Like common stockholders, mutual fund shareholders have specific rights. This chapter covers:
Mutual fund shareholders have the right to vote for the Board of Directors (BOD) (sometimes called the Board of Trustees). The BOD is a group of board members approved by shareholders. Its main job is to represent shareholder interests by overseeing the fund’s operations and monitoring compliance with securities regulations.
If problems arise (for example, the fund isn’t complying with the law or the portfolio no longer matches the fund’s stated objectives), the BOD is responsible for addressing them.
Additionally, the BOD nominates and oversees the fund’s investment adviser, the firm responsible for managing (investing) the fund’s assets. The investment adviser employs the fund manager, the individual who makes the day-to-day investment decisions.
Because these roles control shareholder money, shareholders must approve the investment adviser’s initial contract. That initial contract can last no more than two years. After that, the contract is renewed annually, and approval is required from either:
Only one of those approvals is required (not both). If the fund performs poorly, the BOD can replace the investment adviser and fund manager.
*Approval requires a majority of shareholder votes. Like common stockholders, shareholders receive more voting power as they own more shares. In particular, a shareholder gets one vote for each dollar invested in the fund. A “majority of shareholder votes” does not necessarily mean a majority of shareholders. For example, assume one shareholder owns 51% of the fund’s total value and one million other shareholders own the remaining 49%. If the 51% shareholder votes to approve an item and the other million shareholders vote against it, the 51% shareholder’s vote wins. The outcome is based on voting power, not the number of people voting.
The Investment Company Act of 1940 requires at least 40% of the BOD to be independent to help keep the board as unbiased as possible. An independent board member (also called non-interested) must not have had related business with the fund sponsor, investment adviser, or fund affiliates within the past two years.
By contrast, interested (non-independent) board members typically do business with, or are employees of, the sponsor, investment adviser, or fund affiliates (for example, a subsidiary of the fund sponsor). Any board member should raise concerns when something needs to be fixed, but independent members are generally more likely to do so because they have fewer ties to the fund’s management.
Shareholders are typically asked to vote on fund-specific matters each year. Like common stockholders, shareholders can vote by proxy (using online or printed voting materials) or attend the annual shareholder meeting (if one is held).
The most common matters requiring a vote include:
*12b-1 fees are marketing fees, which we will discuss later in this unit.
Most mutual funds make distributions to shareholders, often on an annual schedule.
Dividends are the income the fund receives from the securities it holds.
Capital gain distributions occur when the fund manager sells a security in the portfolio for more than the fund paid for it, and the fund distributes that profit to shareholders.
Shareholders have the right to receive dividend and capital gain distributions, but they don’t vote on whether distributions are made. Instead, the BOD approves dividend payments. In practice, the BOD commonly approves distributions because there are tax incentives to do so (covered later in this unit).
Most securities issuers must provide detailed disclosures to investors. Mutual funds are no exception. Common mutual fund disclosures include:
The prospectus (also called a statutory prospectus) provides the key information a potential investor or current shareholder needs about the fund. It must be delivered:
In practice, many investors receive electronic access to the prospectus (for example, a link during an online purchase or an emailed document).
Information disclosed in the prospectus includes:
*Funds that have existed for at least 10 years must disclose the past 1, 5, and 10-year returns. If a fund is not at least 10 years old, it must disclose as much of the typical requirements, plus the life of the fund. For example, a fund in existence for 7 years would disclose the past 1, 5, and 7-year returns. Or, a fund in existence for 4 years would disclose the past 1 and 4-year returns.
**Fund policies include minimum required investment (e.g., minimum $2,500 required to invest), availability of shares (e.g., shares only available to US citizens), and excessive trading policies (restrictions imposed on investors that quickly liquidate shares).
***Financial highlights include the fund’s historical income and expenses.
A fund prospectus can be dozens of pages long and may be difficult to read straight through. A summary prospectus is a condensed version that may be delivered instead of the statutory prospectus.
To view a real world version of these documents, click these links:
The statement of additional information (SAI) provides detailed, “in the weeds” information about the fund. Many shareholders never read the SAI, but it’s the go-to document if you want a deeper look at how the fund operates.
Information in the SAI includes micro-details on:
The SAI does not have to be delivered to investors, but it must be available upon request.
Click this link to view the SAI for the Fidelity Value Fund, a real world version of this disclosure.
Funds must file annual Securities and Exchange Commission (SEC) reports. The SEC makes these reports publicly available after receiving them.
These reports include:
Click this link to view the SEC annual report for the Fidelity Value Fund, a real world version of this disclosure.
Funds must make semi-annual reports available to shareholders. Much of the information overlaps with the annual SEC report, including:
Click this link to view the semi-annual shareholder report for the Fidelity Value Fund, a real world version of this disclosure.
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