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A single missed delivery deadline or outdated disclosure can put an ETF out of compliance. That’s why asset managers must have a precise understanding of ETF prospectus delivery requirements, rather than a basic idea of how they work.
The prospectus is a critical document for every exchange-traded fund (ETF). It outlines a fund’s investment objective, investment strategy, risks, fees, management, and expenses for investors who buy and sell ETF shares, as well as for regulators. Getting prospectus delivery right, however, is a team effort: compliance officers and legal counsel manage the regulatory timeline, while operations teams are responsible to execute it.
Here’s what every member of the team needs to know about ETF prospectus delivery requirements, from initial filing and annual updates to common compliance pitfalls.
It is absolutely vital for asset managers to understand prospectus delivery rules and stick to the required delivery timeline. If your compliance team fails to deliver the required prospectus materials to investors or regulators, or misses a deadline, there will be repercussions for your fund.
Open-ended funds, including ETFs and mutual funds, must keep a Securities and Exchange Commission (SEC)-approved prospectus available for all investors. A more concise version, known as a summary prospectus, can be deployed so long as a full prospectus is available online for investors to access. It is also worth noting that funds are required to send out annual and semi-annual shareholder reports.
The timeline for prospectus delivery begins before a fund has launched. All ETFs are required to make the following documents available:
Because ETFs and mutual funds are continuously offered, there is no single underwriter overseeing distribution the way there would be in a traditional IPO.
Once a registration is effective and the new fund is priced, issuers must file a completed statutory prospectus, typically via SEC Form 424. The statutory prospectus must be delivered to all investors at or prior to the time of sale. In the primary market, this means at or before the time of creation unit transactions. For dealers and broker-dealers in the secondary market, this means before or at confirmation of the sale or upon the request of an investor at any time.
ETFs, much like mutual funds, can post statutory prospectuses online. If it is readily available and accessible, they can use a shorter, more condensed summary prospectus. Continuous annual updates are required throughout a fund’s lifecycle.
Delivery of an ETFprospectus must occur at or before the confirmation of a sale. The prospectus can be delivered to investors electronically, though investors must either consent to this or receive notice and then not object. If sent electronically, a prospectus must also be in a format that can easily be printed.
It is worth noting that if multiple investors have the same physical address, issuers of a fund can send a single copy of the prospectus to that address, provided the investors consent.
If using a summary prospectus, it is vital to have an accessible statutory prospectus available online.
Here are the requirements for electronic delivery:
Finally, all documents must be provided in a way that is both readable and printable.
Read about: 7 tips for cost-efficient ETF operations
Issuers must understand the difference between a summary prospectus and a statutory prospectus to know which one to deliver, and when. A statutory prospectus is the fully realized version of the document, containing all legally required information in dense detail.
Statutory prospectuses are full of every piece of pertinent and required information. They go into granular detail and are often filled with legal terminology that make them hard to read for the average investor. They are the actual, canonical prospectus of a fund.
Because statutory prospectuses are often many pages, issuers will often opt to create summary prospectuses that cover the most salient information for investors. Note that the summary prospectus typically begins with a cover page that highlights the fund’s key facts before directing investors to the full statutory prospectus for additional detail.
The SEC allows these summary prospectuses to be used in place of a statutory prospectus for physical or electronic delivery, provided that the statutory prospectus is accessible and available online.
Knowing when to deploy a summary prospectus vs a statutory prospectus is critical for issuers. As discussed, a summary prospectus can be submitted at or before the time of sale provided a statutory prospectus is easily accessible online for investors.
However, compliance teams should be aware that any investor can request a full statutory prospectus at any time and the issuer must comply with the request. In this instance, a summary prospectus will not be sufficient and a full statutory prospectus must be delivered.
Issuers of mutual funds and ETFs have different prospectus delivery obligations due to the different nature of those fund types. Here’s how they differ.
Mutual funds issuers and ETF issuers can both host a prospectus online. Because of how they trade on the secondary market, widespread access to a full prospectus satisfies delivery requirements for ETFs. Since 2009, mutual funds issuers have also enjoyed the ability to deploy a summary prospectus as long as a statutory prospectus is hosted online. Summary prospectus are sometimes deployed with more of a marketing angle and become product descriptions more than the legal document that is the statutory prospectus.
The big difference between mutual funds and ETFs when it comes to prospectus delivery rules is that ETFs have an exemption from 22(e). Rule 22(e) of the Investment Company Act of 1940 prevents issuers from delaying redemption payments for more than seven days. ETFs have relief from this rule because of the nature of their structure. Under SEC Rule 6c-11, they can delay payment on in-kind redemptions of foreign securities for up to 15 days.
In high-stress situations, the SEC can grant an emergency order that allows mutual funds or ETFs the opportunity to suspend redemptions entirely.
Compliance officers and legal teams should note that the SEC has recently overhauled mutual fund and ETF shareholder reports, a rulemaking process supported by the agency’s Division of Investment Management. These changes could impact the old model of “access equals delivery.”
Changes to rule 30e-3 mean that funds that register their shares on Form N-1A must mail their annual and semi-annual reports to shareholders. There are also changes to advertising rules, and some attempts made to condense shareholder reports.
Here are some of the most common ETF prospectus compliance mistakes issuers should watch for.
Net Asset Value (NAV), market price, median bid-ask spread, and premiums/discounts must be disclosed daily. An inaccurate disclosure can result in regulatory enforcement.
The solution is building in a daily review step before disclosures go out to help catch errors before they become full-blown compliance issues.
If your fund’s custom basket departs from its official policies and procedures or fails to be reviewed by designated officers that can create regulatory enforcement. This can also happen if the custom basket is found to be not in shareholder interest, fails to properly keep records, or include asset classes outside of standard operating rules.
The solution is to regularly audit custom baskets in order to catch any instances of non-compliance.
Current SEC requirements under Rule 6c-11 mean that most funds must disclose their portfolio holdings at the close of each business day.
The solution is automating end-of-day disclosure reporting to ensure consistency.
Compliance and legal teams should note that a statutory prospectus is a living document that requires constant upkeep and updates. NAV, holdings, and other stats are easy to lose track of, but fees and expenses can change a lot. Make sure the prospectus is updated frequently to reflect reality and avoid falling out of compliance.
The solution to this issue to to set up a recurring review schedule for fee and expense data that can help keep your prospectus current.
Check out: Choosing the right ETF wrapper for your strategy
There are several steps fund managers, investment advisers, and legal teams can take to properly coordinate prospectus delivery to investors.
Compliance and legal teams seeking an easy solution to the challenges of prospectus delivery can investigate automated tools. There are a number of tools that can integrate with your firm’s data and interact with EDGAR and the necessary platforms to make prospectus delivery more efficient.
Most prospectuses are filled with financial and legal jargon. A “plain-English” summary prospectus allows for clear, concise text using simple vocabulary and shorter sentences.
Digital delivery comes with enormous benefits for legal and compliance teams looking to efficiently handle prospectus delivery. However, not all investors will want a digital prospectus. Many will request it in writing, and having a hybrid infrastructure in place to deliver both electronically and analog will be advantageous.
EDGAR (Electronic Data Gathering, Analysis, and Retrieval) is an SEC system that disseminates all of the required, mandatory information to investors. Compliance teams will enjoy EDGAR’s automated validation and efficiency. Funds will also benefit from the SEC’s security protocols, which protect issuers and investors alike.
Broker-dealers facilitate trading on the primary and secondary markets. They execute trades for clients, meaning that it is important to coordinate all requests for prospectus delivery with the authorized participants and market makers supporting your product.
Legal and compliance teams should note that keeping track of all your deliveries, whether electronic or physical, is important. If your fund is audited, you’ll need to prove you have been in compliance with prospectus delivery requirements, and record-keeping is essential.
Managing a fund is an ongoing task that never ends. Fund managers, legal teams, and compliance need to set an ongoing fund prospectus review to ensure accuracy. Make sure the workflow is clearly mapped out and that there are redundancies. Falling out of compliance can be catastrophic for a fund and an ingrained review and updating process mitigates that risk.
Asset managers looking to ensure their funds are in compliance can check periodically by auditing themselves. This will allow you to catch any potential issues in advance of regulators and make sure that all key information is available to investors.
You might like: Best practices for launching an ETF
An ETF prospectus is a legal document, filed with and reviewed by the SEC, that outlines a fund’s investment objectives, strategies, fees, risks, and historic performance. It is designed to give investors the information they need to evaluate a fund before buying or selling shares, and asset managers are required to make it available to investors at specific points before and after a sale.
An ETF prospectus delivery obligation is triggered any time shares of an ETF are created and distributed in the primary market, or any time a broker-dealer sells shares in the secondary market. Delivery is also required whenever an investor specifically requests a prospectus, regardless of where or when the transaction occurs.
A broker-dealer must deliver a prospectus before or at the time of sale, or at confirmation of the transaction in the secondary market. If an investor requests a prospectus at any other time, the broker-dealer must provide it then as well.
Rule 172 is an SEC rule that establishes an “access equals delivery” model for prospectus delivery. Under this rule, a prospectus is considered delivered as long as it is filed with the SEC and easily accessible online, even if it isn’t physically sent to the investor. This allows issuers to satisfy delivery requirements without making a paper copy for every transaction.
Rule 6c-11 provides exemptive relief for ETFs from certain provisions of the Investment Company Act of 1940. It allows ETFs to operate without obtaining individual exemptive orders, streamlining the process of launching new funds. The rule also facilitates the in-kind creation and redemption mechanism that defines the ETF structure, and permits ETFs to delay redemption payments for foreign securities for up to 15 days, longer than the standard limit for other investment vehicles.
Prospectus delivery is an ongoing obligation, one that follows an ETF from its initial registration statement through every disclosure document required over the life of the fund.
Remember that securities laws are subject to change. For that reason, your workflows should be built in a flexible way that allows you to adapt them over time.
VettaFi works with asset managers to navigate the complex process of launching and maintaining ETFs. Reach out to our team now to learn more.
A single missed delivery deadline or outdated disclosure can put an ETF out of compliance. That’s why asset managers must have a precise understanding of ETF prospectus delivery requirements, rather than a basic idea of how they work.
The prospectus is a critical document for every exchange-traded fund (ETF). It outlines a fund’s investment objective, investment strategy, risks, fees, management, and expenses for investors who buy and sell ETF shares, as well as for regulators. Getting prospectus delivery right, however, is a team effort: compliance officers and legal counsel manage the regulatory timeline, while operations teams are responsible to execute it.
Here’s what every member of the team needs to know about ETF prospectus delivery requirements, from initial filing and annual updates to common compliance pitfalls.
It is absolutely vital for asset managers to understand prospectus delivery rules and stick to the required delivery timeline. If your compliance team fails to deliver the required prospectus materials to investors or regulators, or misses a deadline, there will be repercussions for your fund.
Open-ended funds, including ETFs and mutual funds, must keep a Securities and Exchange Commission (SEC)-approved prospectus available for all investors. A more concise version, known as a summary prospectus, can be deployed so long as a full prospectus is available online for investors to access. It is also worth noting that funds are required to send out annual and semi-annual shareholder reports.
The timeline for prospectus delivery begins before a fund has launched. All ETFs are required to make the following documents available:
Because ETFs and mutual funds are continuously offered, there is no single underwriter overseeing distribution the way there would be in a traditional IPO.
Once a registration is effective and the new fund is priced, issuers must file a completed statutory prospectus, typically via SEC Form 424. The statutory prospectus must be delivered to all investors at or prior to the time of sale. In the primary market, this means at or before the time of creation unit transactions. For dealers and broker-dealers in the secondary market, this means before or at confirmation of the sale or upon the request of an investor at any time.
ETFs, much like mutual funds, can post statutory prospectuses online. If it is readily available and accessible, they can use a shorter, more condensed summary prospectus. Continuous annual updates are required throughout a fund’s lifecycle.
Delivery of an ETFprospectus must occur at or before the confirmation of a sale. The prospectus can be delivered to investors electronically, though investors must either consent to this or receive notice and then not object. If sent electronically, a prospectus must also be in a format that can easily be printed.
It is worth noting that if multiple investors have the same physical address, issuers of a fund can send a single copy of the prospectus to that address, provided the investors consent.
If using a summary prospectus, it is vital to have an accessible statutory prospectus available online.
Here are the requirements for electronic delivery:
Finally, all documents must be provided in a way that is both readable and printable.
Read about: 7 tips for cost-efficient ETF operations
Issuers must understand the difference between a summary prospectus and a statutory prospectus to know which one to deliver, and when. A statutory prospectus is the fully realized version of the document, containing all legally required information in dense detail.
Statutory prospectuses are full of every piece of pertinent and required information. They go into granular detail and are often filled with legal terminology that make them hard to read for the average investor. They are the actual, canonical prospectus of a fund.
Because statutory prospectuses are often many pages, issuers will often opt to create summary prospectuses that cover the most salient information for investors. Note that the summary prospectus typically begins with a cover page that highlights the fund’s key facts before directing investors to the full statutory prospectus for additional detail.
The SEC allows these summary prospectuses to be used in place of a statutory prospectus for physical or electronic delivery, provided that the statutory prospectus is accessible and available online.
Knowing when to deploy a summary prospectus vs a statutory prospectus is critical for issuers. As discussed, a summary prospectus can be submitted at or before the time of sale provided a statutory prospectus is easily accessible online for investors.
However, compliance teams should be aware that any investor can request a full statutory prospectus at any time and the issuer must comply with the request. In this instance, a summary prospectus will not be sufficient and a full statutory prospectus must be delivered.
Issuers of mutual funds and ETFs have different prospectus delivery obligations due to the different nature of those fund types. Here’s how they differ.
Mutual funds issuers and ETF issuers can both host a prospectus online. Because of how they trade on the secondary market, widespread access to a full prospectus satisfies delivery requirements for ETFs. Since 2009, mutual funds issuers have also enjoyed the ability to deploy a summary prospectus as long as a statutory prospectus is hosted online. Summary prospectus are sometimes deployed with more of a marketing angle and become product descriptions more than the legal document that is the statutory prospectus.
The big difference between mutual funds and ETFs when it comes to prospectus delivery rules is that ETFs have an exemption from 22(e). Rule 22(e) of the Investment Company Act of 1940 prevents issuers from delaying redemption payments for more than seven days. ETFs have relief from this rule because of the nature of their structure. Under SEC Rule 6c-11, they can delay payment on in-kind redemptions of foreign securities for up to 15 days.
In high-stress situations, the SEC can grant an emergency order that allows mutual funds or ETFs the opportunity to suspend redemptions entirely.
Compliance officers and legal teams should note that the SEC has recently overhauled mutual fund and ETF shareholder reports, a rulemaking process supported by the agency’s Division of Investment Management. These changes could impact the old model of “access equals delivery.”
Changes to rule 30e-3 mean that funds that register their shares on Form N-1A must mail their annual and semi-annual reports to shareholders. There are also changes to advertising rules, and some attempts made to condense shareholder reports.
Here are some of the most common ETF prospectus compliance mistakes issuers should watch for.
Net Asset Value (NAV), market price, median bid-ask spread, and premiums/discounts must be disclosed daily. An inaccurate disclosure can result in regulatory enforcement.
The solution is building in a daily review step before disclosures go out to help catch errors before they become full-blown compliance issues.
If your fund’s custom basket departs from its official policies and procedures or fails to be reviewed by designated officers that can create regulatory enforcement. This can also happen if the custom basket is found to be not in shareholder interest, fails to properly keep records, or include asset classes outside of standard operating rules.
The solution is to regularly audit custom baskets in order to catch any instances of non-compliance.
Current SEC requirements under Rule 6c-11 mean that most funds must disclose their portfolio holdings at the close of each business day.
The solution is automating end-of-day disclosure reporting to ensure consistency.
Compliance and legal teams should note that a statutory prospectus is a living document that requires constant upkeep and updates. NAV, holdings, and other stats are easy to lose track of, but fees and expenses can change a lot. Make sure the prospectus is updated frequently to reflect reality and avoid falling out of compliance.
The solution to this issue to to set up a recurring review schedule for fee and expense data that can help keep your prospectus current.
Check out: Choosing the right ETF wrapper for your strategy
There are several steps fund managers, investment advisers, and legal teams can take to properly coordinate prospectus delivery to investors.
Compliance and legal teams seeking an easy solution to the challenges of prospectus delivery can investigate automated tools. There are a number of tools that can integrate with your firm’s data and interact with EDGAR and the necessary platforms to make prospectus delivery more efficient.
Most prospectuses are filled with financial and legal jargon. A “plain-English” summary prospectus allows for clear, concise text using simple vocabulary and shorter sentences.
Digital delivery comes with enormous benefits for legal and compliance teams looking to efficiently handle prospectus delivery. However, not all investors will want a digital prospectus. Many will request it in writing, and having a hybrid infrastructure in place to deliver both electronically and analog will be advantageous.
EDGAR (Electronic Data Gathering, Analysis, and Retrieval) is an SEC system that disseminates all of the required, mandatory information to investors. Compliance teams will enjoy EDGAR’s automated validation and efficiency. Funds will also benefit from the SEC’s security protocols, which protect issuers and investors alike.
Broker-dealers facilitate trading on the primary and secondary markets. They execute trades for clients, meaning that it is important to coordinate all requests for prospectus delivery with the authorized participants and market makers supporting your product.
Legal and compliance teams should note that keeping track of all your deliveries, whether electronic or physical, is important. If your fund is audited, you’ll need to prove you have been in compliance with prospectus delivery requirements, and record-keeping is essential.
Managing a fund is an ongoing task that never ends. Fund managers, legal teams, and compliance need to set an ongoing fund prospectus review to ensure accuracy. Make sure the workflow is clearly mapped out and that there are redundancies. Falling out of compliance can be catastrophic for a fund and an ingrained review and updating process mitigates that risk.
Asset managers looking to ensure their funds are in compliance can check periodically by auditing themselves. This will allow you to catch any potential issues in advance of regulators and make sure that all key information is available to investors.
You might like: Best practices for launching an ETF
An ETF prospectus is a legal document, filed with and reviewed by the SEC, that outlines a fund’s investment objectives, strategies, fees, risks, and historic performance. It is designed to give investors the information they need to evaluate a fund before buying or selling shares, and asset managers are required to make it available to investors at specific points before and after a sale.
An ETF prospectus delivery obligation is triggered any time shares of an ETF are created and distributed in the primary market, or any time a broker-dealer sells shares in the secondary market. Delivery is also required whenever an investor specifically requests a prospectus, regardless of where or when the transaction occurs.
A broker-dealer must deliver a prospectus before or at the time of sale, or at confirmation of the transaction in the secondary market. If an investor requests a prospectus at any other time, the broker-dealer must provide it then as well.
Rule 172 is an SEC rule that establishes an “access equals delivery” model for prospectus delivery. Under this rule, a prospectus is considered delivered as long as it is filed with the SEC and easily accessible online, even if it isn’t physically sent to the investor. This allows issuers to satisfy delivery requirements without making a paper copy for every transaction.
Rule 6c-11 provides exemptive relief for ETFs from certain provisions of the Investment Company Act of 1940. It allows ETFs to operate without obtaining individual exemptive orders, streamlining the process of launching new funds. The rule also facilitates the in-kind creation and redemption mechanism that defines the ETF structure, and permits ETFs to delay redemption payments for foreign securities for up to 15 days, longer than the standard limit for other investment vehicles.
Prospectus delivery is an ongoing obligation, one that follows an ETF from its initial registration statement through every disclosure document required over the life of the fund.
Remember that securities laws are subject to change. For that reason, your workflows should be built in a flexible way that allows you to adapt them over time.
VettaFi works with asset managers to navigate the complex process of launching and maintaining ETFs. Reach out to our team now to learn more.
