SEC Proposes Default Electronic Delivery for Required Disclosures

The Securities and Exchange Commission (the “Commission”) has proposed a new Regulation E-Delivery that would fundamentally change how registered investment advisers, broker-dealers, issuers of securities, and other “covered entities” subject to federal securities laws, deliver required disclosures, reports, and other materials to their clients, customers, investors and certain other “covered recipient” counterparties (see “Scope – Who is Affected” below).

If the proposal is adopted, electronic delivery would be the default method for delivering information required under the federal securities laws, replacing the current paper-first, electronic opt-in approach.

Background

Under the current framework, the SEC has not adopted binding rules governing electronic delivery. Instead, the Commission relies on a patchwork of interpretive releases—known as the E-Delivery Guidance—that describe conditions under which issuers and market intermediaries may use electronic media to deliver required information. Because this guidance requires that investors “opt in” to electronic delivery by providing affirmative consent, paper remains the default delivery method for most regulatory disclosures and reports.

The proposed Regulation E-Delivery would replace this patchwork approach with a single, comprehensive electronic delivery rule. If adopted, Reg E-Delivery would become the Commission’s primary e-delivery rule and would generally supersede the current guidance-based framework. The proposal would allow electronic delivery as the default delivery method to investors, clients, and other covered recipients without first obtaining affirmative consent, subject to specified conditions designed to protect recipients. The Commission has also proposed to rescind Rule 30e-3 under the Investment Company Act (which permits certain registered investment companies to satisfy shareholder report transmission requirements by posting reports online and providing a paper notice of availability) and amend related rules for proxy and tender offer materials.

Scope — Who and What Is Affected

Covered Entities. The proposed rule defines a “covered entity” broadly as any person with an obligation to deliver “covered information” to a “covered recipient” under the federal securities laws. This includes issuers, SEC-registered investment advisers, broker-dealers, registered investment companies, business development companies (BDCs), transfer agents, and any person delivering proxy, information statement, or tender offer materials.

Covered Information. “Covered information” generally means any information required to be delivered under the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, or other applicable federal securities laws.¹There are limited exclusions for Regulation Crowdfunding, Exchange Act Rule 15c2-11, and the security-based swap trade acknowledgment rule.

Covered Recipients. A “covered recipient” is any current or prospective customer, client, investor, security holder, counterparty, or similar recipient to whom a covered entity must deliver covered information. The definition of “similar recipient” extends to designated recipients or representatives, including trustees, executors, conservators, attorneys-in-fact, financial professionals, or other designees authorized to receive information on behalf of a covered recipient.

New Default Rule

Under the proposed rule, a covered entity could rely on Reg E-Delivery where:

1. the covered recipient has provided (or accepted use of) an electronic address;
2. the covered entity provides prominent disclosure that it will send covered information to that electronic address; and
3. the recipient has not opted out (Reg E-Delivery permits, but does not require, default electronic delivery).

Electronic delivery must be made no later than the date the information is otherwise required to be delivered under federal securities laws.

Every electronic delivery must include a prominent statement explaining how to (i) request a free paper copy, (ii) opt out of e-delivery at any time for all or a subset of covered information, and (iii) update an electronic address—all free of charge. Covered entities must also adopt and implement written policies and procedures reasonably designed to identify and remediate failed electronic delivery, including by obtaining a new electronic address or delivering paper until a new address is provided.

The proposal exempts covered information delivered under Reg E-Delivery from E-SIGN’s consumer consent requirements to the extent those requirements would otherwise apply. That exemption is significant in practice because it allows the SEC’s rule-based opt-out framework to operate without a separate E-SIGN affirmative-consent process for covered information that must be provided “in writing.”

Methods of Delivery and Personal Financial Information

The method of electronic delivery depends on whether the covered information includes personal financial information (“PFI”), which is information specific to a covered recipient’s personal financial matters, such as an account number or details regarding a specific securities transaction. PFI includes information of institutions and business entities as well as natural persons.

For covered information that does not include PFI, direct delivery to the recipient’s electronic address is permitted, including in the body of an email or as an attachment.

If covered information includes PFI, the covered entity may not send the information directly by email. Instead, it must send a “statement of availability” with a web address where the recipient can access the information through a process reasonably designed to safeguard the PFI. The statement of availability must lead the recipient directly to the covered information after the safeguarding process.

Transition from Current Framework

The proposed rule includes a structured transition process for moving existing paper-delivery recipients to the new default e-delivery framework. The transition applies to covered recipients who, as of the effective date of Reg E-Delivery, receive any covered information in paper format and for whom the covered entity has an electronic address on file.

To initiate the transition, a covered entity must send a clear and conspicuous initial notice in paper to the recipient’s last known physical address. The initial notice must describe: (a) the types of covered information that will move to e-delivery; (b) the electronic address that will be used; (c) the delivery methods that may be used; (d) the date the transition to default e-delivery will begin (which must be no earlier than 180 days after the initial notice); and (e) the process for opting out or updating or confirming an electronic address.

A follow-up paper notice must generally be sent 30 days before the transition date unless the recipient updates or confirms an electronic address after the initial notice and has not opted out, or if the recipient opts out and elects paper for all or a subset of covered information. Recipients may opt out at any time and receive paper delivery free of charge, and covered entities must promptly comply.

The proposal contemplates a final rule effective date 60 days after publication of any final rule in the Federal Register, and a two-year interim period before rescission of prior e-delivery guidance would become effective. This interim period is designed to allow covered entities time to update their systems and implement the new delivery framework.

Key Takeaways for Clients

Clients should consider the following near-term actions:

• Identify your covered information. Inventory all disclosures, reports, and other materials your firm is required to deliver under federal securities laws, and determine which of those materials include personal financial information (PFI) that would trigger additional safeguarding requirements. For most registered investment advisers that primarily advise private funds and/or real estate funds, the two main ongoing disclosure delivery requirements under federal securities laws are (1) the Form ADV Part 2A Brochure must be delivered annually to the adviser’s clients, and (2) if a private fund is relying on the audited financial statement exemption from the Custody Rule, the fund’s audited financial statements must be delivered annually to the fund’s underlying investors; however, in most cases the method for delivering investor reports, including the annual audited financial statements, is prescribed in the fund’s governing agreements (as the same may be modified by any side letters with individual investors) and so would not be impacted by the proposed regulation.
• Develop a transition plan. For investors and clients currently receiving paper communications, begin assessing whether you have electronic addresses on file and planning for the required notice-and-waiting-period process to move those recipients to default e-delivery.
• Consider submitting comments. The public comment period remains open for 60 days after publication of the proposing release in the Federal Register. Stakeholders may wish to engage on questions of scope, compliance timelines, and operational requirements.