Starting in January 2011, mutual funds will be required to provide the risk/return summary information section of their prospectuses in an electronic reporting format that “tags” data using a set of standard definitions.1 This format, eXtensible Business Reporting Language, or XBRL, organizes the risk/return information so that it can be recognized, selected, analyzed, stored, exchanged with other computers and presented in different human-readable formats.
The new interactive data rules for mutual funds are complex, and implementing them will require time and resources. It is not too soon to begin preparing to meet the new requirements.
The Interactive Data File
The mutual fund data tagging requirements apply to the information disclosed in a fund’s prospectus pursuant to Items 2, 3 and 4 of Form N1-A, that is, the fund’s investment objectives and strategies, costs, risks, and past performance. The new rules do not eliminate or alter existing disclosure requirements for the risk/return summary. Each piece of information in the risk/return summary — section headings, blocks of text (such as the fund’s objective), column headings in tables and charts, line items and numbers in tables and charts, footnotes — will be assigned its own tag. Contextual information, such as the name of the registrant and identifying information (for example, CIK number), date of the prospectus, series name, and class of shares, will also be tagged. The tags will be selected from a designated dictionary of tags (often referred to as a “taxonomy”) maintained by XBRL U.S.2 The Securities and Exchange Commission posts links to XBRL taxonomies on its website.3 Funds using XBRL can adapt it (it is “eXtensible”) to include tags for unique bits of information, but only if an appropriate tag is not included in the taxonomy.
An interactive data file can be read only by computers. To read an interactive data file, a person must use a viewer (or “rendering engine”) to convert the file into a human readable format. The SEC’s website contains links that allow users to view tagged information, and to compare mutual fund risk/return summary information.4
The content of an interactive data file may not vary from the information in the original filing. The interactive data file is not permitted to include a legend cautioning investors to read the full prospectus. The SEC will, however, include this cautionary language on the SEC’s mutual fund viewer that investors use to read interactive data files on the SEC’s website.
A fund may choose to prepare its own interactive data files by using commercially available software, or it may outsource the tagging process.
Filing and Web Posting Requirements
For new registration statements and annual updates of existing registration statements that are effective after January 1, 2011, a fund must file the interactive data file as an exhibit (Ex-101) to the registration statement within 15 business days after the effective date of the filing. This filing is required to be a separate filing under Rule 485(b).5 The filing will contain the new exhibit, a facing page, a signature page, a cover letter explaining the nature of the amendment and a revised exhibit list.
If a fund changes its risk/return summary information in a filing made under Rule 497(c) or (e),6 an interactive data file must be included with the Rule 497 filing or filed within 15 business days following the filing. In the latter case, the fund would make a second Rule 497 filing that includes a Rule 497 document (it may incorporate by reference the first Rule 497 filing and should include the accession number of the first filing) and the interactive data exhibit.7 An interactive data file is not required for a filing of a summary prospectus under Rule 497(k).
The interactive data file must also be posted on the fund’s website no later than the end of the calendar day it is submitted to the SEC or is required to be submitted, whichever is earlier. This means that, for a submission made after 5:30 p.m. ET, which will be deemed filed on the next business day, the web posting will be required on the next business day. A hyperlink to the fund’s interactive data file on the SEC website will not suffice. A fund is not required to make a viewer available on its website, however.
If a required filing or posting of an interactive data file of a fund’s risk/return summary is not made on time, the registrant’s ability to make filings under Rule 485(b) is automatically suspended until the registrant makes and posts the interactive data file. During the suspension, the fund will not be able to file amendments to its registration statement that are effective immediately, and, instead, the fund’s amendments will be subject to a 60-day delay. The suspension applies to all Rule 485(b) post-effective amendments, even, in the case of a registrant with multiple funds, those relating to other funds. The failure to provide the interactive data submission does not affect the mutual fund’s ability to incorporate by reference the fund’s prospectus or statement of additional information into another document, such as the summary prospectus.
Prior to October 31, 2014, Rule 406T of Regulation S-T, a temporary liability rule, applies to interactive data filings made by mutual funds. The filings are subject to the anti-fraud provisions of the federal securities laws, but they will be deemed not filed as part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, Section 18 of the Securities Exchange Act of 1934 or Section 34(b) of the Investment Company Act of 1940. The interactive data files are deemed filed for purposes of Rule 103 of Regulation S-T, which provides relief for errors or omissions in an electronic filing resulting from transmission errors, if the errors are promptly corrected. Interactive data filers may be subject to liability for failure to comply with Rule 405 of Regulation S-T. Rule 405 contains requirements for content, format, submission and website posting requirements for interactive data files. However, Rule 405 offers special protection from the liability provisions for a fund that promptly amends an incorrect interactive data file. “Promptly” means “as soon as reasonably practicable under the facts and circumstances at the time.” A safe harbor is included: a correction made by the later of 24 hours, or 9:30 a.m. on the business day after, the mutual fund becomes aware of the need for correction, is deemed promptly made.
After October 31, 2014, all interactive data filings will be subject to all liability provisions that apply to the related, official filings.
The SEC plans to use a validation system to detect major and minor errors in an interactive data filing.8 The interactive data exhibit will be suspended for major errors, but the rest of the file will be accepted. In that case, a corrected interactive data file must be submitted in an amendment to the first filing.
The SEC will permit test filings to create viewable interactive data, and the SEC system will advise the filer of errors, both major and minor, in the test filing.
Mutual fund advisers should consider how they will manage the risks that arise in connection with the mutual fund risk/return summary tagging rules. Among these risks are tagging or other technical errors that cause the interactive file to differ from the related, official filing or that result in inaccurate comparisons to data filed by other mutual funds, transmission errors and website interruptions. Testing an interactive file before it is filed, either on the SEC’s website, with a service provider or internally with a viewer that renders the file in human readable form, and matching content to the related filing, seems a necessary part of the filing routine. Once the filing has been made with the SEC, a fund adviser should check the file using the SEC’s viewer to confirm the absence of transmission errors. A fund adviser should also test the integrity of the interactive data file on its website from time to time, and perhaps compare the fund’s interactive data file with the files of other mutual funds to verify proper tagging. Compliance personnel will want to consider whether policies and procedures for maintaining the fund’s website, and for reviewing whether information posted on the website is accurate and complete, will need to be updated to take into account the new interactive data filing requirements.
It is not too soon to turn your attention to the mutual fund interactive data filing requirements. The rules are long, complex and detailed, and the final mutual fund taxonomy should be available soon. There is still time — but not much time — to learn the rules, prepare filings, submit them as test filings and work through the problems before the end of the year.
For assistance, please contact the following lawyers: