Fund companies, administrators, and investment industry service providers pulled off a notable feat this summer by making the leap to new “Tailored Shareholder Reports” (TSR) without a single major snag. In fact, the transition was so seamless that it probably seemed like a minor event to investors.TSRs were produced for over 14,000 share classes and nearly 300 million were delivered by Broadridge to shareholders.

But make no mistake, the move to comply with the Securities and Exchange Commissions’ TSR rule was no minor event for the industry. Fund providers and their partners dedicated huge amounts of resources and time to pull off a complex and demanding transition. Although these firms might still be stinging from the operational demands associated with TSR compliance, there is at least one clear silver lining from the experience: Technology solutions and best practices established for TSR conversion have already become permanent fixtures, enhancing operational efficiency and making the industry better prepared to navigate a constantly evolving global regulatory environment.

Ready for the Next Round of Rulemaking

Starting this year, Securities and Exchange Commission (SEC) rulemaking required fund managers to overhaul and replace the traditional shareholder reports and other notices they provide investors, with new TSRs. The SEC’s goal with the new rule was to provide investors with more engaging and meaningful information.

As the Head of Mutual Fund Regulatory Communications at Broadridge, I had a unique vantage point from which to observe the switch to TSR. Under the new SEC rules, open-end mutual funds and most ETFs were required to replace full shareholder reports and 30e-3 notices with streamlined summary annual and semi-annual reports, starting in July 2024. Broadridge worked with more than 200 fund companies to help manage this conversion, in areas ranging from data management, report composition, and data tagging to web hosting, printing, distribution and SEC filing.

My overall takeaway from that experience was that the initial implementation of TSR was a success, and an accomplishment for which the industry should take some well-deserved pride. Firms built, nearly from scratch, a process to create and distribute the massive volume of TSRs and executed on that process with no significant issues reported.

In addition to meeting the SEC’s core objective of making it easier for investors to digest information and make informed decisions about their funds, the technology solutions, operational processes and best practices established for TSR have put investment firms in a strong position for the inevitable next round of regulatory requirements.

In all likelihood, firms won’t have long to wait. Canadian regulators are already considering a proposal similar to TSR. The proposed “Modernization of the Continuous Disclosure Regime for Investment Funds,” consultation, which is currently out for comment, looks to modernize fund disclosure by “improving the quality of disclosure provided to investors”. Meanwhile, the SEC is targeting April 2025 for a new proposal to revamp fund fee disclosure. Investment firms who invested in technology to make the transition to TSR appear seamless to shareholders should take real satisfaction knowing they will be much better prepared when it comes time to implement these and other new rules.

Integration, Automation and AI

The biggest legacy of TSR will be the technology solutions built to manage the conversion. Producing and delivering more reports within the same 60-day time period required a level of systems integration and automation that many firms had not yet achieved. TSR motivated firms to create new solutions to link report composition systems to web hosting and filing systems, and to share data among internal platforms. Although the immediate goal of that integration was to facilitate the creation and distribution of TSRs, this integration will create opportunities to further the enhance the investor experience by creating a more immersive digital experience via e-deliveries, websites, and financial apps.  Roughly 70% of TSR distributions to shareholders occurred via e-delivery.

At the same time, TSR accelerated automation efforts for many firms. If there were any areas that posed challenges for firms during TSR implementation, it was iXBRL tagging and ADA compliance. In both cases, many firms overcame these challenges by working with external partners to build and adopt automated processes, like iXBRL tagging solutions embedded into the composition process to reduce downstream SEC filing workloads, and automated compliance solutions for ADA. These efforts will provide a valuable blueprint for the use of automation in future compliance efforts.

Finally, many investment firms used artificial intelligence (AI) to achieve the efficiency and scale needed to meet the demands of TSR. Firms leveraged AI to speed and enhance data reconciliation and to mitigate risk throughout the data aggregation and oversight process. The integration of AI for TSR will lay a foundation for the addition of other AI-powered solutions in core functions like data management, reporting, client service, and compliance.

TSR Best Practices Enhance Compliance

In addition to technology systems, some of the processes put in place to facilitate the transition to TSR are becoming permanent features of firms’ operational blueprints and compliance strategies. These best practices are already making the entire industry better positioned to navigate today’s challenging regulatory environment.

For example, TSR provided a dramatic reminder of the need to take regulatory compliance seriously and to start planning for new rules well in advance. For TSR, most firms kicked off a comprehensive planning process in early 2023, well ahead of the July 2024 compliance date. Firms took a holistic perspective to the task. Most firms created internal working groups integrating accounting, legal, compliance, technology, client service, operations and other functions. These teams created new workflows to handle the new content demands and increased volume of reports. Key to those new workflows was internal standardization that dramatically boosted operational efficiency by eliminating the need for customization among the fund types. Firms worked closely with external vendors to ensure that systems, processes and formats were properly aligned. All those practices will endure in organizations going forward, making future modernization projects and regulatory change easier to implement.

TSR also drove home the importance of oversight and forced industry participants to implement new and expanded oversight procedures. For many firms, the TSR rules significantly increased the volume of reports generated each cycle, sometimes multiplying the output several times over. To produce accurate, error-free reports at this scale, firms implemented a highly structured oversight process, incorporating upstream validation to identify and resolve issues early, and ensuring compliance, legal, and other key functions had clearly defined opportunities to review and approve each report.

Finally, the complexity of TSR conversion pushed firms to embed testing into the compliance process. The industry spent much of the last 12 months testing, re-testing and testing again, often culminating with an end-to-end test including external vendors. Even with this comprehensive planning and extensive testing, many firms decided to be extra cautious by kicking-off the TSR process while continuing to run the original report production process in parallel as a backup. In the end, those backup systems weren’t needed, since nearly all major firms made something close to a seamless transition to TSR.

By utilizing new technology and best practices, the transition to TSR looked seamless, and was seamless.  And by employing technology and best practices, these extra efforts will pay off for the industry in the long run as fund companies, administrators, and investment industry service providers become more skilled and agile to comply with future regulatory and compliance requirements.