success function, and how his efforts will allow Synthesis to provide more value within and across the sales, marketing, and client service functions at investment management firms.

Read More