80_FR_33703
80 FR 33590 - Investment Company Reporting Modernization
80 FR 33590 - Investment Company Reporting Modernization
SECURITIES AND EXCHANGE COMMISSION
Federal Register Volume 80, Issue 113 (June 12, 2015)
Page Range
33590-33716
FR Document
2015-12779
The Securities and Exchange Commission is proposing new rules and forms as well as amendments to its rules and forms to modernize the reporting and disclosure of information by registered investment companies. The Commission is proposing new Form N-PORT, which would require certain registered investment companies to report information about their monthly portfolio holdings to the Commission in a structured data format. In addition, the Commission is proposing amendments to Regulation S-X, which would require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The Commission is also proposing new rule 30e-3, which would permit but not require registered investment companies to transmit periodic reports to their shareholders by making the reports accessible on a Web site and satisfying certain other conditions. The Commission is proposing new Form N-CEN, which would require registered investment companies, other than face amount certificate companies, to annually report certain census-type information to the Commission in a structured data format. Finally, the Commission is proposing to rescind current Forms N-Q and N-SAR and to amend certain other rules and forms. Collectively, these amendments would, among other things, improve the information that the Commission receives from investment companies and assist the Commission, in its role as primary regulator of investment companies, to better fulfill its mission of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. Investors and other potential users could also utilize this information to help investors make more informed investment decisions.
Federal Register, Volume 80 Issue 113 (Friday, June 12, 2015)
[Federal Register Volume 80, Number 113 (Friday, June 12, 2015)]
[Proposed Rules]
[Pages 33590-33716]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2015-12779]
[[Page 33589]]
Vol. 80
Friday,
No. 113
June 12, 2015
Part II
Securities and Exchange Commission
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17 CFR Parts 200, 210, 230, et al.
Investment Company Reporting Modernization; Proposed Rule
Federal Register / Vol. 80 , No. 113 / Friday, June 12, 2015 /
Proposed Rules
[[Page 33590]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 210, 230, 232, 239, 240, 249, 270, 274
[Release Nos. 33-9776; 34-75002; IC-31610; File No. S7-08-15]
RIN 3235-AL42
Investment Company Reporting Modernization
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is proposing new rules
and forms as well as amendments to its rules and forms to modernize the
reporting and disclosure of information by registered investment
companies. The Commission is proposing new Form N-PORT, which would
require certain registered investment companies to report information
about their monthly portfolio holdings to the Commission in a
structured data format. In addition, the Commission is proposing
amendments to Regulation S-X, which would require standardized,
enhanced disclosure about derivatives in investment company financial
statements, as well as other amendments. The Commission is also
proposing new rule 30e-3, which would permit but not require registered
investment companies to transmit periodic reports to their shareholders
by making the reports accessible on a Web site and satisfying certain
other conditions. The Commission is proposing new Form N-CEN, which
would require registered investment companies, other than face amount
certificate companies, to annually report certain census-type
information to the Commission in a structured data format. Finally, the
Commission is proposing to rescind current Forms N-Q and N-SAR and to
amend certain other rules and forms. Collectively, these amendments
would, among other things, improve the information that the Commission
receives from investment companies and assist the Commission, in its
role as primary regulator of investment companies, to better fulfill
its mission of protecting investors, maintaining fair, orderly and
efficient markets, and facilitating capital formation. Investors and
other potential users could also utilize this information to help
investors make more informed investment decisions.
DATES: Comments should be received on or before August 11, 2015.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
Send an email to [email protected]. Please include
File No. S7-08-15 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number S7-08-15. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information you wish to make
available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's Web site. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Daniel K. Chang, Senior Counsel, J.
Matthew DeLesDernier, Senior Counsel, Jacob D. Krawitz, Senior Counsel,
Andrea Ottomanelli Magovern, Senior Counsel, Michael C. Pawluk, Branch
Chief, or Sara Cortes, Senior Special Counsel, at (202) 551-6792,
Investment Company Rulemaking Office, Alan Dupski, Assistant Chief
Accountant, Chief Accountant's Office, at (202) 551-6918, Division of
Investment Management, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the
``Commission'') is proposing for comment new Form N-PORT [referenced in
17 CFR 274.150], new Form N-CEN [referenced in 17 CFR 274.101] under
the Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.]
(``Investment Company Act''); new rules 30a-4 [17 CFR 270.30a-4], 30b1-
9 [17 CFR 270.30b1-9] and 30e-3 [17 CFR 270.30e-3] under the Investment
Company Act; rescission of rules 30b1-1 [17 CFR 270.30b1-1], 30b1-2 [17
CFR 270.30b1-2], 30b1-3 [17 CFR 270.30b1-3], and 30b1-5 [17 CFR
270.30b1-5] under the Investment Company Act; amendments to rules 8b-16
[17 CFR 270.8b-16], 8b-33 [17 CFR 270.8b-33], 10f-3 [17 CFR 270.10f-3],
30a-1 [17 CFR 270.30a-1], 30a-2 [17 CFR 270.30a-2], 30a-3 [17 CFR
270.30a-3], and 30d-1 [17 CFR 270.30d-1] under the Investment Company;
amendments to Forms N-1A [referenced in 17 CFR 274.11A], N-2
[referenced in 274.11a-1], N-3 [referenced in 274.11b], N-4 [referenced
in 17 CFR 274.11c], and N-6 [referenced in 17 CFR 274.11d] under the
Investment Company Act and the Securities Act of 1933 [15 U.S.C. 77a et
seq.] (``Securities Act''); amendments to rule 498 [17 CFR 230.498] and
Form N-14 [referenced in 17 CFR 239.23] under the Securities Act;
rescission of Form N-SAR [referenced in 17 CFR 274.101 and Form N-Q
[referenced in 17 CFR 274.130] and amendments to Form N-CSR [referenced
in 17 CFR 274.128] under the Investment Company Act and Securities
Exchange Act of 1934 [15 U.S.C. 78a et seq.] (``Exchange Act'');
amendments to rules 10A-1 [17 CFR 240.10A-1], 12b-25 [17 CFR 240.12b-
25], 13a-10 [17 CFR 240.13a-10], 13a-11 [17 CFR 240.13a-11], 13a-13 [17
CFR 240.13a-13], 13a-16 [17 CFR 240.13a-16], 14a-16 [17 CFR 240.14a-
16]; 15d-10 [17 CFR 240.15d-10], 15d-11 [17 CFR 240.15d-11], 15d-13 [17
CFR 240.15d-13], and 15d-16 [17 CFR 240.15d-16] under the Exchange Act;
rescission of section 332 [17 CFR 249.332] and amendments to sections
322 [17 CFR 249.322] and 330 [17 CFR 249.330] of 17 CFR part 249;
amendments to Article 6 [17 CFR 210.6-01 et seq.] and Article 12 [17
CFR 210.12-01 et seq.] of Regulation S-X [17 CFR 210]; amendments to
section 800 of 17 CFR part 200 [17 CFR 200.800]; and amendments to
rules 105 [17 CFR 232.105], 301 [17 CFR 232.301], and 401 [17 CFR
232.401] of Regulation S-T [17 CFR 232].
[[Page 33591]]
Table of Contents
I. Background
A. Changes in the Industry and Technology
B. Changes to Current Reporting Regime
1. Form N-PORT, Amendments to Regulation S-X, and Option for Web
Site Transmission of Shareholder Reports
2. Form N-CEN
II. Discussion
A. Form N-PORT
1. Who Must File Reports on Form N-PORT
2. Information Required on Form N-PORT
3. Reporting of Information on Form N-PORT
4. Public Disclosure of Information Reported on Form N-PORT
B. Rescission of Form N-Q and Amendments to Certification
Requirements of Form N-CSR
1. Rescission of Form N-Q
2. Amendments to Certification Requirements of Form N-CSR
3. Request for Comment
C. Amendments to Regulation S-X
1. Overview
2. Enhanced Derivatives Disclosures
3. Amendments to Rules 12-12 Through 12-12C
4. Investments In and Advances to Affiliates
5. Form and Content of Financial Statements
D. Option for Web Site Transmission of Shareholder Reports
1. Overview
2. Discussion
3. Rule 30e-3
4. Use of Summary Schedule of Investments
5. Related Disclosure Amendments
6. Requests for Comment
E. Form N-CEN and Rescission of Form N-SAR
1. Overview
2. Who Must File Reports on Form N-CEN
3. Frequency of Reporting and Filing Deadline
4. Information Required on Form N-CEN
5. Items Required by Form N-SAR That Would Be Eliminated by Form
N-CEN
F. Technical and Conforming Amendments
G. Compliance Dates
1. Form N-PORT, Rescission of Form N-Q, and Amendments to the
Certification Requirements of Form N-CSR
2. Form N-CEN and Rescission of Form N-SAR
3. Option for Web Site Transmission of Shareholder Reports
4. Regulation S-X and Related Amendments
5. Request for Comment
III. General Request for Comment
IV. Economic Analysis
A. Introduction
B. Form N-PORT, Rescission of Form N-Q, and Amendments to Form
N-CSR
C. Amendments to Regulation S-X
D. Option for Web Site Transmission of Shareholder Reports
E. Form N-CEN and Rescission of Form N-SAR
F. Alternatives to the Reporting Requirements
G. Request for Comments
V. Paperwork Reduction Act
A. Portfolio Reporting
1. Form N-PORT
2. Rescission of Form N-Q
B. Census Reporting
1. Form N-CEN
2. Rescission of Form N-SAR
C. Amendments to Regulation S-X
1. Rule 30e-1
2. Rule 30e-2
D. Option for Web Site Transmission of Shareholder Reports
1. Availability of Report and Other Materials and Delivery Upon
Request
2. Shareholder Consent and Notice
3. Impact on Information Collections for Rules 30e-1 and 30e-2
E. Amendments to Certification Requirements of Form N-CSR
F. Amendments to Registration Statement Forms
G. Request for Comments
VI. Initial Regulatory Flexibility Analysis
A. Reasons for and Objectives of the Proposed Actions
B. Legal Basis
C. Small Entities Subject to the Rule
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
1. Form N-PORT
2. Rescission of Form N-Q
3. Form N-CEN
4. Rescission of Form N-SAR
5. Regulation S-X Amendments
6. Web Site Transmission of Shareholder Reports
7. Amendments to Form N-CSR
8. Amendments to Registration Statement Forms
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. General Request for Comment
VII. Consideration of Impact on the Economy
VIII. Statutory Authority and Text of Proposed Amendments
I. Background
A. Changes in the Industry and Technology
As the primary regulator of the asset management industry, the
Commission relies on information included in reports filed by
registered investment companies (``funds'') \1\ and investment advisers
for a number of purposes, including monitoring industry trends,
informing policy and rulemaking, identifying risks, and assisting
Commission staff in examination and enforcement efforts. Over the
years, however, as assets under management and complexity in the
industry have grown, so too has the volume and complexity of
information that the Commission must analyze to carry out its
regulatory duties.
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\1\ For purposes of the preamble of this release, we use
``funds'' to mean registered investment companies other than face
amount certificate companies and any separate series thereof--i.e.,
management companies and unit investment trusts. In addition, we use
the term ``management companies'' or ``management investment
companies'' to refer to registered management investment companies
and any separate series thereof. We note that ``fund'' may be
separately and differently defined in each of the proposed new forms
or rules, or proposed rule or form amendments.
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Commission staff estimates that there were approximately 16,619
funds registered with the Commission, as of December 2014.\2\
Commission staff further estimates that there were about 11,500
investment advisers registered with the Commission, along with another
2,845 advisers that file reports with the Commission as exempt
reporting advisers, as of January 2015.\3\ At year-end 2014, assets of
registered investment companies exceeded $18 trillion, having grown
from about $4.7 trillion at the end of 1997.\4\ At the same time, the
industry has developed new product structures, such as exchange-traded
funds (``ETFs'') \5\, new fund types, such as target date funds with
asset allocation strategies,\6\ and increased its use of derivatives
and
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other alternative strategies.\7\ These products and strategies can
offer greater opportunities for investors to achieve their investment
goals, but they can also add complexity to funds' investment
strategies, amplify investment risk, or have other risks, such as
counterparty credit risk.
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\2\ Based on data obtained from the Investment Company
Institute. See www.ici.org/research/ stats.
\3\ Based on Investment Adviser Registration Depository system
data. In 2010, Congress charged the Commission with implementing new
reporting and registration requirements for certain investment
advisers to private funds (known as ``exempt reporting advisers'').
See Public Law 111-203, 124 Stat. 1376, 1570-80.
Form ADV is used by registered investment advisers to register
with the Commission and with the states and by exempt reporting
advisers to report information to the Commission. Information on
Form ADV is available to the public through the Investment Adviser
Public Disclosure System, which allows the public to access the most
recent Form ADV filing made by an investment adviser and is
available at http://www.adviserinfo.sec.gov. Today, in a
contemporaneous release, we are proposing a limited set of
amendments to Form ADV and certain rules under the Advisers Act to
fill certain data gaps and to enhance current reporting
requirements, to incorporate ``umbrella registration'' for private
fund advisers, and to make clarifying, technical and other
amendments. See Amendments to Form ADV and Investment Advisers Act
Rules, Investment Advisers Act Release No. 4091 (May 20, 2015).
\4\ See Investment Company Institute, 2015 Investment Company
Fact Book 9 (55th ed., 2015) (``2015 ICI Fact Book''), available at
http://www.ici.org/research/stats/factbook.
\5\ See generally Exchange-Traded Funds, Securities Act Release
No. 8901 (Mar. 11, 2008) [73 FR 14618, 14619 (Mar. 18, 2008)] (``ETF
Proposing Release''); see also http://www.ici.org/etf_resources/research/etfs_03_15 (discussing March 2015 statistics on ETFs). As
of March 2015, there were over 1400 ETFs with over $2 trillion in
assets. In the period of March 2014 to March 2015, assets of ETFs
increased $352.43 billion or 20.6%. See id.
\6\ See generally Investment Company Advertising: Target Date
Retirement Fund Names and Marketing, Securities Act Release No. 9126
(June 16, 2010) [75 FR 35920 (June 23, 2010)] (``Investment Company
Advertising Release'').
\7\ See generally Use of Derivatives by Investment Companies
Under the Investment Company Act of 1940, Investment Company Act
Release No. 29776 (Aug. 31, 2011) [76 FR 55237 (Sept. 7, 2011)]
(``Derivatives Concept Release''); International Swaps and
Derivatives Association (``ISDA'') Study, Size and Uses of the Non-
Cleared Derivatives Market (Apr. 2014), available at http://www2.isda.org/attachment/NjQ0MA==/FINAL%20-%20Size%20and%20Uses%20of%20the%20Non-Cleared%20Derivatves%20Market.pdf (noting increases in the use of
inflation swaps by asset managers and other investors); ISDA
Research Study, Dispelling Myths: End-User Activity in OTC
Derivatives (Aug. 2014), available at http://www2.isda.org/attachment/Njc2Nw==/ISDA-Dispelling%20myths-final.pdf (noting levels
of derivative usage by surveyed American and French asset managers
of 27% in 2011 and 53% in 2013, respectively, with 98% of total
gross notional exposure of surveyed UK hedge funds related to
derivatives in 2013; Sam Diedrich, `Alternative' or `Hedged' Mutual
Funds: What Are They, How Do They Work, and Should You Invest?,
(Feb. 28, 2014), available at http://www.forbes.com/sites/samdiedrich/2014/02/28/alternative-or-hedged-mutual-funds-what-are-they-how-do-they-work-and-should-you-invest/ (noting that
``alternative mutual fund products grew at a neck-breaking 43% [in
2013]. . . .'').
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While these changes have been taking place in the fund industry,
there has also been a significant increase in the use of the Internet
as a tool for disseminating information and advances in the technology
that can be used to report and analyze information. As discussed below,
we have allowed the use of the Internet as a platform for providing
required disclosure to investors. We have also started to use
structured and interactive data formats to collect, aggregate, and
analyze data reported by registrants and other filers. These data
formats for information collection have enabled us and other data
users, including investors and other industry participants, to better
collect and analyze reported information and have improved our ability
to carry out our regulatory functions.
We have historically acted to modernize our forms and the manner in
which information is filed with the Commission and disclosed to the
public in order to keep up with changes in the industry and technology.
For example, in 1985, the Commission replaced five different reporting
forms with Form N-SAR, which was designed to require reporting of data
in a structured manner so that the Commission could construct a
comprehensive database of information about the fund industry.\8\ In
2000, we adopted new rules and rule amendments under the Investment
Advisers Act of 1940 (``Advisers Act'') to require advisers registered
with the Commission to make filings under the Advisers Act with the
Commission electronically through the Investment Adviser Registration
Depository (IARD).\9\ In 2007, we sought to enhance the ability of
investors to make informed voting decisions and to expand the use of
the Internet to ultimately lower the costs of proxy solicitations by
requiring Internet availability of proxy materials.\10\
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\8\ See Semi-Annual Report Form for Registered Investment
Companies, Exchange Act Release No. 21633 (Jan. 4, 1985) [50 FR 1442
(Jan. 11, 1985)]. Reports on Form N-SAR are publicly available on
the Commission's EDGAR Web site.
\9\ See Electronic Filing by Investment Advisers; Amendments to
Form ADV, Investment Advisers Act Release No. 1897 (Sept. 12, 2000)
[65 FR 57438 (Sept. 22, 2000)].
\10\ See Shareholder Choice Regarding Proxy Materials,
Investment Company Act Release No. 27911 (July 26, 2007) [72 FR
42222 (Aug. 1, 2007)].
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In 2009, we amended Form N-1A, the registration form for open-end
funds, to enhance the information provided to investors by requiring
these funds to include a summary of key information in the front of
their prospectuses.\11\ The 2009 amendments to Form N-1A also sought to
harness the benefits of technological advances and increased Internet
usage by allowing mutual funds to satisfy their prospectus delivery
obligations by delivering a summary prospectus to investors and posting
the statutory prospectus and other materials on an Internet Web site.
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\11\ See Enhanced Disclosure and New Prospectus Delivery Option
for Registered Open-End Management Investment Companies, Investment
Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26,
2009)].
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Also in 2009, the Commission sought to take advantage of new
technology by adopting amendments requiring open-end funds to file
their prospectus risk/return summaries in eXtensible Business Reporting
Language (``XBRL'').\12\ In doing so, the Commission noted that this
interactive data format would make ``risk/return summary information
easier for investors to analyze [and] assist in automating regulatory
filings and business information processing.'' Additionally, in 2010,
the Commission adopted Form N-MFP, which requires money market funds to
report detailed portfolio holdings information on a monthly basis in
Extensible Markup Language (``XML'').\13\ Because these disclosures and
reports are filed in a structured data format using XBRL or XML,
Commission staff, investors and other potential users are able to
aggregate and analyze the data in a much less labor-intensive manner
than plain text or hypertext filing formats would allow. The Commission
also now uses the XML data format to collect and analyze certain
information from advisers to private funds on Form PF \14\ and has
modernized the reporting of securities holdings by institutional
investment managers on Form 13F,\15\ which we believe resulted in
efficiencies for data users.\16\
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\12\ See Interactive Data for Mutual Fund Risk/Return Summary,
Investment Company Act Release No. 28617 (Feb. 11, 2009) [74 FR 7748
(Feb. 19, 2009)]. Just prior to adopting the XBRL requirements for
mutual fund risk/return summaries, the Commission also adopted
amendments requiring operating companies to provide their financial
statement information in XBRL format. See Interactive Data to
Improve Financial Reporting, Securities Act Release No. 33-9002
(Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)]. In adopting these
requirements, the Commission noted that ``[i]n this format,
financial statement information could be downloaded directly into
spreadsheets, analyzed in a variety of ways using commercial off-
the-shelf software, and used within investment models in other
software formats.'' Id.
\13\ See Money Market Fund Reform, Investment Company Act
Release No. 29132 (Feb. 23, 2010) [75 FR 10060, 10082 (Mar. 4,
2010)] (``Money Market Fund Reform 2010 Release''); see also Money
Market Fund Reform; Amendments to Form PF, Investment Company Act
Release No. 31166 (July 23, 2014) [79 FR 47736 (Aug. 14, 2014)]
(``Money Market Fund Reform 2014 Release'') (adopting amendments to
Form N-MFP). The information in Form N-MFP allows the Commission,
investors, and other potential users to monitor compliance with rule
2a-7 and to better understand and monitor the underlying risks of
money market fund portfolios. Additionally, pursuant to the 2010 and
2014 amendments, money market funds are required to disclose certain
information, including portfolio holdings, on their Web sites.
\14\ See Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, Investment Advisers Act Release No. 3308 (Oct. 31, 2011)
[76 FR 71228 (Nov. 16, 2011)] (``Form PF Adopting Release'').
\15\ See Adoption of Updated EDGAR Filer Manual, Securities Act
Release No. 9403 (May 14, 2013) [78 FR 29616 (May 21, 2013)].
\16\ The Commission has also proposed and adopted XML data
reporting requirements in other contexts. See, e.g., Mandated
Electronic Filing and Web site Posting For Forms 3, 4 and 5,
Securities Act Release No. 8230 (May 7, 2003) [68 FR 27588 (May 13,
2003)]; Electronic Filing and Revision of Form D, Securities Act
Release No. 8891 (Feb. 6, 2008) [73 FR 10592 (Feb. 27, 2008)];
Electronic Filing of Transfer Agent Forms, Securities Exchange Act
Release No. 54864 (Dec. 4, 2006) [71 FR 74698 (Dec. 12, 2006)];
Asset-Backed Securities Disclosure and Registration, Securities Act
Release No. 9638 (Sept. 4, 2014) [79 FR 57184 (Sept. 24, 2014)];
Crowdfunding Securities Act Release No. 9470 (Oct. 23, 2013) [78 FR
66428 (Nov. 5, 2013)]; Proposed Rule Amendments for Small and
Additional Issues Exemptions Under Section 3(b) of the Securities
Act, Securities Act Release No. 9497 (Dec. 18, 2013) [79 FR 3926
(Jan. 23, 2014)]. See generally Recommendations of the Investor
Advisory Committee Regarding the SEC and the Need for the Cost
Effective Retrieval of Information by Investors (July 25, 2013),
available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/data-tagging-resolution-72513.pdf.
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As these industry changes and technological advances have occurred
over the years, we recognize a need to improve the type and format of
the information that funds provide to us and to investors. We also
recognize the need to improve the information that the Commission
receives from funds in order to improve the Commission's monitoring of
the fund industry in its role as the primary regulator of funds and
investment advisers. As discussed below, today we are proposing a set
of reporting and disclosure reforms designed to take advantage of the
benefits of advanced technology and to modernize the fund reporting
regime in order to help the Commission, investors, and other market
participants better assess different fund products and to assist us in
carrying out our mission to protect investors, maintain fair, orderly,
and efficient markets, and facilitate capital formation. Our proposed
reforms seek to (1) increase the transparency of fund portfolios and
investment practices both to the Commission and to investors, (2) take
advantage of technological advances both in terms of the manner in
which information is reported to the Commission and how it is provided
to investors and other potential users, and (3) where appropriate,
reduce duplicative or otherwise unnecessary reporting burdens on the
industry.
We also note that in December 2014, the Financial Stability
Oversight Council (``FSOC'') issued a notice requesting comment on
aspects of the asset management industry, which includes, among other
entities, registered investment companies.\17\ The notice included
requests for comment on additional data or information that would be
helpful to regulators and market participants. Although this rulemaking
proposal is independent of FSOC, several commenters responding to the
notice discussed issues concerning data that are relevant to the rules
we are proposing today, including data regarding derivatives, global
identifiers, and securities lending activities and are cited in the
discussions below, as relevant.\18\
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\17\ Financial Stability Oversight Council, Notice Seeking
Comment on Asset Management Products and Activities, Docket No.
FSOC-2014-0001 (``FSOC Notice''), available at http://www.treasury.gov/initiatives/fsoc/rulemaking/Documents/Notice%20Seeking%20Comment%20on%20Asset%20Management%20Products%20and%20Activities.pdf.
\18\ Comments submitted in response to the FSOC Notice are
available at http://www.regulations.gov/#!docketDetail;D=FSOC-2014-
0001. We also note that, in addition to commenters that argued for
additional specific disclosures by funds, several commenters
asserted, as a general matter, that registered funds are currently
subject to robust disclosure requirements. See, e.g., Comment Letter
of the Investment Company Institute to the FSOC Notice (Mar. 25,
2015); Comment Letter of Federated Investors, Inc. to the FSOC
Notice (Mar. 10, 2015); Comment Letter of the Capital Group
Companies to the FSOC Notice (Mar. 25, 2015).
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B. Changes to Current Reporting Regime
1. Form N-PORT, Amendments to Regulation S-X, and Option for Web Site
Transmission of Shareholder Reports
Currently, management investment companies (other than small
business investment companies (``SBICs'')) are required to report their
complete portfolio holdings to the Commission on a quarterly basis.\19\
These funds are required to provide this information in reports on Form
N-Q under the Investment Company Act and the Exchange Act as of the end
of each first and third fiscal quarter,\20\ and in reports on Form N-
CSR under those Acts as of the end of each second and fourth fiscal
quarter.\21\
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\19\ See Shareholder Reports and Quarterly Portfolio Disclosure
of Registered Management Investment Companies, Securities Act
Release No. 8393 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)]
(``Quarterly Portfolio Holdings Adopting Release'').
\20\ Rule 30b1-5 under the Investment Company Act [17 CFR
270.30b1-5]. While SBICs file reports on Form N-CSR, SBICs are not
required to file reports on Form N-Q.
\21\ See rule 30b2-1 under the Investment Company Act [17 CFR
270.30b2-1].
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As discussed in Parts II.A and II.B of this release, we propose to
rescind Form N-Q and adopt a new portfolio holdings reporting form,
Form N-PORT, which would be filed by all registered management
investment companies and unit investment trusts (``UITs'') that operate
as ETFs,\22\ other than money market funds and SBICs.\23\ We are
proposing that reports on Form N-PORT would be filed with the
Commission on a monthly basis, with every third month available to the
public 60 days after the end of the fund's fiscal quarter. The reports
on Form N-PORT would include a fund's complete portfolio holdings in a
structured data format. Additionally, as discussed below, proposed Form
N-PORT would include additional information concerning fund portfolio
holdings that are not currently provided on Forms N-Q and N-CSR, but
that would facilitate risk analyses and other Commission oversight. For
example, Form N-PORT would require reporting of additional information
relating to derivative investments. It would also include certain risk
metric calculations that would measure a fund's exposure and
sensitivity to changing market conditions, such as changes in asset
prices, interest rates, or credit spreads.
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\22\ Under the proposal, all ETFs would be required to file
reports on Form N-PORT, regardless of whether they are organized as
management companies or UITs. UITs are a type of investment company
which (a) are organized under a trust indenture contract of
custodianship or agency or similar instrument, (b) do not have a
board of directors, and (c) issue only redeemable securities. See
section 4(2) of the Investment Company Act.
\23\ Money market funds file reports on Form N-MFP on a monthly
basis and, thus, would not be required to file reports on Form N-
PORT.
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We believe that more timely and frequent reporting of portfolio
holdings information, as well as the additional information we are
proposing to require, would enable the Commission to further its
mission to protect investors by assisting the Commission and Commission
staff in carrying out its regulatory responsibilities related to the
asset management industry. These responsibilities include its
examination, enforcement, and monitoring of funds, the Commission's
formulation of policy, and the staff's review of fund registration
statements and disclosures.
While Form N-PORT is primarily designed to assist the Commission
and Commission staff, we believe that information in Form N-PORT would
be beneficial to investors and other potential users. In particular, we
believe that both sophisticated institutional investors and third-party
users that provide services to investors may find the information we
propose to require on Form N-PORT useful. For example, Form N-PORT's
structured format would allow the Commission, investors, and other
potential users to better collect and analyze portfolio holdings
information. The portfolio holdings information currently filed on Form
N-Q, in contrast, is filed in a plain text or hypertext format, which
often requires labor-intensive manual reformatting by Commission staff
and other potential users in order to prepare the reported data for
analysis. While we do not anticipate that many individual investors
would analyze data using Form N-PORT, although some may, we believe
that individual investors would benefit indirectly from the information
collected on reports on Form N-PORT, through enhanced Commission
monitoring and oversight of the fund industry and through analyses
prepared by third-party service providers.
In addition, we are proposing amendments to Regulation S-X that
would require standardized enhanced derivatives disclosures in fund
financial statements, as well as other amendments. Currently,
Regulation S-X does not prescribe specific information for most types
of derivatives, including swaps, futures, and forwards. While we
recognize that many fund groups provide disclosures regarding the terms
[[Page 33594]]
of their derivatives contracts, the lack of standard disclosure
requirements has resulted in inconsistent disclosures in fund financial
statements.
We believe our proposed amendments to Regulation S-X to enhance and
standardize derivatives disclosures in financial statements would allow
comparability among funds and help all investors better assess funds'
use of derivatives. We are proposing to require reports on Form N-PORT
to contain similar derivatives disclosures to facilitate analysis of
derivatives investments across funds. Because Form N-PORT is not
primarily designed for individual investors, the proposed amendments to
Regulation S-X would require disclosures concerning the fund's
investments in derivatives, as well as other disclosures related to
liquidity and pricing of investments, in the financial statements that
are provided to investors. We have endeavored to mitigate burdens on
the industry by conforming the derivatives disclosures that would be
required by both Regulation S-X and Form N-PORT.
Finally, we are also proposing a rule that would provide funds with
an optional method to satisfy shareholder report transmission
requirements by posting such reports online if they meet certain
conditions. In order to rely on the rule, funds would be required to
make the report and other required materials publicly accessible and
free of charge at a Web site address specified in a notice to
shareholders, and meet certain conditions relating to shareholder
consent, and notice to shareholders of the Web site availability of
shareholder reports and of the methods by which shareholders would be
able to request a paper copy of the materials. This optional method is
intended to modernize the manner in which periodic information is
transmitted to shareholders, which we believe would improve the
information's overall accessibility while reducing burdens such as the
costs associated with printing and mailing shareholder reports.
2. Form N-CEN
Currently, the Commission collects census-type information on
management investment companies and UITs on reports on Form N-SAR.\24\
As discussed above, Form N-SAR was adopted in 1985 and, at that time,
was intended to reduce reporting burdens and better align the
information that was required to be reported with the characteristics
of the fund industry. While Commission staff has indicated that the
census-type information reported on Form N-SAR is useful in its support
of the Commission's regulatory functions, staff has also indicated that
in the thirty years since Form N-SAR's adoption, changes in the
industry have reduced the utility of some of the currently required
data elements. Additionally, the filing format that is required for
reports on Form N-SAR limits our ability to use the reported
information for analysis. Commission staff also believes that obtaining
certain additional census-type information not currently collected by
Form N-SAR would improve the staff's ability to carry out regulatory
functions, including risk monitoring and analysis of the industry.
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\24\ See rules 30a-1 and 30b1-1 under the Investment Company Act
[17 CFR 270.30a-1 and 17 CFR 270.30b1-1].
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Accordingly, we are proposing to rescind Form N-SAR and replace it
with Form N-CEN, a new form on which funds will report census-type
information to the Commission. Form N-CEN would include many of the
same data elements as Form N-SAR, but, in order to improve the quality
and utility of information reported, would replace those items that are
outdated or of limited usefulness with items that we believe to be of
greater relevance today. Where possible, we are also proposing to
eliminate items that are reported on other Commission forms, or are
available elsewhere. In addition, we are proposing to require that
reports on Form N-CEN be filed in a structured XML format, which, we
believe, could reduce reporting burdens for current Form N-SAR filers
and yield data that can be used more effectively by the Commission and
other potential users. Finally, we are proposing that reports on new
Form N-CEN be filed annually, rather than semi-annually as is required
for reports on Form N-SAR by management companies, which would further
reduce current burdens on funds.
II. Discussion
A. Form N-PORT
As discussed above, we are proposing to create a new monthly
portfolio reporting form, Form N-PORT. Our proposal would require
registered management investment companies and ETFs organized as UITs,
other than money market funds and SBICs, to electronically file with
the Commission monthly portfolio investments information on new Form N-
PORT in an XML format no later than 30 days after the close of each
month.\25\ As discussed below in Part II.A.4, only information reported
for the third month of each fund's fiscal quarter on Form N-PORT would
be publicly available, and that information would not be made public
until 60 days after the end of the fiscal quarter.\26\
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\25\ See proposed rule 30b1-9.
\26\ As used throughout this section, the term ``fund''
generally refers to investment companies that would file reports on
Form N-PORT.
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As the primary regulator of the fund industry, the Commission
relies on information that funds file with us, including their
registration statements, shareholder reports, and various reporting
forms such as Form N-SAR, Form N-CSR, and Form N-Q. The Commission and
its staff use this information to understand trends in the fund
industry and carry out regulatory responsibilities, including
formulating policy and guidance, reviewing fund registration
statements, and assessing and examining a fund's regulatory compliance
with the federal securities laws and Commission rules thereunder.
Information on fund portfolios is currently filed with the
Commission quarterly with up to a 70-day delay.\27\ Moreover, the
reports are currently filed in a format that does not allow for
efficient searches or analyses across portfolios, and even limits the
ability to search or analyze a single portfolio. Based on staff
experience with data analysis of funds, including staff experience
using Form N-MFP, we believe that more frequent and timely information
concerning fund portfolios than we currently receive through
registration statements, shareholder reports on Form N-CSR, and reports
on Form N-Q will assist the Commission in
[[Page 33595]]
its role as the primary regulator of funds, as discussed further below.
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\27\ Funds currently file with the Commission portfolio
schedules for the fund's first and third fiscal quarters on Form N-
Q, and shareholder reports, including portfolio schedules for the
fund's second and fourth fiscal quarters, on Form N-CSR. These
reports are available to the public and the Commission with either a
60- or 70-day delay. See rule 30b1-5 (requiring management
companies, other than SBICs, to file reports on Form N-Q no more
than 60 days after the close of the first and third quarters of each
fiscal year); rule 30b2-1 (requiring management companies to file
reports on Form N-CSR no later than 10 days after the transmission
to stockholders of any report required to be transmitted to
stockholders under rule 30e-1). See also rules 30e-1 and 30e-2 under
the Investment Company Act [17 CFR 270.30e-1 and 17 CFR 270.30e-2]
(requiring management companies and certain UITs to transmit to
stockholders semi-annual reports containing, among other things, the
fund's portfolio schedules, no more than 60 days after the close of
the second and fourth quarters of each fiscal year). These reports
include portfolio holdings information as required by Regulation S-
X. See rule 12-12 of Regulation S-X [17 CFR 210.12-12], et seq.
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The information we are proposing to collect on Form N-PORT would be
important to the Commission in analyzing and understanding the various
risks in a particular fund, as well as risks across specific types of
funds and the fund industry as a whole. These risks can include the
investment risk that the fund is undertaking as part of its investment
strategy, such as interest rate risk, credit risk, volatility risk,
other market risks, or risks associated with specific types of
investments, such as emerging market debt or commodities. Additionally,
the information is helpful to understanding liquidity risks and
counterparty risks, and determining whether a fund's exposure to price
movements is leveraged, either through borrowings or the use of
derivatives. We believe that information we are proposing to require on
Form N-PORT will assist the Commission in better understanding each of
these risks in the fund industry. We believe that the ability to
understand the risks that funds face will help our staff better
understand and monitor risks and trends in the fund industry as a
whole, facilitating our informed regulation of the fund industry.
We also believe that information obtained from Form N-PORT filings
would facilitate our oversight of funds and assist Commission staff in
examination, enforcement, and monitoring, as well as in formulating
policy and in its review of fund registration statements and
disclosures. In this regard, we expect that Commission staff would use
the data reported on Form N-PORT for many of the same purposes as
Commission staff has used data reported on Form N-MFP by money market
funds. The data received on Form N-MFP has been used extensively by
Commission staff, including for purposes of assessing regulatory
compliance, identifying funds for examination, and risk monitoring.
Form N-MFP data has also informed Commission policy; for example, staff
used Form N-MFP data in analyses that informed the Commission's
considerations when it proposed and adopted money market fund reform
rules in 2013 and 2014.\28\
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\28\ See, e.g., Money Market Fund Reform; Amendments to Form PF,
Investment Company Act Release No. 30551 (June 5, 2013) [78 FR 36834
(June 19, 2013)]; Money Market Fund Reform 2014 Release, supra note
13 at n.502 and accompanying text (citing use of Form N-MFP data in
discussing the Commission's decision to require basis point
rounding); and at n.651 and accompanying text (citing use of Form N-
MFP data in discussing the Commission's decision regarding the size
of the non-government securities basket for government money market
funds).
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We recognize that, unlike money market funds, which as cash
management vehicles generally share common investment objectives and
strategies and thus invest in a relatively small number of common
security types, other funds invest in a much more diverse manner.
Accordingly, Form N-PORT, as proposed, would require reporting of
additional information relative to Form N-MFP, in order to facilitate
understanding and analysis of the investment strategies that funds
pursue, as well as the large variety of securities, commodities,
currencies, derivatives, and other investments that funds may invest
in.
In addition to assisting the Commission in its regulatory
functions, we believe that investors and other potential users could
benefit from the periodic public disclosure of the information reported
on Form N-PORT. Proposed Form N-PORT is primarily designed for use by
the Commission and its staff, and not for disclosing information
directly to individual investors. This is because the form's structured
format, while needed for quantitative analysis within a fund and across
funds, is not an easily human-readable format. Additionally, the
information we are proposing to require on Form N-PORT is more
voluminous than on a schedule of investments. We believe, however, that
some investors, particularly institutional investors, could directly
use the data from the information on proposed Form N-PORT for their own
quantitative analysis of funds, including to better understand the
funds' investment strategies and risks, and to better compare funds
with similar strategies. Additionally, we believe that entities
providing services to investors, such as investment advisers, broker-
dealers, and entities that provide information and analysis for fund
investors, could also utilize and analyze the information that would be
required by proposed Form N-PORT to help all investors make more
informed investment decisions. Accordingly, whether directly or through
third parties, we believe that the periodic public disclosure of the
information on proposed Form N-PORT could benefit all fund investors.
As discussed further below, in order to mitigate the risk that the
information on Form N-PORT could be used in ways that might ultimately
result in investor harm, we are proposing to limit the public
availability of Form N-PORT reports to those reports filed as of
quarter end, as well as delay public availability of those reports by
60 days after quarter end.
We intend to increase transparency of fund investments through
proposed Form N-PORT in several ways. First, N-PORT would improve
reporting of fund derivative usage. As the Commission has previously
noted, we have observed significant increases in the use of derivatives
by funds, which have highlighted the need for more robust and
standardized derivatives disclosures.\29\ Additionally, funds that are
considered ``alternative'' funds, which often use derivatives for
implementing their investment strategy, are becoming increasingly
popular among investors.\30\ Although Regulation S-X establishes
general disclosure requirements for financial statements in fund
registration statements, based on staff review of fund filings, the
lack of standardized requirements as to the terms of derivatives that
must be reported has sometimes led to inconsistent approaches to
reporting derivatives information and, in some cases, insufficient
information concerning the terms and underlying reference assets of
derivatives to allow the Commission or investors to understand the
investment. This hinders both an analysis of a particular fund's
investments, as well as comparability among funds.\31\ The information
requested in Form N-PORT would create a more detailed, uniform, and
structured reporting regime. This would allow the Commission and
investors to better analyze and compare
[[Page 33596]]
funds' derivatives investments and the exposures they create, which can
be important to understanding funds' investment strategies, use of
leverage, and potential for risk of loss.
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\29\ See Derivatives Concept Release, supra note 7, at n.7 and
accompanying text.
\30\ While there is no clear definition of ``alternative'' in
the fund industry, an alternative fund is generally understood to be
a fund whose primary investment strategy falls into one or more of
the three following categories: (1) Non-traditional asset classes
(for example, currencies); (2) non-traditional strategies (such as
long/short equity positions); and/or (3) less liquid assets (such as
private debt).
At the end of December 2014, alternative mutual funds had
almost $200 billion in assets. Although alternative mutual funds
only accounted for 1.19% of the mutual fund market as of December
2014, the almost $20.1 billion of inflows into these funds in 2014
represented 4.3% of the inflows for the entire mutual fund industry
in that year. These statistics were obtained from staff analysis of
Morningstar Direct data, and are based on fund categories as defined
by Morningstar.
\31\ See, e.g., rule 12-13 of Regulation S-X [17 CFR 210.12-13]
(requiring funds to generally disclose derivatives together with
``other'' investments); rule 6-03 of Regulation S-X [17 CFR 210.6-
03] (applying articles 1-4 of Regulation S-X to investment
companies, but not specifying where derivative disclosures should be
made for funds); ASC 815, Disclosures about Derivative Instruments
and Hedging Activities (discussing general derivative disclosure)
(``ASC 815''); ASC 820, Fair Value Measurements (requiring
disclosure of valuation information for major categories of
investments) (``ASC 820''). See also Part II.C.
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Furthermore, as discussed further below, proposed Form N-PORT would
require funds to report certain risk metrics that would provide
measurements of a fund's exposure to changes in interest rates, credit
spreads and asset prices, whether through investments in debt
securities or in derivatives. Financial statement information provides
historical information over a particular time period (e.g., a statement
of operations), or information about values of assets at a particular
point in time (e.g., a balance sheet including, for funds, a schedule
of investments). Risk metrics, on the other hand, measure the change in
value of an investment in response to small changes in the underlying
reference asset of an investment, whether the underlying reference
asset is a security (or index of securities), commodity, interest rate,
or credit spread over an interest rate. Based on staff experience, as
well as staff outreach to asset managers and entities that provide risk
management services to asset managers, discussed further below, we
believe that fund portfolio managers and risk managers commonly
calculate these risk metrics to analyze the exposures in their
portfolios.\32\ The Commission believes that staff can use these risk
measures to better understand the exposures in the fund industry,
thereby facilitating better monitoring of risks and trends in the fund
industry as a whole.
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\32\ See generally John C. Hull, Options, Futures, and Other
Derivatives, Seventh Edition (2009) (discussing, for example, the
function of duration, convexity, delta, and other calculations used
for measuring changes in the value of bonds or derivatives as a
result in changes in underlying asset prices or interest rates);
Sheldon Natenberg, Option Volatility and Pricing (1994) (same).
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Form N-PORT would also require information about certain fund
activities such as securities lending, repurchase agreements, and
reverse repurchase agreements, including information regarding the
counterparties to which the fund is exposed in those transactions, as
well as in over-the-counter derivatives transactions. Such information
would increase transparency concerning these activities and would
provide better information regarding counterparty information, which
would be useful in assessing both individual and multiple fund
exposures to a single counterparty.\33\
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\33\ See, e.g., Report by Task Force on Tri-Party Repo
Infrastructure, May 17, 2010 (concluding that insufficient
transparency of the tri-party repurchase agreement market
contributed to the build-up of exposures and the lack of prior
concerted action to address the issues that led to financial turmoil
during 2007-2009). The Task Force on Tri-Party Repo Infrastructure
was formed in September 2009 under the purview of the Payments Risk
Committee, a private sector body sponsored by the Federal Reserve
Bank of New York. The Task Force membership includes representatives
from multiple types of market participants that participate in the
tri-party repo market, as well as relevant industry associations.
Federal Reserve and Commission staff participated in meetings of the
Task Force as observers and technical advisors.
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Proposed Form N-PORT also requires information that would assist
the Commission in assessing fund liquidity risk by, for example,
requiring funds to provide information about the market liquidity and
pricing of portfolio investments, as well as information regarding fund
flows, which is helpful to understanding the liquidity pressures a fund
might experience due to investor redemption activity.
Finally, as discussed further below, Form N-PORT would be filed
electronically in a structured, XML format. This format would enhance
the ability of the Commission, as well as investors and other potential
users, to analyze portfolio data both on a fund-by-fund basis and also
across funds. As a result, although we are proposing to collect certain
information on Form N-PORT that may be similarly disclosed or reported
elsewhere (e.g., portfolio investments would continue to be included as
part of the schedules of investments contained in shareholder reports,
and filed on a semi-annual basis with the Commission on Form N-CSR), we
believe that it is appropriate to also collect this information in a
structured format for analysis by our staff as well as investors and
other potential users.
1. Who Must File Reports on Form N-PORT
Our proposal would require a report on Form N-PORT to be filed by
each registered management investment company and each ETF organized as
a UIT.\34\ Registrants offering multiple series would be required to
file a report for each series separately, even if some information is
the same for two or more series. Money market funds and SBICs would not
be required to file reports on Form N-PORT.\35\
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\34\ See proposed rule 30b1-9.
\35\ Money market funds already file their monthly portfolio
investments with the Commission. See Form N-MFP. SBICs are unique
investment companies that operate differently than other management
investment companies. They are ``privately owned and managed
investment funds, licensed and regulated by [the Small Business
Administration (``SBA'')], that use their own capital plus funds
borrowed with an SBA guarantee to make equity and debt investments
in qualifying small businesses.'' See SBIC Program Overview
available at https://www.sba.gov/content/sbic-program-overview. As
of December 31, 2014, only one SBIC had publicly offered securities
outstanding.
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As indicated above, our proposal would require all ETFs to file
reports on Form N-PORT, regardless of their form of organization.
Although most ETFs today are structured as open-end management
investment companies, there are several ETFs that are organized as
UITs.\36\ ETFs organized as UITs have significant numbers of investors
who we believe could benefit from the disclosures required in Form N-
PORT.\37\
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\36\ There are currently eight ETFs organized as UITs that have
registered with the Commission.
\37\ Commission staff estimates that as of December 2014, ETFs
organized as UITs represented 14% of all assets invested in ETFs.
This analysis is based on data from Morningstar Direct.
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We request comment on the entities that would be required to file
reports on Form N-PORT.
Should any funds that we are proposing to require to file
reports on Form N-PORT not be required to do so? If so, what types of
funds?
Should we require SBICs to file reports on Form N-PORT?
How useful would the information reported on Form N-PORT be for
investors?
Our proposal would allow investors in different types of
ETFs to compare their portfolio investments by means of identical
disclosures on reports on Form N-PORT, regardless of whether an ETF was
organized as an open-end management investment company or as a UIT.
Should ETFs organized as UITs not be required to file reports on Form
N-PORT? If so, why?
2. Information Required on Form N-PORT
Form N-PORT would require a fund to report certain information
about the fund and the fund's portfolio investments as of the close of
the preceding month, including: (a) General information about the fund;
(b) assets and liabilities; (c) certain portfolio-level metrics,
including certain risk metrics; (d) information regarding securities
lending counterparties; (e) information regarding monthly returns; (f)
flow information; (g) certain information regarding each investment in
the portfolio; (h) miscellaneous securities (if any); (i) explanatory
notes (if any), and (j) exhibits. Each of these is discussed in more
detail below.
a. General Information and Instructions
Part A of Form N-PORT would require general identifying information
about the fund, including the name of the registrant, name of the
series, and relevant file numbers.\38\ Funds would
[[Page 33597]]
also report the date of their fiscal year end, the date as of which
information is reported on the form, and indicate if they anticipated
that this would be their final filing on Form N-PORT.\39\ This
information would be used to identify the registrant and series filing
the report, track the reporting period, and identify final filings.
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\38\ See Form N-PORT, Items A.1 and A.2. Funds would provide the
name of the registrant, the Investment Company Act and CIK file
numbers for the registrant, and the address and telephone number of
the registrant. Funds would also provide the name of and EDGAR
identifier for the series.
\39\ See Form N-PORT, Items A.3 and A.4.
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Additionally, we are proposing that funds provide the Legal Entity
Identifier (``LEI'') number of the registrant and series.\40\ The LEI
is a unique identifier associated with a single corporate entity and is
intended to provide a uniform international standard for identifying
counterparties to a transaction.\41\ Fees are not imposed for the usage
of or access to LEIs, and all of the associated reference data needed
to understand, process, and utilize the LEIs are widely and freely
available and not subject to any usage restrictions. Funds or
registrants that have not yet obtained an LEI would be required to
obtain one, which would entail a modest fee.\42\ The inclusion of LEI
information on Form N-PORT, however, would facilitate the ability of
investors and the Commission to link the data reported on Form N-PORT
with data from other filings or sources that is or will be reported
elsewhere as LEIs become more widely used by regulators and the
financial industry.\43\
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\40\ See Form N-PORT, Items A.1.d and A.2.c. The Commission has
begun to require disclosure of the LEI in other contexts. See, e.g.,
Form PF Adopting Release, supra note 14; Regulation SBSR-Reporting
and Dissemination of Security-Based Swap Information, Securities
Exchange Act Release No. 74244 (Feb. 11, 2015) [80 FR 14438 (Mar.
19, 2015)] (``Regulation SBSR Adopting Release'').
\41\ The global LEI system operates under an LEI Regulatory
Oversight Committee (``ROC'') that currently includes members that
are official bodies from over 40 jurisdictions. The Commission is a
member of the ROC and currently serves on its Executive Committee.
The Commission notes that it would expect to revisit the proposed
requirement to report LEIs if the operation of the LEI system were
to change significantly.
\42\ As of December 26, 2014, the cost of obtaining an LEI from
the Global Markets Entity Identifier (``GMEI'') Utility in the
United States was $200, plus a $20 surcharge for the LEI Central
Operating Unit. The annual cost of maintaining an LEI from the GMEI
Utility was $100, plus a $20 surcharge for the LEI Central Operating
Unit. See https://www.gmeiutility.org/frequentlyAskedQuestions.jsp.
\43\ See, e.g., Press Release: Commodities Futures Trading
Commission (``CFTC'') Announces Mutual Acceptance of Approved Legal
Entity Identifiers, CFTC (Oct. 30, 2013), available at http://www.cftc.gov/PressRoom/PressReleases/pr6758-13; Letter from Kenneth
Bentsen, President & CEO of SIFMA to Jacob Lew, Chairman of FSOC re:
Adoption of the Legal Entity Identifier, SIFMA (Apr. 11, 2014),
available at http://www.sifma.org/issues/item.aspx?id=8589948488;
Regulation SBSR Adopting Release, supra note 40.
Commenters to the FSOC Notice expressed support for regulatory
acceptance of LEI identifiers. See, e.g., Joint Comment Letter of
SIFMA/Investment Adviser Association (Mar. 25, 2015) (``SIFMA/IAA
FSOC Notice Comment Letter'') (expressing support for the LEI
initiative, and noting that the use of LEIs has already enhanced the
industry's ability to identify and monitor global market
participants); Comment Letter of Fidelity to FSOC Notice (Mar. 25,
2015) (expressing the need to develop analytics to make data
intelligible, such as the ability to map exposures across the
financial system, such as through the use of LEIs).
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Form N-PORT would also include general filing and reporting
instructions, as well as definitions of specific terms referenced in
the form.\44\ These instructions and definitions are intended to
provide clarity to funds and to assist them in filing reports on Form
N-PORT.\45\
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\44\ See Form N-PORT, General Instructions A (Rule as to Use of
Form N-PORT), B (Application of General Rules and Regulations), C
(Filing of Reports), D (Paperwork Reduction Act Information), E
(Definitions), F (Public Availability), G (Responses to Questions),
and H (Signature and Filing of Report).
\45\ See id. For example, General Instructions A, B, C, G, and H
provide specific filing and reporting instructions (including how to
report entity names, percentages, monetary values, numerical values,
and dates), General Instructions D and F provide information about
the Paperwork Reduction Act and the public availability of
information reported on Form N-PORT, and General Instruction E
provides definitions for specific terms referenced in Form N-PORT.
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We seek comment on these proposed disclosures and instructions.
Is there any additional or alternative information that
should be required to facilitate identification of funds and analysis
of the reported information with information from other filings or
otherwise available elsewhere?
Should the Commission require funds to obtain LEIs? Is it
appropriate for the Commission to require LEIs, which are only
available through the global LEI system? Why or why not? In the case of
funds that have not obtained an LEI, will those funds seek to obtain an
LEI in the future absent any regulatory requirement to do so? In
addition to the fees for obtaining and maintaining an LEI, would there
be other costs associated with funds obtaining LEIs? \46\
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\46\ See supra note 42 (discussing the costs of obtaining and
maintaining an LEI identifier in the United States). The Commission
has further estimated the one-time burden associated with obtaining
an LEI is one hour, with ongoing administration of an LEI
corresponding to one hour per year. See SBSR Adopting Release, supra
note 40, at nn. 1109-1111 and accompanying text.
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Are there any instructions or definitions that should be
revised? If so, how? Should any instructions or definitions be added to
provide additional clarity, or deleted to avoid confusion with
conflicting instructions, definitions, or industry practices?
b. Information Regarding Assets and Liabilities
Part B of proposed Form N-PORT would seek certain portfolio level
information about the fund. Part B would include questions requiring
funds to report their total assets, total liabilities, and net
assets.\47\ Funds would separately report certain assets and
liabilities, as follows. First, funds would report the aggregate value
of any ``miscellaneous securities'' held in their portfolios.\48\
Currently, Regulation S-X permits funds to report an aggregate amount
not exceeding five percent of the total value of the portfolio
investments in one amount as ``Miscellaneous securities,'' provided
that securities so listed are not restricted, have been held for not
more than one year prior to the date of the related balance sheet, and
have not previously been reported by name to the shareholders, or set
forth in any registration statement, application, or annual report or
otherwise made available to the public, and, as discussed further
below, we are proposing the same conditions for Form N-PORT.\49\
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\47\ See Form N-PORT, Item B.1.
\48\ See Form N-PORT, Items B.1.a and B.2.a. As discussed
further below, we are proposing that funds would also report
information about miscellaneous securities on an investment-by-
investment basis, although such information would be nonpublic and
would be used for Commission use only. We also request comment below
on whether funds should continue to be permitted to categorize
investments as ``miscellaneous securities.'' See infra note 151 and
accompanying text.
\49\ See rule 12-12 of Regulation S-X.
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Funds would also report any assets invested in a controlled foreign
corporation for the purpose of investing in certain types of
investments (``controlled foreign corporation'' or ``CFC'').\50\ Some
funds use CFCs for making certain types of investments, particularly
commodities and commodity-linked derivatives, often for tax purposes.
Our proposal would require funds to disclose each underlying investment
in a CFC, rather than just the investment in the CFC itself, which
would increase transparency on fund investments through CFCs.\51\ These
disclosures would allow investors to look through CFCs and understand
the specific underlying holdings that they are
[[Page 33598]]
investing in, which would in turn allow investors to better analyze
their fund holdings and risk associated with CFC investments, and hence
enable investors to make more informed investment decisions. In
addition, as discussed further below in Part II.E.4, we believe it
would be beneficial for the Commission to have certain information
about funds' use of CFCs. The information we are proposing to obtain in
Form N-PORT, combined with additional information we are proposing to
require on Form N-CEN regarding CFCs, discussed below, would help the
Commission better monitor funds' compliance with the Investment Company
Act and assess funds' use of CFCs, including the extent of their use by
reporting of total assets in CFCs.\52\
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\50\ See Form N-PORT, Instruction E (providing that ``controlled
foreign corporation'' has the meaning defined in section 957 of the
Internal Revenue Code [26 U.S.C. 957]) and Item B.2.b (requiring
funds to report assets invested in controlled foreign corporations).
\51\ See Form N-PORT, Part B Instruction (``Report the following
information for the Fund and its consolidated subsidiaries.'').
\52\ See infra note 467 and accompanying and following text.
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Second, we are proposing to require that funds report the amount of
certain liabilities, in particular: (1) Borrowings attributable to
amounts payable for notes payable, bonds, and similar debt, as reported
pursuant to rule 6-04(13)(a) of Regulation S-X [17 CFR 210.6-
04(13)(a)]; (2) payables for investments purchased either (i) on a
delayed delivery, when-delivered, or other firm commitment basis, or
(ii) on a standby commitment basis; and (3) liquidation preference of
outstanding preferred stock issued by the fund.\53\ This information
would allow Commission staff, as well as investors and other potential
users, to better understand a fund's borrowing activities and payment
obligations for assets that have been already received, which would
facilitate analysis of the fund's use of financial leverage, as well as
the fund's liquidity and ability to meet redemptions, which are
important to understanding the risks such borrowings might create.
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\53\ See Form N-PORT, Items B.2.c to B.2.e.
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We request comment on the reporting of assets and liabilities
proposed on Form N-PORT.
As discussed above, our proposal would require funds to
disclose each underlying investment in a CFC. Should we consider
modifying the information we propose to require, or require additional
information? How commonly do funds invest in CFCs that in turn invest
their assets in underlying investments? Should we provide instructions
to clarify how funds should report investments in this situation? If
so, should the Commission permit funds to disclose only the ultimate
underlying investments, or should the Commission require disclosure of
each layer of investment?
Are there other methods of reporting the assets (including
assets in CFCs) and liabilities described above that we should
consider?
Are there other assets and liabilities that funds should
be required to separately report? If so, why? For example, should the
Commission require funds to separately break out categories of assets
and liabilities similar to what is currently required by Form N-SAR?
\54\ What would be the costs associated with providing such information
on a monthly basis?
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\54\ See Form N-SAR, Item 74 (requiring funds to report
consolidated balance sheet data, including cash, repurchase
agreements, debt-securities, preferred stock, common stock, options,
other investments, receivables, other assets, total assets, payables
for portfolio instruments purchased, amounts owed to affiliated
persons, senior long-term debt, other liabilities, senior equity,
net assets of common shareholders, number of shares outstanding, net
asset value per share, total number of shareholder accounts, and
total value of assets in segregated accounts).
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c. Portfolio Level Risk Metrics
One of the purposes of Form N-PORT is to provide the Commission
with information regarding fund portfolios to help us better monitor
trends in the fund industry, including investment strategies funds are
pursuing, the investment risks that funds undertake, and how different
funds might be affected by changes in market conditions. As discussed
above, the Commission uses information from fund filings, including a
fund's registration statement and reports on Form N-CSR (which includes
the fund's shareholder report) and Form N-Q, to inform its
understanding and regulation of the fund industry. Additionally our
staff reviews fund disclosures--including registration statements,
shareholder reports, and other documents--both on an ongoing basis as
well as retroactively every three years.\55\
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\55\ See, e.g., section 408 of the Sarbanes-Oxley Act of 2002,
Pub. L. 107-204, 116 Stat. 745 (2002) (requiring the Commission to
engage in enhanced review of periodic disclosures by certain issuers
every three years).
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The disclosures in a fund's registration statement about its
investment objective, investment strategies, and risks of investing in
the fund, as well as the fund's financial statements, are fundamental
to understanding a fund's implementation of its investment strategies
and the risks in the fund. However, the financial statements and
narrative disclosures in fund registration statements and shareholder
reports do not always provide a complete picture of a fund's exposure
to changes in asset prices, particularly as fund strategies and fund
investments become more complex. The financial statements, including a
fund's schedule of portfolio investments, provide data regarding
investments' values as of the end of the reporting period--a
``snapshot'' of data at a particular point in time--or, in the case of
the statement of operations, for example, historical data over a
specified time period. By contrast, based on staff experience and
outreach to funds, we understand that funds commonly internally use
multiple risk metrics that provide calculations that measure the change
in the value of fund investments assuming a specified change in the
value of underlying assets or, in the case of debt instruments and
derivatives that provide exposure to interest rates and debt
instruments, changes in interest rates or in credit spreads above the
risk-free rate.
Accordingly, we believe it is appropriate to propose requiring
funds to report quantitative measurements of certain risk metrics that
would provide information beyond the narrative, often qualitative
disclosures about investment strategies and risks in the fund's
registration statement, as well as a fund's historical financial
statement disclosures. Monthly reporting on these risk measures, in
particular, would help provide the Commission with more current
information on how funds are implementing their investment strategies
through particular exposures. Receiving this information on a monthly
basis could help the Commission, for example, more efficiently analyze
the potential effects of a market event on funds.
Specifically, we are proposing to require certain funds to provide
portfolio level measures on Form N-PORT that will help Commission staff
better understand and monitor funds' exposures to changes in interest
rates and credit spreads across the yield curve. As discussed in Part
II.A.2.g below, we are also proposing to require risk measures at the
investment level for options and convertible bonds. We believe that the
staff can use these measures, for example, to determine whether
additional guidance or policy measures are appropriate to improve
disclosures in order to help investors better understand how changes in
interest rate or credit spreads might affect their investment in a
fund.
Additionally, as we discussed above, we believe that institutional
investors, as well as entities that provide services to both
institutional and individual investors, would be able to use these risk
metrics to conduct their own analyses in order to help them better
understand fund composition, investment strategy, and interest rate
[[Page 33599]]
and credit spread risk the fund is undertaking. This would complement
the risk disclosures that are contained in the registration statement,
thereby potentially helping all investors to make more informed
investment choices. We believe that our proposal to require these funds
to publicly disclose these measures quarterly, like other information
in the schedule of investments, will also help provide investors with
more specific, quantitative information regarding the nature of a
fund's exposure to particular asset classes than they do currently.
Providing this more specific and current information through periodic
public disclosure of such risk metrics could be especially important
for investors with respect to funds that continuously offer new shares
to the public, because such funds are generally required to maintain an
updated or ``evergreen'' prospectus that must precede or accompany
delivery of those securities.\56\
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\56\ See section 5(b)(2) of the Securities Act.
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In particular, for funds that invest in debt instruments, or in
derivatives that provide exposure to debt or debt instruments, we
believe it is important for the Commission staff, investors, and other
potential users to have measures that would help them analyze how
portfolio values might change in response to changes in interest rates
or credit spreads.\57\ To improve the ability of the Commission staff,
investors, and other potential users to analyze how changes in interest
rates and credit spreads might affect a fund's portfolio value, we are
proposing that a fund that invests in debt instruments, or derivatives
that provide exposure to debt instruments or interest rates,
representing at least 20% of the fund's notional exposure, provide a
portfolio level calculation of duration and spread duration across the
applicable maturities in the fund's portfolio.
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\57\ As discussed further below, the Commission also believes
that there would be a benefit to collecting risk measures for
derivatives that provide exposure to certain assets, such as
equities and commodities. Due to the nature of these instruments,
however, we believe that such information should be provided on an
instrument-by-instrument basis, instead of as a portfolio level
calculation.
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We are proposing to limit this requirement to funds that invest in
debt instruments or derivatives that provide exposure to debt
instruments or interest rates that represent at least 20% of the fund's
notional value as of the reporting date.\58\ We are proposing the 20%
threshold because we believe that at this level, the Commission would
still receive measurements of duration and spread duration from funds
that make investments in debt instruments as a significant part of
their investment strategy, while providing an appropriate threshold so
that funds that do not invest in debt to achieve their investment
strategy would not have to monitor each month whether they trigger the
requirement for making such calculations. Funds that primarily invest
in assets other than debt instruments, such as equities, might have
some level of investments in debt instruments for cash management or
other purposes. We do not believe that requiring such funds to provide
monthly calculations of duration or spread duration would be helpful
for understanding such funds' investment strategy or risk exposures,
and we believe that the 20% threshold will provide a de minimis level
to relieve the burden of calculating these measures for such funds. We
believe that information would be most useful from funds that actually
use debt exposures as part of their investment strategy. Based on staff
experience, we believe that such funds have a debt exposure of at least
20%, and commonly greater than that. As discussed below, we request
comment on the proposed de minimis threshold.
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\58\ Specifically, we are proposing to calculate notional value
as the sum of the absolute values of: (i) The value of each debt
security, (ii) the notional amount of each swap, including, but not
limited to, total return swaps, interest rate swaps credit default
swaps, for which the underlying reference asset or assets are debt
securities or an interest rate; and (iii) the delta-adjusted
notional amount of any option for which the underlying reference
asset is an asset described in clause (i) or (ii). See Form N-PORT,
Item B.3, Instruction.
The delta-adjusted notional value of options is needed to have
an accurate measurement of the exposure that the option creates to
the underlying reference asset. See, e.g., Comment Letter of
Morningstar (Nov. 7, 2011) (``Morningstar Derivatives Concept
Release Comment Letter'') (submitted in response to the Derivatives
Concept Release, supra note 7, which sought comment regarding the
use of derivatives by management investment companies).
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For duration, we are proposing to require that a fund calculate the
change in value in the fund's portfolio from a 1 basis point change in
interest rates (commonly known as DV01) for each applicable key rate
along the risk-free interest rate curve, i.e., 1 month, 3 month, 6
month, 1 year, 2 year, 3 year, 5 year, 7 year, 10 year, 20 year, and 30
year interest rate, for each applicable currency in the fund. We
realize that funds might not have exposures for every applicable key
rate. For example, a short-term bond fund is unlikely to have debt
exposures with longer maturities. Accordingly, a fund would only report
the key rates that are applicable to the fund. Funds would report zero
for maturities to which they have no exposure.\59\ For exposures
outside of the range of listed maturities listed on Form N-PORT (i.e.,
maturities shorter than one month or longer than 30 years), funds would
be instructed to include those exposures in the nearest maturity.
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\59\ For funds with exposures that fall between any of the
listed maturities in the form, funds would be instructed to use
linear interpolation to approximate exposure to each maturity listed
above.
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We believe that requiring funds to provide further detail about
their exposures to interest rate changes along the risk-free rate curve
would provide the Commission with a better understanding of the risk
profiles of funds with different strategies for achieving debt
exposures. For example, funds targeting an effective duration of five
years could achieve that objective in different ways--one fund could
invest predominantly in intermediate-term debt; another fund could
create a long position in longer-term bonds, matched with a short
position in shorter-term bonds. While both funds would have an
intermediate-term duration, the risk profiles of these two funds, that
is, their exposures to changes in long-term and short-term interest
rates, are different. Having the proposed DV01 calculations along the
risk-free interest rate curve would clarify this difference. The
Commission staff could use this information to better understand how
funds are achieving their exposures to interest rates, and use this
information to perform analysis across funds with similar strategies to
identify outliers for potential further inquiry, as appropriate.
Additionally, we are proposing to require that the same funds
provide a measure of spread duration (commonly known as SDV01) at the
portfolio level for each of the same maturities listed above,
aggregated by non-investment grade and investment grade exposures.\60\
This would measure the fund's sensitivity to changes in credit spreads,
i.e., a measure of spread above the risk-free interest rate. This is
helpful for analyzing shifts in credit spreads for non-investment grade
and investment grade debt, respectively, over the yield curve, as
credit spreads for investment grade and non-investment grade debt do
not always shift in parallel or in lock
[[Page 33600]]
step, particularly during times of market stress.\61\ Because credit
spreads can also vary based on the maturity of the bonds, we believe
that providing credit spread measures for the key rates along the yield
curve, as with DV01, would help the Commission better analyze credit
spreads of investments in funds.\62\ Again, similar to the example
above regarding the potential use of the DV01 metric, SDV01 can provide
more precise information regarding funds' exposures to credit spreads
when they engage in a strategy investing in investment-grade or non-
investment grade debt.
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\60\ Form N-PORT would include instructions stating that
``Investment Grade'' refers to an investment that is sufficiently
liquid that it can be sold at or near its carrying value within a
reasonably short period of time and is subject to no greater than
moderate credit risk, and ``Non-Investment Grade'' refers to an
investment that is not Investment Grade. See Form N-PORT, General
Instruction E. These instructions are consistent with the
definitions of ``Investment Grade'' and ``Non-Investment Grade''
used in Form PF.
\61\ See, e.g., Frank K. Reilly, David J. Wright, and James A.
Gentry, Historic Changes in the High Yield Bond Market, Journal of
Applied Corporate Finance, Volume 21, No. 3, 65-79 (Summer 2009)
(discussing the historical performance, including the credit spreads
of the high yield bond market compared to the investment grade bond
market).
\62\ The delineation between non-investment grade and investment
grade debt is similar to information regarding private fund
exposures gathered on Form PF, which could be helpful for comparing
and analyzing credit spreads between public and private funds. See,
e.g., Item 26 of Form PF.
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In determining the methodology for the proposed measures of
duration and spread duration, staff engaged in outreach to asset
managers and risk service providers that provide risk management and
other services to asset managers and institutional investors. The
methodology proposed is both based on staff experience in using
duration and spread duration, as well as this outreach to better
understand common fund practices for calculating such measures. The
Commission recognizes that particular funds might currently vary their
methodology for calculating duration and spread duration by, for
example, only providing a single measure of duration or spread duration
or by only reporting key rate durations for particular maturities.
Based on staff experience and outreach, the Commission believes that
the proposed methodologies for reporting duration and spread duration
will allow for better comparability across funds.
Also, based on outreach, Commission staff believes that service
providers that provide risk management services to funds generally use
a ``bottom up'' approach to calculating duration and spread duration,
meaning that such measures are first calculated at the position level
and then aggregated at the portfolio level. Accordingly, we believe
that providing the specific methodology for aggregation of duration and
spread duration would not significantly increase the burden of
calculating such metrics by funds, even if funds analyze such measures
at the portfolio level using a methodology different from what we are
proposing. As discussed below, however, we request comment on the
proposed methodologies, including whether such methodologies should be
modified.
For both duration and spread duration, we are proposing to require
that funds provide the change in value in the fund's portfolio from a 1
basis point change in interest rates or credit spreads, rather than a
larger change, such as 5 basis points or 25 basis points. Based on
staff's outreach, we believe that a 1 basis point change is the
methodology that many funds currently use to calculate these risk
measures at the position level for internal risk monitoring and would
provide sufficient information to assist the Commission in analyzing
fund exposures to changes in interest rate or credit spreads. We
believe that requiring funds to calculate such measures based on a
larger basis point change could require more customized calculations,
and therefore increase costs to funds, relative to the approach
proposed. We request comment on this aspect of the proposed
methodology.
While the Commission is proposing that funds provide a calculation
of each of these measures at a portfolio level, the Commission has
considered whether to propose, instead, that funds report these risk
metrics for each debt instrument or derivative that has an interest
rate or credit exposure. This would provide more precise data for
analysis of various movements in interest rates and credit spreads.
Additionally, as discussed above, the Commission believes that most
funds currently calculate these risk metrics at a position level;
however, we recognize that even if such calculations are available at a
position level, reporting these metrics could cause funds to make
additional systems changes to collect such position-level data for
reporting, as well as potential burdens related to increased review
time and quality control in submitting the reports. Based on staff's
outreach and staff's experience, the Commission believes that requiring
funds to provide this information for each maturity at the portfolio
level would provide a sufficient level of granularity for purposes of
Commission staff analysis. Finally, we believe that there would be
certain efficiencies for the Commission, investors, and other potential
users to having funds report the portfolio-level calculations relative
to reporting position-level calculations, as this could allow for more
timely and efficient analysis of the data by not requiring the
Commission or other potential users to calculate the portfolio-level
measures from the position-level measures. We request comment below on
the relative burdens and benefits of providing portfolio level and
position level data.
The Commission also considered whether to require funds to report a
portfolio level measure (or, for the same reasons discussed immediately
above in connection with how risk measures are calculated, position
level measures) for convexity, which facilitates more precise
measurement of the change in a bond price with larger changes in
interest rates.\63\ We have preliminarily determined not to require
reporting of this metric, however, because we believe, based on staff
outreach, that funds more commonly analyze non-linear changes to
interest rates through stress testing, rather than through calculating
convexity. We request comment, however, on whether requiring funds to
report a portfolio-level measure of convexity would be useful to the
Commission, investors, and other potential users, and the relative
burdens and benefits of reporting convexity.
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\63\ More specifically, convexity measures the non-linearities
in a bond's price with respect to changes in interest rates. See
Frank J. Fabozzi, The Handbook of Fixed Income Securities 149-152
(8th ed. 2012).
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We request comment on the proposed requirements to provide risk
measures at the portfolio level.
We are proposing a 20% threshold because, based on staff
experience, we believe that this would require funds that use debt and
exposure to debt or interest rate changes as part of their investment
strategy to provide those metrics, while providing a minimum threshold
so that funds that invest in debt for cash management or other purposes
unrelated to implementing their investment strategy would not be
required to collect, calculate, or report such data. Given this
objective, is 20% the appropriate threshold for determining which funds
must provide these risk metrics? Should this threshold be lower, such
as 5% or 10% or higher, such as 30% or 35%? Are there alternative
methodologies that the Commission should consider for determining which
funds should be required to provide this information? Should we,
instead, base the threshold directly on the net asset value (``NAV'')
of the fund's debt securities and interest rate investments, rather
than the fund's notional exposure to debt securities or interest rates
as a percentage of the fund's NAV?
We are proposing to require reporting information on DV01
and SDV01 at the portfolio level because we believe that this can
provide the
[[Page 33601]]
Commission and investors with useful information regarding funds'
exposures to changes in interest rate and credit spreads, without
imposing a potential burden that might be involved in providing such
risk metrics at a position level. We believe, however, based on staff
outreach that funds or their service providers generally do calculate
such information at a position level. We request comment on the
relative burdens and benefits of requiring funds to report portfolio
level calculations of duration and spread duration, as opposed to
providing those for each relevant instrument in the portfolio. What, if
any, would be the added costs and burdens associated with adapting
systems in order to centrally collect and report such information? What
would be the benefits to the Commission, investors, and other potential
users to having more precise information in order to evaluate such
exposures? Conversely, are there benefits to having funds report these
measures at the portfolio level rather than the position level, even if
reporting at the position level would not significantly increase costs?
To what extent would the values reported for these risk
metrics be affected by the inputs and assumptions underlying the
methodologies by which funds would calculate these metrics, including
assumptions regarding the valuation of the investments or underlying
securities of investments, particularly for investments that have pre-
payment options, such as mortgage-backed securities? Specifically, how
would the comparability of information reported by different funds be
affected if funds used different inputs and assumptions in their
methodologies? Do funds have concerns regarding reporting measures that
include such assumptions, such as proprietary or liability concerns?
Are there ways the Commission could improve the standardization of the
calculation of these risk metrics? If so, how?
To the extent that funds are calculating such measures
using a methodology other than what the Commission is proposing, what
would the associated costs and other burdens be for funds to calculate
and report these measures according to a different methodology than
that typically used by the fund?
Are there any alternatives or modifications to the
methodologies that the Commission is proposing that the Commission
should consider? \64\ For example, should the Commission require, or
permit, funds to report duration and spread duration only for the
maturities that represent the highest exposures in the fund, such as
the top three or the top five (or another quantity)? Should the
Commission require, or permit, funds to report duration and spread
duration based on a larger change in interest rates or credit spreads,
such as 5 basis points or 25 basis points? How would these
methodologies affect the burden on funds of reporting duration and
credit spread duration? Are there more efficient ways for the
Commission to collect information to increase the transparency of
funds' duration and spread duration?
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\64\ As discussed further below, we separately propose and
request comment on additional and alternative risk metrics. See,
e.g., infra note 127 and accompanying and following text (proposing
that funds report delta for certain derivative contracts), text
following note 142 (requesting comment on vega, gamma, and other
risk metrics), and Part II.A.4.k (generally requesting comment on
additional risk measures).
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Should we provide a de minimis amount for exposure to
different currencies, under which level a fund would not have to report
the DV01 or SDV01 for exposures in that currency? For example, should
we only require funds with exposure to a currency equal to 5% or more
of the fund's NAV to provide a DV01 and SDV01 calculation for such
currency? If we were to provide a de miminis, should the threshold be
higher or lower?
d. Securities Lending
To increase the rate of return on their portfolios, some funds
engage in securities lending activities whereby a fund lends certain of
its portfolio securities to other financial institutions such as
broker-dealers. In return for the security lent, funds receive
collateral and sometimes a fee. To protect the fund from the risk of
borrower default, the borrower generally posts collateral with the fund
in an amount at least equal to the value of the borrowed securities,
and this amount of collateral is adjusted daily as the value of the
borrowed securities is marked to market.\65\ Funds generally receive
cash as collateral. A fund will typically invest cash collateral that
it receives in short-term, highly liquid instruments, such as money
market funds or similar pooled investment vehicles, or directly in
money market instruments.\66\
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\65\ See Securities Industry and Financial Markets Association,
Master Securities Loan Agreement (2000 Version) Sec. Sec. 4, 9,
available at http://www.sifma.org/services/standard-forms-and-documentation/. See also Division of Investment Management,
Securities and Exchange Commission, Securities Lending by U.S. Open-
End and Closed-End Investment Companies (``Securities Lending
Summary''), available at http://www.sec.gov/divisions/investment/securities-lending-open-closed-end-investment-companies.htm.
\66\ Lending funds and borrowers may negotiate the collateral
that the borrower posts to the lender, and a cash collateral fee,
commonly called a ``rebate,'' that the lender pays to the borrower.
The rebate is negotiated and can be negative (i.e., a fee paid from
the borrower to the lender) when demand for the loan of a particular
security is especially great or its supply especially constrained.
See id. at Sec. 5.
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The fund's income from these activities may come from fees paid by
the borrowers to the fund and/or from the reinvestment of collateral.
Many funds engage an external service provider--commonly called a
``securities lending agent''--to administer the securities lending
program. The securities lending agent is typically compensated by being
paid a share of the fund's securities lending revenue after the
counterparty has been paid any rebate due to it.\67\
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\67\ See Securities Lending Summary, supra note 65.
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Securities lending implicates certain provisions of the Investment
Company Act, and funds that engage in securities lending do so in
reliance on Commission staff no-action letters, and in some
circumstances, exemptive orders.\68\ These letters and orders address a
number of areas, including loan collateralization and termination, fees
and compensation, board approval and oversight, and voting of proxies.
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\68\ For example, the transfer of a fund's portfolio securities
to a borrower implicates section 17(f) of the Investment Company
Act, which generally requires that a fund's portfolio securities be
held by an eligible custodian. A fund's obligation to return
collateral at the termination of a loan implicates section 18 of the
Investment Company Act, which governs the extent to which a fund may
incur indebtedness. See id.
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Currently, the information that funds are required to report about
securities lending activity, whether in a structured format or
otherwise, is limited. For example, funds disclose on Form N-SAR
whether they are permitted under their investment policies to, and
whether they did engage during the reporting period in, securities
lending activities.\69\ Funds generally also disclose additional
information regarding their securities lending programs in their
registration statements.\70\ In addition, consistent with current
industry practices, many funds voluntarily identify particular
securities that are on loan in their schedules of portfolio investments
prepared pursuant to Regulation S-X. These requirements do not address
other pertinent considerations, such as
[[Page 33602]]
the extent to which a fund lends its portfolio securities, the
counterparties to which the fund is exposed, the fees and revenues
associated with those activities, and the significance of securities
lending revenue to the investment performance of the fund.
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\69\ Item 70.N of Form N-SAR.
\70\ See, e.g., Form N-1A, Items 9(c) (disclosures regarding
risks), 16(b) (disclosures of investment strategies and risks),
17(f) (disclosures of proxy voting policy), and 28(h) (exhibits of
other material contracts).
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To address these data gaps and provide additional information to
the Commission, investors, and other potential users regarding a fund's
securities lending activities, we are proposing that funds report
certain counterparty information and position-level information monthly
on Form N-PORT.\71\ Also, as to other information for which annual
reporting would be sufficient because it is unlikely to change on a
frequent basis (e.g., name and other identifying information for a
fund's securities lending agent), we are proposing that funds report
this information annually on Form N-CEN as discussed below in Part
II.E. We are also proposing, as discussed below in Part II.C.5, to
require that certain information about the income from and fees paid in
connection with securities lending activities, and the monthly average
of the value of portfolio securities on loan, be disclosed as part of
the notes to funds' financial statements.\72\
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\71\ See infra text following note 74 (discussing the reporting
of counterparty information); Part II.A.2.g (discussing the proposed
requirements regarding position-level information). Commenters to
the FSOC Notice also suggested that enhanced securities lending
disclosures could be beneficial to investors and counterparties.
See, e.g., SIFMA/IAA FSOC Notice Comment Letter, supra note 43
(``Disclosures related to securities lending practices, if
appropriately tailored, could potentially assist investors and
counterparties in making informed choices about where they deploy
their assets and how they engage in lending practices.''); Comment
Letter of the Vanguard Group, Inc. (Mar. 25, 2015) (``Vanguard FSOC
Notice Comment Letter'') (asserting that securities lending as a
whole suffers from a lack of readily available data, and supporting
further efforts to gather data and study the practice of securities
lending).
\72\ See infra text following note 276 (discussing proposed
disclosures in the notes to funds' financial statements that would
allow investors to better understand the income generated from, as
well as the expenses associated with, securities lending
activities).
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Our proposals today are intended, in part, to increase the
transparency of information available related to the lending and
borrowing of securities with respect to funds as a subset of the
universe of market participants engaged in securities lending
activities.\73\
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\73\ See, e.g., section 984(b) of the Dodd-Frank Act, Pub. L.
No. 111-203, 124 Stat. 1376 (2010) (directing the Commission to
promulgate rules designed to increase the transparency of
information available to brokers, dealers, and investors, with
respect to the loan or borrowing of securities).
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Counterparty Information. One risk that funds engaging in
securities lending are exposed to is counterparty risk because
borrowers could fail to return the loaned securities. In this event,
the lender would keep the collateral. Collateral is generally posted in
cash and, in practice, the loan is generally over-collateralized. The
collateral requirements thereby mitigate the extent of a fund's
counterparty risk. In some cases, this risk is further mitigated for
the fund if the fund's securities lending agent indemnifies the fund
against default by the borrower.
While we believe there is value to having information concerning
securities lending counterparties to monitor risk, as well as to
monitor compliance with conditions set forth in staff no-action letters
and exemptive orders,\74\ we are proposing to require that funds
report, for each of their securities lending counterparties as of the
reporting date, the full name and LEI of the counterparty (if any), as
well as the aggregate value of all securities on loan to the
counterparty, rather than at the loan level.\75\ We believe that
disclosure of counterparty information at an aggregate portfolio level
would provide the Commission and investors with information to better
understand the level of potential counterparty risk assumed as part of
the fund's securities lending program, with a lower relative burden on
funds than requesting such information on a per loan level.
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\74\ See generally Securities Lending Summary, supra note 65.
\75\ Form N-PORT, Item B.4.
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We request comment on the portfolio level securities lending
information requirements we are proposing.
As discussed above, Form N-PORT would require funds to
disclose the aggregate value of all securities on loan to each
securities lending counterparty and the name and LEI (if any) of the
counterparty. Should we instead require funds to report this
information on a loan-by-loan or security-by-security basis? To what
extent, if any, would such information be used by investors and other
potential users? What, if any, additional issues would funds face in
tracking and reporting such information on a loan-by-loan or security-
by-security basis? Do funds currently track or have the ability to
readily determine their counterparty exposure on a loan-by-loan or
security-by-security basis? If securities lending counterparty
information should be reported on a loan-by-loan or security-by-
security basis, is there any additional or alternative information we
should require funds to report, such as the rebate or compensation to
the securities lending agent?
Instead of requiring funds to report the aggregate value
of all securities on loan to each securities lending counterparty,
should we limit such disclosures to counterparties to which the fund
has the greatest exposure, such as the top five or top ten
counterparties? \76\ Alternately, should we require funds to report
aggregate exposure to a given counterparty only if such exposure
constitutes more than a certain percentage of the NAV of the fund
(e.g., one percent)? Would either approach more appropriately consider
the costs of tracking and reporting such information and the benefits
that increased transparency would provide to the Commission and other
potential users?
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\76\ Cf. Form PF, Section 1c, Item 22 (requiring advisers to
private funds to report exposures to the five counterparties to
which the reporting fund has the greatest mark-to-market net
counterparty credit exposure).
---------------------------------------------------------------------------
Alternately, or in addition, should the Commission request
information regarding other types of counterparty exposures? For
example, should the Commission require funds to report counterparty
exposures based on the amount of unsettled trades with each
counterparty? If so, should such information be reported in terms of
aggregate or net exposure, and why?
e. Return Information
We are proposing to require funds to provide monthly total returns
for each of the preceding three months.\77\ If the fund is a multiple
class fund, it would report returns for each class.\78\ Funds with
multiple classes would also report their class identification
numbers.\79\ Funds would calculate returns using the same standardized
formulas required for calculation of returns as reported in the
performance table contained in the risk-return summary of the fund's
prospectus and in fund sales materials.\80\
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\77\ See Form N-PORT, Item B.5.a.
\78\ See id.
\79\ See Form N-PORT, Item B.5.b.
\80\ See Form N-1A, Item 26(b)(1); Form N-2, Item 4, Instruction
13; Form N-3, Item 26(b)(i).
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We are proposing to require this information on Form N-PORT because
we believe it would be useful to have such information in a structured
format to facilitate comparisons across funds. For example, analysis of
return information over time among similar funds could reveal outliers
that might merit further inquiry by Commission staff. Additionally,
performance that appears to be inconsistent with a fund's investment
strategy or other benchmarks
[[Page 33603]]
can form a basis for further inquiry and monitoring.\81\
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\81\ Similar risk analytics were used in the Commission's
Aberrational Performance Inquiry, an initiative by the Division of
Enforcement's Asset Management Unit to identify hedge funds with
suspicious returns. See, e.g., Press Release, SEC Charges Hedge Fund
Adviser and Two Executives with Fraud in Continuing Probe of
Suspicious Fund Performance (Oct. 17, 2012), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171485332.
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Because only quarter-end reports on Form N-PORT would be made
public, we are proposing that funds provide return information for each
of the preceding three months.\82\ This would provide investors and
other potential users with monthly return information, so that they
would have access to each month's return on a quarterly basis.
Otherwise, we are concerned that investors might potentially confuse
the month's disclosed return as representing the return for the full
quarter.
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\82\ See Form N-PORT, Item B.5.a. Although generally only
information reported on Form N-PORT for the third month of each
fund's fiscal quarter would be publicly available, the concerns
associated with more frequent public disclosure are related to the
disclosure of portfolio holdings information and would not apply to
the disclosure of fund return information. See generally note 170
and accompanying and following text (discussing the risks of
predatory trading practices such as front-running and the ability of
outside investors to reverse engineer and copycat fund's investment
strategies).
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We are also proposing that funds report, for each of the preceding
three months, monthly net realized gain (or loss) and net change in
unrealized appreciation (or depreciation) attributable to derivatives
for each of the following categories: Commodity contracts, credit
contracts, equity contracts, foreign exchange contracts, interest rate
contracts, and other derivatives contracts.\83\ This item is modeled
after disclosure requirements in Financial Accounting Standards Board
(``FASB'') Accounting Standards Codification (``ASC'') 815, which
governs the accounting disclosure for derivatives and hedging. This
information would help the Commission staff, investors, and other
potential users better understand how a fund is using derivatives in
accomplishing its investment strategy and the impact of derivatives on
the fund's returns. In order to provide a point of comparison, we are
also proposing that funds report, for each of the last three months,
monthly net realized gain (or loss) and net change in unrealized
appreciation (or depreciation) for investments other than
derivatives.\84\
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\83\ See Form N-PORT, Item B.5.c.
\84\ See Form N-PORT, Item B.5.d. Our proposal would also amend
Regulation S-X to require funds to report similar information in
their financial statements, although Regulation S-X would require
such information to be aggregated by type of derivative contract,
rather than by category of exposure as required by Form N-PORT. We
discuss below our reasons for proposing information to be reported
based on contract type on Regulation S-X. See infra Part II.C.
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We request comment on the return information we are proposing in
Form N-PORT.
Should the Commission consider, as an alternative,
requiring funds to provide monthly return information annually on Form
N-CEN, rather than on Form N-PORT? Would this significantly reduce the
burden of reporting such information?
We are proposing to require that funds report three months
of returns so that investors and other potential users, who would only
observe reports on Form N-PORT on a quarterly basis, would still
receive return data for each month of the year. Do commenters agree
that such disclosure of monthly returns would be helpful to investors?
Are there preferable alternatives for providing such information to
investors? Are there potential negative consequences of reporting
monthly returns? For example, could the availability of this
information cause investors to emphasize short-term returns?
We request comment on alternative requirements for fund
reporting of return information. For example, the Commission requests
comment on whether to require reporting by funds of gross returns.
Would gross information, with or without accompanying fee information
for each class, be confusing for investors? If so, are there ways to
mitigate the risk of investor confusion? Instead of requiring reporting
of returns for all classes, should the Commission, for example, require
funds to report return information for a single class, such as the
class with the highest expense ratio or the largest share class in
terms of assets under management? What would be the relative benefits
and burdens of only requiring disclosure of a single class?
Are there alternative methods that the Commission should
consider for requiring funds to report the effect of derivatives on the
return of the fund? For example, should the Commission require that
funds report the monthly net realized gain or loss and net change in
unrealized appreciation or depreciation attributable to derivatives by
type of derivative (i.e., forward, future, option, swap), rather than
by category of exposure? What would be the burden and benefits of
reporting such information relative to the proposed requirement?
f. Flow Information
Form N-PORT would require funds to separately report, for each of
the preceding three months, the total net asset value of: (1) Shares
sold (including exchanges but excluding reinvestment of dividends and
distributions); (2) shares sold in connection with reinvestments of
dividends and distributions; and (3) shares redeemed or repurchased
(including exchanges).\85\ This information is similar to what is
currently reported on Form N-SAR, and would be generally reported
subject to the same guidelines that currently govern reporting of flow
information on that form.\86\ We propose to require this information on
Form N-PORT because we believe that this information would be more
helpful if reported on a monthly basis rather than retrospectively on
an annual basis on Form N-CEN.
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\85\ See Form N-PORT, Item B.6.
\86\ Similar to Form N-SAR, Form N-PORT would instruct funds to
report amounts after any front-end sales loads had been deducted and
before any deferred or contingent deferred sales loads or charges
had been deducted. Shares sold would include shares sold by the fund
to a registered UIT. Funds would also include as shares sold any
transaction in which the fund acquired the assets of another
investment company or of a personal holding company in exchange for
its own shares. Funds would include as shares redeemed any
transaction in which the fund liquidated all or part of its assets.
Exchanges would be defined as the redemption or repurchase of shares
of one fund or series and the investment of all or part of the
proceeds in shares of another fund or series in the same family of
investment companies. Cf. Form N-PORT, Item B.6 and Item 28 of Form
N-SAR (requiring reporting of monthly sales and repurchases of the
Registrant's/Series' shares for the past six months).
---------------------------------------------------------------------------
We believe that having flow information reported to us monthly will
help us better monitor trends in the fund industry. For example, it
could help us analyze types of funds that are becoming more popular
among investors and areas of high growth in the industry. It could help
us better examine investor behavior in response to market events.
Finally, in combination with other information reported on Form N-PORT
regarding liquidity of fund positions, it could also help us identify
funds that might be at risk of experiencing liquidity stress due to
increased redemptions.
What would be the costs and burdens of providing flow
information on a monthly basis on Form N-PORT? Should the Commission
consider, as an alternative, requiring funds to provide monthly flow
information annually on Form N-CEN, rather than on Form N-PORT?
To what extent would the usefulness of the flow
information be
[[Page 33604]]
affected by the fact that omnibus accounts, which generally have
significant amounts of purchases and redemptions, typically net their
transactions prior to executing with the funds' transfer agents? Should
the Commission revise the proposed flow disclosures to address this
issue and, if so, how?
Form N-SAR currently also requires funds to report flow
information related to ``other'' shares sold (i.e., other than through
new sales and exchanges and reinvestments of dividends and
distributions).\87\ Should the Commission also require funds to report
this category of flow information on Form N-PORT? What would be the
utility of requesting flow information to be separately reported in
this additional category?
---------------------------------------------------------------------------
\87\ See id.
---------------------------------------------------------------------------
Should we require that flow information be reported as to
each class of the fund? Would such additional information be helpful to
investors and other potential users? What would be the burdens to funds
with multiple classes of reporting such information?
g. Schedule of Portfolio Investments
Part C of proposed Form N-PORT would require funds to report
certain information on an investment-by-investment basis about each
investment held by the fund and its consolidated subsidiaries as of the
close of the preceding month. Funds would respond to certain questions
that would apply to all investments (i.e., the investment's
identification, amount, payoff profile, asset and issuer type, country
of investment or issuer, and fair value level, and whether the
investment was a restricted security or illiquid asset). Funds would
also respond, if relevant, to additional questions related to specific
types of investments (i.e., debt securities, repurchase and reverse
repurchase agreements, derivatives, and securities lending).
Funds would have the option of identifying any investments that are
``miscellaneous securities.'' \88\ Unless otherwise indicated, funds
would not report information related to those investments in Part C,
but would instead report such information in Part D.\89\
---------------------------------------------------------------------------
\88\ See Form N-PORT, Part D. See also supra note 49 and
accompanying text.
\89\ See infra note 150 and accompanying and following text.
---------------------------------------------------------------------------
i. Information for All Investments
Proposed Form N-PORT would require funds to report certain basic
information about each investment. In particular, funds would report
the name of the issuer and title of issue or description of the
investment, as they are currently required to do on their reported
schedules of investments.\90\
---------------------------------------------------------------------------
\90\ See Form N-PORT, Items C.1.a and C.1.c.
---------------------------------------------------------------------------
To facilitate analysis of fund portfolios, it is important for
Commission staff to be able to identify individual portfolio
securities, as well as the reference instruments of derivative
investments through the use of an identifying code or number, which is
not currently required to be reported on the schedule of investments.
Fund shareholders and potential investors that are analyzing fund
portfolios or investments across funds could similarly benefit from the
clear identification of a fund's portfolio securities across funds. The
staff has found that some securities reported by funds lack a
securities identifier, and this absence has reduced the usefulness of
other information reported.\91\
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\91\ Our inability to identify specific securities has limited
our ability in other contexts to compare ownership of the securities
across multiple funds and monitor issuer exposure. For example,
during the month of February 2013, money market funds reported 6,821
securities without CUSIPs (approximately 10% of all securities
reported on Form N-MFP).
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To address this issue, we propose to require that funds report
additional information about the issuer and the security. Funds would
report certain securities identifiers, if available.\92\ For example,
for swaps and security-based swaps, funds could report the product
identification number used for reporting such instrument to a swap data
repository or securities-based swap data repository, if available.\93\
If a unique identifier is reported, funds would also indicate the type
of identifier used.\94\ Such an identifier may be internally generated
by the fund or provided by a third party, but should be consistently
used across the fund's filings for reporting that investment so that
the Commission, investors, and other potential users of the information
can track the investment from report to report.
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\92\ See Form N-PORT, Item C.1.b and C.1.d to C.1.e (requiring
reporting of identifiers such as LEI of the issuer, CUSIP, ISIN,
ticker or other unique identifier).
\93\ See infra notes 138-140 (discussing product identifiers for
security-based swaps and swaps, as addressed in rulemakings by the
Commission and Commodity Futures Trading Commission, respectively).
\94\ See Form N-PORT, Item C.1.e.iii.
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We also propose to require funds to report the amount of each
investment as of the end of the reporting period, as is currently
required under Regulation S-X.\95\ Funds would report the number of
units or principal amount for each investment, as well as the value of
each investment at the close of the period, and the percentage value of
each investment when compared to the net assets of the fund.\96\ Funds
would also report the currency in which the investment was denominated,
and, if not denominated in U.S. dollars, the exchange rate used to
calculate value.
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\95\ See Form N-PORT, Item C.2. See rule 12-12 of Regulation S-
X.
\96\ See Form N-PORT, Item C.2.a to C.2.d. For derivatives, as
appropriate, funds would provide the number of contracts.
---------------------------------------------------------------------------
Our proposal would also require funds to report the payoff profile
of the investment, indicating whether the investment is held long,
short, or N/A, which would serve the same purpose as the current
requirement in Regulation S-X to disclose investments sold short.\97\
Funds would respond N/A for derivatives and would respond to relevant
questions that indicated the payoff profile of each derivative in the
derivatives portion of the form. These disclosures would identify short
positions in investments held by funds.
---------------------------------------------------------------------------
\97\ See Form N-PORT, Item C.3. See rule 12-12A of Regulation S-
X.
---------------------------------------------------------------------------
Funds would also report the asset type for the investment: Short-
term investment vehicle (e.g., money market fund, liquidity pool, or
other cash management vehicle), repurchase agreement, equity-common,
equity-preferred, debt, derivative-commodity, derivative-credit,
derivative-equity, derivative-foreign exchange, derivative-interest
rate, structured note, loan, ABS-mortgage backed security, ABS-asset
backed commercial paper, ABS-collateralized bond/debt obligation, ABS-
other, commodity, real estate, other) and issuer type (corporate, U.S.
Treasury, U.S. government agency, U.S. government sponsored entity,
municipal, non-U.S. sovereign, private fund, registered fund,
other).\98\ We have based these categories in part on staff review of
how funds currently categorize investments on their schedule of
investments, and in part on the categories of investments required by
private funds under Form PF.\99\ These disclosures would allow the
Commission, investors, and other potential users to assess the
composition of fund portfolios in terms of asset and issuer types and
also
[[Page 33605]]
facilitate comparisons among similar types of investments.
---------------------------------------------------------------------------
\98\ See Form N-PORT, Item C.4.a and C.4.b.
\99\ See, e.g., Form PF, Item 26 (requiring filers to report
exposures by asset type); Form N-Q, Item 1 (requiring filers to
report the schedules of investments required by sections 210.12-12
to 12-14 of Regulation S-X); Form N-CSR, Item 1 (requiring filers to
attach a copy of the report transmitted to shareholders, which would
include schedules of investments required by sections 210.12-12 to
12-14 of Regulation S-X).
---------------------------------------------------------------------------
Our proposal would also require funds to report, for each
investment, whether the investment is a restricted security and whether
the investment is an illiquid asset.\100\ These disclosures would
provide investors and the Commission staff with more information about
liquidity risks associated with the fund's investments.
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\100\ See Form N-PORT, Items C.6 and C.7. ``Restricted
security'' would have the definition provided in rule 144(a)(3)
under the Securities Act [17 CFR 230.144(a)(3)]. See Form N-PORT,
General Instruction E. See also proposed rule 12-13, nn.6 and 8 of
Regulation S-X, which would require similar disclosures in funds'
schedules of investments to identify securities that are restricted
or illiquid.
Form N-PORT would define ``illiquid asset'' as ``an asset that
cannot be sold or disposed of by the Fund in the ordinary course of
business within seven calendar days, at approximately the value
ascribed to it by the Fund.'' See Form N-PORT, General Instruction
E. This definition is the same definition used in the liquidity
guidance issued by the Commission for open-end funds. See Revisions
of Guidelines to Form N-1A, Investment Company Act Release No. 18612
(Mar. 12, 1992) [57 FR 9829 (Mar. 20, 1992)] (``1992 Release''). As
recently stated by Chair Mary Jo White, the Division of Investment
Management is considering a recommendation that the Commission
update liquidity standards for open-end funds and ETFs, which may
result in updated guidance on this issue. See Speech by Securities
and Exchange Commission Chair Mary Jo White (Dec. 11, 2014),
available at http://www.sec.gov/News/Speech/Detail/Speech/1370543677722.
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Each fund would also report whether the investment is categorized
by the fund as a Level 1, Level 2, or Level 3 fair value measurement in
the fair value hierarchy under U.S. Generally Accepted Accounting
Principles (``U.S. GAAP'').\101\ Commission staff could use this
information to identify and monitor investments that may be more
susceptible to increased valuation risk and identify potential outliers
that warrant additional monitoring or inquiry.\102\ In addition,
Commission staff would be better able to identify anomalies in reported
data by aggregating all fund investments industry-wide into the various
level categories. Currently, funds are required to evaluate the fair
value level measurement of each investment as part of the fair value
level hierarchy disclosure in their financial statements.\103\ We
believe that based on this requirement, funds should have pricing
information available to determine the categorization of their
portfolio investments as Level 1, Level 2, or Level 3 within the fair
value hierarchy.
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\101\ See ASC 820. An investment is categorized in the same
level of the fair value hierarchy as the lowest level input that is
significant to its fair value measurement. Level 1 inputs include
quoted prices (unadjusted) for identical investments in an active
market (e.g., active exchange-traded equity securities). Level 2
inputs include other observable inputs, such as: (i) Quoted prices
for similar securities in active markets; (ii) quoted prices for
identical or similar securities in non-active markets; and (iii)
pricing models whose inputs are observable or derived principally
from or corroborated by observable market data through correlation
or other means for substantially the full term of the security.
Level 3 inputs are unobservable inputs. We are proposing amendments
to Regulation S-X to require that funds identify level 3 securities
in their schedules of investments. See infra Part II.C.3.
\102\ For a discussion of some of the challenges regulators may
face with respect to Level 3 accounting, see, e.g., Konstantin
Milbradt, Level 3 Assets: Booking Profits and Concealing Losses, in
25 Rev. Fin. Stud. 55-95 (2011).
\103\ ASC 820-10-50-2 requires for each class of assets and
liabilities measured at fair value, the level of the fair value
hierarchy within which the fair value measurements are categorized
in their entirety (Level 1, 2, or 3).
---------------------------------------------------------------------------
Form N-PORT would also require funds to report the country that
corresponds to the country of investment or issuer based on the
concentrations of the risk and economic exposure of the investment.
Additionally, funds would be required to report the country in which
the issuer is organized if that is different from the country of risk
and economic exposure.\104\
---------------------------------------------------------------------------
\104\ See Form N-PORT, Item C.5. Currently, funds are required
to report the related industry, country, or geographic region of the
investment in their schedules of investments. As discussed below, we
are proposing to amend Regulation S-X to require funds to report the
industry and the country or geographic region of the investment. See
infra Part II.C.3.
---------------------------------------------------------------------------
These disclosures would provide the Commission staff and investors
with more information about country-specific exposures associated with
the fund's investments. Specifically, the Commission believes that
providing both the country based on concentrations of risk and economic
exposure and also the country in which the issuer is organized would
assist the Commission, investors, and other potential users in
understanding the country-specific risks associated with such
investments. For example, knowing the country of risk and economic
exposure is important for understanding the effect of such investments
in a portfolio when that country might be going through times of
economic or political stress, regardless of whether the investment is
issued in a different country. Knowing the country in which the issuer
is organized would be important information for analyzing the effect of
any events that could affect the country in which the issuer is
organized, such as sanctions or monetary controls, as this could affect
the ability of the fund to liquidate the investment.
We request comment on our proposed disclosure requirements.
Our proposal would require funds to report certain
identifiers for their investments. Should the Commission include
additional specific identifiers in Form N-PORT, such as the Financial
Instrumental Global Identifier (``FIGI'') or other similar identifier,
if available? \105\ If so, which identifier or identifiers would be
expected to be reported? Are there any special considerations relating
to the use of any identifiers (e.g., licensing fees associated with
certain identifiers, the prevalence of a particular identifier as
adopted by the marketplace, etc.) that could be addressed through these
reporting requirements? If so, how should the requirements be
restructured to address those considerations while still providing the
Commission and investors the necessary identifying information?
---------------------------------------------------------------------------
\105\ Information about the FIGI is available on the Object
Management Group's Web site, a not-for-profit technology standards
consortium. See generally Object Management Group, Documents
Associated With Financial Industry Global Identifier (FIGI) Version
1.0--Beta 1, available at http://www.omg.org/spec/FIGI/1.0/Beta1/.
---------------------------------------------------------------------------
We request comment on our proposal to require funds to
provide other unique identifiers for investments that do not have ISIN
or ticker identifiers. Should the Commission require, in certain
circumstances, specific identifiers to be reported as other unique
identifiers? For example, in the case of security-based swaps, should
the Commission require funds to report unique product identifiers?
\106\ If so, why?
---------------------------------------------------------------------------
\106\ See infra note 139 and accompanying and following text.
---------------------------------------------------------------------------
How, if at all, should we modify our proposed disclosures
for the amount of each investment at the end of the reporting period
(as well as the currency in which it is denominated)? Likewise, should
we modify our proposed disclosures for the payoff profile of each
investment and the restricted/illiquid nature of securities? If so,
why?
Would our proposed asset and issuer categories allow funds
to readily categorize the investments typically held in fund
portfolios? Should we include additional or alternative categories, and
if so why? For example, are there any specific asset subcategories with
sufficiently unique features as to warrant their own asset category? To
the extent that funds currently are not categorizing their investments
as proposed in Form N-PORT, what costs would be associated with
providing such information?
Should any of these disclosures be aggregated and reported
on a portfolio
[[Page 33606]]
basis, rather than at an individual investment level? Alternately,
should any of the proposed portfolio level information be reported on
an individual investment level?
We request comment on the incremental burden of reporting
this information for each investment held by the fund, relative to the
current burden of reporting the total value of each class of
investments categorized in each level of the fair value hierarchy, as
currently required by U.S. GAAP. Are there other ways in which a fund
could identify and disclose investments that do not have readily
available market quotations or observable inputs as an alternative to
disclosing each investment's categorization as a Level 1, Level 2, or
Level 3 measurement?
Are there additional items that should be included on Form
N-PORT in order to improve the transparency regarding the liquidity and
valuation of investments? For example, should the Commission require
additional disclosure regarding the fund's valuation of its
investments, such as the primary pricing source used (e.g., exchange,
broker quote, third-party pricing service, internal fair value), the
name of any third-party pricing source, or whether an independent
consultant or appraiser assisted with development of internal fair
value? If so, should such information be disclosed on an individual
security basis? Would such information increase the transparency of the
pricing of thinly traded securities? Would investors benefit from such
information and, if so, how? What costs and burdens would be associated
with providing such information?
Should the Commission require funds to report both the
country in which the issuer is organized and also the country with the
greatest concentrations of risk and economic exposure of the
investments? What is the burden of reporting both elements, if
different? Should the Commission provide specific guidance or
instructions for determining the country with the greatest
concentration of risks and economic exposure? Should funds have the
option of reporting more than one country of economic risk, or a
geographic region of economic risk?
Should funds not be required to report country codes for
U.S. investments? Would such an exclusion result in reduced burdens for
funds that held only domestic securities? On the other hand, would such
an exclusion result in investor confusion or complicate data validation
efforts, by, for example, rendering it unclear whether an investment
with N/A reported for its country code was a U.S. investment or was
instead a foreign investment for which a country code had not been
properly reported?
ii. Debt Securities
In addition to the information required above, Form N-PORT would
require additional information about each debt security held by the
fund in order to gain transparency into the payment flows and
convertibility into equity of such investments, as such information can
be used to better understand the payoff profile and credit risk of
these investments. First, funds would report the maturity date and
coupon (reporting annualized rate and indicating whether fixed,
floating, variable, or none).\107\ Funds would also indicate whether
the security is currently in default, whether interest payments for the
security are in arrears or whether any coupon payments have been
legally deferred by the issuer, as well as whether any portion of the
interest is paid in kind.\108\
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\107\ See Form N-PORT, Items C.9.a and C.9.b.
\108\ See Form N-PORT, Items C.9.c to C.9.e.
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Finally, we are proposing to require additional information for
convertible securities, to indicate whether the conversion is mandatory
or contingent.\109\ We are also proposing to require funds to disclose
for each convertible security the conversion ratio, information about
the asset into which the debt is convertible, and the delta, which is
the ratio of the change in the value of the option to the change in the
value of the asset into which the debt is convertible. This reflects
the sensitivity of the debt's value to changes in the price of the
asset into which the debt is convertible. The proposed requirement to
provide the delta would also be required for options, as discussed
further below, because convertible securities have optionality.\110\
For similar reasons discussed below regarding options, the Commission
believes that providing the delta for convertible securities is
important to understand the extent of both the credit exposure of the
debt portion of the convertible bond as well as the market price
exposure relative to the underlying security into which it can be
converted or exchanged.
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\109\ See Form N-PORT, Item C.9.f.
\110\ See text accompanying and following note 127 (discussing
information required for options, including delta).
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We request comment on our proposed disclosure requirements for debt
securities.
Are there additional or alternative characteristics of
debt securities that we should require to be disclosed to assist the
Commission, investors, or other potential users in understanding the
nature and risks of a fund's debt security investments? For example,
would disclosure of which debt securities are guaranteed, the nature of
such guarantee (e.g., guarantee insurance or letter of credit), and the
identity of the guarantor, be useful to investors? Alternately, or in
addition, should the Commission require disclosure regarding the
frequency of coupon payments, principal payback schedule, priority in
security structure (e.g., senior, subordinated, etc.), embedded options
(if any), insurance wrapper (if any), and whether the debt is secured?
We request comment on our proposed disclosure requirements
for convertible securities. With regard to the delta, to what extent
would the inputs and assumptions underlying the methodology by which
funds calculate price changes affect the values reported? Are there
liability or other concerns associated with the reporting of such
measures with such inputs and assumptions? How would the comparability
of information reported between funds be affected if funds used
different inputs and assumptions in calculating delta, such as
different assumptions regarding the values of the funds' portfolios?
Are there ways the Commission could improve the standardization of the
calculation of delta? If so, how? What would the associated costs and
other burdens be for funds to calculate and report these measures
according to a different methodology than that typically used by the
fund?
iii. Repurchase and Reverse Repurchase Agreements
In addition to the information required above for all investments,
Form N-PORT would require each fund to report additional information
for each repurchase and reverse repurchase agreement held by the fund.
The fund would report the category that reflects the transaction from
the perspective of the fund (repurchase, reverse repurchase), whether
the transaction is cleared by a central counterparty--and if so the
name of the central counterparty--or if not the name and LEI (if any)
of the over-the-counter counterparty, repurchase rate, whether the
repurchase agreement is tri-party (to distinguish from bilateral
transactions), and the maturity date.\111\ Funds would also report the
principal amount and value of collateral, as well as the
[[Page 33607]]
category of investments that most closely represents the
collateral.\112\
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\111\ See Form N-PORT, Items C.10.a to C.10.e.
\112\ See Form N-PORT, Item C.10.f. Funds would report the
category of investments that most closely represents the collateral,
selected from among the following (asset-backed securities; agency
collateralized mortgage obligations; agency debentures and agency
strips; agency mortgage-backed securities; private label
collateralized mortgage obligations; corporate debt securities;
equities; money market; U.S. Treasuries (including strips); other
instrument). If ``other instrument,'' funds would also include a
brief description, including, if applicable, whether it is a
collateralized debt obligation, municipal debt, whole loan, or
international debt.
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These disclosures would enhance the information currently reported
regarding funds' use of repurchase agreements and reverse repurchase
agreements. Information regarding repurchase agreements would be
comparable to similar disclosures currently required to be made by
money market funds on Form N-MFP. The categories used for reporting
collateral would track the categories currently used to report tri-
party repurchase agreement information to the Federal Reserve Bank of
New York. We believe that conforming the categories that would be used
in Form N-PORT to categories used in other reporting contexts would
ease reporting burdens and enhance comparability.\113\
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\113\ See Money Market Fund Reform 2014 Release, supra note 13,
at nn.1515-1518 and accompanying text (discussing comment letter
stating that the categories used to report collateral for tri-party
repurchase agreements to the Federal Reserve Bank of New York would
allow for regular and efficient comparison of current and historical
risk factors regarding repurchase agreements on a standardized
basis).
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We request comment on our proposed disclosure requirements above.
As discussed above, the reporting requirements contained
in Form N-PORT would be comparable to similar disclosures currently
required to be made by money market funds on Form N-MFP concerning
repurchase agreements. Should we collect different or additional
information? For example, should the proposed reporting requirements be
revised to encompass characteristics of bilateral repurchase and
reverse repurchase agreements, which are not typically held by money
market funds but we understand are more commonly held by funds that
would be reporting on Form N-PORT? If so, how? Should the categories
used for reporting collateral, which as proposed would track the
categories currently used to report tri-party repurchase agreement
information to the Federal Reserve Bank of New York, be revised? If so,
how and why?
We believe that funds already track the characteristics of
their repurchase and reverse repurchase agreements that we would
require to be reported on Form N-PORT. To the extent this is true, what
would be the incremental cost and burden of reporting such information
to the Commission?
Are there additional or alternative disclosures that we
should require to be reported to assist investors in understanding
counterparty and other risks associated with the fund's repurchase and
reverse repurchase agreements?
iv. Derivatives
As discussed above, the current reporting regime for derivatives
has led to inconsistent approaches to reporting derivatives information
and, in some cases, insufficient information concerning the terms and
underlying reference assets of derivatives to allow the Commission or
investors to understand the investment. Additionally, as discussed
further below, for options, the Commission believes that it would be
important to have a measurement of ``delta,'' a measure not reported in
the financial statements or schedule of investments, to better
understand the exposure to the underlying reference asset that the
options produce in the portfolio. Currently, the Commission and
investors are sometimes unable to accurately assess funds' derivatives
investments and the exposures they create, which can be important to
understanding funds' investment strategies, use of leverage, and risk
of loss. Our proposal is intended to increase transparency into funds'
derivatives investments by requiring funds to disclose certain
characteristics and terms of derivative contracts that are important to
understand the payoff profile of a fund's investment in such contracts,
as well as the exposures they create or hedge in the fund. This would
include, for example, exposures to currency fluctuations, interest rate
shifts, prices of the underlying reference asset, and counterparty
credit risk. As discussed further below, we are also amending
Regulation S-X to make similar changes to the reporting regime for
derivatives disclosures in fund financial statements.
Consequently, in addition to the information required above for all
investments, Form N-PORT would require additional information about
each derivative contract in the fund's portfolio. Funds would report
the category of derivative that most closely represents the investment
(e.g., forward, future, option, etc.).\114\ Funds would also report the
name and LEI (if any) of the counterparty (including a central
counterparty).\115\ This identifying information should assist the
Commission, investors, and other potential users in better identifying
and monitoring the categories of derivatives held by funds and the
associated counterparty risks.\116\
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\114\ See Form N-PORT, Item C.11.a. Funds would report the
category of derivative that most closely represents the investment,
selected from among the following (forward, future, option,
swaption, swap, warrant, other). If ``other,'' funds would provide a
brief description.
\115\ See Form N-PORT, Item C.11.b.
\116\ Commenters to the FSOC Notice indicated that counterparty
data for derivative disclosures is not often available and discussed
the need to have more transparency in this regard. See, e.g.,
Comment Letter of Americans for Financial Reform (Mar. 27, 2015)
(``Americans For Financial Reform FSOC Notice Comment Letter'')
(asserting that counterparty data in derivative disclosures is not
often available); Comment Letter of the Systemic Risk Council (Mar.
25, 2015) (``Systemic Risk Council FSOC Notice Comment Letter'')
(discussing the need to have information about investment vehicles
that hold bank liabilities).
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Form N-PORT would also require funds to report terms and conditions
of each derivative investment that are important to understanding the
payoff profile of the derivative.\117\ For options and warrants,
including options on a derivative (e.g., swaptions), funds would report
the type (e.g., put), payoff profile (e.g., written), number of shares
or principal amount of underlying reference instrument per contract,
exercise price or rate, expiration date, and the unrealized
appreciation or depreciation of the option or warrant.\118\
[[Page 33608]]
Form N-PORT would require funds to provide a description of the
reference instrument, including name of issuer, title of issue, and
relevant securities identifier.\119\
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\117\ We are proposing to require similar information on a
fund's schedule of investments. See Part II.C.2. Commenters to the
FSOC Notice were supportive of enhanced derivatives disclosures.
See, e.g., Systemic Risk Council FSOC Notice Comment Letter, supra
note 116 (``While most managed funds do not employ leverage to the
same degree that banks do, we encourage regulators to consider
carefully whether there are potential improvements to the current
data collection regime (e.g., for registered investment advisers)
that would allow regulators to track the presence and concentration
of leverage in the asset management industry, particularly as it
arises from use of derivatives. . . .''); Americans for Financial
Reform FSOC Notice Comment Letter, supra note 116 (stating that
regulatory oversight should include ensuring appropriate
transparency of fund positions to both investors and regulators,
asserting that current derivatives disclosure requirements for
registered investment companies ``appear very poor,'' noting the
deficiency of just current accounting values and expressing the need
for risk and exposure metrics that show the potential losses or
gains to the fund if market prices change, and suggesting that new
disclosures should require derivatives data to be sufficiently
granular such that regulators and market participants could perform
their own independent calculations of risk exposure, rather than
relying on aggregated metrics of total risk); Vanguard FSOC Notice
Comment Letter, supra note 71 (asserting that regulators would
benefit by better understanding how and why mutual funds use
derivatives).
\118\ See Form N-PORT, Item C.11.c. The type of warrant or
option would be selected from among the following (put or call). The
payoff profile of the warrant or option would be selected from among
the following (written or purchased). Funds would respond N/A for
warrants for both type and payoff profile. As discussed above, funds
would report the number of option contracts in Item C.2.a of Form N-
PORT. See supra note 96 and accompanying text.
\119\ See Form N-PORT, Items C.11.c.iii.2 and C.11.c.iii.3. For
the securities identifier, funds would report, if available, CUSIP
of the reference asset, ISIN (if CUSIP is not available), ticker (if
CUSIP and ISIN is not available), or other unique identifier (if
CUSIP, ISIN, and ticker are not available). See also supra note 92
and accompanying and following text.
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We recognize that some derivatives have underlying assets that are
indices of securities or other assets or a ``custom basket'' of assets,
the components of which are not publicly available. We are proposing
requirements to ensure that the Commission, investors, and other
potential users are aware of the components of such indices or custom
baskets. If the reference instrument is an index for which the
components are publicly available on a Web site and are updated on that
Web site no less frequently than quarterly, funds would identify the
index and provide the index identifier, if any.\120\ We are proposing
to require at least quarterly public disclosure for the components of
the index because it matches the frequency with which funds are
currently required and, as proposed in this release, would continue to
be required, to disclose their portfolio holdings.\121\ If the index's
components are not publicly available as provided above, and the
notional amount of the derivative represents 1% or less of the NAV of
the fund, the fund would provide a narrative description of the
index.\122\ If the index's components are not publicly available in
that manner, and the notional amount of the derivative represents more
than 1% of the NAV of the fund, the fund would provide the name,
identifier, number of shares or notional amount or contract value as of
the trade date (all of which would be reported as negative for short
positions), value, and unrealized appreciation or depreciation of every
component in the index.\123\
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\120\ See Form N-PORT, Item C.11.c.iii.2.
\121\ See infra Part II.A.4 (discussing proposed rules
concerning the public disclosure of reports on Form N-PORT).
\122\ See supra note 120.
\123\ See id. Short positions in the index, if any, would be
reported as negative numbers. The identifier for each index
component would include CUSIP, ISIN (if CUSIP is not available),
ticker (if CUSIP and ISIN are not available), or other identifier
(if CUSIP, ISIN, and ticker are not available. If other identifier
is provided, the fund would indicate the type of identifier used.
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We are proposing this requirement because we believe that it is
important for the Commission, investors, and other potential users to
have transparency into all exposures to assets that the fund has,
regardless of whether the fund directly holds investments in those
assets or chooses to create those exposures through a derivatives
contract.\124\ We are proposing the 1% notional amount threshold based
on our experience with the summary schedule of investments, which
requires funds to disclose investments for which the value exceeds 1%
of the fund's NAV in that schedule.\125\ We believe that, similar to
this threshold in the summary schedule of investments, providing a 1%
de minimis for disclosing the components of a derivative with nonpublic
reference assets considers the need for the Commission, investors, and
other potential users to have transparency into the exposures that
derivative contracts create while not requiring extensive disclosure of
multiple components in a non-public index for instruments that
represent a small amount of the fund's overall value.
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\124\ We are also proposing to modify Regulation S-X to require
similar disclosures. See infra Part II.C.2.a (discussing proposed
rule 12-13, n.3 of Regulation S-X).
\125\ See rule 12-12C, n.3 of Regulation S-X.
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If the reference instrument is a derivative, funds would indicate
the category of derivative (e.g., swap) and would provide all
information required to be reported on Form N-PORT for that type of
derivative.\126\
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\126\ See Form N-PORT, Item C.11.c.iii.1. Funds would report the
category of derivative that most closely represents the investment,
selected from among the following (forward, future, option,
swaption, swap, warrant, other). If ``other,'' funds would provide a
brief description.
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We are also proposing to require funds to report the delta of the
option, which is the ratio of the change in the value of the option to
the change in the value of the reference instrument.\127\ This measure
reflects the sensitivity of the option's value to changes in the price
of the reference instrument. Disclosure of delta for options and
warrants would provide the Commission, investors, and other potential
users a more accurate measure of a fund's full exposure to the
reference instrument than the option's notional amount, which we would
otherwise not be able to determine. Accordingly, having the measurement
of delta for options is important for the Commission, as well as
investors and other potential users, to measure the impact, on a fund
or group of funds that holds options on an asset, of a change in such
asset's price. Also, as the Commission has previously observed, funds
can use options as a form of obtaining a leveraged position in an
underlying reference asset.\128\ Having a measurement of exposures
created through this type of leverage can help the Commission,
investors, and other potential users better understand the risks that
the fund faces as asset prices change, since the use of this type of
leverage can magnify losses or gains in assets.
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\127\ See Form N-PORT, Item C.11.c.vii.
\128\ See Derivatives Concept Release, supra note 7.
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For futures and forwards (other than foreign exchange forwards,
which share similarities with foreign exchange swaps and should be
reported accordingly as discussed below), Form N-PORT would require
funds to report a description of the reference instrument, the payoff
profile (i.e., long or short), expiration date, aggregate notional
amount or contract value as of the trade date, and unrealized
appreciation or depreciation.\129\ The description of the reference
instrument would conform to the same requirements as the description of
reference instruments for warrants and options.\130\
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\129\ See Form N-PORT, Item C.11.d.
\130\ See Form N-PORT, Item C.11.d.ii. See also supra notes 119-
126 and accompanying text.
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For foreign exchange forwards and swaps, funds would report the
amount and description of currency sold, amount and description of
currency purchased, settlement date, and unrealized appreciation or
depreciation.\131\
---------------------------------------------------------------------------
\131\ See Form N-PORT, Item C.11.e.
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For swaps (other than foreign exchange swaps), funds would report
the description and terms of payments necessary for a user of financial
information to understand the nature and terms of payments to be paid
and received, including, as applicable: a description of the reference
instrument, obligation, or index; financing rate to be paid or
received; floating or fixed rates to be paid and received; and payment
frequency.\132\ The description of the reference instrument would
conform to the same requirements as the description of reference
instruments for forwards and futures.\133\ Funds would also report
upfront payments or receipts, unrealized appreciation or
[[Page 33609]]
depreciation, termination or maturity date, and notional amount.\134\
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\132\ See Form N-PORT, Item C.11.f.i. Funds would separately
report the description and terms of payments to be paid and
received. The description of the reference instrument, obligation,
or index would include the information required to be reported for
the descriptions of reference instruments for warrants, options,
futures, or forwards.
\133\ See id. See also supra note 130 and accompanying text.
\134\ See Form N-PORT, Items C.11.f.ii to C.11.f.v.
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Finally, for derivatives that do not fall into the categories
enumerated in Form N-PORT, funds would provide a description of
information sufficient for a user of financial information to
understand the nature and terms of the investment. This description
would include, as applicable, currency, payment terms, payment rates,
call or put features, exercise price, and a description of the
reference instrument, among other things.\135\ The description of the
reference instrument would conform to the same requirements as the
description of reference instruments for swaps.\136\ Funds would also
report termination or maturity (if any), notional amount(s), unrealized
appreciation or depreciation, and the delta (if applicable).\137\ We
recognize that new derivative products will continue to evolve, and
thus the disclosures for this category are intended to be flexible
enough to encompass the changing needs and products that may emerge.
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\135\ See Form N-PORT, Item C.11.g.1.
\136\ See Form N-PORT, Item C.11.f.i. See also supra note 133
and accompanying text.
\137\ See Form N-PORT, Items C.11.g.ii to C.11.g.v.
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We request comment on our proposed disclosure requirements for
derivatives.
Is there additional or alternative information about
derivative contracts that we should be requiring? Should we modify the
information we are proposing to require for any derivatives contracts?
Should other terms and conditions, categories of derivatives, payoff
profiles, or identifiers be included in Form N-PORT so that all
material elements of derivatives contracts can be reported?
For options, should funds be required to identify the
option exercise type (e.g., American, European, Bermudan, Asian, other)
or report any additional information for more exotic option exercise
types (e.g., rainbow, barrier, lookback, etc.)?
We recently adopted Regulation SBSR, which will require
one of the parties to security-based swap transactions to report
certain information to registered security-based swaps data
repositories or the Commission.\138\ The reporting party will report
certain identifying information, including unique product identifiers
to identify each security-based swap, as well as certain primary and
secondary trade information, including the terms of any standardized
fixed or floating rate payments, the frequency of any such payments,
and any additional data elements included in the agreement between the
counterparties that are necessary for a person to determine the market
value of the transaction.\139\ The Commodities Futures Trading
Commission has engaged in similar efforts with regards to unique
product identifiers that would be reported with regards to swaps.\140\
Are there methods the Commission should consider to harmonize the SBSR
reporting requirements with the proposed reporting requirements on Form
N-PORT? For example, should we consider ways to allow a fund to import
the data reported to swap and security-based swap data repositories
automatically into the fund's reports on Form N-PORT? How would this
affect investors' ability to analyze this data for swaps and security-
based swaps held by funds? Should we require funds to report the
product identifiers or any other data we are not currently proposing to
require on Form N-PORT that will be required to be reported for swaps
or security-based swaps? If so, why?
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\138\ See Regulation SBSR Adopting Release, supra note 40
(requiring the reporting of certain information for each registered
security-based swap transaction to registered security-based swap
data repositories or to the Commission, including unique product
identifiers and transaction identifiers).
\139\ See rule 901 of Regulation SBSR [17 CFR 242.901].
\140\ See generally Q&A--Swap Data Recordkeeping and Reporting
Requirements, CFTC, available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/sdrr_qa.pdf.
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Proposed Form N-PORT would require funds to list all
underlying reference assets unless the underlying reference asset is an
index whose components are publicly available on a Web site and are
updated on that Web site no less frequently than quarterly, in which
case funds would identify the index and publisher of the index, or
unless the notional amount of the derivative represents 1% or less of
the NAV of the fund, in which case funds would provide a narrative
description of the index.\141\ To the extent such indices are
proprietary or subject to licensing agreements, what would be the
effect of this requirement? For example, would funds incur costs for
amending licensing agreements? Would index providers be willing to
amend existing licensing agreements? If not, how would this impact
funds that make such investments and the marketplace of fund options
available to investors generally? Are there other concerns about
disclosing the components of proprietary indices? Should we alter this
requirement, and if so how? For example, should we not require funds to
report underlying index components for derivatives unless the
derivative's notional amount represents at least 5%, or some other
percentage, of the NAV of the fund? Alternatively, should we limit the
required disclosure of index components to the top 50 components and/or
components that represent more than 1% of the index? If the reference
asset is a modified version of an index whose components are publicly
available on a Web site, for example a version that is customized to
exclude certain issuers that the fund is restricted from owning, would
requiring a narrative of those modifications be preferable to funds and
investors rather than requiring each holding of the modified index to
be listed? If so, should such narrative disclosure be reported in the
``explanatory notes'' section of Form N-PORT? \142\
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\141\ See, e.g., supra notes 120-123.
\142\ See infra note 155 and accompanying and following text.
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How, if at all, should we modify the proposed requirement
to report delta? To what extent would the inputs and assumptions
underlying the methodology by which funds calculate this measure affect
the value reported? Are there potential liability or other concerns
associated with the reporting of such measures according to such inputs
and assumptions? For example, how would the comparability of
information reported between funds be affected if funds used different
inputs and assumptions in their methodologies?
Are there additional or alternative metrics that we should
consider requiring to be reported? Would the disclosure of risk metrics
such as vega--which measures the amount that an option contract's price
changes in relation to a 1% change in the volatility of the underlying
asset--or gamma--which measures the sensitivity of delta in response to
price changes in the underlying instrument--enhance the utility of the
derivatives information reported in Form N-PORT? What would be the
costs and burdens to funds and benefits to investors and other
potential users of requiring funds to report such additional or
alternative metrics? How would the comparability of information
reported by different funds be affected if funds used different inputs
and assumptions in their methodologies, such as different assumptions
regarding the values of the funds' portfolios?
We believe that funds already track the characteristics of
their derivatives that we would require to be reported on Form N-PORT.
To the extent this is correct, what would be the incremental
[[Page 33610]]
cost and burden of reporting such information to the Commission?
v. Securities on Loan and Cash Collateral Reinvestment
As discussed above, our proposal would require funds to report on
Form N-PORT, for each of their securities lending counterparties as of
the reporting date, the full name and LEI of the counterparty (if any),
as well as the aggregate value of all securities on loan to the
counterparty.\143\ We are also proposing that funds report on Form N-
PORT, on an investment-by-investment level, information about
securities on loan and the reinvestment of cash collateral that secures
the loans. For each investment held by the fund, a fund would report:
(1) Whether any portion of the investment was on loan by the fund, and,
if so, the value of the securities on loan; \144\ (2) whether any
amount of the investment represented reinvestment of the cash
collateral and, if so, the dollar amount of such reinvestment; \145\
and (3) whether any portion of the investment represented non-cash
collateral received to secure loaned securities and, if so, the value
of the securities representing such non-cash collateral.\146\
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\143\ See supra note 75 and preceding, accompanying, and
following text.
\144\ See Form N-PORT, Item C.12.c.
\145\ See Form N-PORT, Item C.12.a.
\146\ See Form N-PORT, Item C.12.b.
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These disclosures would provide information about how funds
reinvest the cash collateral received from securities lending activity
and should allow for more accurate determination of the value of
collateral securing such loans. This could improve the ability of
Commission staff, as well as investors, brokers, dealers, and other
market participants to assess collateral reinvestment risks and
associated potential liquidity and loss risks, as well as better
understand leverage creation through the reinvestment of
collateral.\147\ These disclosures could also help identify those
investments that one or more funds might have to sell or redeem in the
event of widespread termination or default by borrowers. More
generally, this information could help to address concerns expressed by
industry participants about the lack of transparency in funds'
securities lending transactions.\148\
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\147\ As discussed above, commenters to the FSOC Notice
suggested that enhanced securities lending disclosures could be
beneficial to investors and counterparties. See supra note 71.
\148\ See, e.g., Transcript of Securities and Exchange
Commission Securities Lending and Short Sale Roundtable (Sept. 29,
2009), available at http://www.sec.gov/news/openmeetings/2009/roundtable-transcript-092909.pdf (discussing, among other things,
the lack of publicly available information to market participants
about securities lending transactions).
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We request comment on our proposed disclosure requirements for
securities loans and cash collateral reinvestment.
Should the Commission require funds to report information
about securities on loan or reinvestment of cash collateral at the
portfolio level, rather than at the individual security level? If so,
what categories should be used to report such reinvestment? For
example, would it be appropriate to use the same collateral categories
for securities lending that we are proposing to be used for repurchase
and reverse repurchase agreements?
As discussed, Form N-PORT would require funds to indicate,
for each investment, whether any portion of the investment represented
non-cash collateral received to secure loaned securities. To what
extent would this information be helpful to brokers, dealers, and
investors? To what extent do funds receive collateral other than cash?
Is there additional or alternative information regarding
securities lending transactions that the Commission should require to
be disclosed in reports on Form N-PORT?
We believe that funds already track the characteristics of
their securities lending and cash collateral reinvestment transactions
that we would require to be reported on Form N-PORT. Is this belief
correct? What would be the burden of reporting such information to the
Commission?
h. Miscellaneous Securities
In Part D of Form N-PORT, as currently permitted by Regulation S-X,
funds would have the option of identifying and reporting certain
investments as ``miscellaneous securities.'' \149\ Funds electing to
separately report miscellaneous securities would use the same Item
numbers and report the same information that would be reported for each
investment if it were not a miscellaneous security.\150\ Consistent
with the disclosure regime established by Regulation S-X, all such
responses regarding miscellaneous securities would be nonpublic and
would be used for Commission use only, notwithstanding the fact that
all other information reported for the third month of each fund's
fiscal quarter on Form N-PORT would otherwise be publicly
available.\151\ Keeping information related to these investments
nonpublic may serve to guard against the premature release of those
securities positions and thus deter front-running and other predatory
trading practices, while still allowing the Commission to have a
complete record of the portfolio for monitoring, analysis, and checking
for compliance with Regulation S-X.\152\ The only information publicly
reported for miscellaneous securities would be their aggregate value,
which would be consistent with current practice as permitted by
Regulation S-X.\153\
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\149\ See generally supra note 49 and accompanying text.
\150\ See Form N-PORT, Part D.
\151\ See rule 12-12 of Regulation S-X.
\152\ See, e.g., Quarterly Portfolio Holdings Adopting Release,
supra note 19, at n.64 and accompanying text.
\153\ See supra notes 48-49 and accompanying text.
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Should funds continue to be allowed to use the category of
miscellaneous securities, either on Form N-PORT or in publicly
disclosed schedules of investments pursuant to instruction 1 to rule
12-12 and instruction 5 to rule 12-12C of Regulation S-X? To what
extent do funds currently use ``miscellaneous securities'' as a line
item in their schedule of investments, as opposed to disclosing all
investments in securities of unaffiliated issuers? For what purposes?
Should we continue to allow funds to exclude the full disclosures of
such securities from funds' schedules of investments? Alternatively,
should we consider lowering the threshold, such as to two percent or
one percent of the total value of securities of unaffiliated issuers?
i. Explanatory Notes
In Part E of Form N-PORT, funds would have the option of providing
explanatory notes relating to the filing, if any.\154\ Any notes
provided in public reports on Form N-PORT (i.e., reports on Form N-PORT
for the third month of the fund's fiscal quarter) would be publicly
available, whereas notes provided in nonpublic filings of Form N-PORT
would remain nonpublic.\155\ Funds would also report, as applicable,
the Item number(s) to which the notes are related.\156\
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\154\ See Form N-PORT, Part E. Cf. Form PF, Item 4 (providing
advisers to private funds the option of explaining any assumptions
that they made in responding to any questions in the form).
\155\ See infra Part II.A.4 of this release.
\156\ See Form N-PORT, Part E.
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These notes, which would be optional, could be used to explain
assumptions that funds made in responding to specific items in Form N-
PORT. Funds could also provide context for anomalous responses or
discuss issues that could not be adequately addressed elsewhere given
the constraints of the form. Similar
[[Page 33611]]
information in other contexts has assisted Commission staff in better
understanding the information provided by funds, and we expect that
explanatory notes provided on Form N-PORT would do the same.\157\
---------------------------------------------------------------------------
\157\ See, e.g., Form N-MFP, Item 43 (``Explanatory notes.
Disclose any other information that may be material to other
disclosures related to the portfolio security.'').
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We request comment on our proposed disclosure requirements.
Would the format outlined above for the explanatory notes
allow funds to adequately discuss their responses on Form N-PORT? If
not, how should the format be modified?
Should explanatory notes in publicly available filings of
Form N-PORT be nonpublic? If so, why?
j. Exhibits
In Part F of Form N-PORT, for reports filed for the end of the
first and third quarters of the fund's fiscal year, a fund would also
attach the fund's complete portfolio holdings as of the close of the
period covered by the report. These portfolio holdings would be
presented in accordance with the schedules set forth in Sec. Sec.
210.12-12 to 12-14 of Regulation S-X.
As discussed further below in Part B, we are proposing to rescind
Form N-Q because reports on Form N-PORT for the first and third fiscal
quarters would make similar reports on Form N-Q unnecessarily
duplicative. While we recognize that the quarterly, publicly disclosed
reports on Form N-PORT will provide structured data to investors and
other potential users, we recognize that the amount and structured
format of the data contained in those reports are not primarily
designed for individual investors. We believe that such investors might
prefer that portfolio holdings schedules for the first and third
quarters continue to be presented using the form and content specified
by Regulation S-X, which investors are accustomed to viewing in reports
on Form N-Q and in shareholder reports. Therefore, we are proposing to
require that, for reports on Form N-PORT for the first and third
quarters of a fund's fiscal year, the fund would attach its complete
portfolio holdings for that fiscal quarter, presented in accordance
with the schedules set forth in Sec. Sec. 210.12-12 to 12-14 of
Regulation S-X.
Requiring funds to attach these portfolio holdings schedules to
reports on Form N-PORT would provide the Commission, investors, and
other potential users with access to funds' current and historical
portfolio holdings for those funds' first and third fiscal quarters.
Our proposal would also consolidate these disclosures in a central
location, together with other fund portfolio holdings disclosures in
shareholder reports and reports on Form N-CSR for funds' second and
fourth fiscal quarters.
Under our proposal, and consistent with current practice, funds
would have until 60 days after the end of their second and fourth
fiscal quarters to transmit reports to shareholders containing
portfolio holdings schedules prepared in accordance with Regulation S-X
for that reporting period.\158\ In contrast, under our proposal, funds
would have 30 days after the end of their first and third fiscal
quarters to file reports on Form N-PORT that would include portfolio
holdings schedules prepared in accordance with Regulation S-X, although
such reports would not be required to be made public until 60 days
after the close of the reporting period. Although our proposal would
require funds to prepare Regulation S-X compliant portfolio holdings
schedules for their first and third fiscal quarters 30 days more
rapidly than they do currently, we believe that this would be
reasonable given the significant overlap with information that would be
required to be reported on Form N-PORT, and the fact that funds would
be required to file reports on Form N-PORT within 30 days after the end
of each month. In addition, the portfolio schedules attached to Form N-
PORT would be neither audited nor certified, which we believe would
significantly reduce the time required for preparation and validation.
We request comment below on the timing of preparing this attachment.
---------------------------------------------------------------------------
\158\ See supra note 27 (discussing current requirements to
transmit reports to shareholders); infra Part II.C (discussing our
proposed amendments to Regulation S-X).
---------------------------------------------------------------------------
As discussed below, we are proposing to allow funds to transmit
reports to shareholders by posting online those reports, together with
the funds' complete portfolio holdings for the first and third fiscal
quarters presented in accordance with the schedules set forth in
Sec. Sec. 210.12-12 to 12-14 of Regulation S-X disclosures.\159\ We
recognize that there would be duplication between the portfolio
schedules posted online for funds relying upon proposed rule 30e-3 and
the portfolio schedules for funds attached on reports on Form N-PORT.
However, we believe that requiring the Regulation S-X schedules to be
filed as exhibits to Form N-PORT reports would serve the purpose of
making the schedules permanently available on the Commission's
Electronic Data Gathering, Analysis, and Retrieval System (``EDGAR'')
(even when such schedules are no longer required to be maintained
online pursuant to proposed rule 30e-3).
---------------------------------------------------------------------------
\159\ See supra Part II.D.3.
---------------------------------------------------------------------------
We request comment on our proposed exhibits.
Should funds be required to attach portfolio holdings
schedules to reports on Form N-PORT? Is there an alternative that would
be better for funds and investors in terms of informing investors'
investment decisions with regards to current and historical portfolio
holdings?
As discussed above, the attached portfolio holdings
schedules are intended for investors, but would not be required to be
made publicly available to investors until 60 days after the close of
the reporting period; however, as proposed, funds would be required to
prepare and file this attachment within 30 days of the end of the
reporting period. Should funds be allowed to file reports on Form N-
PORT for the first and third fiscal quarters without Regulation S-X
compliant schedules, but then be required to amend those reports on
Form N-PORT to attach Regulation S-X compliant schedules no later than
60 days after the end of the reporting period?
Should the portfolio schedules attached to Form N-PORT,
which are similar to reports funds are providing currently on Form N-Q,
be certified, as is currently required by Form N-Q?
k. General Request for Comments Regarding the Information on Form N-
PORT
In addition to the requests for comment above, we request general
comment on feasible alternatives to the information we would be
requiring funds to report on Form N-PORT that would minimize the
reporting burdens on funds while maintaining the anticipated benefits
of the reporting and disclosure.\160\ We also request comment on the
utility of the information proposed to be included in reports to the
Commission, investors, and the public in relation to the costs to funds
of providing the reports.\161\
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\160\ See section 30(c)(2)(A) of the Investment Company Act [15
U.S.C. 80a-29(c)(2)(A)] (requiring Commission to consider and seek
public comment on feasible alternatives to the required filing of
information that minimize reporting burdens on funds).
\161\ See section 30(c)(2)(B) of the Investment Company Act
(requiring Commission to consider and seek public comment on the
utility of information, documents and reports to the Commission in
relation to the associated costs).
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[[Page 33612]]
Would Form N-PORT, as proposed, appropriately consider the
usefulness of the information to the Commission, investors, and other
potential users of the required information and the costs that would be
associated with reporting this information? If not, which data points
or items should be enhanced or scaled back? Are there any proposed
items in Form N-PORT that should be revised to avoid duplication of
reporting requirements in different Commission rules or forms? If so,
please explain. On the other hand, are there any elements in Form N-
PORT that the Commission should carry over to other Commission forms or
rules?
Are there specific items that the proposed form would
require that are unnecessary or otherwise should not be required in the
manner that we propose? Alternately, is there different or additional
information that we have not identified that could be useful to us or
investors in monitoring funds? For example, to the extent there are
fund-specific, sector-specific, or industry-wide risks that would not
be addressed by the information we are proposing to collect today,
should we require additional or alternative information that would be
relevant to an evaluation of the risk characteristics of the fund and
its portfolio investments? Likewise, is there any investment- or
entity-specific information that should be included in Form N-PORT to
facilitate analysis of the information that would be reported? Should
the manner in which information would be reported in Form N-PORT be
revised to improve the clarity of disclosures or reduce reporting
burdens?
We believe that the information we are proposing to
require would be readily available to funds as a matter of general
business practice. Do commenters agree with this assumption? For
example, do fund accounting or financial reporting systems, or those of
a fund's custodian, generally contain the investment information that
we are requesting in our proposal? What is the feasibility and burden
of requiring funds to report information that is not contained in such
systems? To the extent that any items that we have requested are not
contained in fund accounting or financial reporting systems, are there
other types of readily available data that would provide us with
similar information?
3. Reporting of Information on Form N-PORT
As discussed above, the Commission proposes that funds would report
information on Form N-PORT in XML, so that Commission staff, investors,
and other potential users could create databases of fund portfolio
information to be used for data analysis. Forms N-CSR and N-Q are not
currently filed in a structured format, which results in reports that
are comprehensible to a human reader, but are not suitable for
automated processing, and generally require filers to reformat the
required information from the way it is stored for normal business
uses.\162\ By contrast, requiring that reports on Form N-PORT be
structured would allow the Commission and other potential users to
combine information from more than one report in an automated way to,
for example, construct a data base of fund portfolio investments
without additional formatting. Based upon our experiences with Forms N-
MFP and PF, both of which require filers to report information in an
XML format, we believe that requiring funds to report information on
Form N-PORT in an XML format would provide the information that we seek
in the most timely and cost-effective manner.\163\ As discussed further
below in the economic analysis, the XML format may also improve the
quality of the information disclosed by imposing constraints on how the
information would be provided, by providing a built-in validation
framework of the data in the reports.\164\
---------------------------------------------------------------------------
\162\ Forms N-CSR and N-Q are required to be filed in HTMA or
ASCII/SGML. See rule 301 of Regulation S-T; EDGAR Filer Manual
(Volume II) version 27 (June 2014) at 5-1.
\163\ We anticipate that the XML interactive data file would be
compatible with a wide range of open source and proprietary
information management software applications. Continued advances in
interactive data software, search engines, and other web-based tools
may further enhance the accessibility and usability of the data.
See, e.g., Money Market Fund Reform 2010 Release, supra note 13, at
n.341.
\164\ See infra Part IV.B.b.
---------------------------------------------------------------------------
What would be the costs to funds of providing data
conforming to a Form N-PORT XML Schema? How would costs be affected, if
at all, by the size of the funds and fund complexes reporting this
data? How would this affect smaller fund companies?
Should the Commission allow or require the form to be
provided in an XML Schema derived from existing XML based languages,
such as Financial products Markup Language (``FpML'') or XBRL? FpML is
an industry standard created by ISDA for exchanging and reporting the
terms and conditions of derivatives contracts. XBRL is another industry
standard used by the Commission for many reporting forms.
Is there another structured format that would allow
investors and analysts to easily download and analyze the data?
The Commission is considering whether reports on Form N-PORT should
be submitted through EDGAR or another electronic filing system, either
maintained by the Commission or by a third-party contractor. If reports
on Form N-PORT were required to be submitted through EDGAR, the
electronic filing requirements of Regulation S-T would apply.\165\
---------------------------------------------------------------------------
\165\ See generally 17 CFR 232 (governing the electronic
submission of documents filed with the Commission).
---------------------------------------------------------------------------
We request comment on this aspect of our proposal.
Are there specific other capabilities that the Commission
should consider in developing or selecting an electronic filing system?
For example, should the system have the capability to cross-check
information reported to other electronic filing systems, such as the
Investment Adviser Registration Depository (where registration forms
for investment advisers are filed)? If so, which platforms and why?
Is EDGAR the optimal vehicle for filing reports on Form N-
PORT with the Commission? If not, what vehicle would be optimal for
filing reports and why? Should the Commission allow the filing of
documents in electronic media other than on EDGAR? If so, please make
specific recommendations.
Are there any particular concerns with filing such reports
on EDGAR as opposed to a third party system or vice versa? If so, what
are those concerns and what are potential remedies for such concerns?
For example, as discussed further below, as proposed, reports on Form
N-PORT for the first and second month of each fiscal quarter would not
be made public. Accordingly, any filing would need to have
confidentiality protections to keep the information on such Forms non-
public. How should EDGAR or an alternative filing platform best address
the confidentiality of this information?
How important to investors and other interested parties is
the fact that EDGAR currently serves as the filing system for fund
filings with the Commission, and thus serves as a single repository
where investors may examine historical filings by a given fund on
related forms and generally compare reports made by other funds? To
what extent, if at all, could investors become confused by the use of a
new filing system for Form N-PORT and the use of EDGAR for other fund
filings? How should any such investor confusion be mitigated by funds
and the Commission?
[[Page 33613]]
Our proposal would require funds to report information on Form N-
PORT no later than 30 days after the close of each month.\166\ We
request comment on this aspect of our proposal.
---------------------------------------------------------------------------
\166\ In contrast, one commenter to the FSOC Notice suggested
that funds should report information to the Commission on a real-
time basis. See Comment Letter of Occupy the SEC to the FSOC Notice
(Mar. 25, 2015) (suggesting that asset managers should be required
to provide real-time data, and that the Commission have the
capability to monitor all funds' transactions on a real-time basis).
---------------------------------------------------------------------------
Would 30 days be sufficient for funds to gather and report
this information to the Commission? If not, what amount of time would
be required and why? Conversely, could funds easily and reliably gather
and report this information in less than 30 days, which would provide
the Commission staff with more timely data? \167\ If so, what amount of
time would be appropriate? To what extent, if at all, should this
determination be affected by the fact that funds would have 60 days to
report their schedule of investments in their financial statements
prepared pursuant to Regulation S-X?
---------------------------------------------------------------------------
\167\ See, e.g., Money Market Fund Reform 2014 Release, supra
note 13 (requiring money market funds to report their holdings and
other information to the Commission within five days after the end
of each month).
---------------------------------------------------------------------------
As an alternative to monthly reports filed on Form N-PORT, should
the Commission require quarterly reports that include portfolio
information for each month of that quarter? How would the viability of
this alternative be affected, if at all, by the technological
challenges and inadvertent disclosure risks associated with combining
in a single form nonpublic portfolio information relating to the first
two months of each quarter with public portfolio information relating
to the third month of that quarter? We note that this alternative would
eliminate many of the benefits of monthly reporting, such as the
ability of monthly data to address the staleness of quarterly data and
to assist in monitoring funds by decreasing the delay between reports.
However, this alternative would still provide twelve data points per
year, which should improve the Commission staff's ability to perform
analyses of portfolios, and would discourage various forms of portfolio
manipulation, as discussed above. What, if any, other factors should
the Commission consider in evaluating this alternative?
4. Public Disclosure of Information Reported on Form N-PORT
We are proposing that funds report information on Form N-PORT on a
monthly basis, no later than 30 days after the close of each
month.\168\ For reasons discussed below, and consistent with current
disclosure practices, only information reported for the third month of
each fund's fiscal quarter would be publicly available, and such
information would not be made public until 60 days after the end of the
third month of the fund's fiscal quarter.\169\
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\168\ Commission staff understands that certain funds currently
report their investments to shareholders as of the last business day
of the reporting period, while other funds report their investments
as of the last calendar day of the reporting period. In recognition
of this fact, and in an effort to avoid disruptions to current fund
operations, the information reported on Form N-PORT may reflect the
fund's investments as of the last business day, or last calendar
day, of the month for which the report is filed.
\169\ As discussed above, portfolio schedules are currently
available to the public in reports that are mailed to shareholders
or filed with the Commission either 60 or 70 days following the end
of each reporting period. See supra note 27 and accompanying text.
---------------------------------------------------------------------------
The quarterly portfolio reports that the Commission currently
receives on Forms N-Q and N-CSR can quickly become stale due to the
turnover of portfolio securities and fluctuations in the values of
portfolio investments. Monthly portfolio reporting would decrease the
delay between reports, which should prove useful to the Commission for
fund monitoring, particularly in times of market stress. This would
also triple the number of data points reported to the Commission in a
given year, as well as ensure that the Commission has current
information, which should in turn enhance the ability of Commission
staff to perform analyses of funds in the course of monitoring for
industry trends, or identifying issues for examination or inquiry.
As discussed above, the Commission generally believes that public
availability of information, including the types of information that
would be collected on Form N-PORT that may not currently be reported or
disclosed by funds, can benefit investors by assisting them in making
more informed investment decisions. Although Form N-PORT is not
primarily designed for disclosing information to individual investors,
we believe that many investors, particularly institutional investors,
as well as academic researchers, financial analysts, and economic
research firms, could use the information reported on Form N-PORT to
evaluate fund portfolios and assess the potential for returns and risks
of a particular fund. Accordingly, whether directly or through third
parties, we believe that the periodic public disclosure of the
information on proposed Form N-PORT could benefit all fund investors.
The Commission, however, recognizes that more frequent portfolio
disclosure could potentially harm fund shareholders by expanding the
opportunities for professional traders to exploit this information by
engaging in predatory trading practices, such as trading ahead of
funds, often called ``front-running.'' \170\ Similarly, the Commission
is sensitive to concerns that more frequent portfolio disclosure may
facilitate the ability of outside investors to ``free ride'' on a
mutual fund's investment research, by allowing those investors to
reverse engineer and ``copycat'' the fund's investment strategies and
obtain for free the benefits of fund research and investment strategies
that are paid for by fund shareholders.\171\ Both front-running and
copycatting can reduce the returns of shareholders who invest in
actively managed funds.\172\
---------------------------------------------------------------------------
\170\ See, e.g., Quarterly Portfolio Holdings Adopting Release,
supra note 19, at n.128 and accompanying text.
\171\ See, e.g., id. at n.129 and accompanying text.
\172\ See The Potential Effects of More Frequent Portfolio
Disclosure on Mutual Fund Performance, 7 Investment Company
Institute Perspective No. 3 (June 2001), available at http://www.ici.org/pdf/per07-03.pdf (``Potential Effects of More Frequent
Disclosure'').
---------------------------------------------------------------------------
We discussed these concerns when we first proposed and adopted Form
N-MFP, and made the determination to make each monthly report on Form
N-MFP public, with a 60 day delay.\173\ In that release, however, we
noted that, due to the short-term and restricted nature of money market
fund securities, and because shares of money market funds are
ordinarily purchased and redeemed at a stable share price, we believed
opportunities for such activities were curtailed.\174\ By contrast,
funds other than money market funds can pursue a variety of investment
strategies and invest in a variety of securities and other investments.
Accordingly, we do not believe that the factors that mitigated our
concerns about the potential for front running or free-riding in money
market funds are as equally applicable to mutual funds.
---------------------------------------------------------------------------
\173\ See Money Market Fund Reform 2010 Release, supra note 13
(adopting Form N-MFP with a 60 day delay for public disclosure). In
2014, the Commission eliminated the 60 day delay in the public
disclosure of Form N-MFP. See Money Market Fund Reform 2014 Release,
supra note 13.
\174\ See Money Market Fund Reform 2010 Release, supra note 13,
at text following n.573.
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Empirical studies indicate that the portfolio holdings information
that investment companies disclose to the Commission and to
shareholders contains information that can be used by other investors
to front-run and
[[Page 33614]]
copycat the positions of reporting funds.\175\ Based on these studies,
as well as experience and discussions with fund groups and market
participants, the Commission is sensitive to the possibility that
increasing the frequency of public portfolio disclosures to a monthly
basis could further enable others to discern trading strategies of the
funds, potentially subjecting registered investment companies to such
predatory trading practices, resulting in competitive harms to the fund
and its investors.
---------------------------------------------------------------------------
\175\ See infra notes 663-667 and accompanying and following
text.
---------------------------------------------------------------------------
We recognize that some free-riding and front running activity can
occur even with quarterly disclosure, with the potential for investor
harm. Conversely, however, investors previously petitioned for
quarterly disclosures, noting numerous benefits that quarterly
disclosure of portfolio schedules could provide, including allowing
investors to better monitor the extent to which their funds' portfolios
overlap, and hence enabling investors to make more informed asset
allocation decisions, and providing investors with greater information
about how a fund is complying with its stated investment
objective.\176\ The Commission cited many of these benefits when it
adopted Form N-Q, and based on staff experience and outreach, believes
that the current practice of quarterly portfolio disclosures provides
benefits to investors, notwithstanding the opportunities for front-
running and reverse engineering it might create.
---------------------------------------------------------------------------
\176\ See Quarterly Portfolio Holdings Adopting Release, supra
note 19, at n.32 and accompanying text (discussing prior investor
petitions for rulemaking). Investors that petitioned for quarterly
disclosure also argued that increasing the frequency of portfolio
disclosure would expose ``style drift'' (when the actual portfolio
holdings of a fund deviate from its stated investment objective) and
shed light on and prevent several potential forms of portfolio
manipulation, such as ``window dressing'' (buying or selling
portfolio securities shortly before the date as of which a fund's
holdings are publicly disclosed, in order to convey an impression
that the manager has been investing in companies that have had
exceptional performance during the reporting period) and ``portfolio
pumping'' (buying shares of stock the fund already owns on the last
day of the reporting period, in order to drive up the price of the
stocks and inflate the fund's performance results).
---------------------------------------------------------------------------
Our proposal is intended to appropriately consider the benefits to
the Commission, investors, and other potential users of public
portfolio disclosures, including the reporting of such disclosures in a
structured format and additional portfolio information that would be
required on proposed Form N-PORT and the potential costs associated
with making that information available to the public, which could be
ultimately borne by investors. Accordingly, in an attempt to minimize
these potential costs and harms, we propose to require public
disclosure of fund reports on Form N-PORT once each quarter, rather
than monthly, thereby maintaining the status quo regarding the
frequency of public portfolio disclosure. As discussed above, funds are
currently required to disclose their portfolio investments quarterly,
via public filings with the Commission and semi-annual reports
distributed to shareholders. Consequently, the Commission is not
currently proposing to make public the information reported for the
first and second months of each fund's fiscal quarter on Form N-PORT.
Only information reported for the third month of each fund's fiscal
quarter on Form N-PORT would be made publicly available, and such
information would not be made public until 60 days after the end of the
third month of the fund's fiscal quarter. We believe that maintaining
the status quo with regard to the frequency and the time lag of
portfolio reporting would allow the Commission, the fund industry, and
the marketplace to assess the impact of the structured and more
detailed data reported on Form N-PORT on the mix of information
available to the public, and the extent to which these changes might
affect the potential for predatory trading, before determining whether
more frequent or more timely public disclosure would be, beneficial to
investors in funds.
We are proposing to maintain the status quo of public disclosure of
quarterly information based upon each fund's fiscal quarters, rather
than calendar quarters, to ensure that public disclosure of information
filed on Form N-PORT would be the same as the portfolio disclosures
reported on a semi-annual fiscal year basis on Form N-CSR. We believe
that such overlap would minimize the risks of predatory trading,
because otherwise funds with fiscal year-ends that fall other than on a
calendar quarter- or year-end would have their portfolios publicly
available more frequently than funds with fiscal year-ends that fall on
a calendar quarter- or year-end, thus increasing the risks to those
funds discussed above related to potential front-running or reverse
engineering.
We request comment on the proposed frequency and delay of public
disclosure of information reported on Form N-PORT.
Should we require information on Form N-PORT reported for
the first and second month of each fund's fiscal quarter be made
public? Are the concerns about front-running or other possible harms
discussed above warranted given the 60-day delay? Would a different
combination of public disclosure frequency and delay better protect
funds and their investors from the risks of predatory trading, while
still providing timely and regular information to investors? To what
extent would investors benefit from receiving monthly data as opposed
to quarterly data?
Are there alternatives we should consider to provide
investors and other potential users with the information reported on
Form N-PORT for the first and second months of each quarter? For
example, would the potential harms discussed above be mitigated if
reports on Form N-PORT for the first and second months were made public
60 days (or a shorter or longer time period) after the end of each
quarter, or 60 days (or a shorter or longer time period) after the end
of each fund's fiscal year, thereby increasing the time lag of such
information? If monthly information were to be provided quarterly or
annually, how would that affect the benefits of such information to
investors and other potential users?
Would Form N-PORT contain the type of information that, if
disclosed on a monthly basis, could reveal information that a fund
would consider proprietary or confidential or that could place the fund
at a competitive disadvantage? If so, please explain and provide
examples, as applicable.
Would restricting public disclosure of the information
reported on Form N-PORT to information reported for the third month of
each fund's fiscal quarter alleviate concerns about front-running or
other possible harms that might be caused by making the monthly
information reported on Form N-PORT public? Should we instead provide
that all or a portion of the requested information on Form N-PORT be
submitted in nonpublic reports to the Commission? If so, please
identify the specific items that should remain nonpublic and explain
why.
Do commenters believe that our proposed 60-day delay in
making the information public would be helpful in protecting against
possible front running or free riding? Would a shorter delay (e.g., 45
or 30 days) or a longer delay (e.g., 70 days) be more appropriate? If
so, why? For example, should we provide for a longer delay to prevent
investors other than shareholders from trading along with the fund, to
the possible detriment of the fund and its shareholders? Alternately,
would a shorter delay, for example 30 days, better serve the needs of
shareholders
[[Page 33615]]
and potential fund investors while still appropriately protecting the
interests of funds?
Should information be reported on Form N-PORT as of the
third month of each fund's fiscal year, as proposed, or should we
instead require a uniform public reporting schedule for all funds to
facilitate comparison of information reported on Form N-PORT (e.g.,
March 31, June 30, September 30, and December 31)? To what extent would
a uniform public disclosure schedule increase burdens to funds, given
that one of the purposes for selecting fiscal year-ends that vary from
calendar year-ends is to spread out filing burdens throughout the year
for fund complexes?
B. Rescission of Form N-Q and Amendments to Certification Requirements
of Form N-CSR
1. Rescission of Form N-Q
Along with our proposal to adopt new Form N-PORT, we are proposing
to rescind Form N-Q. Management companies other than SBICs are
currently required to report their complete portfolio holdings as of
the end of their first and third fiscal quarters on Form N-Q. Because
the data reported on proposed Form N-PORT would include the portfolio
holdings information contained in reports on Form N-Q, we believe that
Form N-PORT, if adopted, would render reports on Form N-Q unnecessarily
duplicative. Therefore, we believe it is appropriate to rescind Form N-
Q rather than require funds to report similar information to the
Commission on two separate forms.
However, as noted earlier, we believe that individual investors and
other potential users might prefer that portfolio holdings schedules
for the first and third quarters continue to be presented using the
form and content specified by Regulation S-X, which investors are
accustomed to viewing in reports on Form N-Q and in shareholder
reports. Therefore, we are proposing to require that, for reports on
Form N-PORT for the first and third quarters of a fund's fiscal year,
the fund would attach its complete portfolio holdings for that fiscal
quarter, presented in accordance with the schedules set forth in
Sec. Sec. 210.12-12 to 12-14 of Regulation S-X [17 CFR 210.12-12--12-
14]. Also, as discussed below, proposed new rule 30e-3 would allow
funds to satisfy requirements to transmit reports to shareholders by
posting on a Web site those shareholder reports and these same
portfolio schedules for the funds' first and third quarters.\177\
---------------------------------------------------------------------------
\177\ See infra Part II.D.
---------------------------------------------------------------------------
2. Amendments to Certification Requirements of Form N-CSR
In connection with the Commission's implementation of the Sarbanes-
Oxley Act of 2002, Form N-Q and Form N-CSR require the principal
executive and financial officers of the fund to make quarterly
certifications relating to (1) the accuracy of information reported to
the Commission, and (2) disclosure controls and procedures and internal
control over financial reporting.\178\ Rescission of Form N-Q would
eliminate certifications as to the accuracy of the portfolio schedules
reported for the first and third fiscal quarters.
---------------------------------------------------------------------------
\178\ See Item 3 of Form N-Q (certification requirement); Form
N-Q Adopting Release, supra note 152; Item 12 of Form N-CSR
(certification requirement); Certification of Management Investment
Company Shareholder Reports and Designation of Certified Shareholder
Reports as Exchange Act Periodic Reporting Forms; Disclosure
Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002,
Investment Company Act Release No. 24914 (Jan. 27, 2003) [68 FR 5348
(Feb. 3, 2003)] (adopting release for Form N-CSR).
---------------------------------------------------------------------------
Under today's proposal, the certifications as to the accuracy of
the portfolio schedules reported for the second and fourth fiscal
quarters on Form N-CSR would remain. However, we are proposing to amend
the form of certification in Form N-CSR to require each certifying
officer to state that he or she has disclosed in the report any change
in the registrant's internal control over financial reporting that
occurred during the most recent fiscal half-year, rather than the
registrant's most recent fiscal quarter as currently required by the
form.\179\ Lengthening the look-back of this certification to six
months, so that the certifications on Form N-CSR for the semi-annual
and annual reports would cover the first and second fiscal quarters and
third and fourth fiscal quarters, respectively, would fill the gap in
certification coverage that would otherwise occur once Form N-Q is
rescinded. To the extent that certifications improve the accuracy of
the data reported, removing such certifications could have negative
effects on the quality of the data reported. Likewise, if the reduced
frequency of the certifications affects the process by which controls
and procedures are assessed, requiring such certifications semi-
annually rather than quarterly could reduce the effectiveness of the
fund's disclosure controls and procedures and internal control over
financial reporting are assessed. However, we expect such effects, if
any, to be minimal because certifying officers would continue to
certify portfolio holdings for the fund's second and fourth fiscal
quarters and would further provide semi-annual certifications
concerning disclosure controls and procedures and internal control over
financial reporting that would cover the entire year.
---------------------------------------------------------------------------
\179\ Proposed Item 11(b) of Form N-CSR; proposed paragraph 5(b)
of certification exhibit of Item 11(a)(2) of Form N-CSR.
---------------------------------------------------------------------------
3. Request for Comment
We request comments on the proposed rescission of Form N-Q and
related rule and form amendments.
Should we rescind Form N-Q, as we have proposed? Should we
instead retain Form N-Q, and not require Regulation S-X compliant
schedules to be attached to reports for the first and third fiscal
quarters on Form N-PORT? Why or why not?
Would the proposed amendments to the certification
requirements in Form N-CSR be an appropriate substitute for the
certification requirements in Form N-Q? Would the change from quarterly
to semiannual certifications have an effect on the quality of funds'
internal controls or on other costs associated with certifications? If
so, are those changes appropriate?
C. Amendments to Regulation S-X
1. Overview
As part of our larger effort to modernize the manner in which funds
report holdings information to investors, today we are proposing
amendments to Regulation S-X, which prescribes the form and content of
financial statements required in registration statements and
shareholder reports.\180\ As discussed above, many of the proposed
amendments to Regulation S-X, particularly the amendments to the
disclosures concerning derivative contracts, are similar to the
proposed requirements concerning disclosures of derivatives that would
be required on reports on proposed Form N-PORT. The proposed amendments
to Regulation S-X would, among other things, require similar
disclosures in a fund's financial
[[Page 33616]]
statements in its shareholder reports and, as applicable, Web site
disclosures in order to provide investors, particularly individual
investors, with clear and consistent disclosures across funds
concerning fund investments in derivatives in a human-readable format,
as opposed to the structured format of proposed Form N-PORT.
---------------------------------------------------------------------------
\180\ See rule 1-01, et seq of Regulation S-X [17 CFR 210.1-01,
et seq]. While ``funds'' are defined in the preamble as registered
investment companies other than face amount certificate companies
and any separate series thereof--i.e., management companies and
UITs--we note that our proposed amendments to Regulation S-X apply
to both registered investment companies and BDCs. See infra notes
264 and 265. Therefore, throughout this section, when discussing
fund reporting requirements in the context of our proposed
amendments to Regulation S-X, we are also including changes to the
reporting requirements for BDCs.
---------------------------------------------------------------------------
As outlined below, we are proposing amendments to Articles 6 and 12
of Regulation S-X that would: (1) Require new, standardized disclosures
regarding fund holdings in open futures contracts, open forward foreign
currency contracts, and open swap contracts,\181\ and additional
disclosures regarding fund holdings of written and purchased option
contracts; (2) update the disclosures for other investments, as well as
reorganize the order in which some investments are presented; and (3)
amend the rules regarding the general form and content of fund
financial statements. Our amendments would also require prominent
placement of disclosures regarding investments in derivatives in a
fund's financial statements, rather than allowing such schedules to be
placed in the notes to the financial statements. Finally, our
amendments would require a new disclosure in the notes to the financial
statements relating to a fund's securities lending activities.
---------------------------------------------------------------------------
\181\ We recognize that under the federal securities laws,
certain derivatives fall under the definition of securities
notwithstanding, for purposes of our proposals to Regulation S-X, we
expect funds to adhere to the requirements of the disclosure
schedules for the relevant derivative investment, regardless of how
it would be defined under the federal securities laws. See, e.g.,
proposed rule 12-13C of Regulation S-X (Open swap contracts).
---------------------------------------------------------------------------
As discussed above, the proposed rules will renumber the current
schedules in Article 12 of Regulation S-X and break out the disclosure
of derivatives currently reported on Schedule 12-13 into separate
schedules. These changes are summarized in Figure 1, below.
Proposed Changes to Article 12 of Regulation S-X
------------------------------------------------------------------------
Current rules Proposed rules
------------------------------------------------------------------------
12-12 (Investments in securities of 12-12 (Investments in
unaffiliated issuers). securities of unaffiliated
issuers).
12-12A (Investments--securities sold 12-12A (Investments--securities
short). sold short).
12-12B (Open option contracts written). 12-13 (Open option contracts
written).*
12-12C (Summary schedule of investments 12-12B (Summary schedule of
in securities of unaffiliated issuers). investments in securities of
unaffiliated issuers).*
12-13 (Investments other than 12-13A (Open futures
securities). contracts).*
12-13B (Open forward foreign
currency contracts).*
12-13C (Open swap contracts).*
12-13D (Investments other than
those presented in Sec. Sec.
210.12-12, 12-12A, 12-12B, 12-
13, 12-13A, 12-13B, and 12-
13C)*
12-14 (Investments in and advances to 12-14 (Investments in and
affiliates). advances to affiliates).
------------------------------------------------------------------------
* Denotes new or renumbered schedules.
Figure 1
We believe the proposed amendments will assist comparability among
funds, and increase transparency for investors regarding a fund's use
of derivatives and the liquidity of certain investments. We have
endeavored to mitigate burdens on the industry by proposing to require
similar disclosures both on Form N-PORT and in a fund's financial
statements.\182\ As a further consideration, we believe that the
amendments we are proposing today are generally consistent with how
many funds are currently reporting investments (including derivatives),
and other information according to current industry practices.
---------------------------------------------------------------------------
\182\ See discussion supra Part II.A.2.g.iv.
---------------------------------------------------------------------------
2. Enhanced Derivatives Disclosures
In 2011, as part of a wider effort to review the use of derivatives
by management investment companies, we issued a concept release and
request for comment on a range of issues.\183\ We received comment
letters from a variety of stakeholders, including investors, fund
groups, and third-party users of the information, who commented on a
number of issues. Several commenters noted that holdings of derivative
investments are not currently reported by funds in a consistent
manner.\184\ Commenters also suggested that more disclosure on
underlying risks was necessary, including more information on
counterparty exposure and reporting relating to the notional amount of
certain derivatives.\185\ Another commenter specifically requested that
we revise Regulation S-X in order to keep ``financial reporting current
with developments in the financial markets.'' \186\
---------------------------------------------------------------------------
\183\ Derivatives Concept Release, supra note 7.
\184\ Comments submitted in response to the Derivatives Concept
Release are available at http://www.sec.gov/comments/s7-33-11/s73311.shtml. See Morningstar Derivatives Concept Release Comment
Letter, supra note 58 (``This is because fund companies are not
reporting derivative holdings in a consistent manner and are not
reporting derivative holdings in a manner that identifies the
underlying risk exposure.''); Comment Letter of Rydex[bond]SGI (Nov.
7, 2011) (``Rydex[bond]SGI Derivatives Concept Release Comment
Letter'') (``However, the quality and extent of such derivatives
disclosure still varies greatly from registrant to registrant.'').
Commenters to the FSOC Notice made similar observations. See, e.g.,
Americans for Financial Reform FSOC Notice Comment Letter, supra
note 116 (``While full position-level data on securities portfolios
is available periodically for registered funds, current derivatives
disclosure requirements appear very poor.''); Systematic Risk
Council FSOC Notice Comment Letter, supra note 116 (``While most
managed funds do not employ leverage to the same degree that banks
do, we encourage regulators to consider carefully whether there are
potential improvements to the current data collection regime [ ]
that would allow regulators to track the presence and concentrations
of leverage in the asset management industry, particularly as it
arises from the use of derivatives . . . .'').
\185\ See Morningstar Derivatives Concept Release Comment
Letter, supra note 58 (``Notional exposure . . . is a better measure
of risk''); Comment Letter of Oppenheimer Funds to Derivatives
Concept Release (Nov. 7, 2011) (``Instead, counterparty risks
incurred through the investments in derivatives . . . should be
considered in a new SEC rulemaking that is primarily disclosure
based.''); Rydex[bond]SGI Derivatives Concept Release Comment
Letter, supra note 184 (recommending that funds that invest in
derivatives should disclose notional exposure for non-exchanged
traded derivatives and a fund's exposure to counterparties).
Commenters to the FSOC Notice made similar observations relating to
counterparty disclosures. See, e.g., Americans for Financial Reform
FSOC Notice Comment Letter, supra note 116 (``Counterparty data is
also often not available.''); Systematic Risk Council Comment
Letter, supra note 116 (discussing the need to have information
about investment vehicles that hold bank liabilities).
\186\ Comment Letter of Stephen A. Keen to Derivatives Concept
Release (Nov. 8, 2011).
---------------------------------------------------------------------------
While the rules under Regulation S-X establish general requirements
for portfolio holdings disclosures in fund financial statements, they
do not prescribe standardized information to be included for derivative
instruments
[[Page 33617]]
other than options. Currently, rule 12-13 of Regulation S-X
(Investments other than securities) requires limited information on the
fund's investments other than securities--that is, the investments not
disclosed under rules 12-12, 12-12A, 12-12B, and 12-14.\187\ Thus,
under Regulation S-X, a fund's disclosures of open futures contracts,
open forward foreign currency contracts, and open swap contracts are
generally reported in accordance with rule 12-13.
---------------------------------------------------------------------------
\187\ The schedule to rule 12-13 requires disclosure of: (1)
Description; (2) balance held at close of period--quantity; and (3)
value of each item at close of period. See rule 12-13 of Regulation
S-X.
---------------------------------------------------------------------------
To address issues of inconsistent disclosures and lack of
transparency as to derivative instruments, we are proposing to amend
Regulation S-X by proposing new schedules for open futures contracts,
open forward foreign currency contracts, and open swap contracts. We
are also proposing to modify the current disclosure requirements for
purchased and written option contracts. Finally, we are proposing to
include certain instructions regarding the presentation of derivatives
contracts that are generally consistent with instructions that are
currently included, or that we are proposing to add, in either rule 12-
12 (Investments in securities of unaffiliated issuers) or rule 12-13
(Investments other than securities).\188\
---------------------------------------------------------------------------
\188\ See, e.g., proposed rule 12-12, n.2 of Regulation S-X
(instructions for categorizing investments); n.10 (disclosure of
illiquid securities); n.12 (disclosure of costs basis for Federal
income tax purposes); see also rule 12-13, n.7 of Regulation S-X
(current requirement for disclosure of costs basis for Federal
income tax purposes).
---------------------------------------------------------------------------
a. Open Option Contracts Written--Rule 12-13 (Current Rule 12-12B) and
Options Purchased
Our proposed rule would modify the current disclosure of written
option contracts.\189\ First, we are adding new columns to the schedule
for written option contracts that would require a description of the
contract (replacing the current column for name of the issuer), the
counterparty to the transaction,\190\ and the contract's notional
amount.\191\ Thus, under the new rule 12-13, for each open written
options contract, funds would be required to disclose: (1) Description;
(2) counterparty; (3) number of contracts; (4) notional amount; (5)
exercise price; (6) expiration date; and (7) value.\192\ Second, we are
proposing to add an instruction to current rule 12-12, which is the
schedule on which purchased options are required to be disclosed, that
would require funds to provide all information required by proposed
rule 12-13 for written option contracts.\193\
---------------------------------------------------------------------------
\189\ Under current rule 12-12B, funds are required to report,
for open option contracts, the name of the issuer, number of
contracts, exercise price, expiration date, and value. See rule 12-
12B of Regulation S-X [17 CFR 210.12-12B].
\190\ See supra note 116. This information should assist
investors in identifying and monitoring the counterparty risks
associated with a fund's investments in over-the-counter
derivatives.
\191\ While rule 12-13 is specific to open option contracts
written, the same disclosures also apply for purchased options as
required by proposed instruction 3 to rule 12-12. See also proposed
rule 12-12B, n.5 of Regulation S-X.
\192\ See proposed rule 12-13 of Regulation S-X.
\193\ See proposed rule 12-12, n.3 of Regulation S-X.
---------------------------------------------------------------------------
We are also proposing for options where the underlying investment
would otherwise be presented in accordance with another provision of
rule 12-12 or proposed rules 12-13 through 12-13D that the presentation
of that investment must include a description, as required by those
provisions.\194\ Thus, if another investment contains some sort of
optionality (e.g., put or call features), the investment's disclosure
must include both a description of the optionality (as required by
proposed rule 12-13), and a description of the underlying investments,
as required by the applicable provisions of proposed rules 12-12, 12-
12A, and 12-13 through 12-13D. For example, reporting for a swaption
would include the disclosures required under both the swaps rule
(proposed rule 12-13C) and the options rule (proposed rule 12-13).
---------------------------------------------------------------------------
\194\ See proposed rules 12-12, n.3; 12-12B, n.5; and 12-13, n.3
of Regulation S-X.
---------------------------------------------------------------------------
As required in proposed Form N-PORT,\195\ in the case of an option
contract with an underlying investment that is an index or basket of
investments whose components are publicly available on a Web site as of
the fund's balance sheet date,\196\ or if the notional amount of the
holding does not exceed one percent of the fund's NAV as of the close
of the period, we are proposing that the fund provide information
sufficient to identify the underlying investment, such as a
description.\197\ If the underlying investment is an index whose
components are not publicly available on a Web site as of the fund's
balance sheet date, or is based upon a custom basket of investments,
and the notional amount of the option contract exceeds one percent of
the fund's NAV as of the close of the period, the fund would list
separately each of the investments comprising the index or basket of
investments.\198\ We believe that disclosure of the underlying
investments of an option contract is an important element to assist
investors in understanding and evaluating the full risks of the
investment. We are also proposing to include a similar instruction for
swap contracts.\199\ The disclosures in proposed instruction 3 would
provide investors with more transparency into both the terms of the
underlying investment and the terms of the option.
---------------------------------------------------------------------------
\195\ See Item C.11.c.iii of proposed Form N-PORT.
\196\ Under the proposal, the components would be required to be
publicly available on a Web site as of the fund's balance sheet date
at the time of transmission to stockholders for any report required
to be transmitted to stockholders under rule 30e-1. The components
would be required to remain publicly available on a Web site as of
the fund's balance sheet date until 70 days after the fund's next
fiscal year-end. For example, components of an index underlying an
option contract for a fund's 12/31/14 annual report must be made
publicly available on a Web site as of 12/31/14 by the time that the
12/31/14 annual report is transmitted to stockholders. The
components must remain publicly available until 3/10/16.
\197\ See proposed rule 12-13, n.3 of Regulation S-X. See supra
note 120 and accompanying text (discussing the rationale for similar
proposed requirements in Form N-PORT).
\198\ See id.
\199\ See proposed rule 12-13C, n.3 of Regulation S-X.
---------------------------------------------------------------------------
We are also proposing several instructions to rule 12-13 and the
other rules we are proposing concerning derivatives holdings (e.g.,
open futures contracts, open swap contracts) in order to maintain
consistency with the disclosures required by current rule 12-13.
Current rule 12-13 contains an instruction requiring identification of
``each investment not readily marketable.'' \200\ We are proposing to
modify this requirement in proposed rule 12-13 and the other rules
concerning derivatives holdings in order to increase transparency into
the marketability of, and observability of valuation inputs for, a
fund's investments by requiring separate identification of investments
that are restricted securities, as well as those investments that were
fair valued using significant unobservable inputs. Thus, we are
proposing to require funds to indicate if an investment cannot be sold
because of restrictions or conditions applicable to the
investment.\201\ We are also proposing to require funds to indicate if
a security's fair value was
[[Page 33618]]
determined using significant unobservable inputs.\202\
---------------------------------------------------------------------------
\200\ See rule 12-13, n.4 of Regulation S-X (``The term
`investment not readily marketable' shall include investments for
which there is no independent publicly quoted market and investments
which cannot be sold because of restrictions or conditions
applicable to the investment or the company.'').
\201\ See proposed rule 12-13, n.6 of Regulation S-X; see also
proposed rules 12-13A, n.4; 12-13B, n.2; 12-13C, n.5; and 12-13D,
n.6 of Regulation S-X.
\202\ See proposed rule 12-13, n.7 of Regulation S-X; see also
proposed rules 12-13A, n.5; 12-13B, n.3; 12-13C, n.6; and 12-13D,
n.7 of Regulation S-X. These instructions would require funds to
identify each investment categorized in Level 3 of the fair value
hierarchy in accordance with ASC Topic 820. See ASC 820-10-20
(defining ``level 3 inputs'' as ``unobservable inputs for the asset
or liability''); see also ASC 820-10-35-37A (``In some cases, the
inputs used to measure the fair value of an asset or a liability
might be categorized within different levels of the fair value
hierarchy. In those cases, the fair value measurement is categorized
in its entirety in the same level of the fair value hierarchy as the
lowest level input that is significant to the entire measurement.'')
(emphasis added); see also discussion supra note 101.
---------------------------------------------------------------------------
Current rule 12-13 likewise contains an instruction to include tax
basis disclosures for investments other than securities.\203\ We are
extending this requirement to proposed rule 12-13, as well as the other
rules concerning derivatives holdings.\204\ We believe that this type
of tax basis information is important to investors in investment
companies, which are generally pass-through entities pursuant to
Subchapter M of the Internal Revenue Code.\205\
---------------------------------------------------------------------------
\203\ See rule 12-13, n.7 of Regulation S-X.
\204\ See proposed rule 12-13, n.10 of Regulation S-X; see also
proposed rules 12-13A, n.8; 12-13B, n.6; 12-13C, n.9; and 12-13D,
n.11 of Regulation S-X.
\205\ See 26 U.S.C. 851, et seq.
---------------------------------------------------------------------------
In order to provide greater transparency to investors into which
investments are deemed illiquid, we are also proposing to require funds
to identify illiquid investments.\206\ Liquidity is an important
consideration for a fund's investors in understanding the risk exposure
of a fund. For example, in times of market stress, illiquid investments
may not be readily sold at their approximate value. Indicating which
investments are illiquid would allow an investor to understand which
holdings in a fund are likely to be sold at a discount if a portion of
the fund's investments must be sold to meet cash needs, such as
redemptions or distributions.
---------------------------------------------------------------------------
\206\ See proposed rule 12-13, n.8 of Regulation S-X; see also
proposed rules 12-13A, n.6; 12-13B, n.4; 12-13C, n.7; and 12-13D,
n.8 of Regulation S-X. See generally 1992 Release, supra note 100.
As previously stated, the staff is reviewing possible
recommendations to the Commission for rulemaking to update liquidity
standards for mutual funds and ETFs, which may result in changes to
the Commission's current guidance on this issue. See supra note 100.
---------------------------------------------------------------------------
Proposed rule 12-13 would also include other new instructions.\207\
---------------------------------------------------------------------------
\207\ Instruction 2 would add ``description'' and
``counterparty'' to the organizational categories of options
contracts that must be listed separately. See proposed rule 12-13,
n.2 of Regulation S-X. Instruction 4 would clarify that the fund
need not include counterparty information for exchange-traded
options. See proposed rule 12-13, n.4 of Regulation S-X.
---------------------------------------------------------------------------
b. Open Futures Contracts--New Rule 12-13A
We are proposing new rule 12-13A, which would require standardized
reporting of open futures contracts.\208\ For open futures contracts,
funds are currently required to report under rule 12-13 a description
of the futures contract (including its expiration date), the number of
contracts held (under the balance held--quantity column), and any
unrealized appreciation and depreciation (under the value column).\209\
In order to allow investors to better understand the economics of a
fund's investment in futures contracts, our proposal would also require
funds to report notional amount and value.\210\ Therefore, under the
proposal, funds with open futures contracts would report: (1)
Description; (2) number of contracts; (3) expiration date; (4) notional
amount; (5) value; and (6) unrealized appreciation and
depreciation.\211\ In addition, instruction 7 would include the new
requirement that funds should reconcile the total of Column F
(unrealized appreciation/depreciation) to the total variation margin
receivable or payable on the related balance sheet.\212\ We believe
that proposed instruction 7 would improve transparency by linking the
information in the schedule of open futures contracts with the related
balance sheet.
---------------------------------------------------------------------------
\208\ See proposed rule 12-13A of Regulation S-X.
\209\ See rule 12-13 of Regulation S-X.
\210\ See proposed rule 12-13A, columns D and E of Regulation S-
X.
\211\ See proposed rule 12-13A of Regulation S-X.
\212\ See proposed rule 12-13A, n.7 of Regulation S-X.
---------------------------------------------------------------------------
As discussed above, our proposal also contains certain new
instructions for rule 12-13A that are generally the same across all of
the schedules for derivatives contracts.\213\ Based on staff review of
disclosures of open futures contracts of funds, we believe that these
proposed disclosures are generally consistent with current industry
practice.\214\
---------------------------------------------------------------------------
\213\ Instruction 1 would require funds to organize long
purchases of futures contracts and futures contracts sold short
separately. See proposed rule 12-13A, n.1 of Regulation S-X.
Instruction 2 would require funds to list separately futures
contracts where the descriptions or expiration dates differ. See
proposed rule 12-13A, n.2 of Regulation S-X. Instruction 3 would
clarify that the description should include the name of the
reference asset or index. See proposed rule 12-13A, n.3 of
Regulation S-X. Instruction 4 would require the fund to indicate
each investment which cannot be sold because of restrictions or
conditions applicable to the investment. See proposed rule 12-13A,
n.4 of Regulation S-X. Instruction 5 would require the fund to
indicate each investment whose fair value was determined using
significant unobservable inputs. See proposed rule 12-13A, n.5 of
Regulation S-X. Instruction 6 would require the fund to identify
each illiquid investment. See proposed rule 12-13A, n.6 of
Regulation S-X. Instruction 8 would extend current rule 12-13's tax
basis disclosure to disclosures of open futures contracts. See
proposed rule 12-13A, n.8 of Regulation S-X.
\214\ We understand that many funds disclose either value or
notional amount for open futures contracts, but may not disclose
both. Our proposal would require disclosure of both value and
notional amount.
---------------------------------------------------------------------------
c. Open Forward Foreign Currency Contracts--New Rule 12-13B
We are also proposing new rule 12-13B, which would require
standardized disclosures for open forward foreign currency
contracts.\215\ Currently, under rule 12-13, funds are required to
report a description of the contract (including a description of what
is to be purchased and sold under the contract and the settlement
date), the amount to be purchased and sold on settlement date (under
the balance held--quantity column), and any unrealized appreciation or
depreciation (under the value column).\216\ In order to allow investors
to better understand counterparty risk for forward foreign currency
contracts, our proposal would additionally require funds to disclose
the counterparty to each transaction.\217\ As proposed, funds holding
open forward foreign currency contracts would therefore report the: (1)
Amount and description of currency to be purchased; (2) amount and
description of currency to be sold; (3) counterparty; (4) settlement
date; and (5) unrealized appreciation/depreciation.\218\ Based on staff
review of disclosures of open forward foreign currency contracts of
funds, we believe that these proposed disclosures are generally
consistent with current industry practice. Our proposal would also
include certain new instructions to the schedule that are similar to
the other derivatives disclosure requirements we are proposing
today.\219\
---------------------------------------------------------------------------
\215\ See proposed rule 12-13B of Regulation S-X.
\216\ See rule 12-13 of Regulation S-X.
\217\ See proposed rule 12-13B, column C of Regulation S-X.
\218\ See proposed rule 12-13B of Regulation S-X.
\219\ Instruction 1 would require the fund to separately
organize forward foreign currency contracts where the description of
currency purchased, currency sold, counterparties, or settlement
dates differ. See proposed rule 12-13B, n.1 of Regulation S-X.
Instruction 2 would require the fund to indicate each investment
which cannot be sold because of restrictions or conditions
applicable to the investment. See proposed rule 12-13B, n.2 of
Regulation S-X. Instruction 3 would require the fund to indicate
each investment whose fair value was determined using significant
unobservable inputs. See proposed rule 12-13B, n.3 of Regulation S-
X. Instruction 4 would require the fund to identify each illiquid
investment. See proposed rule 12-13B, n.4 of Regulation S-X.
Instruction 5 would clarify that Column E (unrealized appreciation/
depreciation) should be totaled and agree with the total of
correlative amounts shown on the related balance sheet. See proposed
rule 12-13B, n.5 of Regulation S-X. Instruction 6 would extend
current rule 12-13's tax basis disclosure to disclosures of open
forward foreign currency contracts. See proposed rule 12-13B, n.6 of
Regulation S-X.
---------------------------------------------------------------------------
[[Page 33619]]
d. Open Swap Contracts--New Rule 12-13C
We are also proposing new rule 12-13C, which would require
standardized reporting of fund positions in open swap contracts.\220\
Under rule 12-13, funds currently report description (including a
description of what is to be paid and received by the fund and the
contract's maturity date), notional amount (under balance held--
quantity column), and any unrealized appreciation or depreciation
(under the value column).\221\ Our proposal would additionally require
funds to report the counterparty to each transaction (except for
exchange-traded swaps), the contract's value, and any upfront payments
or receipts.\222\ This additional information would allow investors to
both better understand the economics of the transaction, as well as its
associated risks.\223\ Thus, as proposed, funds would report for each
swap the: (1) Description and terms of payments to be received from
another party; (2) description and terms of payments to be paid to
another party; (3) counterparty; (4) maturity date; (5) notional
amount; (6) value; (7) upfront payments/receipts; and (8) unrealized
appreciation/depreciation.\224\ We are proposing these categories of
information in an effort to increase transparency of swap contracts,
while maintaining enough flexibility for the variety of swap products
that currently exist and future products that might come to
market.\225\
---------------------------------------------------------------------------
\220\ See proposed rule 12-13C of Regulation S-X.
\221\ See rule 12-13 of Regulation S-X.
\222\ See proposed rule 12-13C, columns C, F, and G of
Regulation S-X.
\223\ For example, upfront payments disclose whether cash was
paid or received when entering into a swap contract, allowing
investors to better understand the initial cost of the investment,
if any.
\224\ See proposed rule 12-13C of Regulation S-X. The
description and terms of payments to be paid and received (and other
information) to and from another party should reflect the investment
owned by the fund and allow an investor to understand the full
nature of the transaction.
\225\ See id. at n.1 (requiring the fund to list each major
category of swaps by descriptive title); n.2 (requiring the fund to
list separately each swap where description, counterparty, or
maturity dates differ within each major category).
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While instruction 3 of proposed rule 12-13C provides specific
examples for the more common types of swap contracts (e.g., credit
default swaps, interest rate swaps, and total return swaps), we
recognize that other types of swaps exist (e.g., currency swaps,
commodity swaps, variance swaps, and subordinated risk swaps).\226\ For
example, a cross-currency swap has two notional amounts, one for the
currency to be received and one for the currency to be paid. For a
cross-currency swap, funds would report for purposes of Column A of
proposed rule 12-13C, a description of the interest rate to be received
and the notional amount that the calculation of interest to be received
is based upon. Column B of proposed rule 12-13C would include a
description of the interest rate to be paid and the notional amount
that the calculation of interest to be paid is based upon. Column E
would include both notional amounts and the currency in which each is
denominated, or the same information could be presented in two separate
columns.
---------------------------------------------------------------------------
\226\ See proposed rule 12-13C, n.3 of Regulation S-X.
---------------------------------------------------------------------------
As required in our proposed disclosures for open option contracts
\227\ and in proposed Form N-PORT,\228\ in the case of a swap with a
referenced asset that is an index whose components are publicly
available on a Web site as of the fund's balance sheet date, or if the
notional amount of the holding does not exceed one percent of the
fund's NAV as of the close of the period, we are proposing that the
fund provide information sufficient to identify the referenced asset,
such as a description.\229\ If the referenced asset is an index whose
components are not publicly available on a Web site as of the fund's
balance sheet date, or is based upon a custom basket of investments,
and the notional amount of the holding exceeds one percent of the
fund's NAV as of the close of the period, the fund would list
separately each of the investments comprising the referenced
assets.\230\ As with underlying investments for option contracts, we
believe that disclosure of the underlying referenced assets of a swap
would assist investors in better understanding and evaluating the full
risks of investments in swaps.
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\227\ See proposed rule 12-13, n.3 of Regulation S-X.
\228\ See Item C.11.f.i of proposed Form N-PORT.
\229\ See proposed rule 12-13C, n.3 of Regulation S-X.
\230\ See id.
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For swaps which pay or receive financing payments, funds would
disclose variable financing rates in a manner similar to disclosure of
variable interest rates on securities in accordance with instruction 4
to proposed rule 12-12.\231\ Our proposal would also include other
instructions to this rule that are similar across all of our proposed
rules for derivatives contracts.\232\
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\231\ See proposed rule 12-13C, n.3; and 12-12, n.4 of
Regulation S-X.
\232\ Instruction 4 would clarify that the fund need not list
counterparty for exchange traded swaps. See proposed rule 12-13C,
n.4 of Regulation S-X. Instruction 5 would require the fund to
indicate each investment which cannot be sold because of
restrictions or conditions applicable to the investment. See
proposed rule 12-13C, n.5 of Regulation S-X. Instruction 6 would
require the fund to indicate each investment whose fair value was
determined using significant unobservable inputs. See proposed rule
12-13C, n.6 of Regulation S-X. Instruction 7 would require funds to
identify each illiquid investment. See proposed rule 12-13C, n.7 of
Regulation S-X. Instruction 8 would require that columns F (value),
G (upfront payments/receipts), and H (unrealized appreciation/
depreciation) be totaled and agree with the totals of their
respective amounts shown on the related balance sheet. See proposed
rule 12-13C, n.8 of Regulation S-X. Instruction 9 would extend
current rule 12-13's tax basis disclosure to disclosures of swap
contracts. See proposed rule 12-13C, n.9 of Regulation S-X.
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e. Other Investments -- Rule 12-13D (Current Rule 12-13)
We are also proposing to amend current rule 12-13 and, for
organization and consistency, renumber it as proposed rule 12-13D.
Proposed rule 12-13D is intended to continue, as is currently required
by rule 12-13, to be the schedule by which funds report investments not
otherwise required to be reported pursuant to Article 12.\233\ As
proposed, rule 12-13D would require reporting of: (1) Description; (2)
balance held at close of period-quantity; and (3) value of each item at
close of period.\234\ We expect that funds would report, among other
holdings, investments in physical holdings, such as real estate or
commodities, pursuant to proposed rule 12-13D. As discussed above, our
proposal would also modify current rule 12-13's requirement that funds
disclose ``each investment not readily marketable'' \235\ in favor of
disclosures concerning whether an investment is restricted and if an
investment's fair value was determined using significant unobservable
inputs.\236\ Our proposal would also include certain new instructions
to the schedule that are generally the same across all the schedules
for derivatives contracts.\237\
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\233\ See proposed rule 12-13D of Regulation S-X.
\234\ Id.
\235\ See rule 12-13, n.4 of Regulation S-X.
\236\ See proposed rule 12-13D, n.6 of Regulation S-X (requiring
the fund to indicate each investment which cannot be sold because of
restrictions or conditions applicable to the investment); n.7
(requiring the fund to indicate each issue of securities whose fair
value was determined using significant unobservable inputs).
\237\ Instruction 1 would require the fund to organize each
investment separately where any portion of the description differs.
See proposed rule 12-13D, n.1 of Regulation S-X. Instruction 2 would
require the fund to categorize the schedule by the type of
investment, and related industry, country, or geographic region, as
applicable. See proposed rule 12-13D, n.2 of Regulation S-X.
Instruction 3 would require that the description of the asset
include information sufficient for a user to understand the nature
and terms of the investment. See proposed rule 12-13D, n.3 of
Regulation S-X. Instruction 8 would require the fund to identify
each illiquid investment. See proposed rule 12-13D, n.8 of
Regulation S-X.
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[[Page 33620]]
We request comment on our proposed amendments to rules 12-13
through 12-13D of Regulation S-X:
Many of our proposed portfolio holdings disclosure
requirements in Article 12 conform with similar requirements on
proposed Form N-PORT. Are our proposed amendments to Article 12
appropriate for fund financial statements? Is there information that is
currently proposed in Form N-PORT, but not in Article 12, that would
benefit investors? For example, to the extent that proposed Form N-PORT
instructs filers to report the country code that corresponds to the
country of investment or issuer based on the concentrations of the risk
and economic exposure of the investments, or, if different, the country
where the issuer is organized, should those same instructions be
integrated into Regulation S-X to standardize how funds report that
information in their financial statements and in Form N-PORT? \238\
---------------------------------------------------------------------------
\238\ See supra note 104 and accompanying and following text
(discussing how funds would report country codes for portfolio
investments on Form N-PORT).
---------------------------------------------------------------------------
Are there other categories of investments not specifically
covered in Article 12 that should be specifically addressed in a new
rule or directly addressed in rule 12-13D?
To what extent are proposed rules 12-13 through 12-13D
consistent with industry practices? How are our proposed amendments
different? Are there other industry practices that we should include in
our proposal with respect to the disclosure of derivative investments?
The schedules to rules 12-13 through 12-13D use the term
``description'' to require funds to disclose the information sufficient
for a user of financial information to identify the investment. Should
the instructions to any of those rules be enhanced or modified to
clarify what is meant by the term ``description?'' If so, how should
these be enhanced or modified?
The schedules to rules 12-13 (Open option contracts
written), 12-13B (Open forward foreign currency contracts), 12-13C
(Open swap contracts), and 12-13D (Other investments) would require
disclosure of the counterparty to the transaction for non-exchange
traded instruments. Should we, as proposed, require disclosure of the
counterparty to certain transactions? Should the exchange or clearing
member be disclosed for exchange-traded derivatives? Are there any
additional counterparty or exchange risks that should be disclosed? If
so, why? Are there any confidentiality or other concerns with requiring
the disclosure of counterparties?
We request comment on our proposed amendments to rule 12-
13 (Open option contracts written). Should we require different or
additional information about these contracts? Should any of the
proposed information requirements be excluded? Is it appropriate to
require disclosure of ``notional amount'' for option contracts? Is this
metric useful to investors? Should we require the disclosures of open
option contracts written to be grouped or subtotaled? For example,
should we require over-the-counter option contracts to be grouped by
counterparty?
As proposed, rule 12-13 would require disclosure of each
option contract with an underlying investment that is an index or
basket of investments whose components are not publicly available on a
Web site and the notional amount of the holding exceeds one percent of
the NAV of the fund. Are there better alternatives to disclose the
underlying investments for an options contract if it consists of a
custom basket of securities? If so, what alternatives and why? To the
extent such indices are proprietary or subject to licensing agreements,
what would be the effect of this requirement? For example, would funds
incur costs for amending licensing agreements? Would index providers be
unwilling to amend existing licensing agreements? If so, how would this
impact funds that make such investments and the marketplace generally?
Are there other concerns about disclosing the components of proprietary
indices? Should we alter this requirement, and if so how? Is our
exceeding one percent of the NAV disclosure threshold appropriate?
Should there be a different disclosure threshold applied to an option
contract's underlying investments? If so, what threshold and why? For
example, should there be a disclosure threshold applied to individual
holdings (e.g., if the notional amount of a single underlying
investment in a custom basket is less than a certain percentage of a
fund's net assets)? Should we use a different percentage for the
disclosure threshold, such as exceeding five percent of the NAV?
Alternatively, would summary disclosure be adequate to inform
investors, similar to instruction 3 of rule 12-12C, which requires
disclosure of the 50 largest issues and any other issue the value of
which exceeded one percent of net asset value of the fund as of the
close of the period? If so, how should such a disclosure be handled? If
the reference asset is a modified version of an index whose components
are publicly available on a Web site as of the fund's balance sheet
date, for example a version that is customized to exclude certain
issuers that the fund is restricted from owning, would requiring a
narrative of those modifications be preferable to funds and investors
rather than requiring each holding of the modified index to be listed?
We request comment on proposed rule 12-13A (Open futures
contracts). Should we require different or additional information about
these contracts? Should any of the proposed information requirements be
excluded? Our proposed rule would require disclosure of notional amount
and value on open futures contracts. Should we require disclosure of
notional amount for futures contracts? Should we require disclosure of
value for futures contracts? Should we require the disclosures of open
futures contracts to be grouped or subtotaled? If so, how? For example,
should we require open futures contracts to be organized by country of
issuance?
We request comment on proposed rule 12-13B (Open forward
foreign currency contracts). Should we require different or additional
information about these contracts? Should any of the proposed
information requirements be excluded? Rule 12-13B, as proposed, is
limited to forward foreign currency contracts. Are there other types of
forwards that should be addressed in this section that would not
otherwise be presented as other derivative investments, such as swaps?
Should we require the disclosures of open forward foreign currency
contracts to be grouped or subtotaled? If so, how? For example, should
we require open forward foreign currency contracts to be organized by
currency or type of transaction (e.g., purchased or sold U.S. dollars)?
We request comment on proposed rule 12-13C (Open swap
contracts). Should we require different or additional information about
these contracts? Should any of the proposed information requirements be
excluded? Instruction 1 to proposed rule 12-13C requires the schedule
to be organized by descriptive title (e.g., credit default swaps,
interest rate swaps). Should we require additional subgrouping of the
schedules beyond what is already required? For example, should we
[[Page 33621]]
require over-the-counter swaps to be grouped by counterparty?
Instruction 3 of proposed rule 12-13C contains examples of
information that could be included for credit default swaps, interest
rate swaps, and total return swaps. Is the example contained in
proposed rule 12-13C adequate? Is there any other information that
should be disclosed as part of the description for credit default
swaps, interest rate swaps, and total return swaps? Are there other
types of swaps that should be included as examples within proposed rule
12-13C? If so, what information should be included in the example?
As proposed, rule 12-13C would require disclosure of each
investment with a referenced asset that is an index whose components
are not periodically publicly available on a Web site and the notional
amount of the holding exceeds one percent of the NAV of the fund. Are
there better alternatives to disclose the underlying assets of a swap
if it consists of a custom basket of securities? If so, what
alternative and why? To the extent such indices are proprietary or
subject to licensing agreements, what would be the effect of this
requirement? For example, would funds incur costs for amending
licensing agreements? Would index providers be unwilling to amend
existing licensing agreements? If so, how would this impact funds that
make such investments and the marketplace generally? Are there other
concerns about disclosing the components of proprietary indices? Should
we alter this requirement, and if so how? Is our exceeding one percent
of the NAV disclosure threshold appropriate? Should there be a
different disclosure threshold applied to a swap's referenced assets?
If so, what threshold and why? For example, should there be a
disclosure threshold applied to individual holdings (e.g., if the
notional amount of a single underlying investment in a custom basket is
less than a certain percentage of a fund's net assets)? Should we use a
different percentage for the disclosure threshold, such as exceeding
five percent of the NAV? Alternatively, would summary disclosure be
adequate to inform investors, similar to instruction 3 of rule 12-12C,
which requires disclosure of the 50 largest issues and any other issue
the value of which exceeded one percent of net asset value of the fund
as of the close of the period? If so, how should such a disclosure be
handled? Should we include this disclosure requirement for other
investments? For example, should we require funds to disclose the
referenced asset for futures contracts or forward foreign currency
contracts if their underlying investments are composed of an index or
custom basket of securities?
We request comment on our proposed amendments in rule 12-
13D (Investments other than those presented in rules 12-12, 12-12A, 12-
12B, 12-13, 12-13A, 12-13B, and 12-13C). Should we require different or
additional information about these contracts? Should any of the
proposed information requirements be excluded?
We request comment on our proposed requirements in rules
12-13 through 12-13D that the fund identify investments which cannot be
sold because of restrictions or conditions applicable to the
investment. Is this requirement appropriate? Why or why not? Would this
requirement assist investors and other interested parties with
understanding the marketability of an investment? Why or why not?
We request comment on our proposed requirements in rules
12-13 through 12-13D that the fund identify investments whose fair
value was determined using significant unobservable inputs. Is this
requirement appropriate? Why or why not? Would this requirement assist
investors and other interested parties with understanding risks
associated with valuation?
Should we propose a disclosure relating to ``investments
not readily marketable'' as is currently required by rule 12-13? Why or
why not?
We request comment on our proposed requirements in rules
12-13 through 12-13D that the fund identify investments that are
considered to be illiquid. Is this requirement appropriate? Why or why
not? What are the costs and benefits associated with this requirement?
Will independent accountants be able to audit this disclosure?
We request comment on our proposed disclosures based on
cost for Federal income tax purposes under proposed rule 12-12A and
rules 12-13 through 12-13D. Do these disclosures provide meaningful
information for investors in addition to tax basis disclosures required
under U.S. GAAP? What are the costs and benefits associated with
providing this disclosure? Should our proposed disclosures be reported
in a separate stand-alone disclosure or, as proposed, as a note to each
separate schedule? Should we eliminate the current disclosure
requirement to present tax-basis cost and unrealized appreciation and
depreciation in both semi-annual and annual shareholder reports? Why or
why not? As an alternative, should we make the tax-basis disclosure an
annual requirement?
3. Amendments to Rules 12-12 Through 12-12C
While we are not proposing changes to the schedules for rules 12-
12, 12-12A, and 12-12C, we are proposing certain additional rule
instructions that would include new disclosures, as well as certain
clarifying changes, including renumbering several of the schedules.
We are proposing several modifications to the instructions to rule
12-12, the rule concerning disclosure of investments in securities of
unaffiliated issuers. We are proposing to modify instruction 2 to rule
12-12 (and the corresponding instructions to proposed rules 12-12A, 12-
12B, 12-13D, and 12-14) which would require funds to categorize the
schedule by type of investment, the related industry, and the related
country, or geographic region.\239\ U.S. GAAP requires investment
companies that are nonregistered investment partnerships to categorize
investments in securities by type, country or geographic region, and
industry.\240\ In order to provide more transparency into the industry
and the country or geographic region of a fund's investments in
securities, we believe that the disclosures provided by funds should
provide investors with the same categorization as nonregistered
investment partnerships. We also believe that disclosure of both the
industry and the country or geographic region would be particularly
beneficial for investors in global and international funds, where
currently funds are only required to categorize their schedule by
industry, country, or geographic region, as it would provide additional
transparency into the investments owned by the fund.
---------------------------------------------------------------------------
\239\ See proposed rule 12-12, n.2 of Regulation S-X; see also
proposed rules 12-12A, n.2; 12-12B, n.2; 12-13D, n.2; and 12-14, n.2
of Regulation S-X.
\240\ See ASC 946-210-50-6, Financial Services--Investment
Companies (``ASC 946'').
---------------------------------------------------------------------------
In order to provide more transparency to a fund's investments in
debt securities, we are proposing an instruction to rule 12-12
requiring the fund to indicate the interest rate or preferential
dividend rate and maturity rate for certain enumerated debt
instruments.\241\ When disclosing the interest rate for variable rate
securities, we are proposing that the fund describe the referenced rate
and spread.\242\ In proposing disclosures for variable rate securities,
we considered other alternatives, such as period-end interest rate
(e.g. the investment's interest rate in effect at the end of the
period).
[[Page 33622]]
However, we believe that disclosure of both the referenced rate and
spread allow investors to better understand the economics of the fund's
investments in variable rate debt securities, such as the effect of a
change in the reference rate on the security's income. This proposal is
intended to result in more consistency across funds in disclosures of
the interest rate for variable rate securities. For securities with
payments-in-kind, we are proposing that the fund provide the rate paid
in-kind in order to provide more transparency to investors when the
fund is generating income that is not paid in cash.\243\
---------------------------------------------------------------------------
\241\ See proposed rule 12-12, n.4 of Regulation S-X.
\242\ See id.
\243\ Id.
---------------------------------------------------------------------------
Our proposal would modify the current instruction to rule 12-12
\244\ that requires a fund to identify each issue of securities held in
connection with open put or call option contracts and loans for short
sales, by adding the requirement to also indicate where any portion of
the issue is on loan.\245\ We believe that this disclosure would
increase the transparency of the fund's securities lending activities.
We are also proposing to modify current instruction 3 of rule 12-12
concerning the organization of subtotals for each category of
investments, making the instructions consistent with those in proposed
rule 12-12B (current rule 12-12C), Summary schedule of investments in
securities of unaffiliated issuers.\246\
---------------------------------------------------------------------------
\244\ See rule 12-12, n.7 of Regulation S-X.
\245\ See proposed rule 12-12, n.11 of Regulation S-X; see also
proposed rule 12-12B, n.14 of Regulation S-X.
\246\ See rule 12-12, n.3 of Regulations S-X; see also proposed
rule 12-12B, n.2 of Regulation S-X.
---------------------------------------------------------------------------
As in our proposed derivatives disclosures,\247\ in order to
increase transparency into the observability of inputs used in
determining the value of individual investments, we are adding the
requirement for funds to disclose those investments whose fair value
was determined using significant unobservable inputs.\248\ Here, as in
our proposed derivatives disclosures, we would expect funds to identify
each investment categorized in Level 3 of the fair value hierarchy in
accordance with ASC Topic 820. We are also extending this requirement
to proposed rules 12-12A and 12-12B.\249\
---------------------------------------------------------------------------
\247\ See proposed rules 12-13, n.7; 12-13A, n.5; 12-13B, n.3;
12-13C, n.6; and 12-13D, n.7 of Regulation S-X.
\248\ See proposed rule 12-12, n.9 of Regulation S-X.
\249\ See proposed rules 12-12A, n.6 and 12-12B, n.12 of
Regulation S-X.
---------------------------------------------------------------------------
As in proposed rules 12-13 through 12-13D,\250\ proposed
instruction 10 to rule 12-12 would contain a requirement to identify
each issue of illiquid securities.\251\ Like other proposed rules, we
believe that this requirement would provide investors with greater
transparency and understanding of the liquidity of a fund's
investments.\252\
---------------------------------------------------------------------------
\250\ See proposed rules 12-13, n.8; 12-13A, n.6; 12-13B, n.4;
12-13C, n.7; and 12-13D, n.8 of Regulation S-X.
\251\ See proposed rule 12-12, n.10 of Regulation S-X.
\252\ See supra note 206 and accompanying text.
---------------------------------------------------------------------------
Likewise, we are proposing several modifications to rule 12-12A
regarding the presentation of securities sold short, in order to
conform the instructions to proposed rule 12-12.\253\
---------------------------------------------------------------------------
\253\ Instruction 2 would require the fund to organize the
schedule in rule 12-12A in the same manner as is required by
instruction 2 of rule 12-12. See proposed rule 12-12A, n.2.
Instruction 3 would require the fund to identify the interest rate
or preferential dividend rate and maturity rate as required by
instruction 4 of proposed rule 12-12. See proposed rule 12-12A, n.3
of Regulation S-X. Instruction 4 would require the subtotals for
each category of investments be subdivided both by investment type
and business grouping or instrument type, and be shown together with
their percentage value compared to net assets, in the same manner as
is required by proposed instruction 5 of rule 12-12. See proposed
rule 12-12A, n.4 of Regulation S-X. Instruction 6 would require the
fund to identify each issue of securities whose fair value was
determined using significant unobservable inputs. See proposed rule
12-12A, n.6 of Regulation S-X. Instruction 7 would require the fund
to identify each issue of securities held in connection with open
put or call option contracts in the same manner as required by
proposed instruction 11 of rule 12-12. See proposed rule 12-12A, n.7
of Regulation S-X. Instruction 8 would extend rule 12-12's tax basis
disclosure to securities sold short. See proposed rule 12-12A, n.8
of Regulation S-X.
---------------------------------------------------------------------------
Funds are permitted to include in their reports to shareholders a
summary portfolio schedule, in lieu of a complete portfolio schedule,
so long as it conforms with current rule 12-12C (Summary schedule of
investments in securities of unaffiliated issuers).\254\ In order to
maintain numbering consistency and organization throughout the
regulation, we are proposing to rename current rule 12-12C (Summary
schedule of investments in securities of unaffiliated issuers) as rule
12-12B. As in rule 12-12 and 12-12A, we are not proposing to modify the
schedule of proposed rule 12-12B (current rule 12-12C), but again added
similar changes to its instructions.\255\
---------------------------------------------------------------------------
\254\ See rule 6-10(c)(2) of Regulation S-X [17 CFR 210.6-
10(c)(2)]; see also Quarterly Portfolio Holdings Adopting Release,
supra note 19.
\255\ Instruction 2 would add ``type of investment'' to the
current subtotal requirements for the summary schedule. See proposed
rule 12-12B, n.2 of Regulation S-X. Instruction 3 would extend rule
12-12's proposed requirement that funds indicate the interest rate
or preferential dividend rate and maturity rate for certain
enumerated securities. See proposed rule 12-12B, n.3 of Regulation
S-X. Instruction 5 would require for options purchased all
information that would be required by rule 12-13 for written option
contracts. See proposed rule 12-12B, n.5 of Regulation S-X.
Instruction 12 would require the fund to indicate each issue of
securities whose fair value was determined using significant
unobservable inputs. See proposed rule 12-12B, n.12 of Regulation S-
X. Instruction 13 would require the fund to identify illiquid
securities. See proposed rule 12-12B, n.13 of Regulation S-X.
Instruction 14 would extend rule 12-12's requirement that the fund
indicate where any portion of the issue is on loan. See proposed
rule 12-12B, n.14 of Regulation S-X.
---------------------------------------------------------------------------
We request comment on our amendments to proposed rules 12-12
through 12-12B of Regulation S-X:
Are our proposed amendments to rule 12-12 through 12-12B
appropriate? Are there other amendments to rules 12-12 through 12-12B
that should be made to improve disclosures regarding the investments
that would be reported under the rules? If so, what amendments and why?
We request comment on proposed amendments to rule 12-12
(Investments in securities of unaffiliated issuers). For variable rate
securities, we propose to require disclosure of a description of the
reference rate and spread (e.g., USD LIBOR 3-month + 2%). Is this
requirement appropriate? Should we alternatively require disclosure of
the period end interest rate?
We request comment on instruction 2 to proposed rule 12-12
(and the corresponding instructions to rules 12-12A, 12-12B, and 12-14)
which would require funds to categorize the schedule by type of
investment, the related industry, and the related country, or
geographic region. Should we include this instruction in our proposed
rules? What are the costs or benefits associated with such a
requirement?
We request comment our proposed modifications in rules 12-
12 and 12-12B that would require a fund to indicate where any portion
of the issue is on loan. Should we include this requirement in our
proposed rules? Why or why not?
We request comment on instruction 4 to proposed rule 12-
12. Should we require funds to disclose the interest rate or
preferential dividend rate and maturity rate for certain debt
instruments? Are there any types of securities that should (or should
not) be included in instruction 4's list of applicable debt
instruments?
We request comment on our proposal to require a fund to
disclose each issue of illiquid securities. Should we include this
requirement in our proposed rules? Why or why not? Would the fund's
independent accountants be able to audit this disclosure?
We request comment on our proposed requirements in rules
12-12, 12-12A, and 12-12B that the fund identify investments whose fair
value
[[Page 33623]]
was determined using significant unobservable inputs. Is this
requirement appropriate? Why or why not? Would this requirement assist
investors and other interested parties with understanding risks
associated with valuation?
Are our amendments to proposed rules 12-12 through 12-12B
consistent with industry practices? If not, how are our amendments
different and what would be the costs and benefits associated with such
differences? Are there other industry practices that we should include
in our proposal?
4. Investments In and Advances to Affiliates
We are proposing amendments to rule 12-14 (Investments in and
advances to affiliates).\256\ Rule 12-14 requires a fund to make
certain disclosures about its investments in and advances to any
``affiliates'' or companies in which the investment company owns 5% or
more of the outstanding voting securities.\257\ The rule currently
requires that a fund disclose the ``amount of equity in net profit and
loss for the period'' for each controlled company, but does not require
disclosure of realized or unrealized gains or losses. Based upon staff
experience, we believe that the presentation of realized gains or
losses and changes in unrealized appreciation or depreciation would
assist investors with better understanding the impact of each
affiliated investment on the fund's statement of operations. As a
result, we are proposing to modify column C of the schedule to rule 12-
14 to require ``net realized gain or loss for the period,'' \258\ and
column D to require ``net increase or decrease in unrealized
appreciation or depreciation for the period'' for each affiliated
investment.\259\
---------------------------------------------------------------------------
\256\ See proposed rule 12-14 of Regulation S-X.
\257\ See rule 12-14 of Regulation S-X.
\258\ See proposed rule 12-14, column C of Regulation S-X.
Column C of current rule 12-14 requires disclosure of the ``amount
of equity in net profit and loss for the period,'' which is derived
from the controlled company's income statement and does not directly
translate to the impact to a fund's statement of operations. We are
proposing to replace this requirement with ``net realized gain or
loss for the period.''
\259\ See id. at column D.
---------------------------------------------------------------------------
Likewise, in instruction 6(e) and (f), we are proposing to require
disclosure of total realized gain or loss and total net increase or
decrease in unrealized appreciation or depreciation for affiliated
investments in order to correlate these totals to the statement of
operations.\260\ Disclosure of realized gains or losses and changes in
unrealized appreciation or depreciation, in addition to the current
requirement to disclose the amount of income, would allow investors to
understand the full impact of an affiliated investment on a fund's
statement of operations.
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\260\ See proposed rule 12-14, nn.6(e) and (f) of Regulation S-
X.
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Additionally, we are proposing a new instruction 7 in order to make
the categorization of investments in and advances to affiliates
consistent with the method of categorization used in proposed rules 12-
12, 12-12A, and 12-12B.\261\ We are also proposing several other
modifications to the instructions to rule 12-14 in order to, in part,
conform the rule to our proposed disclosure requirements in rules 12-12
and 12-13.\262\
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\261\ See id. at n.7; see also proposed rule 12-12, n.5, 12-12A.
n.4, 12-12B, n.2 of Regulation S-X.
\262\ Instruction 1 would delete the instruction to segregate
subsidiaries consolidated in order to make the disclosures under
rule 12-14 consistent with the fund's balance sheet. See proposed
rule 12-14, at n.1 of Regulation S-X. Instruction 2 would require
the fund to organize the schedule to rule 12-14 in the same manner
as is required by instruction 2 of rule 12-12. See proposed rule 12-
14, at n.2 of Regulation S-X. Instruction 3 would require the fund
to identify the interest rate or preferential dividend rated and
maturity rate, as applicable. See proposed rule 12-14, at n.3 of
Regulation S-X. Instruction 4 would add column F to the columns to
be totaled and update the instruction to state that Column F should
agree with the correlative amount shown on the related balance
sheet. See proposed rule 12-14, at n.4 of Regulation S-X.
Instruction 5 would update the reference to instruction 8 of rule
12-12 and reference to rule 12-13 to reflect the changes in the
numbering of the instructions for those rules. See proposed rule 12-
14, at n.5 of Regulation S-X. Instruction 6(a) and (b) would update
references to column D to reference Column E in order to reflect our
proposed changes to rule 12-14's schedule. See proposed rule 12-14,
at nn.6(a) and (b) of Regulation S-X. Instruction 6(d), which
proposes to add clarifying language from instruction 7 of rule 12-
12, would provide the fund with more detail on the definition of
non-income producing securities. See proposed rule 12-14, at n.6(d)
of Regulation S-X. Instruction 8 would require the fund to identify
each issue of securities whose fair value was determined using
significant unobservable inputs. See proposed rule 12-14, at n.8 of
Regulation S-X. Instruction 9 would require the fund to identify
illiquid securities. See proposed rule 12-14, at n.9 of Regulation
S-X. Instruction 10 would require the fund to indicate each issue of
securities held in connection with open put or call option
contracts, loans for short sales, or where any portion of the issue
is on loan, as required by note 11 to rule 12-12. See proposed rule
12-14, at n.10 of Regulation S-X. Instruction 11 would extend rule
12-12's tax basis disclosure to investments in and advances to
affiliates. See proposed rule 12-14, at n.11 of Regulation S-X.
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We request comment on our proposed amendments to rule 12-14 of
Regulation S-X:
Are our proposed amendments to rule 12-14 appropriate? Are
there other amendments to rule 12-14 that should be made to improve
disclosures regarding the investments that would be reported under the
rule? If so, what amendments and why?
In proposed rule 12-14, we are no longer requiring
information about the fund's equity in the profit or loss of each
controlled portfolio company. Instead, we are proposing to require the
realized gain or loss and change in unrealized appreciation or
depreciation for all affiliated investments. Is this change
appropriate? Is it still important to understand the equity in the
profit or loss of each controlled company in addition to the controlled
portfolio company's effect on the fund's statement of operations? Would
the presentation of realized gains or losses and changes in unrealized
appreciation or depreciation assist investors with better understanding
the impact of each affiliated investment on the fund's statement of
operations? Why or why not? Are there other changes to the disclosure
of affiliated transactions that would better assist investors with
understanding the impact of affiliated investments on the fund's
statement of operations?
In addition to those discussed above, what are the costs
and benefits associated with the proposed changes? Would the proposed
changes under rule 12-14 reduce any burdens on filers? If so, how?
Are our amendments to proposed rule 12-14 consistent with
industry practices? If not, how are our amendments different? Are there
other industry practices that we should include in our proposal with
respect to the disclosure of affiliated investments?
5. Form and Content of Financial Statements
Finally, we are proposing revisions to Article 6 of Regulation S-X,
which prescribes the form and content of financial statements filed for
funds. Many of the revisions we are proposing today are intended to
conform Article 6 with our proposed changes to Article 12 and update
other financial statement requirements.\263\ As part of these changes,
we are proposing to modify the title and description of Article 6 from
``Registered Investment Companies'' to ``Registered Investment
Companies and Business Development Companies'' to clarify that BDCs are
subject to Article 6 of Regulation S-X.\264\ This does not
[[Page 33624]]
change existing requirements for BDCs.\265\
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\263\ We are also proposing to amend the reference in rule 6-
03(c) to Sec. 210.3A-05, as that section of Regulation S-X was
rescinded in 2011. See Rescission of Outdated Rules and Forms, and
Amendments to Correct References, Securities Act Release No. 33-9273
(Nov. 4, 2011) [76 FR 71872 (Nov. 21, 2011)].
\264\ See proposed rules 6-01; 6-03; 6-03(c)(1); 6-03(d); 6-
03(i); 6-04; and 6-07 of Regulation S-X.
A BDC is a closed-end fund that is operated for the purpose of
making investments in small and developing businesses and
financially troubled businesses and that elects to be regulated as a
BDC. See section 2(a)(48) of the Investment Company Act (defining
BDCs). BDCs are not subject to periodic reporting requirements under
the Investment Company Act, although they must comply with periodic
reporting requirements under the Exchange Act.
\265\ See Instruction 1.a to Item 6.c of Form N-2 (``A business
development company should comply with the provisions of Regulation
S-X generally applicable to registered management investment
companies. (See section 210.3-18 [17 CFR 210.3-18] and sections
210.6-01 through 210.6-10 of Regulation S-X [17 CFR 210.6-01 through
210.6-10]).'').
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In order to allow a more uniform presentation of investment
schedules in a fund's financial statements, we are proposing to rescind
subparagraph (a) of rule 6-10 under Regulation S-X, regarding which
schedules are to be filed.\266\ We believe that a fund and its
consolidated subsidiaries should present their consolidated investments
for each applicable schedule, without indicating which are owned
directly by the fund or which are owned by the consolidated
subsidiaries.
---------------------------------------------------------------------------
\266\ See proposed rule 6-10 of Regulation S-X.
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Moreover, current rule 6-10(a) provides that if the information
required by any schedule (including the notes thereto) is shown in the
related financial statement or in a note thereto without making such
statement unclear or confusing, that procedure may be followed and the
schedule omitted.\267\ We believe that some funds may have interpreted
this guidance as allowing presentation of some Article 12 schedules
(e.g., rules 12-13 and 12-14) in the notes to the financial statements,
as opposed to immediately following the schedules required by rules 12-
12, 12-12A, and 12-12C, and are therefore proposing to eliminate rule
6-10(a). In light of the increased use of derivatives by funds, we
believe that all schedules required by rule 6-10 should be presented
together within a fund's financial statements, and not in the notes to
the financial statements. We recognize that our proposal would change
current practice for some funds but believe that, coupled with more
detailed disclosure rules for derivatives, this amendment would provide
more consistent disclosure and improve the usability of financial
statements for investors.\268\
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\267\ See rule 6-10 of Regulation S-X.
\268\ Additionally, in order to conform proposed rule 6-10(b)
with the new requirements under Article 12, we added schedules
corresponding to our proposed new schedules of derivatives
investments.
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We are also proposing changes to rules 6-03 and 6-04 to
specifically reference the investments required to be reported on
separate schedules in amended Article 12.\269\ Additionally, we are
proposing to eliminate current rule 6-04.4, which requires disclosure
of ``Total investments'' on the balance sheet under ``Assets,''
recognizing that investments reported under proposed rules 12-13A
through 12-13D could potentially be presented under both assets and
liabilities on the balance sheet.\270\ For example, a fund may hold a
forward foreign currency contract with unrealized appreciation and a
different forward foreign currency contract with unrealized
depreciation. The fund presents on its balance sheet an asset balance
for the contract with unrealized appreciation and a liability balance
for the contract with unrealized depreciation. Totaling the amounts of
investments reported under assets could be misleading to investors in
this example, or in other examples where a fund holds derivatives in a
liability position (e.g., unrealized depreciation on an interest rate
swap contract). A ``Total investments'' amount in the Assets section of
the fund's balance sheet would include the fund's investments in
securities and derivatives that are in an appreciated position, but it
would not include the unrealized depreciation on the interest rate swap
contract, which would be classified under the Liabilities section of
the fund's balance sheet. Given the increasing use of derivatives by
funds, we believe eliminating current rule 6-04.4 would provide more
complete information to investors. We are also proposing a
corresponding change in rule 6-03(d) to remove the reference to ``total
investments reported under [rule 6-04.4].'' \271\
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\269\ See proposed rules 6-03(d), 6-04.3 and 6-04.9 of
Regulation S-X.
\270\ See rule 6-04.4 of Regulation S-X [17 CFR 210.6-04.4].
\271\ See proposed rule 6-03(d) of Regulation S-X.
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We are also proposing to amend rule 6-04 to refer individually to
our derivatives disclosures in proposed rules 12-13A through 12-
13C.\272\ As is currently the case, these proposed amendments are not
meant to require gross presentation where netting is allowed under U.S.
GAAP.\273\ For example, if a fund held a forward foreign currency
contract which had unrealized appreciation and another forward foreign
currency contract which had unrealized depreciation, the fact that
forward foreign currency contracts are mentioned in proposed rules 6-
04.3(b) and 6-04.9(d) is not meant to require both contracts to be
presented gross on the balance sheet if netting were allowed under U.S.
GAAP.
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\272\ See proposed rules 6-04.3; 6-04.6; and 6-04.9 of
Regulation S-X.
\273\ See ASC 210, Balance Sheet (``ASC 210'') and ASC 815.
---------------------------------------------------------------------------
Proposed rule 6-05.3 would also specifically require presentation
of items relating to investments other than securities in the notes to
financial statements.\274\ Current rule 6-05.3 only requires
presentation in the notes to financial statements of disclosure
required by rules 6-04.10 through 6-04.13, which include information
relating to securities sold short and open option contracts
written.\275\ Our proposal would also amend rule 6-05.3 to require fund
financial statements to reflect all unaffiliated investments other than
securities presented on separate schedules under Article 12.\276\
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\274\ See proposed rule 6-05.3 of Regulation S-X.
\275\ See rule 6-05.3 of Regulation S-X [17 CFR 210.6-05.3].
\276\ See proposed rule 6-05.3 of Regulation S-X.
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We are also proposing to add new disclosure requirements that are
designed to increase transparency to investors about certain
investments and activities. First, we are proposing to add new
subsection (m) to rule 6-03 that would require funds to make certain
disclosures in connection with a fund's securities lending activities
and cash collateral management.\277\ Specifically, we are proposing to
require disclosure of (1) the gross income from securities lending,
including income from cash collateral reinvestment; (2) the dollar
amount of all fees and/or compensation paid by the registrant for
securities lending activities and related services, including borrower
rebates and cash collateral management services; (3) the net income
from securities lending activities; (4) the terms governing the
compensation of the securities lending agent, including any revenue
sharing split, with the related percentage split between the registrant
and the securities lending agent, and/or any fee-for-service, and a
description of services included; (5) the details of any other fees
paid directly or indirectly, including any fees paid directly by the
registrant for cash collateral management and any management fee
deducted from a pooled investment vehicle in which cash collateral is
invested; and (6) the monthly average of the value of portfolio
securities on loan.\278\ We believe that these proposed disclosures
would allow investors to better understand the income generated from,
as well as the expenses associated with, securities lending activities.
Second, our proposal would also amend rule 6-07 to require funds to
make a separate disclosure for income from
[[Page 33625]]
non-cash dividends and payment-in-kind interest on the statement of
operations.\279\ Our proposed amendment to rule 6-07 is intended to
increase transparency for investors in order to allow them to better
understand when fund income is earned, but not received, in the form of
cash.
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\277\ See supra note 71 and accompanying text.
\278\ See proposed rule 6-03(m) of Regulation S-X.
\279\ See proposed rule 6-07.1 of Regulation S-X.
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We are proposing to amend rule 6-07.7(a) in order to conform
statement of operations disclosures of the net realized gains or losses
from investments to include our additional derivatives disclosures in
proposed rules 12-13A through 12-13C.\280\ Likewise, we are proposing
similar changes to proposed 6-07.7(c) (current rule 6-07.7(d)) in order
to conform statement of operations disclosures of the net increase or
decrease in the unrealized appreciation or depreciation of investments
to include our new derivatives disclosures.\281\ We recognize that
Regulation S-X, which organizes net realized gains and losses (and net
increases or decreases in the unrealized appreciation or depreciation)
by investment type, diverges from our approach in proposed Form N-PORT,
which organizes net realized gain or loss and net change in unrealized
appreciation or depreciation attributable to derivatives by each
instrument's primary underlying risk exposure.\282\ While we believe
that organizing these disclosures by exposure type, which are derived
from ASC Topic 815, are appropriate for Form N-PORT; we also believe
that it is more appropriate for statement of operations disclosures to
be organized by major types of investment transactions, as doing so
would be consistent with the types of investments requiring separate
schedules in Article 12 and allow investors to relate the disclosures
in the schedule of investments with the statement of operations.\283\
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\280\ See proposed rule 6-07.7(a) of Regulation S-X.
\281\ See proposed rule 6-07.7(c) of Regulation S-X.
\282\ See Item B.5.c of proposed Form N-PORT.
\283\ See ASC 815.
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We are also proposing to eliminate Regulation S-X's requirement for
specific disclosure of written options activity under current rule 6-
07.7(c).\284\ This provision was adopted prior to FASB adopting
disclosures generally applicable to derivatives, including written
options, now required by ASC Topic 815.\285\ We are proposing that the
requirement for specific disclosures for written options activity be
removed because they are generally duplicative of the requirements of
ASC Topic 815, which include disclosure of the fair value amounts of
derivative instruments, gains and losses on derivative instruments, and
information that would enable users to understand the volume of
derivative activity.\286\
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\284\ See rule 6-07.7(c) of Regulation S-X [17 CFR 210.6-
07.7(c)].
\285\ See ASC 815.
\286\ Id. Rule 6-07.7(c) requires disclosure in a note to the
financial statements of the number and associated dollar amounts as
to option contracts written: (i) At the beginning of the period;
(ii) during the period; (iii) expired during the period; (iv) closed
during the period; (v) exercised during the period; (vi) balance at
end of the period. The balances at the beginning of the period and
end of the period are available in the prior period-end and current
period-end schedules of open option contracts written, respectively.
By eliminating the written options roll-forward, investors would no
longer have information regarding the number of contracts expired,
closed, or exercised during the period. However, disclosures
required by ASC 815 provide gains and losses on derivative
instruments, including written options, along with information that
would enable users to understand the volume of derivative activity
during the period.
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We are also proposing to eliminate the exception in Schedule II of
current rule 6-10 which does not require reporting under current rule
12-13 if the investments, at both the beginning and end of the period,
amount to one percent or less of the value of total investments.\287\
We believe that it is appropriate to propose eliminating this
exception, because a fund may have significant notional amount in its
portfolio that could be valued at one percent or less of the value of
total investments. Accordingly, removing this exception would provide
more transparency to investors regarding a fund's derivatives activity.
---------------------------------------------------------------------------
\287\ See rule 6-10(c)(1) Schedule II of Regulation S-X; see
also proposed rule 6-10(b)(1) Schedule II of Regulation S-X.
---------------------------------------------------------------------------
We request comment on our proposed changes to Article 6 of
Regulation S-X.
Are our proposed amendments to Article 6 of Regulation S-X
appropriate? If not, which amendments are not appropriate and why? Are
there other amendments to Article 6 of Regulation S-X that we should
propose? If so, what amendments and why?
Are there alternative methods of presentation of
derivatives that we should consider, rather than the proposed
requirement that all schedules be presented in the same location? If
so, what method and why is it preferable?
As we discussed above, among others, our basis for
proposing to eliminate rule 6-10(a) was our belief that a fund and its
consolidated subsidiaries should present their consolidated investments
for each applicable schedule, without indicating which are owned
directly by the fund and which are owned by the consolidated
subsidiaries. Is this proposed change appropriate? Why or why not?
Should we require different or additional information about
consolidated investments?
We request comment on our proposal to eliminate rule 6-
04.4, which requires disclosure of ``Total investments'' on the balance
sheet under ``Assets,'' and the corresponding reference to rule 6-04.4
in rule 6-03(d). Are these proposed changes appropriate? Why or why
not? Would eliminating current rule 6-04.4 provide more complete
information to investors?
We request comment on our proposal to amend rule 6-05.3 to
specifically require presentation of items relating to investments
other than securities in the notes to the financial statements, as well
as require fund financial statements to reflect all unaffiliated
investments presented on separate schedules under Article 12. Are our
proposed changes appropriate? Why or why not?
Would the disclosure required under proposed rule 6.03(m)
concerning income and expenses in connection with securities lending
activities provide meaningful information to investors or other
potential users? For example, would the disclosures regarding
compensation and other fee and expense information relating to the
securities lending agent and cash collateral manager be useful to fund
boards in evaluating their securities lending arrangements? Would these
disclosures be sufficient for this purpose, or would additional
information be necessary, for example, to put the fee and expense
information in context (e.g., the nature of the services provided by
the securities lending agent and cash collateral manager)? Should the
Commission instead require that these or other similar disclosures, be
provided elsewhere in the fund's financial statements (e.g., the
Statement of Operations), or provided as part of other disclosure
documents (e.g., the Statement of Additional Information) or reporting
forms (e.g., proposed Form N-CEN)? Why or why not?
Is the proposed disclosure under rule 6-07.1 for non-cash
dividends and payment-in-kind interest on the statement of operations
meaningful to investors or other potential users of the fund's
financial statements? Should all non-cash interest be disclosed,
including amortization and accretion, or should just payment-in-kind
interest be disclosed?
Do our proposed amendments to rules 6-07.7(a) and 6-
07.7(c) omit any classifications of gains or loss or changes in
unrealized appreciation or
[[Page 33626]]
depreciation that should be disclosed? If so, which categories and why?
We request comment on our proposal to eliminate Regulation
S-X's requirements for specific disclosure of written options activity
under rule 6-07.7(c). Does the current requirement for specific
disclosure of written options activity under rule 6-07.7(c) provide a
user of financial statements with sufficient incremental benefit to
merit retaining this disclosure in addition to the disclosures required
by ASC Topic 815? Why or why not?
Proposed rule 6-10(b) would no longer allow funds to omit
the schedule of investments other than securities if the investments,
other than securities, at both the beginning and end of the period
amount to one percent or less of the value of total investments. Is
this change appropriate? Are there any costs associated with this
change? If so, what are they?
Are our amendments to Article 6 of Regulation S-X
generally consistent with industry practices, except where specifically
noted in the discussion above? If not, how are our amendments
different? Are there other industry practices that we should include in
our proposal with respect to the form and content of financial
statements?
D. Option for Web Site Transmission of Shareholder Reports
1. Overview
The Commission is proposing new rule 30e-3 under the Investment
Company Act, which would, if adopted, permit, but not require, a fund
to satisfy requirements under the Act and rules thereunder to transmit
reports to shareholders if the fund makes the reports and certain other
materials accessible on its Web site. Reliance on the rule would be
subject to certain conditions, including conditions relating to (1) the
availability of the shareholder report and other required information,
(2) prior shareholder consent, (3) notice to shareholders of the
availability of shareholder reports, and (4) shareholder ability to
request paper copies of the shareholder report or other required
information.
This new option is intended to modernize the manner in which
periodic information is transmitted to shareholders. We believe it
would improve the information's overall accessibility while reducing
burdens such as printing and mailing costs borne by funds, and
ultimately, by fund shareholders. As described below, today's proposal
draws on the Commission's experience with use of the Internet as a
medium to provide documents and other information to investors. The
proposal is supported by recent Commission investor testing efforts and
other empirical research concerning investors' preferences about report
transmission methods and use of the Internet for financial and other
purposes generally. At the same time, the Commission recognizes that
empirical research, discussed below, demonstrates that some investors
continue to prefer to receive paper reports. The proposal therefore
incorporates a set of protections intended to avoid investor confusion
and protect the ability of investors to choose their preferred means of
communication.
Reliance on the rule would be optional. Funds that do not maintain
Web sites or that otherwise wish to transmit shareholder reports in
paper or pursuant to the Commission's existing electronic delivery
guidance would continue to be able to satisfy transmission requirements
by those transmission methods. Furthermore, under the rule as proposed,
a fund relying on the rule to satisfy shareholder report transmission
obligations with respect to certain shareholders would not be precluded
from transmitting shareholder reports to other shareholders pursuant to
the Commission's electronic delivery guidance. We expect that funds
would continue to rely on the Commission's guidance to electronically
transmit reports to shareholders who have elected to receive reports
electronically, and rely on the rule with respect to shareholders who
have not so elected (i.e., those who currently receive printed
shareholder reports by mail).
2. Discussion
Funds are generally required to transmit reports to shareholders on
a semiannual basis.\288\ Historically, these reports have been printed
and mailed to shareholders. With advances in technology and, in
particular, the increasing use of the Internet as a medium through
which information, financial or otherwise, is made accessible, we have
previously issued guidance describing the circumstances under which
transmission of disclosure documents may be effected through electronic
means.\289\ Under that guidance, funds may transmit documents
electronically provided that a number of conditions related to
shareholder notice, access, and evidence of delivery are met.\290\
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\288\ See section 30(e) of the Investment Company Act [15 U.S.C.
80a-29(e)]; rule 30e-1 (reports to stockholders of management
companies); rule 30e-2 (reports to shareholders of unit investment
trusts substantially all the assets of which consist of securities
issued by a management company).
\289\ See generally Use of Electronic Media for Delivery
Purposes, Investment Company Act Release No. 21399 (Oct. 6, 1995)
[60 FR 53458 (Oct. 13, 1995)] (``1995 Release'') (providing
Commission views on the use of electronic media to deliver
information to investors, with a focus on electronic delivery of
prospectuses, annual reports to security holders and proxy
solicitation materials under the federal securities laws); Use of
Electronic Media by Broker-Dealers, Transfer Agents, and Investment
Advisers for Delivery of Information, Investment Company Act Release
No. 21945 (May 9, 1996) [61 FR 24644 (May 15, 1996)] (``1996
Release'') (providing Commission views on electronic delivery of
required information by broker-dealers, transfer agents and
investment advisers); Use of Electronic Media, Investment Company
Act Release No. 24426 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)]
(``2000 Release'') (providing updated interpretive guidance on the
use of electronic media to deliver documents on matters such as
telephonic and global consent; issuer liability for Web site
content; and legal principles that should be considered in
conducting online offerings).
More recently, the Division of Investment Management published
guidance stating the staff's position that electronic delivery of a
notice pursuant to rule 19a-1 under the Investment Company Act,
consistent with the Commission's electronic delivery guidance, would
satisfy the purposes and policies underlying the rule. See Division
of Investment Management, Securities and Exchange Commission,
Shareholder Notices of the Sources of Fund Distributions--Electronic
Delivery, IM Guidance Update No. 2013-11 (Nov. 2013), available at
http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-11.pdf (``2013-11 IM Guidance Update'').
\290\ See id.
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Recent investor testing and Internet usage trends have highlighted
that preferences about electronic delivery of information have evolved,
and that many investors would prefer enhanced availability of fund
information on the Internet. For example, investor testing sponsored by
the Commission and conducted in 2011 \291\ suggested that an
[[Page 33627]]
investor looking for a fund's annual report is most likely to seek it
out on the fund's Web site, rather than request it by mail or phone or
by retrieving it from the Commission's EDGAR system.\292\ Many
investors indicated that they would prefer that fund information be
made available in both electronic and print versions, with a plurality
of respondents preferring electronic transmission by email with the
option to easily request a print copy of a particular report, though a
significant minority indicated that they would still prefer to receive
a print copy through the mail.\293\
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\291\ In 2011, the Commission engaged a consultant to conduct
investor testing regarding shareholder reports. We have placed the
consultant's report concerning that testing (``Investor Testing of
Mutual Fund Shareholder Reports'') in the comment file for the
proposed rule (available at www.sec.gov/comments/s7-08-15/s70815.shtml). Separately, Commission staff prepared a study of
investor financial literacy pursuant to section 917 of the Dodd-
Frank Act. Materials relating to this study, including the staff's
report, are available at http://www.investor.gov/publications-research-studies/sec-research.
Also, in 2007, the Commission engaged a consultant to conduct
focus group interviews and a telephone survey concerning investors'
views and opinions about various disclosure documents filed by
companies, including mutual funds. We have placed the consultant's
report concerning the focus group testing and related transcripts in
the comment file for the proposed rule (available at www.sec.gov/comments/s7-08-15/s70815.shtml). The consultant's report concerning
the telephone survey (``Telephone Survey Report'') is available at
http://www.sec.gov/pdf/disclosuredocs.pdf. Respondents to the
telephone survey who had received a mutual fund shareholder report,
for example, were asked about their preferences for a mode of
delivery of the information contained in a shareholder report, and
``an Internet Web site'' received the highest ratings (with 49%
rating it 7 or above on a 10 point scale), compared with 42% of
respondents who rated ``a paper copy'' 7 or above. See Telephone
Survey Report at 96.
\292\ See Investor Testing of Mutual Fund Shareholder Reports,
supra note 291, at 72. When asked ``If you wanted to see a mutual
fund annual report, how would you access/obtain the report? Please
check all that apply.,'' 59.5% of respondents selected ``look on the
mutual fund company's Web site,'' compared with 33.3% who selected
``ask my financial advisor,'' 24.5% who selected ``request by
mail,'' 21.0% who selected ``do a web search (Google, etc.),'' 18.8%
who selected ``request by phone,'' 12.3% who selected ``check with
my employer's HR or employee benefits representative,'' 11.3% who
selected ``look on the SEC's Web site or on EDGAR,'' and 2.3% who
selected ``other.'' Id.
\293\ See id. at 185. When asked ``How would you prefer to
receive information about your mutual fund investments?,'' 25.8% of
respondents selected ``online through a link provided in an email,
with the option to request a print version,'' compared with 19.5% of
respondents who selected ``in print through the mail, with a web
address provided for an online version,'' 18.5% who selected
``online through a link provided in an email,'' 16.5% who selected
``a print summary of the key information through the mail, with a
web address provided for a complete online version,'' 13.8% who
selected ``in print through the mail,'' and 6.0% who selected ``I
don't have a preference.'' Id.
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In the time since this investor testing was conducted, access to
and use of the Internet has continued to increase significantly,
including among demographic groups that have previously been less apt
to use the Internet. For example, a study conducted by the Pew Research
Center's Internet & American Life Project in 2013 found that only 15%
of American adults ages 18 and older do not use the Internet or email--
falling from 26% in 2011, when our investor testing was conducted, and
from 39% a decade before in 2001.\294\ These researchers also found
that for the first time in 2012, more than half of adults over the age
of 64 used the Internet, a figure that climbed to 59% in 2013.\295\
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\294\ See Pew Research Center, Who's Not Online and Why, at 2
(Sept. 25, 2013), available at http://pewinternet.org/Reports/2013/Non-internet-users.aspx.
\295\ See Pew Research Center, Older Adults and Technology Use,
at 1 (Apr. 3, 2014), available at http://www.pewinternet.org/2014/04/03/older-adults-and-technology-use/.
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These trends have also extended to use of the Internet for
financial purposes. For example, a recent survey by the Investment
Company Institute found that in 2014, 94% of U.S. households owning
mutual funds had Internet access (up from 68% in 2000), with widespread
use among various age groups, education levels and income levels.\296\
The year before, the Investment Company Institute found that 82% of
U.S. households owning mutual funds used the Internet for financial
purposes.\297\
---------------------------------------------------------------------------
\296\ See 2015 ICI Fact Book, at 129, supra note 4. For example,
the study found the following with respect to Internet access in
mutual fund owning households: (1) Head of household age 65 or
older, 86% have access, (2) education level of high school diploma
or less, 84% have access, and (3) household income of less than
$50,000, 84% have access.
\297\ See 2014 Investment Company Fact Book, Investment Company
Institute, at 115-17, available at http://www.ici.org/pdf/2014_factbook.pdf.
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Given the evolving preferences and trends in Internet usage, in
particular with regard to the delivery of financial information, we
believe that it is appropriate to propose a rule that would permit the
Web site transmission of fund shareholder reports, while maintaining
the ability of shareholders who prefer to receive reports in paper to
receive reports in that form. Funds and their shareholders would
benefit from the reductions in related printing and mailing costs.
Also, the rule, as proposed, would consolidate current and historical
portfolio holdings information in one location (i.e., a particular Web
site, as opposed to having some information on one Web site and other
information on EDGAR), whereas currently, funds are not required to
transmit or otherwise make accessible to investors holdings information
as to the first and third fiscal quarters.\298\
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\298\ Currently, funds report their complete portfolio holdings
as of the first and third fiscal quarters on Form N-Q, which is
accessible only through EDGAR. There is no separate requirement for
funds to transmit or otherwise make this information available to
shareholders.
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Although we believe the proposed rule would benefit many investors,
we recognize that there are concerns associated with how some investors
may be affected. For example, as discussed above, investor testing
suggests that a significant minority of investors prefer to receive
paper reports and that some demographic groups of investors may be less
likely to use the Internet. Some of these investors might not fully
understand the actions they would need to take under the proposed rule
to continue to receive their reports in paper. We believe that it is
critical that these investors continue to receive disclosure in a means
that is convenient and accessible for them. In addition, there is a
risk that even some investors that prefer to use the Internet might be
less likely to review reports electronically than they would in paper.
We also believe it is critical that the proposed rule communicate the
importance of the information that would be made available on the Web
site.
Accordingly, as discussed below, the proposed rule would include
certain safeguards for investors who wish to continue to receive
shareholder reports in paper, by requiring prior consent of investors,
and continuing to make shareholder reports and other required
information available in paper upon request. The proposed rule would
also include requirements intended to emphasize the importance of the
information available on the Web site. These protections are intended
to maintain the ability of investors who prefer to receive reports in
paper to continue to do so without confusion, as well as to provide to
investors clear and prominent printed notifications each time a new
shareholder report is made available online. We request comment below
on the potential concerns articulated above, as well as the steps we
are proposing to address them while capturing the potential benefits
for investors and funds of electronic communication.
3. Rule 30e-3
As proposed, new rule 30e-3 would provide that a fund's annual or
semiannual report to shareholders would be considered transmitted to a
shareholder of record if certain conditions set forth in the rule are
satisfied as to (a) availability of the report and other materials, (b)
shareholder consent, (c) notice to shareholders, and (d) delivery of
materials upon request of the shareholder.\299\ As discussed below,
these conditions are generally consistent with similar conditions in
other rules adopted by the Commission, including its rules regarding
the use of a summary prospectus, internet delivery of proxy materials,
and ``householding'' of certain disclosure documents.
---------------------------------------------------------------------------
\299\ Proposed rule 30e-3(a).
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a. Availability of Report and Other Materials
Under the rule as proposed, the fund's report to shareholders under
rule 30e-1 or 30e-2 would be required to be publicly accessible, free
of charge, at a
[[Page 33628]]
specified Web site address.\300\ The report would need to be accessible
beginning no later than the date of the transmission in reliance on
this option, and ending no earlier than the date when the fund next
``transmits'' a report required by rule 30e-1 or 30e-2.\301\ This
requirement is intended to provide shareholders with the opportunity
for ongoing access from the date of intended transmission until the
date that the fund transmits its next shareholder report.\302\
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\300\ Proposed rule 30e-3(b)(1).
\301\ Id.
\302\ See 1995 Release, supra note 289 (noting that to satisfy
access requirements under the Commission's electronic delivery
guidance, ``as is the case with a paper document, a recipient should
have the opportunity to retain the information or have ongoing
access equivalent to personal retention).
---------------------------------------------------------------------------
In addition to the most current shareholder report, the rule as
proposed would require that the fund post on its Web site (1) any
previous shareholder report transmitted to shareholders of record
within the last 244 days,\303\ and (2) in the case of a fund that is
not a money market fund or an SBIC, the fund's complete portfolio
holdings as of the close of its most recent first and third fiscal
quarters, if any, after the date on which its registration statement
became effective.\304\ In addition, a fund that is not a money market
fund or an SBIC would be required to make its portfolio holdings as of
the end of the next fiscal quarter accessible in the same manner within
60 days after the close of that period.\305\ We are proposing
exceptions to the posting requirement of first and third fiscal quarter
portfolio holdings schedules for money market funds and SBICs because
money market funds are currently required to post certain portfolio
holdings and other information on their Web sites pursuant to rule 2a-
7,\306\ and because SBICs are neither currently required to file
reports on Form N-Q,\307\ nor would SBICs be required to file reports
on proposed Form N-PORT.\308\
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\303\ Proposed rule 30e-3(b)(1)(ii). Thus, for example, a fund
with a December 31 fiscal year end wishing to rely on rule 30e-3 to
transmit its annual report to shareholders would also be required to
ensure that its semiannual report as of June 30 is similarly
accessible. Only those annual and semiannual reports that are
required under rule 30e-1 or rule 30e-2 are required to be
accessible in order to rely on rule 30e-3. Thus, for example, if a
fund is transmitting a report for its first operational semiannual
period, the fund could rely on rule 30e-3 to transmit that report,
despite not having made a previous report publicly accessible
provided that it meets the other required conditions.
\304\ See proposed rule 30e-3(b)(1)(iii).
\305\ See proposed rule 30e-3(b)(2). For example, a fund with a
December 31 fiscal year end wishing to rely on rule 30e-3 to
transmit its annual report to shareholders would also be required to
ensure that its complete portfolio holdings for the first quarter of
the next year is similarly available.
\306\ See rule 2a-7(h)(10). In 2014, we adopted certain
amendments to the Web site disclosure requirements for money market
funds under rule 2a-7. The compliance date for these amendments is
April 14, 2016. See Money Market Fund Reform 2014 Release, supra
note 13, at sections III.E.9 and III.N.4.
\307\ See rule 30b1-5.
\308\ See proposed rule 30b1-9.
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These materials would also be required to be publicly accessible in
the same manner and for the same time period as the current shareholder
report.\309\ We are proposing this requirement so that shareholders
have access to a complete year of portfolio holdings information in one
location (i.e., the Web site on which the report transmitted under the
proposed rule is made accessible), rather than have to separately
access portfolio holdings information for the first and third quarters
by accessing the fund's reports on Form N-PORT for those periods.
---------------------------------------------------------------------------
\309\ Proposed rules 30e-3(b)(1) and (b)(2).
---------------------------------------------------------------------------
To conform the form and content of the portfolio holdings schedules
for the first and third quarters to those schedules presented in the
fund's shareholder reports for the second and fourth quarters, the
proposed rule would require the schedules for the first and third
quarters to be presented in accordance with the schedules set forth in
Sec. Sec. 210.12-12--12-14 of Regulation S-X [17 CFR 210.12-12--12-
14], which need not be audited.\310\ As discussed above, we have also
proposed to require that these materials be filed as exhibits to Form
N-PORT, regardless of whether the fund intends to rely on the rule to
satisfy its shareholder report transmission obligations.\311\
---------------------------------------------------------------------------
\310\ Id.
\311\ See supra Part II.A.2.j.
---------------------------------------------------------------------------
These Web site portfolio disclosure requirements would be generally
consistent with funds' current disclosure obligations under Regulation
S-X for reports filed on Forms N-Q and N-CSR.\312\ Accordingly, we
anticipate that most funds would have established procedures in place
to report and validate such disclosures, and that funds would be
familiar with these disclosure requirements. These Web site portfolio
disclosure requirements are also intended to provide disclosures that
would be easily understood and familiar to investors, because these
disclosures would contain similar information and would be presented in
a similar manner as those currently included in shareholder reports.
---------------------------------------------------------------------------
\312\ See generally supra note 27.
---------------------------------------------------------------------------
Proposed rule 30e-3 would require compliance with certain
conditions designed to ensure the accessibility of shareholder reports
and other required materials.\313\ First, the Web site address on which
the shareholder reports and other required portfolio information are
made accessible could not be the Commission's Web site address for
electronic filing.\314\ Second, the materials required to be posted on
the Web site would have to be presented in a format that is convenient
for both reading online and printing on paper, and persons accessing
the materials would have to be able to permanently retain (free of
charge) an electronic copy of the materials in this format.\315\ These
conditions are designed to ensure that shareholder reports and other
information posted on a fund's Web site pursuant to the proposed rule
are user-friendly and allow shareholders the same ease of reference and
retention abilities they would have with paper copies of the
information.
---------------------------------------------------------------------------
\313\ These requirements are largely similar to the
accessibility requirements of rule 498 under the Securities Act,
which allows funds to use a summary prospectus, and rule 14a-16
under the Securities Exchange Act, which requires issuers and other
soliciting persons to furnish proxy materials by posting these
materials on a public Web site and notifying shareholders of the
availability of these materials and how to access them.
\314\ See proposed rule 30e-3(b)(3). Currently, the Commission's
electronic filing system for fund documents is EDGAR.
\315\ See proposed rules 30e-3(b)(4) and (5).
---------------------------------------------------------------------------
Third, the rule as proposed would include a safe harbor provision
that would allow a fund to continue relying on the rule even if it did
not meet the posting requirements of the rule for a temporary period of
time.\316\ In order to rely on this safe harbor, a fund would be
required to have reasonable procedures in place to ensure that the
required materials are posted on its Web site in the manner required by
the rule and take prompt action to correct noncompliance with these
posting requirements.\317\ We are proposing this safe harbor because we
recognize that there may be times when, due to events beyond a fund's
control, such as system outages or other technological issues, natural
disasters, acts of terrorism, pandemic illnesses, or other
circumstances, a fund is temporarily not
[[Page 33629]]
in compliance with the Internet posting requirements of the rule.\318\
---------------------------------------------------------------------------
\316\ See proposed rule 30e-3(b)(6). The rule provides that the
conditions in paragraphs (b)(1) through (b)(5) of the rule (i.e.,
the posting requirements) shall be deemed to be met, notwithstanding
the fact that the materials required by paragraph (b)(1) of the rule
are not available for a period of time in the manner required by the
posting requirements, so long as certain conditions are met. See id.
\317\ See proposed rules 30e-3(b)(6)(i) and (ii). The rule would
require prompt action ``as soon as practicable following the earlier
of the time at which it knows or reasonably should have known'' that
the required documents are not available in the manner prescribed by
the posting requirements of the rule.
\318\ Compare rule 498(e)(4) of the Securities Act (providing a
similar safe harbor under the summary prospectus rule for the same
reasons).
---------------------------------------------------------------------------
b. Shareholder Consent
While we believe that many investors would prefer electronic
transmission of shareholder reports based on investor testing and
Internet usage trends, we also acknowledge that there likely will be
investors that may continue to prefer receiving shareholder reports in
paper.\319\ To maintain the ability of those shareholders to receive
paper copies of their shareholder reports, the rule as proposed would
require that a fund obtain shareholder consent prior to relying on the
rule to satisfy transmission obligations with respect to a particular
shareholder.\320\ Specifically, rule 30e-3 as proposed would permit
electronic transmission of shareholder report to a particular
shareholder only if the shareholder has either previously consented to
this method of transmission,\321\ or has been determined to have
provided implied consent under certain conditions specified in the
rule.\322\ Under the proposed rule, each series of a registrant
offering multiple series would need to obtain separate consent as to a
shareholder, regardless of whether consent was obtained from that
shareholder by other series offered by that registrant.\323\
---------------------------------------------------------------------------
\319\ See supra notes 291-296 and accompanying text.
\320\ These conditions are substantially similar to certain of
the conditions relating to the Commission's rules on
``householding'' prospectuses, shareholder reports, and proxy
statements and information statements to investors who share an
address. See, e.g., rule 154 under the Securities Act [17 CFR
230.154] (permitting householding of prospectuses); rules 30e-1 and
30e-2 under the Investment Company Act (permitting householding of
fund shareholder reports); rules 14a-3 and 14c-3 under the Exchange
Act (permitting householding of proxy statements and information
statements). See generally Delivery of Disclosure Documents to
Households, Investment Company Act Release No. 24123 (Nov. 4, 1999)
[64 FR 62540 (Nov. 16, 1999)] (adopting householding rules with
respect to prospectuses and shareholder reports); Delivery of Proxy
Statements and Information Statements to Households, Investment
Company Release No. 24715 (Oct. 27, 2000) [65 FR 65736 (Nov. 2,
2000) (adopting householding rules with respect to proxy statements
and information statements). For purposes of the householding rules,
consent may be written or implied.
\321\ While the householding rules require that consent be ``in
writing,'' we are not proposing a similar ``in writing'' requirement
as, consistent with the Commission's guidance on electronic
delivery, consent may be provided in a number of ways, including in
writing, electronically, or telephonically. See 1995 Release, supra
note 289 (noting that one method for satisfying evidence of delivery
is to obtain informed consent from an investor to receive
information through a particular medium); 1996 Release, supra note
289 (stating that informed consent should be made by written or
electronic means); 2000 Release, supra note 289 (stating
Commission's view that an issuer or market intermediary may obtain
an informed consent telephonically, as long as a record of that
consent is retained).
\322\ Proposed rule 30e-3(c).
\323\ See id.
---------------------------------------------------------------------------
To obtain implied consent as to a shareholder, the fund would be
required to transmit to the shareholder a separate written statement
(``Initial Statement''), at least 60 days before it begins to rely on
the rule, notifying the shareholder of the fund's intent to make future
shareholder reports available on the fund's Web site until the
shareholder revokes consent.\324\ As proposed, the Initial Statement
must be written using plain English principles so that it will be
easily understood by most investors \325\ and:
---------------------------------------------------------------------------
\324\ See proposed rule 30e-3(c)(1). For purposes of the rule,
``Initial Statement'' would be defined as the notice described in
paragraph (c)(1) of the rule. See proposed rule 30e-3(h)(2).
\325\ See proposed rules 30e-3(c)(1) and (e). See also A Plain
English Handbook, Securities and Exchange Commission, available at
https://www.sec.gov/pdf/handbook.pdf.
---------------------------------------------------------------------------
State that future shareholder reports will be accessible,
free of charge, at a Web site; \326\
---------------------------------------------------------------------------
\326\ Proposed rule 30e-3(c)(1)(i).
---------------------------------------------------------------------------
explain that the fund will no longer mail printed copies
of shareholder reports to the shareholder unless the shareholder
notifies the fund that he or she wishes to receive printed reports in
the future; \327\
---------------------------------------------------------------------------
\327\ Proposed rule 30e-3(c)(1)(ii).
---------------------------------------------------------------------------
include a toll-free telephone number and be accompanied by
a reply form that is pre-addressed with postage-paid and that includes
the information that the fund would need to identify the shareholder,
and explain that the shareholder can use either of those two methods at
any time to notify the fund that he or she wishes to receive printed
reports in the future; \328\
---------------------------------------------------------------------------
\328\ Proposed rule 30e-3(c)(1)(iii).
---------------------------------------------------------------------------
state that the fund will mail printed copies of future
shareholder reports within 30 days after the fund receives notice of
the shareholder's preference; \329\ and
---------------------------------------------------------------------------
\329\ Proposed rule 30e-3(c)(1)(iv).
---------------------------------------------------------------------------
contain a prominent legend in bold-face type that states:
``How to Continue Receiving Printed Copies of Shareholder Reports.''
\330\
---------------------------------------------------------------------------
\330\ Proposed rule 30e-3(c)(1)(v). This legend would be
required to appear on the envelope on which the Initial Statement is
delivered, or alternatively, if the Initial Statement is delivered
separately from other communications to investors, the legend may
appear either on the Initial Statement or on the envelope in which
the Initial Statement is delivered.
---------------------------------------------------------------------------
The Initial Statement is designed to permit funds to infer that a
shareholder has consented to electronic transmission of future
shareholder reports by alerting the shareholder to the fact that the
shareholder will no longer receive printed copies in the future unless
the shareholder notifies the fund that he or she wishes to receive
print copies of such reports in the future. Because of the importance
of this information, in addition to the required prominent legend on
the envelope in which the Initial Statement is delivered or on the
Initial Statement itself, the proposed rule would require certain
conditions intended to ensure that the Initial Statement is not
obscured by other materials. Specifically, the proposed rule would
require that the Initial Statement could not be incorporated into or
combined with another document,\331\ nor could it be sent along with
other shareholder communications (with the exception of the fund's
current summary prospectus, statutory prospectus, statement of
additional information, or Notice of Internet Availability of Proxy
Materials under rule 14a-16 under the Exchange Act).\332\
---------------------------------------------------------------------------
\331\ See proposed rule 30e-3(c)(2).
\332\ See proposed rule 30e-3(c)(3). For purposes of the
proposed rule, (1) ``summary prospectus'' would mean the summary
prospectus described in paragraph (b) of rule 498, (2) ``statutory
prospectus'' would mean a prospectus that satisfies the requirements
of section 10(a) of the Securities Act, and (3) ``statement of
additional information'' means the statement of additional
information required by Part B of the registration form applicable
to the fund. See proposed rule 30e-3(h).
---------------------------------------------------------------------------
If the fund does not receive the reply form or other notification
indicating that a particular shareholder wishes to continue to receive
paper reports by mail within 60 days after the fund sends the Initial
Statement, then the fund may begin to transmit shareholder reports to
that shareholder electronically, provided that it meets the other
conditions of the rule.\333\
---------------------------------------------------------------------------
\333\ Proposed rule 30e-3(c)(4).
---------------------------------------------------------------------------
c. Notice
Proposed rule 30e-3 would require funds relying on the rule with
respect to a shareholder who has consented to electronic transmission
pursuant to the conditions of paragraph (c)(1) of the rule to send a
notice (``Notice'') within 60 days of the close of the fiscal period to
which the report relates.\334\ The proposed requirements for a Notice
largely mirror the notice requirements under the Commission's rules
mandating the posting of proxy materials online.\335\
---------------------------------------------------------------------------
\334\ See proposed rule 30e-3(d). For purposes of the rule,
``Notice'' would be defined as the notice described in paragraph (d)
of the rule. See proposed rule 30e-3(h)(3).
\335\ See rule 14a-16 under the Exchange Act [17 CFR 240.14a-
16].
---------------------------------------------------------------------------
As proposed, the Notice, like the Initial Statement, would be
required to
[[Page 33630]]
be written using plain English principles so that it will be easily
understood by most investors.\336\ and:
---------------------------------------------------------------------------
\336\ See proposed rules 30e-3(d)(1) and (e).
---------------------------------------------------------------------------
Contain a prominent legend in bold-face type stating that
an important report to shareholders is available online and in print by
request; \337\
---------------------------------------------------------------------------
\337\ Proposed rule 30e-3(d)(1)(i). The rule as proposed would
also require that the legend include the specific fund name to which
the Notice relates, or the fund complex name.
---------------------------------------------------------------------------
state that each shareholder report contains important
information about the fund, including its portfolio holdings, and is
available on the Internet or, upon request, by mail, and encouraging
shareholders to access and review the report; \338\
---------------------------------------------------------------------------
\338\ Proposed rule 30e-3(d)(1)(ii).
---------------------------------------------------------------------------
include a Web site address that leads directly to each
report the fund is transmitting to the recipient shareholder in
reliance on rule 30e-3; \339\
---------------------------------------------------------------------------
\339\ Proposed rule 30e-3(d)(1)(iii). A fund could send a joint
Notice with other funds held by the same shareholder in a fund
complex; however, the Notice would have to include a link to each of
those funds' shareholder reports. A fund may also send a separate
Notice if it so wishes.
---------------------------------------------------------------------------
include the Web site address where the shareholder report
and other required portfolio information is posted; \340\
---------------------------------------------------------------------------
\340\ Proposed rule 30e-3(d)(1)(iv). The Web site address would
have to be specific enough to lead investors directly to the
documents that are required to be posted online under the rule. The
Web site address could be a central site with prominent links to
each document, but could not be a home page or section of the Web
site other than where the documents are posted. See id.
---------------------------------------------------------------------------
provide instructions on how a shareholder may request, at
no charge, a paper copy of the shareholder report or other materials
required to be made accessible online, and an indication that the
shareholder will not receive a paper copy of the report unless
requested; \341\ and
---------------------------------------------------------------------------
\341\ Proposed rule 30e-3(d)(1)(v).
---------------------------------------------------------------------------
include a toll-free telephone number and must be
accompanied by a reply form that is pre-addressed with postage-paid and
that includes the information that the fund would need to identify the
shareholder, and explain that the shareholder can use either of those
two methods at any time to notify the fund that he or she wishes to
receive printed reports in the future.\342\
---------------------------------------------------------------------------
\342\ Proposed rule 30e-3(d)(1)(vi).
---------------------------------------------------------------------------
The proposed Notice is designed to alert shareholders to the
availability of a shareholder report online and to provide shareholders
with information on how to obtain a paper copy of the report if they
should want one. We believe it is important to limit the information in
the Notice and the other materials sent along with the Notice in order
to ensure that shareholders are made aware of the availability of a
shareholder report and so that the availability of the report does not
become obscured. Therefore, the rule as proposed would limit the
information contained in the Notice to the information required by the
rule.\343\ The Notice also could not be incorporated into or combined
with another document,\344\ nor could it be sent along with other
shareholder communications (with the exception of the fund's current
summary prospectus, prospectus, statement of additional information, or
Notice of Internet Availability of Proxy Materials under rule 14a-16
under the Exchange Act).\345\
---------------------------------------------------------------------------
\343\ See proposed rule 30e-3(d)(3).
\344\ See proposed rule 30e-3(d)(2).
\345\ See proposed rule 30e-3(d)(4).
---------------------------------------------------------------------------
Similar to the Commission's rules on householding prospectuses,
shareholder reports, and proxy statements and information
statements,\346\ proposed rule 30e-3 also would allow funds to send one
Notice to shareholders who share an address so long as the fund
addresses the Notice to the shareholders individually or as a
group.\347\ In addition, the proposed rule would require funds to file
a form of the Notice with the Commission not later than 10 days after
the Notice is sent to shareholders.\348\ This filing would occur on a
new EDGAR submission type which would be created by the Commission. We
believe the Notice filing requirement would assist us in overseeing
compliance with the rule.
---------------------------------------------------------------------------
\346\ See, e.g., rule 154 under the Securities Act (permitting
householding of prospectuses); rules 30e-1 and 30e-2 under the
Investment Company Act (permitting householding of fund shareholder
reports); rules 14a-3 and 14c-3 under the Exchange Act (permitting
householding of proxy statements and information statements).
\347\ See proposed rule 30e-3(d)(5).
\348\ See proposed rule 30e-3(d)(6).
---------------------------------------------------------------------------
d. Delivery Upon Request
Proposed rule 30e-3 would also require, as a condition to reliance
on the rule to transmit shareholder reports electronically, that the
fund (or a financial intermediary through which shares of the fund may
be purchased or sold) must send, at no cost to the requestor and by
U.S. first class mail or other reasonably prompt means, a paper copy of
any of the materials discussed above--viz., the fund's most recent
annual and semiannual reports, and the fund's portfolio holdings as of
its most recent first and third fiscal quarters--to any person
requesting such a copy within three business days after receiving a
request for a paper copy.\349\ This requirement is intended to allow
for investors to receive shareholder reports and portfolio information
in print format, if they so prefer, even if they have consented to
electronic transmission without revoking the consent.\350\
---------------------------------------------------------------------------
\349\ Proposed rule 30e-3(f).
\350\ See, e.g., 1995 Release, supra note 289 (stating the
Commission's belief that ``as a matter of policy, where a person has
a right to receive a document under the federal securities laws and
chooses to receive it electronically, that person should be provided
with a paper version of the document if any consent to receive
documents electronically were revoked or the person specifically
requests a paper copy (regardless of whether any previously provided
consent was revoked.'').
---------------------------------------------------------------------------
e. Prospectuses and Statements of Additional Information Transmitted
Under Rule 30e-1(d)
Rule 30e-1(d) under the Investment Company Act permits an open-end
management investment company to transmit a copy of its prospectus or
statement of additional information in place of its shareholder report,
if it includes all of the information that would otherwise be required
to be contained in the shareholder report.\351\ We recognize that the
nature and purpose of the fund prospectus is different from that of
fund shareholder reports. Accordingly, at this time, we are not
proposing to permit a similar regime for fund prospectus delivery
obligations under the Securities Act. As a result, we do not believe
that it would be appropriate to permit the transmission of statutory
prospectuses in the manner provided under the proposed rule. Therefore,
the proposed rule would not be available to a fund seeking to transmit
a copy of its currently effective statutory prospectus or statement of
additional, or both, as permitted by paragraph (d) of rule 30e-1.\352\
---------------------------------------------------------------------------
\351\ See rule 30e-1(d).
\352\ Proposed rule 30e-3(g).
---------------------------------------------------------------------------
4. Use of Summary Schedule of Investments
Under the current rules, in lieu of providing a complete schedule
of portfolio investments as part of the financial statements included
in its shareholder report, a fund may provide a summary schedule of
portfolio investments (``Summary Schedule'').\353\ Pursuant to Rule 12-
12C of Regulation S-X, the Summary Schedule generally must list
separately the 50 largest issues and any other issue the value of which
[[Page 33631]]
exceeded one percent of the net asset value of the fund at the close of
the period.\354\
---------------------------------------------------------------------------
\353\ See, e.g., Instruction 1 to Item 27(b)(1) of Form N-1A
(permitting the inclusion of Schedule VI--Summary schedule of
investments in securities of unaffiliated issuers under Rule 12-12C
of Regulation S-X in lieu of Schedule 1 -- Investments of securities
of unaffiliated issuers under Rule 12-12 of Regulation S-X.
\354\ See rule 12-12C, n.3 Regulation S-X [17 CFR 210.12-12C].
---------------------------------------------------------------------------
We believe that use of the summary schedule may be
unnecessary,\355\ and in particular, may be potentially confusing or
cumbersome to investors seeking to access the fund's complete portfolio
holdings.\356\ For these reasons, we are proposing amendments to our
registration forms that would restrict funds relying on proposed rule
30e-3 from providing a Summary Schedule in their shareholder reports in
lieu of a complete schedule.\357\
---------------------------------------------------------------------------
\355\ For example, a fund using the summary schedule for
considerations relating to printing and mailing costs would likely
have fewer such concerns if the report is posted on its Web site in
reliance on the proposed rule.
\356\ For example, a shareholder consenting to electronic
transmission that wishes to view the complete portfolio holdings
would, pursuant to the rule as proposed, first receive a notice of
the availability of the report, then take the step to access the
report on the fund's Web site, only to have to take a subsequent
step to request or otherwise access the full schedule.
\357\ See proposed amendments to Item 27(b) of Form N-1A; Item
24, Instruction 7 of Form N-2; and Item 28(a), Instruction 7(i) of
Form N-3.
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5. Related Disclosure Amendments
We are also proposing some related amendments to certain of our
rules and forms. First, we are proposing to amend rule 498 under the
Securities Act, which concerns the use of a summary prospectus,\358\ to
require funds relying on proposed rule 30e-3 to include as part of the
legend on the cover page of the fund's summary prospectus the Web site
address required to be included in the Notice.\359\ As proposed, the
Web site address that leads to shareholder report information could be
the same as the Web site address that leads to prospectus information,
provided that the other conditions of each rule are met, but funds
would also be permitted to use different Web site addresses for each
type of material and provide both addresses in the legend.\360\ This
requirement is intended to provide investors an additional reminder of
the availability of shareholder report and related portfolio holdings
information on the fund's Web site.
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\358\ See rule 498 under the Securities Act [17 CFR 230.498].
\359\ See rule 498(b)(1)(v)(A) under the Securities Act.
\360\ See id.
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Second, we are proposing to amend rule 498 under the Securities Act
and rule 14a-16 under the Exchange Act to include an Initial Statement
or Notice that would be required by proposed rule 30e-3 among the
materials that are permitted to accompany and have equal or greater
prominence than the summary prospectus prepared in reliance on rule 498
and a notice of Internet availability of proxy materials.\361\ These
amendments are intended to permit a fund's Initial Statement and Notice
to be sent with its summary prospectus or notice of Internet
availability of proxy materials if the fund wishes to send them in that
manner.\362\
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\361\ See proposed rules 498(f)(2) under the Securities Act and
14a-16(f)(2)(iii) under the Exchange Act.
\362\ See proposed rule 30e-3(d)(4).
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6. Requests for Comment
We request comments on our proposal that would permit electronic
transmission of shareholder reports.
To what extent are funds currently relying on the
Commission's guidance on the use of electronic media to deliver or
transmit disclosure documents and other information to shareholders? To
what extent have shareholders elected to receive disclosure documents
and other information in general, and shareholder reports in
particular, through electronic means? In the case of shareholders who
have elected electronic delivery of disclosure documents in general,
and delivery of shareholder reports in particular, to what extent are
those shareholders accessing those materials online? Please provide
supportive data to the extent available.
If proposed rule 30e-3 is adopted, to what extent would
funds (i) choose to rely on the rule, and (ii) continue to rely on
guidance concerning electronic transmission that we have already
issued?
Would availability of the rule change in any way current
industry practices on transmitting shareholder reports electronically?
For example, we expect that funds would continue to rely on the
Commission's guidance to electronically transmit reports to
shareholders who have elected to receive reports electronically, and
rely on the rule with respect to shareholders who have not so elected.
For administrative or other purposes, would funds discontinue their
reliance on the Commission's guidance and instead rely on the rule to
transmit reports electronically with respect to their entire
shareholder base? If so, why? What impact, if any, would the proposed
rule have on the transmission of reports to shareholders of UITs
required to transmit reports pursuant to rule 30e-2 under the
Investment Company Act? What impact, if any, would the proposed rule
have on the transmission of reports to shareholders holding fund shares
through financial intermediaries or other omnibus type arrangements?
Should we permit funds that rely on rule 30e-3 to continue to rely on
prior electronic transmission guidance for certain of their
shareholders? Why or why not?
If rule 30e-3 is adopted as proposed, in the case of funds
relying on the rule to transmit reports electronically to one or more
shareholders, would funds nonetheless seek shareholder consent to
transmit reports to those shareholders pursuant to the Commission's
electronic guidance in lieu of the rule? Why or why not?
Should we, as we have proposed, allow funds to transmit
reports to shareholders electronically by making them accessible on a
Web site? Would investors prefer that these materials be transmitted in
this manner? What would be the effect of proposed rule 30e-3 on the
ability of investors to access shareholder reports? Would the
shareholder report information be more useful or less useful if
transmitted in the manner proposed? Would investors be more aware or
less aware of the availability of the information if transmitted in
reliance on the proposed rule?
Would any positive or negative effect of the proposed rule
on investors be disproportionately greater for certain investors than
for others? If so, which investors would be disproportionately
affected, to what extent, and how would such effects manifest? What, if
any, additional measures could help mitigate any such disproportionate
effects? Please provide supportive data to the extent available.
Rule 30e-3 as proposed contains a number of conditions to
be satisfied for reliance on the rule. Are the proposed conditions
appropriate? Are there conditions that should be added or are any of
the proposed conditions inappropriate? If so, state the conditions and
the reasons why.
The rule as proposed would require that the materials
required to be accessible online be publicly accessible, free of
charge, at the Web site specified in the Notice, and does not expressly
require that the Web site be the fund's Web site. Should the rule
require that the materials be accessible at the fund's Web site? Why or
why not?
What materials should be required to be accessible in
order for a fund to rely on the rule? For example, we have proposed
that a fund relying on the rule would be required to make accessible
the shareholder report, the shareholder report for the prior period,
and in the case of a fund that is a management
[[Page 33632]]
company other than a money market fund or an SBIC, the complete
portfolio holdings for the most recent first and third fiscal quarters.
Is it appropriate to require funds to post holdings information
covering a full year? Should we require information be posted covering
a longer period or a shorter period? If so, why? Should money market
funds and SBICs relying on the rule be required to post complete
portfolio holdings for the first and third quarters? Why or why not?
The rule as proposed would require that the materials made
accessible on the Web site be presented in a format or formats that are
convenient for both reading online and printing on paper. Is the
proposed format requirement appropriate? Are there liability or other
concerns that would arise in connection with meeting a fund's
obligation to transmit shareholder reports under Section 30(e) and the
rules thereunder? Should we instead require that the materials be
presented in a format or formats that are human-readable and capable of
being printed on paper in human-readable format? Why or why not?
How soon should each of the materials be required to be
accessible, and how long should each be required to remain accessible?
The proposed rule would contain a safe harbor for
instances in which the materials required to be made accessible are not
available for a temporary period of time. Is the safe harbor as
proposed appropriate, or should it be modified? For example, should the
rule be more proscriptive as to the period of time in which action must
be taken to resolve any issues?
Should we require the Web site on which the proposed
rule's required materials are made accessible to incorporate safeguards
to protect the anonymity of its visitors? For example, should we
require similar conditions to those provided in rule 14a-16 under the
Exchange Act relating to Internet availability of proxy materials? Why
or why not? If so, what specific requirements should we consider?
Should the proposed rule require that a shareholder
consent to electronic transmission of shareholder reports before a fund
begins to rely on the rule? Should we permit funds to obtain implied
consent, as proposed, or should we require funds to receive express
consent? Are there certain circumstances in which funds should not be
permitted to obtain implied consent? For example, if an investor upon
opening a new account does not opt-in to electronic delivery of
documents, should the fund be permitted nonetheless to seek to rely on
the proposed rule as to that shareholder? Why or why not?
Under the proposed rule, each series of a registrant
offering multiple series would need to obtain separate consent as to a
shareholder, regardless of whether consent was obtained from that
shareholder by other series offered by that registrant. If a fund has
obtained implied consent from a shareholder as to a particular series,
and subsequently the shareholder invests in one or more other series
offered by the fund, should the fund be required to obtain consent as
to those other series, or should the fund be permitted to infer consent
as to all series offered by the fund? Why or why not? Should the fund
be permitted to infer consent as to only other series offered by the
registered investment company, or should the fund be permitted to infer
consent as to other funds within the fund complex? What, if any, are
the special considerations relating to investors who invest through
intermediaries?
Under the proposed rule, to obtain implied consent as to a
shareholder, the fund would be required to transmit to the shareholder
an Initial Statement, at least 60 days before it begins to rely on the
rule. Are the proposed disclosures for the Initial Statement
appropriate? Should a fund be required to provide to a shareholder
other disclosures before inferring consent to electronic transmission?
Should the rule require funds to provide multiple written
statements (i.e., in addition to the Initial Statement) prior to
inferring consent to electronic transmission? If so, how many
additional statements and how long after the Initial Statement should
they be provided? What period of time after a fund transmits the
Initial Statement should we permit the fund to infer consent? Is 60
days an appropriate time? Why or why not?
What methods should shareholders be permitted to use to
deny or revoke consent to electronic transmission?
Should we permit the Initial Statement to be incorporated
into, or combined with, one or more other documents? If so, which
documents should we permit the Initial Statement to be incorporated
into or combined with?
The rule as proposed would require that the Initial
Statement must be sent separately from other types of communications
and may not accompany any other document or materials except the fund's
current summary prospectus, statutory prospectus, statement of
additional information, or Notice of Internet Availability of Proxy
Materials. Is this requirement appropriate? Should we permit the
Initial Statement to accompany one or more other documents? If so,
which documents?
Should we, as we have proposed for the Notice, permit the
Initial Statement to be sent in a ``householded'' manner?
Should we require that the Initial Statement not contain
any additional information other than that specified in the rule? Why
or why not? Absent any requirement specified by rule, what other
information would funds generally include in the Initial Statement? For
example, would funds provide information on how shareholders could
elect to receive the shareholder report and other documents and
information electronically by satisfying the conditions contained in
the Commission's guidance on use of electronic media relating to
notice, access, and evidence of delivery?
Should the rule permit funds to obtain implied consent
from shareholders who have previously revoked consent? If so, should
the rule prescribe a minimum period of time after consent was revoked
before re-attempting to obtain implied consent from a shareholder? What
period should that be and why?
Should each fund be required to send a shareholder a
Notice each time it transmits a shareholder report electronically under
the proposed rule? Why or why not?
We anticipate that the Notice would be sent in paper and
mailed to shareholders. Should we permit the Notice to be sent by email
if the shareholder has provided an email address? Why or why not? For
example, are there any concerns that under such an approach, while a
shareholder may have provided an email address (e.g., as part of
opening an account), the shareholder may nonetheless neither prefer nor
expect to receive documents or other information through that medium?
To what extent are funds and intermediaries, pursuant to regulatory
requirements or otherwise, maintaining up-to-date email addresses for
investors? Would an investor be more likely to view a Notice delivered
by one method versus another (i.e., print versus electronically)? Would
an investor be more likely to access the related shareholder report and
other required materials when notified by one method or the other?
Are the proposed disclosures for the Notice appropriate?
Should we require that the disclosure in the Notice concerning a
shareholder's ability to indicate a preference for paper transmission
in the future be preceded
[[Page 33633]]
by an additional bold-face legend or otherwise made more prominent?
Should we permit the Notice to be incorporated into, or
combined with, one or more other documents? If so, which documents
should we permit the Notice to be incorporated into or combined with?
The rule as proposed would require that the Notice must be
sent separately from other types of communications and may not
accompany any other document or materials except the fund's current
summary prospectus, statutory prospectus, statement of additional
information, or Notice of Internet Availability of Proxy Materials. Is
this requirement appropriate? Should we permit the Notice to accompany
one or more other documents? If so, which documents? For example, in
the case of a Notice sent to a shareholder for the first time, should
we permit or require the Notice to be accompanied with materials
explaining the new transmission regime? Why or why not?
Should we, as proposed, permit funds to either send
separate Notices for each fund or send combined Notices for more than
one fund held by a particular shareholder, or should the rule require
one or the other of those approaches?
Should we require that the Notice not contain any
additional information other than that specified in the rule? Why or
why not? Absent any restriction by rule, what other information would
funds generally include in the Notice? For example, would funds provide
information on how shareholders could elect to receive the shareholder
report and other documents and information electronically by satisfying
the conditions contained in the Commission's guidance on use of
electronic media relating to notice, access, and evidence of delivery?
In the case of management companies that are not SBICs,
should we require such funds to send a notice each time the fund makes
accessible its complete portfolio holdings for the first or third
fiscal quarters? Why or why not?
Should we, as proposed, permit the Notice to be sent in a
``householded'' manner?
We are proposing that funds would file a form of the
Notice with the Commission not later than 10 days after it is sent to
shareholders. Is 10 days sufficient to meet this proposed filing
requirement, or should some other filing period be required? If so,
what time period and why?
We anticipate that the form of Notice would be filed with
the Commission on EDGAR pursuant to a separate EDGAR submission type.
Should we instead require that the form of Notice be filed as an
exhibit to a report filed with the Commission? For example, should we
require that the form of Notice be filed as part of the fund's report
on Form N-CSR or Form N-CEN? Why or why not?
Should we require, as proposed, that funds send a paper
copy of a shareholder report upon request? If so, how soon should a
fund be required to send the report after receiving a request?
Should we restrict funds relying on the proposed rule from
using the summary schedule of investments? Why or why not? Are there
considerations relating to the use of the summary schedule of
investments other than those relating to printing and mailing costs
that would make the summary schedule an important option for funds to
provide portfolio holdings disclosures? Should we restrict funds from
using the summary schedule only in reports transmitted pursuant to the
rule, and permit funds to use the summary schedule in printed reports
that are mailed to shareholders? Would funds prefer this additional
flexibility? Why or why not?
Are the proposed amendments to rule 498 and the
registration forms regarding Web site availability of documents
appropriate? Should we also, for example, specifically require funds
relying on the rule to disclose on the cover page or elsewhere in the
summary prospectus or statutory prospectus its reliance on the rule and
what specific documents are made available on the Web site?
To what extent would the proposed rule reduce burdens such
as printing and mailing costs borne by funds? Would these burden
reductions ultimately accrue to fund shareholders in the form of lower
total fund operating expenses? For example, would these reductions
ultimately accrue to shareholders in funds with arrangements that
permit or limit payments to service providers or intermediaries such as
broker-dealers in connection with the printing and mailing of
shareholder reports? Please provide supportive data to the extent
available.
In addition to allowing funds to electronically transmit
reports to shareholders, should we also consider options for permitting
similar delivery of summary or statutory prospectuses? Why or why not?
E. Form N-CEN and Rescission of Form N-SAR
1. Overview
We are proposing to amend the framework by which registered
investment companies report census-type information to the Commission
by rescinding Form N-SAR and replacing it with a new form--Form N-
CEN.\363\ Form N-SAR was adopted by the Commission in 1985 and requires
that funds report a wide variety of census information to the
Commission, including information relating to a fund's organization,
service providers, fees and expenses, portfolio strategies and
investments, portfolio transactions, and share transactions. Funds
generally must file reports on Form N-SAR semi-annually, except for
UITs, which file annually.\364\ By contrast, as discussed further
below, we are proposing to have all funds file reports on Form N-CEN
annually.\365\
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\363\ We are proposing to rescind Form N-SAR and replace it with
a new census reporting form, Form N-CEN, rather than to amend Form
N-SAR in order to avoid technical difficulties that could arise with
filing reports on an amended Form N-SAR (e.g., difficulties related
to changes to filing format and form specifications).
\364\ See rules 30b1-1 and 30a-1.
\365\ See proposed amendments to rule 30a-1.
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In recent years, Commission staff has found that the utility of the
information reported on Form N-SAR has become increasingly limited. We
believe there are two primary reasons for this limited utility. First,
in the past two decades, we have not substantively updated the
information reported on the form to reflect new market developments,
products, investment practices, or risks. Second, the technology by
which funds file reports on Form N-SAR has not been updated and limits
the Commission staff's ability to extract and analyze the data
reported. Accordingly, we believe that by updating the content and
format requirements for census reporting, as discussed below, the
Commission will be better able to carry out its regulatory functions,
while at the same time reducing burdens on filers.
Proposed Form N-CEN would gather similar census information about
the fund industry that funds currently report on Form N-SAR, which
could be aggregated and analyzed by Commission staff to better
understand industry trends, inform policy, and assist with the
Commission's examination program. However, in order to improve the
quality and utility of information reported, proposed Form N-CEN would
streamline and update information reported to the Commission to reflect
current Commission staff information
[[Page 33634]]
needs and developments in the industry.\366\ Additionally, where
possible, we have endeavored to exclude items from proposed Form N-CEN
that are disclosed or reported pursuant to other Commission forms, or
are otherwise available; however, in some limited cases, we are
proposing to collect information that may be similarly disclosed or
reported elsewhere, but that the staff would benefit from collecting in
a structured format.
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\366\ We are proposing to streamline our data collection, in
part, through the use of yes/no questions in order to flag certain
information for follow-up, if necessary, by Commission staff. See,
e.g., Item 11 and Item 30.a of proposed form N-CEN. For example,
staff of our Office of Compliance Inspections and Examinations may
rely on responses to flag questions in Form N-CEN to indicate areas
for follow-up discussion or to request additional information.
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In order to improve the utility of the information reported to the
Commission, we are also proposing that reports on Form N-CEN be
structured in an XML format.\367\ By requiring reports on Form N-CEN to
be filed in XML format, filers will no longer be required to use
outdated technology for census reporting. Additionally, requiring
reports on Form N-CEN to be filed in an updated structured format will
allow reported information to be more efficiently and effectively
validated, retrieved, searched, and analyzed through automated means
and, therefore, more useful to end users.\368\
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\367\ The Commission has adopted a number of other forms that
are structured in an XML format, including Form N-MFP. Reports on
Form N-SAR, by contrast, are filed with an outdated filing
application.
\368\ See supra Part II.A.3 (discussing benefits to the use of
XML for reports on Form N-PORT).
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2. Who Must File Reports on Form N-CEN
We are proposing to require that all registered investment
companies, except face amount certificate companies,\369\ file reports
on Form N-CEN.\370\ Funds offering multiple series would be required to
report information in Part C of the form as to each series separately,
even if some information is the same for two or more series.\371\
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\369\ Face-amount certificate companies are investment companies
which are engaged or propose to engage in the business of issuing
face-amount certificates of the installment type, or which have been
engaged in in such businesses and have any such certificates
outstanding. See section 4(1) of the Investment Company Act [15
U.S.C. 80a-4(1)]. Face amount certificate companies are not
currently required to file reports on Form N-SAR. See General
Instruction A to Form N-SAR. Face amount certificate companies would
continue to file periodic reports pursuant to section 13 or section
15(d) of the Exchange Act.
\370\ See proposed amendments to rule 30a-1. Consistent with
Form N-SAR, BDCs, which are not registered investment companies,
would not be required to file reports on Form N-CEN.
\371\ Proposed General Instruction A. Unlike Form N-PORT where
separate reports would be filed for each series, registrants would
file one report on Form N-CEN covering all series (as is currently
done with reports on Form N-SAR). We are proposing this framework
for Form N-CEN to help minimize reporting burdens, as much of the
information that would be required by Form N-CEN (for example, the
information reported pursuant to Parts A and B) would be the same
across a fund's various series. We note that Form N-SAR's approach
to series information is slightly different than that of proposed
Form N-CEN, in that Form N-SAR allows registrants to indicate
instances where the information is the same across all series,
rather than requiring repetitive information. See General
Instruction D(8) of Form N-SAR. Unlike Form N-SAR, however, we have
sought to organize the information requested in proposed Form N-CEN
so that information that is the same for all series is reported in
Parts A and B of the form, with Part C, the part of the form that
requires each series to respond separately, requesting information
that is more likely to differ between series. Accordingly, we
anticipate the need to report repetitive information should be
limited.
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Like Form N-SAR, the sections of Form N-CEN that a fund is required
to complete would depend on the type of registrant in order to better
tailor the disclosure requirements.\372\ All funds would be required to
complete Parts A and B, and file any attachments required under Part G.
In addition, funds would complete the following Parts as applicable:
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\372\ See General Instruction A (Rule as to Use of Form N-CEN)
to proposed Form N-CEN. As reflected in General Instruction A,
registrants would be required to respond to each item in their
required sections. To the extent an item in a required section is
inapplicable to a registrant, the registrant would respond ``N/A''
to that item. Registrants would not, however, have to provide
responses to items in sections they are not required to fill out.
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All management companies, other than SBICs, would complete
Part C;
closed-end funds and SBICs would complete Part D;
ETFs (including those that are UITs) would complete Part
E; \373\ and
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\373\ Certain investment products known as ``exchange-traded
managed funds'' would also be required to complete Part E: of
proposed Form N-CEN.
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UITs would complete Part F.\374\
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\374\ Management companies that are registered on Form N-3 would
also complete certain items in Part F as directed by Item 7.c.i of
proposed Form N-CEN. See General A to proposed Form N-CEN.
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We request comment on who must file Form N-CEN.
Should we require any other types of investment companies
to file reports on Form N-CEN? For example, should face-amount
certificate companies be required to file reports on Form N-CEN?
Should funds offering multiple series be required to file
a report for each series separately, rather than one report covering
multiple series, as proposed?
3. Frequency of Reporting and Filing Deadline
Management investment companies currently file reports on Form N-
SAR semi-annually,\375\ and UITs file such reports annually.\376\ To
reduce reporting burdens, we are proposing that reports on Form N-CEN
be filed annually, regardless of type of filer.\377\ Form N-CEN would
require census-type information, which in our experience does not
change as frequently as, for example, portfolio holdings information.
Accordingly, we believe that an annual filing requirement would be
sufficient for purposes of review by Commission staff, as well as
investors and other market participants that might use this
information.\378\
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\375\ See rule 30b1-1.
\376\ See rule 30a-1.
\377\ See proposed amendments to rule 30a-1.
\378\ As discussed above, certain items that are currently
reported on Form N-SAR that would be helpful to have updated on a
more frequent basis would be moved to proposed Form N-PORT. For
example, item 28 of Form N-SAR requires the fund to provide its
monthly sales and repurchases of the Registrant's/Series' shares. In
order to increase the timeliness of the information reported to the
staff for funds flows, certain information relating to monthly flows
would be reported on item B.6 of proposed Form N-PORT, if adopted.
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We are proposing a filing period of 60 days after the end of the
fiscal year for funds to file reports on Form N-CEN.\379\ This is the
same filing period that management companies currently have to file
reports on Form N-SAR.\380\ As with Form N-SAR, and having considered
the amount and nature of the information that would be requested in
proposed Form N-CEN, we continue to believe that a sixty-day filing
period would appropriately balance the staff's need for timely
information against the time necessary for a fund to collect, verify,
and report the required information to the Commission.
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\379\ Management companies are currently required to file Form
N-SAR reports no more than 60 days after the close of their fiscal
year and fiscal second quarter. See rule 30b1-1 under the Investment
Company Act [17 CFR 270.30b1-1]. Accordingly, we anticipate that
management companies, which would constitute the largest number of
funds filing reports on proposed Form N-CEN, generally will already
have processes in place for reporting census-type information at the
end of their fiscal years. Thus, we believe requiring reports on
proposed Form N-CEN after the close of a fund's fiscal year, rather
than calendar year, would be the least burdensome approach for most
funds.
\380\ See rule 30b1-1 under the Investment Company Act [17 CFR
270.30b1-1]; but see rule 30a-1 under the Investment Company Act [17
CFR 270.30a-1] (requiring UITs to file annual reports on Form N-SAR
no more 60 days after the close of the calendar year).
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Rule 30b1-3 under the Investment Company Act currently requires a
fund to file a transition report on Form N-SAR when a fund's fiscal
year
[[Page 33635]]
changes.\381\ Because reports on Form N-CEN would be filed annually
rather semi-annually, we believe that a rule outlining the requirements
for a transition report would no longer be necessary as transition
report filing requirements for fiscal year changes involve less
complexity in the case of reports required to be filed once a year
rather than twice a year. Consequently, we are proposing to rescind
rule 30b1-3. We are, however, proposing to require that reports on Form
N-CEN not cover a period of more than 12 months.\382\ Thus, if a fund
changes its fiscal year, a report filed on Form N-CEN may cover a
period shorter than 12 months, but would not be permitted to cover a
period longer than 12 months or a period that overlaps with a period
covered by a previously filed report.\383\
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\381\ See rule 30b1-3.
\382\ See General Instruction C of proposed Form N-CEN.
\383\ Id.
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In addition, a fund would be able to file an amendment to a
previously filed report on proposed Form N-CEN at any time, including
an amendment to correct a mistake or error in a previously filed
report.\384\ A fund that files an amendment to a previously filed
report on the form would provide information in response to all items
of Form N-CEN, regardless of why the amendment is filed.\385\
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\384\ See General Instruction E of proposed Form N-CEN. Pursuant
to section 34(b) of the Investment Company Act, we expect that funds
would correct a material mistake in a Form N-CEN report by filing an
amendment to that report.
\385\ Id.
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We request comment on the proposed frequency of reporting and
proposed reporting deadline:
Should reports on Form N-CEN be filed more frequently than
annually, as proposed? Should we require management companies to file
reports on Form N-CEN semi-annually and UITs to file reports annually,
as is currently required by Form N-SAR? Are certain information items
on Form N-CEN of a nature that they may change frequently or such that
more frequent information about them should be reported to the
Commission? If so, should any information items in proposed Form N-CEN
be reported on proposed Form N-PORT or another form instead? If so,
what items and on which forms?
Consistent with the treatment of Form N-SAR filings for
management companies, we are proposing that reports be filed 60 days
after the end of the fund's fiscal year. Should we require a different
filing period? If so, what period should we require and why? How long
would it take funds to collect, verify, and file reports covering the
information required by proposed Form N-CEN? Would the burdens
associated with reports on proposed Form N-CEN be greater or less than
those associated with reports on Form N-SAR?
We have proposed that reports on Form N-CEN be filed as of
the end of the fund's fiscal year. We understand that funds have other
filing requirements that are tied to their fiscal-year end. Should we
require some other period end date, such as end of calendar year?
Should UITs be required to file reports as of the end of their fiscal
year, as proposed, or should they file reports as of the end of their
calendar year as they currently do with reports on Form N-SAR?
We are proposing to eliminate rule 30b1-3 under the
Investment Company Act. Should we instead retain the rule? Are the
general instructions to Form N-CEN, as proposed, sufficiently clear as
to the filing requirements when a fund changes its fiscal year end? If
not, how should the general instructions be revised, or in the
alternative, should a transition period rule be provided in connection
with Form N-CEN? If so, how should a transition period be defined and
what deadlines or timeframes should such a rule address?
Should a fund be required to file an amendment to its Form
N-CEN report or file a current report within a certain period of time
if previously reported information changes? If so, what types of
changes should trigger an amendment requirement? What filing period
should be required for such an amendment requirement?
4. Information Required on Form N-CEN
a. Part A--General Information
Part A of Form N-CEN, which would be completed by all funds, would
collect information about the reporting period covered by the report.
It would require funds to report the fiscal-year end date and indicate
if the report covers a period of less than 12 months.\386\
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\386\ Item 1 of proposed Form N-CEN.
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We request comment on the information items proposed to be reported
in Part A.
b. Part B--Information About The Registrant
Part B of Form N-CEN, which would also be completed by all funds,
would require certain background and other identifying information
about the fund. In the case of funds offering multiple series, if the
response to an item in Part B of the form differs between series, the
fund would be instructed to provide a response for each series, as
applicable, and label the response with the name and series
identification number of the series to which a response relates.\387\
This background information would allow the staff to quickly categorize
filers by fund type and will assist with our oversight of funds.
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\387\ See Instruction to Part B: of proposed Form N-CEN.
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Included in this background information would be the fund's
name,\388\ Investment Company Act filing number,\389\ and other
identifying information, such as its CIK \390\ and LEI.\391\ In
addition, the form would require the fund's address, telephone number,
and public Web site (if any),\392\ and the location of the fund's books
and records.\393\ While the fund's name, address, and filing number are
currently required by Form N-SAR,\394\ some of the additional
information, such as the fund's CIK, LEI, public Web site and location
of books and records would be new. As discussed in the Form N-PORT
section above, information such as the CIK and LEI would assist the
Commission with organizing the data received by the Commission and
allow the staff to cross-reference the data reported on Form N-CEN with
data received from other sources.\395\ For tracking purposes, the
proposed form would require information relating to whether the filing
was the initial or final filing.\396\
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\388\ Item 2.a of proposed Form N-CEN.
\389\ Item 2.b of proposed Form N-CEN.
\390\ Item 2.c of proposed Form N-CEN.
\391\ Item 2.d of proposed Form N-CEN; see also supra note 43
(discussing comment letters received on the FSOC Notice supporting
the use of LEIs).
\392\ Item 3 of proposed Form N-CEN.
\393\ Item 4 of proposed Form N-CEN.; see also infra notes 397-
399 and accompanying text.
\394\ Items 1 and 2 of Form N-SAR.
\395\ See supra Part II.A.2.a. As discussed above, commenters to
the FSOC Notice expressed support for the regulatory acceptance of
LEI identifiers. See supra note 43.
\396\ Item 5 of proposed Form N-CEN.
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As discussed above, funds would be required to include the location
of their books and records in reports on proposed Form N-CEN. We note
that books and records information is currently required by fund
registration forms; \397\ however, this information is not filed with
us in a structured format. We believe that having books and records
information in a structured format would increase our efficiency in
preparing for exams as well as our ability to identify current industry
trends and practices and, thus, we are
[[Page 33636]]
proposing to include this information in proposed Form N-CEN.\398\ In
addition, so as not to create unnecessary burdens, we are proposing to
amend Forms N-1A, N-2, N-3, N-4, and N-6 to exempt funds from those
forms' respective books and records disclosure requirements if the
information is provided in a fund's most recent report on proposed Form
N-CEN.\399\
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\397\ See Item 33 of Form N-1A, Item 32 of Form N-2, Item 36 of
Form N-3, Item 30 of Form N-4, and Item 31 of Form N-6.
\398\ Additionally, by including books and records information
in Form N-CEN, we may receive more frequently updated books and
records information from closed-end funds. Closed-end funds do not
update their registration statements as regularly as open-end funds
and, thus, the information regarding their books and records may not
always be up-to-date.
\399\ Funds that have not yet filed a report on proposed Form N-
CEN would have to continue to include this information in their
registration statement filings.
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Similar to Form N-SAR,\400\ Form N-CEN would require information
regarding whether the fund is part of a ``family of investment
companies.'' The form, which would include a substantially similar
definition as Form N-SAR,\401\ would define a ``family of investment
companies'' to mean, except with respect to insurance company separate
accounts, any two or more registered investment companies that (i)
share the same investment adviser or principal underwriter; and (ii)
hold themselves out to investors as related companies for purposes of
investment and investor services.\402\ This item would assist
Commission staff with analyzing multiple funds across the same family
of investment companies.
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\400\ Items 19, 94 and 116 of Form N-SAR; see also General
Instruction H of Form N-SAR (defining ``family of investment
companies'').
\401\ See id.; see also instruction 1 to Item 17 of Form N-1A.
\402\ Instruction to Item 6 of proposed Form N-CEN. The
instruction, like the definition of ``family of investment
companies'' in Form N-SAR, would also clarify that insurance company
separate accounts that may not hold themselves out to investors as
related companies (products) for purposes of investment and investor
services should consider themselves part of the same family if the
operational or accounting or control systems under which these
entities function are substantially similar. See General Instruction
H to Form N-SAR.
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Similar to Form N-SAR, proposed Form N-CEN would also require the
fund to provide its classification (e.g., open-end fund, closed-end
fund).\403\ In addition, unlike Form N-SAR, the proposed form would
specifically ask whether the fund issues a class of securities
registered under the Securities Act.\404\ These questions are intended
to elicit background information on the fund, which will assist us in
our monitoring and oversight functions (for example, identifying those
funds that have not issued securities registered under the Securities
Act).
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\403\ Item 7 of proposed Form N-CEN; see also Items 5, 6, 27,
58, 59 and 117 of Form N-SAR. If the registrant is an open-end fund,
proposed Form N-CEN would also require information on the total
number of series of the registrant and, if a series of the
registrant was terminated during the reporting period, information
regarding that series. Item 7.a.i-Item 7.a.ii of proposed Form N-
CEN. In addition, registrants that indicate they are management
companies registered on Form N-3 are directed by Item 7 to respond
to certain additional items in Part F of the form that relate to
insurance company separate accounts. Item 7.c.i of proposed Form N-
CEN.
\404\ Item 8 of proposed Form N-CEN.
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Under proposed Form N-CEN, a management company would report
information about its directors, including each director's name,
whether they are an ``interested person'' (as defined by section
2(a)(19) of the Investment Company Act), and the Investment Company Act
file number of any other registered investment company for which they
serve as a director.\405\ Although this information is reported in a
management company's Statement of Additional Information and provided
in annual reports to shareholders, providing this information to the
Commission in a structured format will allow the Commission and other
potential users to sort and analyze the data more efficiently.\406\ In
addition, the fund would be required to provide the chief compliance
officer's (``CCO's'') name, CRD number (if any), address, and phone
number,\407\ as well as indicate if the CCO has changed since the last
filing.\408\ If the fund's CCO is compensated or employed by any person
other than the fund, or an affiliated person of the fund, for providing
CCO services, the fund would also be required to report the name and
Employer Identification Number of the person providing such
compensation.\409\ Although some funds provide information relating to
their CCO in their registration statements, not all funds do.\410\ This
new requirement would provide staff with information on all fund CCOs
and would allow the staff to contact a fund's CCO directly.
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\405\ Item 9 of proposed Form N-CEN.
\406\ See, e.g., Items 17 and 27(b)(5) of Form N-1A.
\407\ Because we expect that funds will provide the CCO's direct
phone number in response to this information request, the CCO's
phone number would be a non-public field in all Form N-CEN filings.
\408\ Item 10 of proposed Form N-CEN.
\409\ Item 10.j of proposed Form N-CEN.
\410\ See, e.g., Item 17 of Form N-1A (requesting information
regarding fund officers). For example, Form N-1A defines the term
``officer'' to mean ``the president, vice-president, secretary,
treasurer, controller, or any other officer who performs policy-
making functions.'' It is our understanding that in some fund
complexes, the CCO does not fit within the category of officers
covered by this definition (i.e., the CCO does not perform a policy-
making function), and therefore, information as to their CCO is not
provided pursuant to the item.
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Part B would also include an item regarding matters that have been
submitted to a vote of security holders during the relevant
period.\411\ Information regarding submissions of matters to a vote of
securities holders is currently reported in Form N-SAR by management
companies in the form of an attachment with multiple reporting
requirements.\412\ In order to alleviate the burden on filers, we are
proposing to reduce the information to be reported regarding votes of
security holders to a yes/no question that is primarily meant to allow
staff to quickly identify funds with such votes, so that they can
follow up as appropriate, such as by reviewing more detailed
information required by other filings.\413\ Like Form N-SAR, the
proposed form would also include an item relating to material legal
proceedings during the reporting period.\414\
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\411\ See Item 11 of proposed Form N-CEN.
\412\ See Item 77.C of Form N-SAR; see also Instruction to
Specific Items for Item 77C.
\413\ This information request would apply to UITs as well as
management companies. The Form N-SAR requirement applies only to
management companies. See id. We believe it is important for the
Commission to have information for all registered investment
companies on matters submitted for security holder vote in order to
assist us in our oversight and examination functions.
\414\ Item 12 of proposed Form N-CEN. As in Form N-SAR Item
77.E, if there were any material legal proceedings, or if a
proceeding previously reported had been terminated, the registrant
would file an attachment as required by Part G: Of proposed Form N-
CEN. See Item 79.a.i of proposed Form N-CEN. We note that Form N-
CEN, unlike Form N-SAR, would require UITs to respond to the
information request related to material legal proceedings. For the
same reasons discussed above with respect to matters submitted for
security holder vote, we believe it is important to have information
on material legal proceedings of all registered investment
companies. See supra n.413.
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Form N-SAR currently requires management companies to report a
number of data points relating to fidelity bond and errors and
omissions insurance policy coverage.\415\ In order to limit the number
of items to those most useful to the Commission staff and reduce
burdens on filers, we are proposing to limit this request to two
separate items in Form N-CEN. One item would ask if any claims were
filed under the management company's fidelity bond and the aggregate
dollar amount of any such claims.\416\ The other item would ask if the
management company's officers or directors are covered under any
directors and officers/errors and omissions insurance policy and, if
so, whether any claims were filed under the policy during the
[[Page 33637]]
reporting period with respect to the registrant.\417\ These questions
will help alert Commission staff to insurance claims made by the fund
or its officers and directors as a result of legal issues related to
the fund.\418\
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\415\ Form N-SAR Items 80-85 and 105-110.
\416\ Item 13 of proposed Form N-CEN; cf. Item 83 of Form N-SAR.
\417\ Item 14 of proposed Form N-CEN; cf. Item 85 of Form N-SAR.
\418\ For example, a fund is required to provide and maintain a
fidelity bond against larceny and embezzlement, which in general
covers each officer and employee of the fund who has access to
securities or funds. See rule 17g-1(a) under the Investment Company
Act [17 CFR 270.17g-1].
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In order to better understand instances when funds receive
financial support from an affiliated entity, our proposal would also
require new information regarding the provision of such financial
support.\419\ We recently adopted disclosure requirements relating to
fund sponsors' support of money market funds as part of our money
market reform amendments in 2014, including a new requirement that
money market funds file reports on Form N-CR disclosing, among other
things, the receipt of financial support.\420\ As with money market
funds, we believe that it is important that the Commission understand
the nature and extent that a fund's sponsor provides financial support
to a fund, and are therefore proposing to extend this requirement to
all funds that would file reports on Form N-CEN. Although we believe it
is an infrequent practice, based on staff experience, non-money market
funds have received sponsor support in the past and we believe this
item would allow Commission staff to readily identify any funds that
have received such support for further analysis and review, as
appropriate. For consistency, Form N-CEN would include a substantially
similar definition of ``financial support'' as provided by Form N-
CR.\421\ In addition, the definition in Form N-CEN would also
explicitly exclude certain routine transactions from the definition of
financial support, as is the case for money market funds.\422\ If the
fund received financial support, it would also be required to provide
more detailed information in the form of an attachment as required by
Part G of Form N-CEN.\423\
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\419\ Item 15 of proposed Form N-CEN.
\420\ See Money Market Fund Reform 2014 Release, supra note 13.
\421\ See Instruction to Item 15 of proposed Form N-CEN; see
also Part C of Form N-CR.
\422\ See id.
\423\ Item 79.a.ii of proposed Form N-CEN. This requirement
would not apply to money market funds, as money market funds
currently provide this information through reports on Form N-CR.
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In addition, Form N-CEN would include a new item requiring
reporting as to whether the fund relied on orders from the Commission
granting the fund an exemption from one or more provisions of the
Investment Company Act, Securities Act or Securities Exchange Act
during the reporting period.\424\ Funds would identify any such order
by release number.\425\ We are proposing to collect this information in
a structured format to better monitor fund reliance on exemptive
orders, which will assist us with our oversight functions.
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\424\ Item 16 of proposed Form pN-CEN. Form N-SAR currently
requires funds to attach information required to be reported on Form
N-1Q pursuant to an existing exemptive order. See Instructions to
Specific Items 77P and 102O of Form N-SAR. Form N-CEN would require
the fund to file as an attachment any information required to be
filed pursuant to exemptive orders issued by the Commission and
relied on by the fund. Instruction to Item 79.a.vi of proposed Form
N-CEN.
\425\ See Item 16.a.i of proposed Form N-CEN.
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As with Form N-SAR,\426\ proposed Form N-CEN would require
identifying information for the fund's principal underwriters \427\ and
independent public accountants,\428\ including, as applicable, name,
SEC file number, CRD number, PCAOB number, LEI (if any), state or
foreign country, and whether a principal underwriter was hired or
terminated or if the independent public accountant changed since the
last filing.\429\ If the independent public accountant changed since
the last filing, the fund would have to provide a detailed narrative
attachment to Form N-CEN.\430\
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\426\ Items 11, 13, 77.K, 91, 102.J, 114, 115 of Form N-SAR.
\427\ Item 17 of proposed Form N-CEN.
\428\ Item 18 of proposed Form N-CEN.
\429\ Item 17 and Item 18 of proposed Form N-CEN.
\430\ Item 79.a.iii of proposed Form N-CEN.
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We are proposing to include for all funds several other accounting
and valuation related items that are currently required for management
companies by Form N-SAR, and that provide important information to the
Commission regarding possible accounting and valuation issues related
to a fund. These items include a question relating to material changes
in the method of valuation of the fund's assets.\431\ However, unlike
reports on Form N-SAR, proposed Form N-CEN would not require a separate
attachment detailing the circumstances surrounding a change in
valuation methods.\432\ Instead, to facilitate review of this
information in a structured format, our proposal would include specific
items in the form itself, including the date of change, explanation of
change, type of investment, statutory or regulatory basis for the
change, and the fund(s) involved.\433\ We would also carry over to
proposed Form N-CEN the requirement from Form N-SAR \434\ that the fund
identify whether there have been any changes in accounting principles
or practices, and, if any, to provide more detailed information in a
narrative attachment to the form.\435\
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\431\ Item 21 of proposed Form N-CEN. Valuation methodologies
are approved by fund directors for use by funds to determine, in
good faith, the fair value of portfolio securities (and other
assets) for which market quotations are not readily available. For
example, valuation methodology changes may include, but are not
limited to, changing from use of bid price to mid price for fixed
income securities or changes in the trigger threshold for use of
fair value factors on international equity securities.
\432\ See Item 77.J and Item 102.I of Form N-SAR. Also unlike
Form N-SAR, this requirement would apply to UITs as well as
management investment companies. We believe it is important for the
Commission to have information on accounting and valuation for all
registered investment companies in order to assist us in our
oversight and examination functions.
\433\ Compare Item 77.J of Form N-SAR with Item 21 of proposed
Form N-CEN. An instruction to Item 21 of proposed Form N-CEN would
clarify that we do not expect responses to this item to include
changes to valuation techniques used for individual securities
(e.g., changing from market approach to income approach for a
private equity security). Form N-SAR does not elaborate on the type
of information it is seeking by asking for changes in the method of
valuation of the registrant's assets. We are proposing to include
this instruction to provide clarity for filers and because we
believe that responding to Item 21 of proposed Form N-CEN for
individual securities may be overly burdensome for filers.
\434\ See Item 77.L and Item 102.K of Form N-SAR.
\435\ Item 22 and Item 79.a.v of proposed Form N-CEN. Like the
information requested regarding changes in valuation methods, Form
N-SAR only requests information from management companies regarding
changes in accounting principles and practices. Unlike Form N-SAR,
Form N-CEN would require this information from UITs as well, for the
same reasons as discussed above with respect to changes in valuation
methods. See supra n.432
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Form N-CEN would also require, like Form N-SAR, that management
companies, other than SBICs, file a copy of their independent public
accountant's report on internal control as an attachment to their
reports on the form.\436\ However, Form N-CEN would also include a new
question that asks whether the report on internal control found any
material weaknesses.\437\ Form N-CEN would also contain a new
requirement that the fund disclose if the certifying accountant issued
an opinion other than an unqualified opinion with respect to its audit
of the fund's
[[Page 33638]]
financial statements.\438\ These questions will elicit information on
potential accounting issues identified by a fund's accountant.
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\436\ See Item 77.B of Form N-SAR; Item 79.a.iv of proposed Form
N-CEN. As noted above, management companies (other than SBICs) are
currently required to file a copy of the independent public
accountant's report on internal control with their reports on Form
N-SAR. We continue to believe that a copy of the management
company's report on internal control should be filed with the
Commission and thus are proposing to carry over the filing
requirement to Form N-CEN.
\437\ Item 19 of proposed Form N-CEN.
\438\ Item 20 of proposed Form N-CEN.
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Unlike Form N-SAR, proposed Form N-CEN would also include an item
relating to whether, during the reporting period, an open-end fund made
any payments to shareholders or reprocessed shareholder accounts as a
result of an NAV error.\439\ Proposed Form N-CEN would also require
information from management companies regarding payments of dividends
or distributions that required a written statement pursuant to section
19(a) of the Investment Company Act and rule 19a-1 thereunder.\440\
These questions will assist the staff in monitoring valuation of fund
assets and the calculation of the fund's NAV, as well as compliance
with distribution requirements under section 19(a) and rule 19a-1.
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\439\ Item 23 of proposed Form N-CEN.
\440\ Item 24 of proposed Form N-CEN. Section 19(a) of the
Investment Company Act generally prohibits a fund from making a
distribution from any source other than the fund's net income,
unless that payment is accompanied by a written statement that
adequately discloses the source or sources of the payment. See 15
U.S.C. 80a-19(a). Rule 19a-1 under the Investment Company Act
specifies the information required to be disclosed in the written
statement. See 17 CFR 270.19a-1; see also 2013-11 IM Guidance
Update, supra note 289.
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We request comment on the proposed information items to be reported
in Part B:
Should any additional information regarding the fund be
requested? Should any of the information that would be requested by
proposed Form N-CEN be excluded? Should any of the information
requested for all Registrants be limited to only certain Registrants?
Should any other identifying number other than file number
and LEI be requested?
Should another definition or term be used to capture
affiliations across related funds rather than ``family of investment
companies''? Should a broader term, such as ``fund complex'' as defined
by instruction 1(b) to Item 17 of Form N-1A, be used instead? If so,
why would a broader definition be better?
Should Form N-CEN request any additional information
concerning the board of directors or individual directors? For example,
should Form N-CEN request information about the length of service of
directors?
Should Form N-CEN request information regarding a fund's
CCO, as proposed? Should we, as proposed, make the CCO's phone number a
non-public data field on all Form N-CEN filings? Are there any privacy
concerns with the other information that would be requested? Would
these concerns still exist if the information is reported in a non-
public data field? Are there any other concerns with the information
that would be requested? Is there other information we should request
in lieu of information that presents such concerns?
The current proposal eliminates Form N-SAR's attachment
regarding matters submitted to a vote of security holders. Should we
retain this requirement in Form N-CEN? Why or why not? Are there any
costs to eliminating Form N-SAR's attachment in Item 77C in favor of
yes/no type questions? Should the item regarding votes submitted to
security holders apply to UITs?
We request comment on Item 12 of proposed Form N-CEN.
Should this item apply to UITs? Should ``legal proceedings'' be
defined? Should it include administrative, mediated, or arbitrated
matters? Are there any other litigation matters that should be deemed
inherently material besides those enumerated in the instructions to the
item? Is there any additional information that should be requested
regarding material legal proceeding matters?
Should Form N-CEN request information about the fidelity
bond beyond what has been proposed (e.g., bond amount, the cost of the
bond, or the number of insured persons)? Should any additional
information regarding claims filed or that could have been filed under
the fidelity bond be requested? For example, should dates of claims
filed or that could have been filed be requested? Should the nature of
the claim be disclosed?
Is the term ``errors and omissions insurance'' clear or
should the form include a definition? In addition to requesting
information on whether any errors and omissions insurance claim was
made as proposed, should dates of insurance claims and amounts of
claims be requested? Should Form N-CEN permit funds to exclude the
advancement of expenses under a policy from disclosure as a claim?
The definition of ``financial support'' in proposed Form
N-CEN would include a non-exclusive list of examples of actions that
would (and would not) be deemed ``financial support.'' Money market
funds currently report this information in reports on Form N-CR. Should
the definition in proposed Form N-CEN be further expanded or limited
from our definition in Form N-CR, and if so, how and why? For example,
should we include a requirement to report information relating to
inter-fund lending? Should we require non-money market funds to report
receipt of financial support on a more timely basis? For example,
should we require non-money market funds to file reports on Form N-CR
or a similar form if they receive financial support?
Should any additional information concerning exemptive or
other orders be requested?
We also considered whether to require funds to disclose
reliance on no-action letters. If we were to require this information,
should we limit it to certain no-action letters and, if so, which ones?
Should we request additional information regarding fund
accounting and valuation? If so, what information? Should the items
relating to changes in valuation methods and changes in accounting
principles and practices apply to UITs, as proposed?
We request comment on Items 23 and 24 of proposed Form N-
CEN. Should we request information regarding NAV errors and/or dividend
and distribution payments that required a written statement pursuant to
section 19(a) and rule 19a-1? Why or why not? Is there additional
information we should request?
c. Part C--Items Relating to Management Investment Companies
i. Background and Classification of Funds
Part C of Form N-CEN would be completed by management investment
companies other than SBICs. For management companies offering multiple
series, this information would be completed separately as to each
series.\441\ The proposed information requirements in this section are
intended to provide the Commission and its staff with background
information on the fund industry and to assist us in meeting our legal
and regulatory requirements, such as requirements under the Paperwork
Reduction Act. Additionally, certain demographic information would
allow the Commission to better identify particular types of management
companies for monitoring and analysis if, for example, an issue arose
with respect to a particular fund type.
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\441\ General Instruction A to proposed Form N-CEN.
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Similar to Form N-SAR, proposed Form N-CEN would include general
identifying information on management companies and any series thereof,
including the full name of the fund, the fund's series identification
number and LEI, and whether it is the fund's first
[[Page 33639]]
time filing the form.\442\ Unlike Form N-SAR, we are proposing to
request specific information on the classes of open-end management
companies, including information relating to the number of classes
authorized, added, and terminated during the relevant period.\443\ Form
N-CEN would also include a new requirement to specifically provide
identifying information for each share class outstanding, including the
name of the class, the class identification number, and ticker
symbol.\444\
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\442\ Item 25 of proposed Form N-CEN; see also supra n.43
(discussing comment letters received on the FSOC Notice supporting
the use of LEIs). The proposed requirements relating to the name of
the fund and if this is the first filing with respect to the fund
are currently required by Form N-SAR. See Items 3 and 7.C of Form N-
SAR.
\443\ Item 26.a-Item 26.c of proposed Form N-CEN.
\444\ Item 26.d of proposed Form N-CEN.
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Pursuant to proposed Form N-CEN, a management company also would be
required to identify if it is any of the following types of funds:
\445\ ETF or exchange-traded managed fund (``ETMF''); \446\ index fund;
\447\ fund seeking to achieve performance results that are a multiple
of a benchmark, the inverse of a benchmark, or a multiple of the
inverse of a benchmark; interval fund; \448\ fund of funds; \449\
master-feeder fund; \450\ money market fund; target date fund; \451\
and underlying fund to a variable annuity or variable life insurance
contract. ETFs and ETMFs, index funds and master-feeder funds would
also be required to provide the additional information discussed
below.\452\
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\445\ Item 27 of proposed Form N-CEN. As discussed herein, many
of the types of funds listed in Item 27 are defined in proposed Form
N-CEN. With the exception of ``index fund'' and ``money market
fund,'' these terms are not currently defined in Form N-SAR. See
General Instruction H and Item 69 of Form N-SAR.
\446\ For purposes of reporting on proposed Form N-CEN, we
propose to define ``exchange-traded fund'' as an open-end management
investment company (or series or class thereof) or UIT, the shares
of which are listed and traded on a national securities exchange at
market prices, and that has formed and operates under an exemptive
order under the Investment Company Act granted by the Commission or
in reliance on an exemptive rule under the Act adopted by the
Commission. We also propose to defined ``exchange-traded managed
fund'' as an open-end management investment company (or series or
class thereof) or UIT, the shares of which are listed and traded on
a national securities exchange at NAV-based prices, and that has
formed and operates under an exemptive order under the Investment
Company Act granted by the Commission or in reliance on an exemptive
rule under the Act adopted by the Commission. General Instruction F
of proposed Form N-CEN. We believe these are appropriate definitions
as they are similar to the one used for determining the
applicability of ETF registration statement disclosure requirements
for open-end funds. See General Instruction A to Form N-1A.
Currently, all ETFs and exchange-traded managed funds rely on relief
from certain provisions of the Investment Company Act that is
granted by Commission order. See ETF Proposing Release, supra note
5; Eaton Vance Management, et al.; Notice of Application, Investment
Company Act Release No. 31333 (Nov. 6, 2014) [79 FR 67471 (Nov. 13,
2014)] (Notice); Eaton Vance Management, et al.; Order, Investment
Company Act Release No. 31361 (Dec. 2, 2014) (Order). The Commission
has, however, proposed to codify the exemptive relief previously
granted to ETFs by order. See ETF Proposing Release, supra note 5
(proposing rule 6c-11).
\447\ For purposes of reporting on proposed Form N-CEN, we
propose to define ``index fund'' as an investment company, including
an ETF, which seeks to track the performance of a specified index.
See Instruction 2 of Item 27 of proposed Form N-CEN. We believe this
is an appropriate definition as it is substantively similar to the
definition of ``index fund'' in Form N-SAR, but also takes into
account the emergence of ETFs. See Instruction to Item 69 of Form N-
SAR. Additionally, the proposed definition is largely similar to the
definition of ``index fund'' in rule 2a19-3 under the Investment
Company Act. See 17 CFR 270.2a19-3 (referring to an index fund for
purposes of the rule as a fund that has ``an investment objective to
replicate the performance of one or more broad-based securities
indices. . . .'').
\448\ For purposes of reporting on proposed Form N-CEN, we
propose to define ``interval fund'' as a closed-end management
company that makes periodic repurchases of its shares pursuant to
rule 23c-3 under the Investment Company Act. See Instruction 3 of
Item 27 of proposed Form N-CEN. We believe this is an appropriate
definition because the term ``interval fund'' is commonly used to
refer to funds that rely on rule 23c-3. See 17 CFR 270.23c-3.
\449\ For purposes of reporting on proposed Form N-CEN, we
propose to define ``fund of funds'' as a fund that acquires
securities issued by another investment company in excess of the
amounts permitted under section 12(d)(1)(A) of the Investment
Company Act. See 15 U.S.C. 80a-12(d)(1)(A); Instruction 1 of Item 27
of proposed Form N-CEN. We believe this is an appropriate definition
because ``funds of funds'' is a term typically used to refer to
funds that invest in other funds beyond the limits of the Investment
Company Act. Additionally, the proposed definition of ``fund of
funds'' largely tracks FINRA's definition of ``fund of funds'' in
its rules. See FINRA Code of Conduct Rule 2830(b)(11) (defining
``fund of funds'').
\450\ For purposes of reporting on proposed Form N-CEN, we
propose to define ``master-feeder fund'' as a two-tiered arrangement
in which one or more funds holds shares of a single fund in
accordance with section 12(d)(1)(E) of the Investment Company Act.
See Instruction 4 of Item 27 of proposed Form N-CEN. We believe this
is an appropriate definition as it is the same definition as used
for purposes of Form N-1A. See General Instruction A to Form N-1A.
\451\ For purposes of reporting on proposed Form N-CEN, we
propose to define ``target date fund'' as an investment company that
has an investment objective or strategy of providing varying degrees
of long-term appreciation and capital preservation through a mix of
equity and fixed income exposures that changes over time based on an
investor's age, target retirement date, or life expectancy. See
Instruction 5 of Item 27 of proposed Form N-CEN. We believe this is
an appropriate definition as it is the same definition as proposed
by the Commission in our 2010 proposing release relating to target
date funds. See Investment Company Advertising Release, supra note
6.
\452\ See Item 27.a; Item 27.b; and Item 27.f of proposed Form
N-CEN.
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First, proposed Form N-CEN would require a management company to
further indicate if it is an ETF or an ETMF.\453\ Second, index funds
would be required to report certain standard industry calculations of
relative performance. In particular, index funds would be required to
report a measure of the difference between the index fund's total
return during the reporting period \454\ and the index's return both
before and after fees and expenses--commonly called the ``tracking
difference''-- \455\ and also a measure of the volatility of the day-
to-day tracking difference over the course of the reporting period--
commonly called the fund's ``tracking error.'' \456\
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\453\ See Item 27.a.i and Item 27.a.ii.
\454\ With respect to index funds that are ETFs, we would expect
a fund to use its NAV-based total return, rather than market-based
total return, in responding to Items 27.b.i. and ii.
\455\ Item 27.b.i of proposed Form N-CEN. The tracking
difference is the return difference between the fund and the index
it is following, annualized. Johnson, Ben, et al., On the Right
Track: Measuring Tracking Efficiency in ETFs, Morningstar ETF
Research, at 29 (Feb. 2013), available at http://media.morningstar.com/uk/MEDIA/Research_Paper/Morningstar_Report_Measuring_Tracking_Efficiency_in_ETFs_February_2013.pdf (``Morningstar Paper''), at 29. Thus, tracking difference = (1
+ RNAV--RINDEX)1/N--1, where
RNAV is the total return for the fund over the reporting
period, RINDEX is the total return for the index for the
reporting period, and N is the length of the reporting period in
years. N will equal to 1 if the reporting period is the fiscal year.
Id.
\456\ See Item 27.b.ii of proposed Form N-CEN. Tracking error is
commonly understood as the standard deviation of the daily
difference in return between the fund and the index it is following,
annualized. Morningstar Paper, supra note 455, at 29. Thus, tracking
error = std (RNAV - RINDEX) x [radic]n, where
RNAV is the daily return for the fund, RINDEX
is the daily return for the index, std() represents the
standard deviation function, and n is the number of trading days in
the fiscal year. Id.
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Specifically, the proposed tracking difference data item would
equal the annualized difference between the index fund's total return
during the reporting period and the index's return during the reporting
period, and the proposed tracking error data item would equal the
annualized standard deviation of the daily difference between the index
fund's total return and the index's return during the reporting
period.\457\ Reporting of these measures will help data users,
including the Commission, investors, and other potential users,
evaluate the degree to which particular index funds replicate the
performance of the target index.\458\ In addition, tracking difference
and tracking error before fees and expenses \459\ would allow data
users to better understand the effect of factors other than fees and
expenses on the degree to which the
[[Page 33640]]
index fund replicates the performance of the target index.\460\
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\457\ See Morningstar Paper, supra note 455, at 29.
\458\ See Morningstar Paper, supra note 455, at 5. We believe
this information would help data users understand which funds are
best tracking their target indices and could highlight outlier
funds.
\459\ See Item 27.b.i.1 and Item 27.b.ii.1 of proposed Form N-
CEN.
\460\ See Morningstar Paper, supra note 455, at 9.
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Finally, master funds would be required to provide identifying
information with respect to each feeder fund, including information on
unregistered feeder funds (i.e., feeder funds not registered as
investment companies with the Commission), such as offshore feeder
funds.\461\ Similarly, a feeder fund would provide identifying
information of its master fund.\462\
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\461\ Item 27.f.i of proposed Form N-CEN.
\462\ Item 27.f.ii of proposed Form N-CEN.
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Proposed Form N-CEN would also require the management company to
report if it seeks to operate as a non-diversified company, as defined
in section 5(b)(2) of the Investment Company Act.\463\ Form N-SAR,
however, asks if the management company was a diversified investment
company at any time during the period or at the end of the reporting
period.\464\ We are proposing to require reporting on the non-
diversified status of a management company, rather than the diversified
status, because it is less common for funds to be non-diversified.\465\
Additionally, the question in proposed Form N-CEN is forward looking
rather than backward looking as in Form N-SAR. This change is intended
to include as part of the universe of non-diversified funds those funds
that seek to operate as non-diversified companies even if they should
happen to meet the definition of a ``diversified company'' as of the
end of a particular reporting period.\466\ We believe this change will
allow our staff to more accurately pinpoint the universe of non-
diversified funds and, thus, better able the staff to assist us in our
analysis and inspection functions.
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\463\ Item 28 of proposed Form N-CEN.
\464\ See Item 60 of Form N-SAR.
\465\ Based on Form N-SAR data between July 2014-December 2014,
74% of funds were diversified during the reporting period.
\466\ For example, if a fund generally operates as a non-
diversified fund, but as a result of market conditions or other
reasons, happens to meet the definition of ``diversified fund'' as
of the end of the reporting period, it would still be required to
indicate that it was a non-diversified fund for purposes of this
item.
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We request comment on the Part C questions relating to the fund's
background and classification:
Should additional identifying information be requested
with regard to series or classes of management investment companies?
Should any of the information proposed to be included in proposed Form
N-CEN be excluded?
We request comment on our list of types of fund. Are there
any types of funds that we should add to or remove from the list? If
so, which ones and why? Should we include additional categories based
on investment strategy, as proposed? If so, which categories? Are the
definitions in proposed Form N-CEN of the type of funds listed
appropriate? Should any different definitions be used for types of
funds? If so, what definitions and why? Are any terms that are not
defined sufficiently clear or should we provide definitions? If so,
what terms and what definitions?
We request comment on the information to be required for
index funds. Should we require the difference between the fund's total
return during the reporting period and the index's return during the
reporting period? Is this a meaningful methodology? Is there a better
methodology for calculating tracking difference or tracking error?
Should the form solicit information about the intent of a
management company to operate as a non-diversified fund or should it
request information about past operations during the reporting period?
ii. Investments in Certain Foreign Corporations
We are also proposing to require a management company to identify
if it invests in a controlled foreign corporation for the purpose of
investing in certain types of instruments, such as commodities,
including the name and LEI of such corporation, if any.\467\ As
discussed supra Part II.A.2.b, some funds use CFCs for making certain
investments, particularly in commodities and commodity-linked
derivatives, often for tax purposes. Information regarding assets
invested in a controlled foreign corporation for the purpose of
investing in certain types of instruments would provide investors
greater insight into special purpose entities, such as CFCs, that may
have certain legal, tax, and country-specific risks associated with
them. Combined with the information that we are proposing to collect in
Form N-PORT, Commission staff would likewise benefit from this
information by better understanding the use of CFCs and other similar
entities, which could allow for more efficient collaboration with
foreign regulatory authorities to the extent the Commission may need
books and records or other information for specific funds or general
inquiries related to CFCs.
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\467\ Item 29 of proposed Form N-CEN. An instruction to Item 29
of proposed Form N-CEN would define ``controlled foreign
corporation'' as having the meaning provided in section 957 of the
Internal Revenue Code.
---------------------------------------------------------------------------
We request comment on the Part C questions relating to the fund's
investments in certain foreign corporations:
Should we request additional information on whether the
management company invested in a foreign corporation or subsidiary,
including CFCs? For example, should we request information on the types
of investing activities the CFCs engage in or certain balance sheet
items from the CFC?
iii. Securities Lending
As discussed above, we are proposing that funds provide certain
securities lending information in reports on Form N-PORT to help inform
the Commission, investors and other market participants about the scale
of securities lending activity by funds and their collateral
reinvestments.\468\ Additionally, we are proposing to require that
funds include in their financial statements certain information
concerning their income and expenses associated with securities lending
activities in order to increase the transparency of this information to
investors and other potential users.\469\ We believe, however, that
some important information concerning securities lending activity by
funds should be reported in a structured format, but on a less frequent
basis than reports on proposed Form N-PORT. In this regard, we believe
an annual reporting requirement on Form N-CEN may yield sufficiently
timely data and may more appropriately balance the requirements'
benefits with their associated costs than would additional monthly
reporting requirements on Form N-PORT.
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\468\ See supra Parts II.A.2.d and II.A.2.g.v.
\469\ See proposed rule 6-03(m) of Regulation S-X.; see also
supra Parts II.C.3 and II.C.5.
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Accordingly, we propose to require that each management company
report annually on new Form N-CEN, in addition to whether it is
authorized to engage in securities lending transactions and whether it
loaned securities during the reporting period,\470\ information about
the fees associated with securities lending activity and information
about the management company's relationship with certain securities-
lending-related service providers. First, we propose to require that
management companies that loaned any securities during the reporting
period disclose certain information that would illuminate the
commonality of borrower default. Specifically, we propose to require
that those management companies disclose annually whether any borrower
of securities had defaulted on its
[[Page 33641]]
obligations to the management company to return loaned securities or
return them on time in connection with a security on loan during that
period.\471\
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\470\ Item 30.a-Item 30.b of proposed Form N-CEN.
\471\ Item 30.b.i of proposed Form N-CEN.
---------------------------------------------------------------------------
Under proposed Form N-CEN, management companies would also be
required to disclose whether a securities lending agent or any other
entity indemnifies the fund against borrower default on loans
administered by the agent and certain identifying information about the
entity providing indemnification if not the securities lending
agent.\472\ Together, these reporting requirements would yield data
that would allow the Commission, investors, and other potential users
to assess the counterparty risks associated with borrower default in
the securities lending market and the extent to which those risks are
mitigated by--or concentrated in--third parties that provide
indemnification against default.\473\
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\472\ Item 30.c.iv and Item 30.c.v.1-Item 30.c.v.2 of proposed
Form N-CEN.
\473\ As discussed above, commenters to the FSOC Notice
suggested that enhanced securities lending disclosures could be
beneficial to investors and counterparties. See supra note 71.
---------------------------------------------------------------------------
Because management companies sometimes engage external service
providers as securities lending agents or cash collateral managers, we
believe that some of the risks associated with securities lending
activities by management companies could be impacted by these service
providers and the nature of their relationships with the management
companies and one another. Accordingly, we propose to require that
management companies report some basic identifying information about
each securities lending agent and cash collateral manager.\474\ In
addition, we propose to require that funds disclose whether each of
these service providers is a first- or second-tier affiliated person of
the management company,\475\ which data would highlight those funds
that might be expected to rely on Commission exemptive relief with
respect to those transactions.\476\ We also propose to require each
management company to disclose whether it has made each of several
specific types of payments, including a revenue sharing split, non-
revenue sharing split (other than an administrative fee),
administrative fee, cash collateral reinvestment fee, and
indemnification fee, to one or more securities lending agents or cash
collateral managers during the reporting period.\477\ These disclosures
will allow the Commission, investors and other management company
boards of directors to understand better the type of fees a management
company pays in connection with securities lending activities and
whether, for example, the revenue sharing split that the company pays
to a securities lending agent includes compensation for other services
such as administration or cash collateral management.\478\ Finally, our
proposed disclosure of whether the cash collateral manager is a first-
or second-tier affiliate of the securities lending agent \479\ could
alert the Commission, investors, and other market participants to
potential conflicts of interest when an entity managing a cash
collateral reinvestment portfolio is affiliated with a securities
lending agent that is compensated with a share of revenue generated by
the cash collateral reinvestment pool. Together, the data that these
proposed requirements would yield would allow the Commission to monitor
the interaction of these service providers with management companies.
In addition to informing the Commission's risk analysis and,
potentially, future policymaking concerning securities lending activity
by management companies, we believe that this information could also
help inform other data users about the use of, and possible risks
associated with, the lending of portfolio securities by management
companies.
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\474\ Item 30.c.i-Item 30.c.ii and Item 30.d.i-Item 30.d.ii of
proposed Form N-CEN.
\475\ Item 30.c.iii and Item 30.d.iv of proposed Form N-CEN.
\476\ Section 17(d) of the Investment Company Act makes it
unlawful for first- and second- tier affiliates, among others,
acting as principal, to effect any transaction in which the fund, or
a company it controls, is a joint or a joint and several participant
in contravention of Commission rules. 15 U.S.C. 80a-17(d). Rule 17d-
1(a) prohibits first- and second-tier affiliates of a registered
fund, among others, acting as principal from participating in or
effecting any transaction in connection with any joint enterprise or
other joint arrangement or profit-sharing plan in which the fund (or
any company it controls) is a participant unless an application or
arrangement or plan has been filed with the Commission and has been
granted. 17 CFR 270.17d-1. These provisions would prohibit a fund
from compensating a securities lending agent that is a first- or
second-tier affiliate with a share of loan revenue or lending to a
borrower that is a first- or second-tier affiliate without an
exemptive order, and generally from investing cash collateral in a
first- or second-tier affiliated liquidity pool unless the fund
satisfies the conditions in rule 12d1-1 under the Investment Company
Act, which provides exemptive relief for fund investments in an
affiliated registered money market fund and pooled investment
vehicle that would be an investment company but for sections 3(c)(1)
and 3(c)(7) of the Investment Company Act and that operate in
compliance with money market fund regulations subject to certain
conditions. A management company that has a service agreement with
an affiliated securities lending agent, under which compensation is
not based on a share of loan revenue generated by the lending
agent's efforts, generally is not a joint enterprise or other joint
arrangement or profit-sharing plan and, thus, does not need an
exemptive order. See Norwest Bank Minnesota, N.A., SEC Staff No-
action Letter (pub. avail. May 25, 1995) available at http://www.sec.gov/divisions/investment/noaction/1995/norwest052595.pdf.
\477\ Item 30.e of proposed Form N-CEN. Management companies
that report that other payments were made to one or more securities
lending agents or cash collateral managers during the reporting
period would also be required to describe the type or types of other
payments. Item 30.e.vi of proposed Form N-CEN.
\478\ In evaluating the fees and services of any securities
lending agent, the board of directors of a management company that
engages in securities lending may be assisted by reviewing and
comparing information on securities lending agent fee arrangements
of other management companies. See, e.g., SIFE Trust Fund, SEC No-
action Letter (publ. avail. Feb. 17, 1982) (management company's
board of directors determines that the securities lending agent's
fee is reasonable and based solely on the services rendered);
Neuberger Berman Equity Funds, et al., Investment Company Act
Release No. 25880 (Jan. 2, 2003) (notice), Investment Company Act
Release No. 25916 (Jan. 28, 2003) (order) (management company's
board of directors, including a majority of independent directors,
will determine initially and review annually, among other things,
that (i) the services to be performed by the affiliated securities
lending agent are appropriate for the lending fund, (ii) the nature
and quality of the services to be provided by the agent are at least
equal to those provided by others offering the same or similar
services; and (iii) the fees for the agent's services are fair and
reasonable in light of the usual and customary charges imposed by
others for services of the same nature and quality).
\479\ Item 30.d.iii of proposed Form N-CEN.
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We request comment on the Part C questions relating to the
management company's securities lending activities:
Should management companies be required to report any or
all of the proposed information concerning securities lending activity?
If not, which items should not be required, and why? Should we collect
any additional information?
Should we require, as proposed, that management companies
disclose annually whether any borrower of securities defaulted on its
obligations to the management company? Why or why not? Should we
instead, or additionally, require management companies to report
monthly on Form N-PORT whether any borrower of securities defaulted on
its obligations to the management company?
Should we require, as proposed, that management companies
report certain information about each securities lending agent and each
cash collateral manager? Why or why not? Should we require that these
funds disclose whether each of these external service providers is a
first- or second-tier affiliate of the fund?
In addition to requiring management companies to report
whether they made each of the proposed types of payments associated
with securities lending, should the Commission also require disclosure
of
[[Page 33642]]
specific rates and/or amounts paid during the reporting period of each
enumerated type of compensation, similar to the disclosures we are
proposing to require in the financial statements concerning the terms
governing the compensation of the securities lending agent and
collateral manager? Would that additional information be useful in
proposed Form N-CEN in a structured format for risk monitoring and use
by investors or other market participants, including other management
company boards of directors that are evaluating securities lending
agent services?
Would the proposed reporting requirements regarding
securities lending yield beneficial information? If not, what
information should the Commission collect instead to conduct
appropriate risk monitoring of securities lending activity by
management companies? How should this information be collected?
Would the proposed reporting requirements concerning
securities lending activity be burdensome?
Should proposed Form N-CEN include a specific definition
for ``securities lending agent''? Why or why not? If so, how should the
term be defined? Should the form include a specific definition for
``cash collateral manager''? Why or why not? If so, how should the term
be defined?
Are there other reporting requirements that the Commission
should adopt for securities lending activity? If so, would these
additional reporting requirements assist with Commission risk
monitoring, inform the public, or both?
iv. Reliance on Certain Rules
Like Form N-SAR, proposed Form N-CEN would include a requirement
that management companies report whether they relied on certain rules
under the Investment Company Act during the reporting period.\480\
However, proposed Form N-CEN would require this information with
respect to additional rules not currently covered by Form N-SAR.\481\
We are proposing to collect information on these additional rules to
better monitor reliance on exemptive rules and to assist us with our
accounting, auditing and oversight functions, including, for some
rules, compliance with the Paperwork Reduction Act. For example,
reporting of reliance on rules 15a-4 and 17a-8 under the Investment
Company Act will allow the staff to monitor significant events relating
to interim investment advisory agreements and affiliated mergers,
respectively.
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\480\ Item 31 of proposed Form N-CEN.
\481\ Compare id. (requiring management companies to identify if
they relied upon any of the following rules: rule 10f-3 (exemption
for the acquisition of securities during the existence of an
underwriting or selling syndicate), rule 12d1-1 (exemptions for
investments in money market funds), rule 15a-4 (temporary exemption
for certain investment advisers), rule 17a-6 (exemption for
transactions with portfolio affiliates), rule 17a-7 (exemption of
certain purchase or sale transactions between an investment company
and certain affiliated persons thereof), rule 17a-8 (mergers of
affiliated companies), rule 17e-1 (brokerage transactions on a
securities exchange), rule 22d-1 (exemption from section 22(d) to
permit sales of redeemable securities at prices which reflect sales
loads set pursuant to a schedule), rule 23c-1 (repurchase of
securities by closed-end companies), rule 32a-4 (independent audit
committees)) with Items 40, 77.N, 77.O, 102.M, 102.N of Form N-SAR
(requiring information regarding rules 2a-7 (money market funds),
10f-3 (see above for description) and 12b-1 (distribution of shares
by registered open-end management investment company).
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In addition, we are proposing to amend rule 10f-3 to eliminate the
requirement that funds provide the Commission with reports on Form N-
SAR regarding any transactions effected pursuant to the rule.\482\ Rule
10f-3 currently requires funds to maintain and preserve certain
information--the same information also required to be filed pursuant to
Form N-SAR--in its records regarding rule 10f-3 transactions.\483\ Our
proposed amendments to rule 10f-3 would eliminate the requirement to
periodically report this information,\484\ but would not alter the
requirement to maintain and preserve it. The Commission believes it is
unnecessary for funds to continue to file this information because
Commission staff can request the information in connection with staff
inspections, examinations and other inquiries.\485\
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\482\ See proposed amendments to rule 10f-3.
\483\ See rule 10f-3(c)(12) under the Investment Company Act [17
CFR 270.10f-3(c)(12)].
\484\ See rule 10f-3(c)(9).
\485\ Similar exemptive rules take this approach and do not
require filings with the Commission. See rule 17a-7 under the
Investment Company Act [17 CFR 270.17a-7] and rule 17e-1 under the
Investment Company Act [17 CFR 270.17e-1]. We note that we
previously proposed deleting this filing requirement from rule 10f-3
in 1996. See Exemption for the Acquisition of Securities During the
Existence of an Underwriting Syndicate, Investment Company Act
Release No. 21838 (Mar. 21, 1996) [61 FR 13620 (Mar. 27, 1996)]. We
chose not to adopt it in light of the other amendments to the rule
at that time, including the increase in the percentage limit on the
principal amount of an offering that an affiliated fund could
purchase. See Exemption for the Acquisition of Securities During the
Existence of an Underwriting of Selling Syndicate, Investment
Company Act Release No. 22775 (July 31, 1997) [62 FR 42401 (Aug. 7,
1997].
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We request comment on the Part C questions relating to the
management company's reliance on certain exemptive rules and orders:
Should any additional information concerning exemptive or
other rules be requested?
We request comment on our proposal to eliminate the
requirement under rule 10f-3 that funds provide the Commission with
periodic reports on Form N-SAR. Should we eliminate this requirement or
continue it under Form N-CEN? Why or why not? Are there any costs or
benefits associated with eliminating this requirement?
v. Expense Limitations
As in Form N-SAR,\486\ Form N-CEN would require information
regarding expense limitations.\487\ The requirements in Form N-CEN,
however, would be modified from Form N-SAR by requiring information on
whether the management company had an expense limitation arrangement in
place, whether any expenses of the fund were waived or reduced pursuant
to the arrangement, whether the waived fees are subject to recoupment,
and whether any expenses previously waived were recouped during the
period.\488\ We believe that more specific questions relating to
management company expense limitation arrangements would reduce burdens
and limit uncertainty for management companies when responding to these
items.
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\486\ See Items 53.A-C of Form N-SAR (requiring the fund to
identify if expenses of the Registrant/Series were limited or
reduced during the reporting period by agreement, and, if so,
identify if the limitation was based upon assets or income).
\487\ Item 32 of proposed Form N-CEN.
\488\ Id. Proposed Form N-CEN would also include an instruction
that filers should provide information in response to the item
concerning any direct or indirect limitations, waivers or
reductions, on the level of expenses incurred by the fund during the
reporting period. The instructions would also provide an example of
how an expense limit may be applied--when an adviser agrees to
accept a reduced fee pursuant to a voluntary fee waiver or for a
temporary period such as for a new fund in its start-up phase. See
Instruction to Item 32 of proposed Form N-CEN.
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We request comment on the Part C questions relating to the
management company's expense limitations and fee waivers:
Are the proposed Form N-CEN items relating to expense
limitations appropriate? Is there any additional information that we
should request on the management company's expense limitations? If so,
what items and why?
vi. Service Providers
Similar to Form N-SAR,\489\ Form N-CEN would collect identifying
information on the management company's service providers, including
its advisers and sub-advisers,\490\ transfer agents,\491\ custodians
(including sub-
[[Page 33643]]
custodians),\492\ shareholder servicing agents,\493\ third-party
administrators,\494\ and affiliated broker-dealers.\495\ We are also
proposing new requirements that the management company provide
information on whether the service provider was hired or terminated
during the reporting period and whether it is affiliated with the fund
or its adviser(s).\496\ In addition, like Form N-SAR, Form N-CEN would
ask custodians to indicate the type of custody, but would expand upon
the types of custody listed.\497\ Together, these items would assist
the Commission in analyzing the use of third-party service providers by
management companies, as well as identify service providers that
service large portions of the fund industry.
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\489\ See Items 8 and 10-15 of Form N-SAR.
\490\ Item 33 of proposed Form N-CEN.
\491\ Item 34 of proposed Form N-CEN. Form N-SAR equates a
``shareholder servicing agent'' with a ``transfer agent.'' See
Instruction to Item 12 of Form N-SAR.
\492\ Item 37 of proposed Form N-CEN.
\493\ Item 38 of proposed Form N-CEN.
\494\ Item 39 of proposed Form N-CEN.
\495\ Item 40 of proposed Form N-CEN.
\496\ See, e.g., Items 33.a.vii, b and c.vii; 34.a.vi and b of
proposed Form N-CEN.
\497\ Compare Items 15.E and 18 of Form N-SAR with Item
37.a.vii.6-Item 37.a.vii.7 of proposed Form N-CEN.
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Based on staff experience, management companies and their boards
often rely on pricing agents to help price securities held by the fund.
Therefore, we are proposing a new requirement that management companies
provide identifying information on persons that provided pricing
services during the reporting period,\498\ as well as persons that
formerly provided pricing services to the management company during the
current and immediately prior reporting period that no longer provide
services to that company.\499\ This would assist the Commission in
assessing the use of pricing services by the fund industry and the role
they play in valuing fund investments.
---------------------------------------------------------------------------
\498\ Item 35 of proposed Form N-CEN.
\499\ Item 36 of proposed Form N-CEN.
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Part C would also require identifying information on the ten
entities that, during the reporting period, received the largest dollar
amount of brokerage commissions from the management company \500\ and
with which the management company did the largest dollar amount of
principal transactions.\501\ Form N-SAR also requests identifying
information on these entities \502\--information that is not available
elsewhere in a structured format. Moreover, we continue to believe that
brokerage commission and principal transaction information provides
valuable information to Commission staff about management company
brokerage practices, and would assist the staff in identifying the
types of broker-dealers who service management company clients,
monitoring for changes in business practices, and assessing the types
of trading activities in which funds are engaged. Finally, similar to
Form N-SAR, we are proposing to ask whether the management company paid
commissions to broker-dealers for ``brokerage and research services''
within the meaning of section 28(e) of the Exchange Act.\503\
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\500\ Item 41 of proposed Form N-CEN.
\501\ Item 42 of proposed Form N-CEN.
\502\ Items 20-23 of Form N-SAR. Form N-SAR includes an
instruction designed to help filers distinguish between agency and
principal transactions for purposes of reporting information
regarding brokerage commissions and principal transactions. See
Instruction to Items 20-23 of Form N-SAR. A substantially similar
instruction would be included in Form N-CEN. See Instructions to
Item 41-Item 42 of proposed Form N-CEN.
\503\ Item 43 of proposed Form N-CEN; see also Item 26.B of Form
N-SAR (requiring disclosure if the fund's receipt of investment
research and statistical information from a broker or dealer was a
consideration which affected the participation of brokers or dealers
or other entities in commissions or other compensation paid on
portfolio transactions of Registrant). Section 28(e) of the Exchange
Act establishes a safe harbor that allows money managers to use
client funds to purchase ``brokerage and research services'' for
their managed accounts under certain circumstances without breaching
their fiduciary duties to clients. See 15 U.S.C. 78bb(e); see also
Commission Guidance Regarding Client Commission Practices Under
Section 28(e) of the Securities Exchange Act of 1934, Release No.
33-54165 (July 18, 2006) [71 FR 41978 (July 24, 2006)]. We continue
to believe that an item indicating whether a fund uses soft dollars
will assist our staff in their examinations and provide census data
as to the number and type of funds that rely on the safe harbor
provided by section 28(e).
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We request comment on the Part C questions relating to the fund's
service providers:
Are the proposed Form N-CEN items relating to service
providers appropriate? Should any of the service providers or
information regarding the service providers included in proposed Form
N-CEN be excluded from the form? Are there other service providers for
which we should require information? For example, should we request
information on index providers and, in particular, affiliated index
providers?
Are the service providers identified in proposed Form N-
CEN sufficiently clear or should we provide definitions for each
provider? If so, what definitions should we use and why?
Should additional information be requested regarding
advisers or sub-advisers? Should the form provide a definition of the
term sub-adviser?
Should any additional specific service provider
information be requested? Is there any proposed service provider
information that should not be requested? Should proposed Form N-CEN
request information on whether the service provider was hired or
terminated, or on the affiliation of the service provider, as proposed?
In addition to requesting service provider city and state
or foreign country information as proposed, should street address,
phone or email information be requested? Would inclusion of this
additional information in proposed Form N-CEN raise any privacy or
other concerns?
Should the form request information regarding sub-transfer
agents or other shareholder servicers?
Should any additional information on service provider fees
be requested? For example, should custodian, audit, or administrator
fees be requested? Is certain service provider fee information
unnecessary as redundant with financial statements?
Is the use of the term ``pricing service'' appropriate as
proposed? Should the form provide a definition of ``pricing service''?
Should we, as proposed, include custody pursuant to rules
17f-6 and 17f-7 under the Investment Company Act (types of custody not
currently listed in Form N-SAR) on the list of types of custody in
proposed Form N-CEN?
Is there additional information regarding broker-dealers
that should be requested? Should we use a different methodology other
than largest amount of brokerage commissions or collect information for
a larger or smaller number of brokers?
Is there additional information regarding payments by the
management companies to brokers or dealers for ``brokerage and research
services'' that should be requested?
We request comment on Part C, generally:
Are there any additional questions regarding management
companies that we should include in proposed Form N-CEN?
d. Part D--Closed-End Management Companies and Small Business
Investment Companies
Proposed Form N-CEN would, as Form N-SAR does, recognize that
closed-end funds and SBICs have particular characteristics that warrant
questions targeted specifically to them.\504\ Like Form N-SAR, Form N-
CEN would require additional
[[Page 33644]]
information to be reported by closed-end funds in Part D of the form
and would also treat SBICs differently than other management investment
companies, requiring them to complete Part D of the form in lieu of
Part C.\505\ The information requested in Part D would provide us with
information that is particular to closed-end funds and SBICs and, thus,
would assist us in monitoring the activities of these funds and our
examiners in their preparation for exams of these funds.
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\504\ See Items 86-88 of Form N-SAR (relating specifically to
closed-end funds) and Items 89-110 of Form N-SAR (relating
specifically to SBICs).
\505\ As discussed above, SBICs are unique investment companies
that operate differently than other management investment companies.
See supra note 35.
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Similar to Form N-SAR, we are proposing to require in Part D of
proposed Form N-CEN information on the securities that have been issued
by the closed-end fund or SBIC, including the type of security issued
(common stock, preferred stock, warrants, convertible securities,
bonds, or any security considered ``other''), title of each class,
exchange where listed, and ticker symbol.\506\ We are also proposing to
require new information relating to rights offerings \507\ and
secondary offerings by the closed-end fund or SBIC,\508\ including
whether there was such an offering during the reporting period and if
so, the type of security involved.\509\ Together, this information will
allow the staff to quickly identify and track the securities and
offerings of closed-end funds and SBICs when monitoring and examining
these funds.
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\506\ Item 44 of proposed Form N-CEN; cf. Items 87-88 and 96 of
Form N-SAR (requesting information on the title and ticker of each
class of securities issued on an exchange and information regarding
certain specific types of securities). An instruction to Item 44 of
proposed Form N-CEN would indicate that the fund should provide the
ticker symbol for any security not listed on an exchange, but that
has a ticker symbol.
\507\ Item 45 of proposed Form N-CEN.
\508\ Item 46 of proposed Form N-CEN.
\509\ See Item 45 and Item 46 of proposed Form N-CEN. Item 45.c
of proposed Form N-CEN would also ask for the percentage of
participation in a primary rights offering and an accompanying
instruction to this item would address the method of calculating
such percentage.
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Like Form N-SAR,\510\ we are also proposing to require that each
closed-end fund or SBIC report information on repurchases of its
securities during the reporting period.\511\ However, unlike Form N-
SAR, which requires information on the number of shares or principal
amount of debt and net consideration received or paid for sales and
repurchases for common stock, preferred stock, and debt securities,
Form N-CEN would only require the closed-end fund or SBIC to indicate
if it repurchased any outstanding securities issued by the closed-end
fund or SBIC during the reporting period and indicate which type of
security.\512\
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\510\ See Items 86 and 95 of Form N-SAR.
\511\ Item 47 of proposed Form N-CEN.
\512\ We note that, with respect to closed-end funds, financial
information relating to monthly sales and repurchases of shares
would be reported monthly on proposed Form N-PORT. See Item B.6 of
proposed Form N-PORT (requiring the aggregate dollar amounts for
sales and redemptions/repurchases of fund shares during each of the
last three months).
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We are also proposing to carry over Form N-SAR's requirements \513\
relating to default on long-term debt \514\ and dividends in
arrears.\515\ However, unlike Form N-SAR, which requires an attachment
stating detailed information on defaults and arrears on senior
securities,\516\ we are proposing that Form N-CEN only require a yes/no
question and text-based responses directly in the form.\517\ We are
similarly proposing to carry over the Form N-SAR requirement \518\
regarding modifications to the constituent's instruments defining the
rights of holders.\519\ Similar to Form N-SAR, if a closed-end fund or
SBIC made modifications to such an instrument, it would also be
required to file an attachment in Part G of Form N-CEN with a more
detailed description of the modification.\520\ This item provides the
Commission with information on and copies of documents reflecting
changes to shareholders' rights.
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\513\ See Items 77.G and 102.F of Form N-SAR.
\514\ Item 48 of proposed Form N-CEN.
\515\ Item 49 of proposed Form N-CEN.
\516\ Items 77.G and 102.F of Form N-SAR.
\517\ Item 48 of proposed Form N-CEN would require, with respect
to any default on long-term debt, the nature of the default, the
date of the default, the amount of the default per $1000 face
amount, and the total amount of default. An instruction to this item
would define ``long-term debt'' to mean a debt with a period of time
from date of initial issuance to maturity of one year or greater.
Item 49 of proposed Form N-CEN would require, with respect to any
dividends in arrears, the title of the issue and the amount per
share in arrears. This item would define ``dividends in arrears'' to
mean dividends that have not been declared by the board of directors
or other governing body of the fund at the end of each relevant
dividend period set forth in the constituent instruments
establishing the rights of the stockholders.
\518\ Items 77.I and 102.H of Form N-SAR.
\519\ Item 50 of proposed Form N-CEN.
\520\ Item 79.b.ii of proposed Form N-CEN.
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Part G of proposed Form N-CEN would also require closed-end funds
or SBICs to file attachments regarding material amendments to
organizational documents,\521\ new or amended investment advisory
contracts,\522\ information called for by Item 405 of Regulation S-
K,\523\ and, for SBICs only, senior officer codes of ethics.\524\ Where
possible, we sought to eliminate the need to file attachments with the
census reporting form in order to simplify the filing process and
maximize the amount of information we receive in a data tagged format.
However, the attachments proposed to be required with reports on Form
N-CEN, provide us with information that is not otherwise updated or
filed with the Commission and, thus, we believe they should continue to
be filed in attachment form. All of the attachments in proposed Form N-
CEN that are specific to closed-end funds and SBICs are also currently
required by Form N-SAR.\525\
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\521\ Item 79.b.i of proposed Form N-CEN.
\522\ Item 79.b.iii of proposed Form N-CEN.
\523\ Item 79.b.iv of proposed Form N-CEN.
\524\ Item 79.b.v of proposed Form N-CEN. This item applies only
to SBICs because other management investment companies, including
closed-end funds, provide this information in filings on Form N-CSR.
See Items 2 and 3 of Form N-CSR; see also rule 30d-1 under the
Investment Company Act [17 CFR 270.30d-1].
\525\ Compare Item 79.b of proposed Form N-CEN with Items
77.Q.1, 77.Q.2, 102.P.1, 102.P.2, and 102.P.3 of Form N-SAR; see
also Instructions to Specific Items 77Q1(a), 77Q1(e), 77Q2,
102P1(a), 102P1(e), 102P2, and 102P3 of Form N-SAR.
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Similar to Form N-SAR, we are proposing to require other census-
type information relating to management fees and net operating
expenses. Closed-end funds would be required to report the fund's
advisory fee as of the end of the reporting period as a percentage of
net assets.\526\ Additionally, closed-end funds and SBICs would both be
required to report the fund's net annual operating expenses as of the
end of the reporting period (net of any waivers or reimbursements) as a
percentage of net assets.\527\ Unlike open-end funds, which provide
management fee and net expense information to the Commission in a
structured format,\528\ such information is not reported to or updated
with the Commission in a structured format by closed-end funds or
SBICs. This information would allow the Commission to track industry
trends relating to fees. Like Form N-SAR, proposed Form N-CEN also
would
[[Page 33645]]
require, for the end of the reporting period, the market price per
share \529\ and NAV per share \530\ of the fund's common stock.
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\526\ Item 51 of proposed Form N-CEN; cf. Items 47-52 and 72.F
of Form N-SAR (requesting advisory fee information for management
companies, including closed-end funds). Whereas Form N-SAR requests
information regarding the advisory fee rate and the dollar amount of
gross advisory fees, an instruction to Item 51 of proposed Form N-
CEN would explain that the management fee reported should be based
on the percentage of amounts incurred during the reporting period.
\527\ Item 52 of proposed Form N-CEN; cf. Items 72.X and 97.X of
Form N-SAR (requesting total expenses in dollars for closed-end
funds and SBICs).
\528\ Management fee information for open-end funds is currently
tagged in XBRL format in the fund's risk return summary and is
therefore not required by proposed Form N-CEN. See General
Instruction C.3.G of Form N-1A.
\529\ Item 53 of proposed Form N-CEN; see Items 76 and 101 of
Form N-SAR.
\530\ Item 54 of proposed Form N-CEN; see Items 74.V.1 and 99.V
of Form N-SAR.
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Finally, like Form N-SAR, proposed Form N-CEN would require
information regarding an SBIC's investment advisers, transfer agents,
and custodians.\531\ This information is the same as what would be
reported by open-end and closed-end funds in Part C of proposed Form N-
CEN, but SBICs would not be required to fill out Part C of the proposed
form. As noted above, proposed Form N-CEN, like Form N-SAR, would
recognize that SBICs have particular characteristics that warrant
questions targeted specifically to them. The majority of questions in
Part C of proposed Form N-CEN would be inapplicable to SBICs or
otherwise request information that would not be helpful to us in
carrying out our regulatory functions with respect to SBICs.
Accordingly, we propose to except SBICs from filling out Part C of the
form and instead would include certain service provider questions from
Part C in Part D of the form as response items for SBICs.
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\531\ Item 55-Item 57 of proposed Form N-CEN.
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We request comment on the following information requirements
relating to closed-end funds and SBICs:
Are the proposed Form N-CEN items relating to closed-end
funds and SBICs appropriate? Are there other information items relating
to closed-end funds and SBICs that we should require? If so, what
information and why? Are there any items relating to closed-end funds
and SBICs in proposed Form N-CEN that should be excluded from the form?
Is there additional information regarding trading in
closed-end fund or SBIC securities that should be requested?
Is there additional information regarding repurchases that
should be requested?
Should the form provide specific instructions on the
calculation of management fees?
Should net annual operating expenses be defined? Should
they include amortization and depreciation expenses?
Should the management fee for closed-end funds be
requested as proposed or should other information such as the absolute
amount of fees be requested?
Should we request this information for SBICs? Should the form
request information on what the fee is based upon, such as a percentage
of income or performance? Should breakpoints used in calculating the
management fee be reported at each breakpoint level or should an
average management fee be provided? Should the management fee
information requested be forward-looking or should it be backward
looking, as proposed, providing a management fee based on fees charged
during the reporting period and, if so, which NAV (e.g., year-end or
average) should be used?
If a closed-end fund or SBIC pays a performance fee,
should the form provide instructions regarding how they should
calculate the fees to be disclosed?
In connection with defaults, is reference to a $1,000 face
amount appropriate? Would this requirement appropriately provide
meaningful information not only on the amount of principal default but
default on interest payments? Should the form also require information
on the amount of debt outstanding to provide additional context and
information related to the default?
Regarding dividends in arrears, should the form request
per share amounts as proposed or should it request the aggregate amount
in arrears?
e. Part E--Exchange-Traded Funds and Exchange-Traded Managed Funds
We are proposing to include a section in Form N-CEN related
specifically to ETFs--Part E--which ETFs would complete in addition to
Parts A, B, and G, and either Part C (for open-end funds) or Part F
(for UITs). For purposes of Form N-CEN, an ETF is a special type of
investment company that is registered under the Investment Company Act
as either an open-end fund or a UIT. Unlike other open-end funds and
UITs, an ETF does not sell or redeem its shares except in large blocks
(or ``creation units'') and with broker-dealers that have contractual
arrangements with the ETF (called ``authorized participants'').\532\
However, national securities exchanges list ETF shares for trading,
which allows investors to purchase and sell individual shares
throughout the day in the secondary market. Thus, ETFs possess
characteristics of traditional open-end funds and UITs, which issue
redeemable shares, and of closed-end funds, which generally issue
shares that trade at negotiated prices on national securities exchanges
and that are not redeemable.\533\
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\532\ For purposes of Form N-CEN, ``creation unit'' is defined
as ``a specified number of Exchange-Traded Fund or Exchange-Traded
Managed Fund shares that the fund will issue to (or redeem from) an
authorized participant in exchange for the deposit (or delivery) of
specified securities, cash, and other assets.'' Instruction 8 to
Item 60 of proposed Form N-CEN. For purposes of Form N-CEN,
``authorized participant'' is defined as ``a broker-dealer that is
also a member of a clearing agency registered with the Commission,
and which has a written agreement with the Exchange-Traded Fund or
Exchange-Traded Managed Fund or one of its designated service
providers that allows it to place orders to purchase or redeem
creation units of the Exchange-Traded Fund or Exchange-Traded
Managed Fund.'' Instruction to Item 59 of proposed Form N-CEN.
\533\ See generally Actively Managed Exchange-Traded Funds,
Investment Company Act Release No. 25258 (Nov. 8, 2001) [66 FR 57614
(Nov. 15, 2001)]; ETF Proposing Release, supra note 446.
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Currently, ETFs are subject to the same comprehensive information
reporting requirements on Form N-SAR as are other open-end funds or
UITs, and they are not required to report additional, more specialized
information because Form N-SAR predates the introduction of ETFs to the
market and has not been amended to address ETFs' distinct
characteristics. In 2009, the Commission amended its registration
statement disclosure requirements for ETFs \534\ that are open-end
funds to better meet the needs of investors who purchase those ETF
shares in secondary market transactions.\535\ We believe that it is
appropriate--and accordingly propose--to similarly tailor some of the
comprehensive information reporting requirements in proposed new Form
N-CEN to the special characteristics of ETFs. Funds and UITs meeting
the definition of ``exchange-traded fund'' in Form N-CEN would be
required to disclose information pursuant to the items in Part E of the
form, as would certain similar investment products known as ``exchange-
traded managed funds.'' \536\
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\534\ See General Instruction A to Form N-1A (defining
``exchange-traded fund'').
\535\ See Enhanced Disclosure and New Prospectus Delivery Option
for Registered Open-End Management Investment Companies, Securities
Act Release No. 8998 (Jan. 13, 2009) [74 FR 4546, 4558 (Jan. 26,
2009)].
\536\ General Instruction A to proposed Form N-CEN; see also
supra note 446.
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Some of the new reporting requirements for ETFs that we are
proposing today as part of Form N-CEN relate to an ETF's (or its
service provider's) interaction with authorized participants. These
entities have an important role to play in the orderly distribution and
trading of ETF shares and are significant to the ETF marketplace.\537\
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\537\ See ETF Proposing Release, supra note 446, at 14620-21.
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Because of the importance of authorized participants, we are
proposing new reporting requirements
[[Page 33646]]
concerning these entities. Currently, the information we have regarding
reliance by ETFs on particular authorized participants is limited, and
we believe that collecting information concerning these entities on an
annual basis would allow us to understand and better assess the size,
capacity, and concentration of the authorized participant framework and
also inform the public about certain characteristics of the ETF primary
markets. Accordingly, we propose to require each ETF to report
identifying information about its authorized participants \538\ and the
dollar value of the ETF shares the authorized participant purchased and
redeemed from the ETF during the reporting period.\539\ More
specifically, proposed Form N-CEN would require an ETF to report the
name of each of its authorized participants (even if the authorized
participant did not purchase or redeem any ETF shares during the
reporting period),\540\ certain other identifying information,\541\ the
dollar value of the ETF's shares that the authorized participant
purchased from the ETF during the reporting period,\542\ and the dollar
value of the ETF's shares that the authorized participant redeemed
during the reporting period.\543\ Collection of this additional
information may allow the Commission staff to monitor how ETF purchase
and redemption activity is distributed across authorized participants
and, for example, the extent to which a particular ETF--or ETFs as a
group--may be reliant on one or more particular authorized
participants.
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\538\ Item 59.a-Item 59.d of proposed Form N-CEN.
\539\ Item 59.e-Item 59.f of proposed Form N-CEN.
\540\ Item 59.a of proposed Form N-CEN.
\541\ Item 59.b-Item 59.d of proposed Form N-CEN.
\542\ Item 59.e of proposed Form N-CEN.
\543\ Item 59.f of proposed Form N-CEN.
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Other proposed new reporting requirements relate to certain
characteristics of ETF creation units--the large blocks of shares that
authorized participants may purchase from or redeem to the ETF. In the
primary market, ETF shares, bundled in creation units, are sold or
redeemed either primarily ``in kind''--i.e., in the form of the ETF's
constituent portfolio securities--or primarily in cash. When
transacting in kind or in cash, the particular authorized participant
wishing to purchase (or redeem) shares typically bears, in the form of
a fixed fee, the transactional costs associated with assembling (or
disassembling) creation units. Those costs, therefore, are not
mutualized to non-transacting shareholders. When an authorized
participant purchases (or redeems) ETF shares all or partly in cash,
absent a countervailing effect, the ETF would experience additional
costs (e.g., brokerage, taxes) involved with buying the securities with
cash or selling portfolio securities to satisfy a cash redemption.
Therefore, in order to ensure that the purchasing or redeeming party
bears these costs rather than the non-transacting shareholders, the ETF
may charge a ``variable'' fee, so called because it is often computed
as a percentage of the value of the creation unit. We understand that
such variable fees also can take the form of a dollar amount.
In order to better understand the capital markets implications of
different creation unit requirements, primary market transaction
methods, and transaction fees, we are proposing to require that ETFs
annually report summary information about these characteristics of
creation units and primary market transactions. ETFs are not currently
required to report the information discussed below in a structured
format, and public availability of many of the proposed data items is
limited and indeterminable. To better understand the commonality of
different transaction methods and the degree to which it varies across
ETFs and over time, we propose to require that ETFs report the total
value (i) of creation units that were purchased by authorized
participants primarily in exchange for portfolio securities on an in-
kind basis; \544\ (ii) of those that were redeemed primarily on an in-
kind basis; \545\ (iii) of those purchased by authorized participants
primarily in exchange for cash; \546\ and (iv) of those that were
redeemed primarily on a cash basis.\547\ For purposes of these proposed
reporting requirements concerning transaction methods and transaction
fees, ``primarily'' would mean greater than 50% of the value of the
creation unit.\548\ To better understand the effects of primary market
transaction fees on ETF pricing and trading and to better inform the
public about such fees, we also propose to require that ETFs report
applicable transactional fees--including each of ``fixed'' and
``variable'' fees--applicable to the last creation unit purchased and
the last creation unit redeemed during the reporting period of which
some or all of the creation unit was transacted on a cash basis, as
well as the same figures for the last creation unit purchased and the
last creation unit redeemed during the reporting period of which some
or all of the creation unit was transacted on an in-kind basis.\549\
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\544\ Item 60.a of proposed Form N-CEN.
\545\ Item 60.c of proposed Form N-CEN.
\546\ Item 60.b of proposed Form N-CEN.
\547\ Item 60.d of proposed Form N-CEN.
\548\ Instruction 9 to Item 60 of proposed Form N-CEN.
\549\ Item 60.e-Item 60.h of proposed Form N-CEN.
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We also propose to require ETFs to report the number of ETF shares
required to form a creation unit as of the last business day of the
reporting period,\550\ which we believe would also allow the Commission
and other data users to better analyze any effects that ETFs' creation
unit size requirements may have on ETF pricing and trading. We are
proposing that this information be as of the last business day of the
reporting period because we understand that these fees sometimes vary
over the course of the reporting period, and the fee level information
is likely to be most current if provided as of the last business day of
the period. In addition to information about authorized participants
and creation units, we propose to require that ETFs, like closed-end
funds, disclose the exchange on which the ETF is listed so that
Commission staff may be better able to quickly gather information as to
which ETFs may be effected should an idiosyncratic risk or market event
arise in connection with a particular exchange.\551\
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\550\ Item 60 of proposed Form N-CEN.
\551\ Item 58 of proposed Form N-CEN.
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Finally, with respect to ETFs that are UITs, we ask for information
regarding tracking difference and tracking error.\552\ This information
is requested of open-end index funds in Item 27(b) and, for the same
reasons discussed in Part II.E.4.c.i of this release, the proposed form
would request this information of ETFs that are UITs.
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\552\ Item 61 of proposed Form N-CEN.
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Taken together, we believe that, in addition to informing the
Commission's risk analysis and, potentially, future policymaking
concerning ETFs, the information these proposed requirements would
yield could also help inform the interested public about the operation
of, and possible risks associated with, these funds.
We request comment on the proposed reporting requirements for ETFs
and ETMFs:
Should ETFs be required to report the proposed additional
information in Part E of proposed Form N-CEN that other funds would not
be required to report?
Should ETFs that are UITs and ETFs that are open-end funds
be subject to the same special reporting requirements, or should the
requirements be different from one
[[Page 33647]]
another? If so, how? Should ETFs and ETMFs be subject to the same
special reporting requirements, or should the requirements be different
from one another? If so, how and why?
Should the proposed items concerning authorized
participants be required? Why or why not? Should we require additional
information about authorized participants? For example, should we
require funds to report the volume of shares purchased and redeemed in
each month of the reporting period by each authorized participant, in
order to better understand how primary market transactions are
distributed across authorized participants and over the course of the
reporting period? Should we require funds to report information on
purchases and redemptions by each authorized participant on days when
the most primary or secondary market activity is observed, which could
be used to better understand how primary market activity responds to
periods of unusual activity? Why or why not? If so, what specific
information should be required?
Should the proposed items concerning creation unit
characteristics and primary market transactions be required? Why or why
not?
Should the ETFs and ETMFs that are subject to the proposed
special reporting requirements be defined as proposed? If not, how
should the group be defined? Are there certain entities that are not
included in the proposed definitions that should be? Are there certain
entities that are included in the proposed definitions that should not
be?
Would the proposed reporting requirements yield beneficial
information? If not, what information should the Commission collect
instead to conduct appropriate risk monitoring of ETFs? How should this
information be collected?
Would any of the proposed reporting requirements conflict
with agreements between private parties, such as ETFs and authorized
participants, to keep information confidential? If so, should the
information nonetheless be required to be disclosed?
How might the proposed reporting requirements concerning
ETF primary market transaction fees be used by others outside the
Commission, if at all? Are the proposed fee categories (viz., fixed
fees and variable fees) appropriate, or would alternative categories be
more suitable? If so, what should those categories be?
How costly would the proposed reporting requirements for
ETFs be? In addition to reporting and recordkeeping costs, are there
competitive or other costs that should be considered in connection with
these proposed requirements?
Are there other reporting requirements that the Commission
should adopt for ETFs? If so, would these additional reporting
requirements assist with Commission risk monitoring, inform the public,
or both?
f. Part F--Unit Investment Trusts
Part F of Form N-CEN would require information specific to UITs.
Like Form N-SAR, proposed Form N-CEN would recognize that UITs have
particular characteristics that warrant questions targeted specifically
to them.\553\ The information requested in Part F would inform us
further about the scope and composition of the UIT industry and, thus,
would assist us in monitoring the activities of UITs and our examiners
in their preparation for exams of UITs. Accordingly, similar to Form N-
SAR,\554\ proposed Form N-CEN would require certain identifying
information relating to a UIT's service providers and entities involved
in the formation and governance of UITs, including its depositor,\555\
sponsor,\556\ trustee,\557\ and third party administrator.\558\
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\553\ See Items 111-133 of Form N-SAR (relating specifically to
UITs).
\554\ See Items 111 (depositor information), 112 (sponsor
information), 113 (trustee information), and 114 (principal
underwriter information) of Form N-SAR.
\555\ Item 62 of proposed Form N-CEN.
\556\ Item 65 of proposed Form N-CEN (only applies to UITs that
are not insurance company separate accounts).
\557\ Item 66 of proposed Form N-CEN (only applies to UITs that
are not insurance company separate accounts).
\558\ Item 63 of proposed Form N-CEN. Form N-SAR does not
request information about a UIT's third-party administrator.
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Proposed Form N-CEN would also ask whether a UIT is a separate
account of an insurance company.\559\ Depending on a UIT's response to
this item, it would proceed to answer certain additional questions in
Part F.\560\ While Form N-SAR generally does not differentiate between
UITs that are and are not separate accounts of insurance companies,
proposed Form N-CEN would make this distinction. We believe that by
distinguishing between these different types of UITs, the form will
allow us to better target the information requests in the form
appropriate to the type of UIT. We also believe this new approach will
allow filers to better understand the information being requested of
them because it will be more reflective of their operations and should
thus improve the consistency of the information reported.
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\559\ Item 64 of proposed Form N-CEN; see Item 117.A of Form N-
SAR.
\560\ If a UIT answers ``yes'' to this item, it would proceed to
answer Items 73 through 78 of the form. However, if a UIT answers
``no'' to this item, it would proceed to Items 65 through 72, and
78. Id.
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Accordingly, similar to Form N-SAR,\561\ a UIT that is not a
separate account of an insurance company would provide the number of
series existing at the end of the reporting period that had securities
registered under the Securities Act \562\ and, for new series, the
number of series for which registration statements under the Securities
Act became effective during the reporting period \563\ and the total
value of the portfolio securities on the date of deposit.\564\ Proposed
Form N-CEN would also carry over from Form N-SAR \565\ requirements
relating to the number of series with a current prospectus,\566\ the
number of existing series (and total value) for which additional units
were registered under the Securities Act,\567\ and the value of units
placed in portfolios of subsequent series.\568\ Our proposal would also
require that a UIT that is not a separate account of an insurance
company provide the total assets of all series combined as of the
reporting period,\569\ which is also currently required by Form N-
SAR.\570\
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\561\ See Items 118-120 of Form N-SAR (all UITs are required to
complete these items).
\562\ Item 67 of proposed Form N-CEN.
\563\ Item 68.a of proposed Form N-CEN.
\564\ Item 68.b of proposed Form N-CEN.
\565\ See Items 121-124 of Form N-SAR (all UITs are required to
complete these items).
\566\ Item 69 of proposed Form N-CEN.
\567\ Item 70 of proposed Form N-CEN.
\568\ Item 71 of proposed Form N-CEN.
\569\ Item 72 of proposed Form N-CEN.
\570\ See Item 127.L of Form N-SAR (all UITs are required to
complete this item). Proposed Form N-CEN would not require UITs to
report certain assets held by a UIT as required by Item 127 of Form
N-SAR. See Items 127.A-K of Form N-SAR.
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As proposed, Form N-CEN would also require certain new information
to be reported by separate accounts offering variable annuity and
variable life insurance contracts. Specifically, if the UIT is a
separate account of an insurance company, proposed Form N-CEN would
require disclosure of its series identification number \571\ and, for
each security that has a contract identification number assigned
pursuant to rule 313 of Regulation S-T, the number of individual
contracts that are in force at the end of the reporting period.\572\
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\571\ Item 73 of proposed Form N-CEN.
\572\ Item 74 of proposed Form N-CEN.
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With respect to insurance company separate accounts, our proposal
would also require new identifying and census information for each
security issued
[[Page 33648]]
through the separate account.\573\ This requirement would include the
name of the security,\574\ contract identification number,\575\ total
assets attributable to the security,\576\ number of contracts
sold,\577\ gross premiums received,\578\ and amount of contract value
redeemed.\579\ This item would also require additional information
relating to section 1035 exchanges, including gross premiums received
pursuant to section 1035 exchanges,\580\ number of contracts affected
in connection with such premiums,\581\ amount of contract value
redeemed pursuant to section 1035 redemptions \582\ and the number of
contracts affected by such redemptions.\583\ In addition, insurance
company separate accounts would be required to provide information on
whether they relied on rules 6c-7 \584\ and 11a-2 \585\ under the
Investment Company Act. This information, which is specific to UITs
that are separate accounts of insurance companies and is either not
otherwise filed with the Commission or is not filed in a structured
format, will further assist the Commission in its oversight of UITs,
including monitoring trends in the variable annuity and variable life
insurance markets.
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\573\ Item 75 of proposed Form N-CEN.
\574\ Item 75.a of proposed Form N-CEN.
\575\ Item 75.b of proposed Form N-CEN.
\576\ Item 75.c of proposed Form N-CEN.
\577\ Item 75.d of proposed Form N-CEN.
\578\ Item 75.e of proposed Form N-CEN.
\579\ Item 75.h of proposed Form N-CEN.
\580\ Item 75.f of proposed Form N-CEN.
\581\ Item 75.g of proposed Form N-CEN.
\582\ Item 75.i of proposed Form N-CEN.
\583\ Item 75.j of proposed Form N-CEN.
\584\ Item 76 of proposed Form N-CEN. Rule 6c-7 under the
Investment Company Act provides exemptions from certain provisions
of sections 22(e) and 27 of the Act for registered separate accounts
offering variable annuity contracts to participants in the Texas
Optional Retirement Program. See 17 CFR 270.6c-7.
\585\ Item 77 of proposed Form N-CEN. Rule 11a-2 under the
Investment Company Act relates to offers of exchange by certain
registered separate accounts or others, the terms of which do not
require prior Commission approval. See 17 CFR 270.11a-2.
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Finally, Form N-CEN would carry over the Form N-SAR \586\
requirement that a UIT provide certain information relating to
divestments under section 13(c) of the Investment Company Act.\587\
Thus, if a UIT intends to avail itself of the safe harbor provided by
section 13(c) with respect to its divestment of certain securities, it
will continue to make the following disclosures on Form N-CEN:
Identifying information for the issuer, total number of shares or
principal amount divested, date that the securities were divested, and
the name of the statute that added the provisions of section 13(c) in
accordance with which the securities were divested.\588\ If the UIT
holds any securities of the issuer on the date of the filing, it would
also provide the ticker symbol, CUSIP number, and total number of
shares or, for debt securities, the principal amount held on the date
of the filing.\589\
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\586\ Item 133 of Form N-SAR. Section 13(c) of the Investment
Company Act provides a safe harbor for registered investment
companies and its employees, officers, directors and investment
advisers, based solely upon the investment company divesting from,
or avoiding investing in, securities issued by persons that the
investment company determines, using credible information that is
available to the public, engage in certain investment activities in
Iran or Sudan. The safe harbor, however, provides that this
limitation on actions does not apply unless the investment company
makes disclosures about the divestments in accordance with
regulations prescribe by the Commission. See 15 U.S.C. 80a-
13(c)(2)(B). Management investment companies are required to provide
the disclosure on Form N-CSR, pursuant to Item 6(b) of the form, and
UITs are required to provide the disclosure on Form N-SAR, pursuant
to Item 133 of the form. See Technical Amendments to Forms N-CSR and
N-SAR in Connection With the Comprehensive Iran Sanctions,
Accountability, and Divestment Act of 2010, Exchange Act Release No.
34-63087 (Oct. 13, 2010) [75 FR 64120 (Oct. 19, 2010)].
\587\ Item 78 of proposed Form N-CEN.
\588\ Item 78.a of proposed Form N-CEN.
\589\ Item 78.b of proposed Form N-CEN. An instruction to Item
78 would address when the UIT should report divestments pursuant to
this item.
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We request comment on the following information requirements
relating to UITs:
Is there any additional information regarding series of
UITs that should be requested? For example, are there other special UIT
account types that should also be included in the form? Is there any
information regarding UITs that is included in proposed Form N-CEN that
should be excluded from the form?
Is there any additional information regarding those
involved in the formation and governance of the UIT and service
providers to the UIT that should be requested? Should the form provide
instructions or a definition regarding depositor or sponsor?
Is there any additional information regarding the number
of series that should be requested?
We request comment on the requirement to provide asset
information for the UIT. Is there any other information regarding the
series' assets that should be provided? Form N-SAR item 127 contains a
detailed list of asset types held by the UIT. The requirement in Form
N-CEN is limited to total assets. Should we require more granular asset
information in Form N-CEN, as we did in Form N-SAR item 127? If so
which items should we include?
We request comment on our items relating specifically to
insurance company separate accounts. Should we include items relating
solely to insurance company separate accounts? Are there any UIT items
that insurance company separate accounts should be subject to that they
would not be subject to under our proposal? Is there any other
information that we should require for insurance company separate
accounts?
g. Part G--Attachments
Like Form N-SAR,\590\ we are proposing that Part G of Form N-CEN
require some descriptive attachments to the filing in order to provide
the staff with more granular information regarding certain key
issues.\591\ Where possible, we sought to eliminate the need to file
attachments with the census reporting form in order to simplify the
filing process and maximize the amount of information we receive in a
data tagged format.\592\ Accordingly, we have attempted to limit the
number of attachments to the form to those that are most useful to the
staff, either because of investor protection issues or because the
information is not available elsewhere. Moreover, all except one of the
proposed attachments to Form N-CEN are current requirements in Form N-
SAR.\593\
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\590\ See Items 77.E, 77.I, 77.K, 77.L, 77.N, 77.P, 77.Q.1,
77.Q.2, 102.D, 102.H, 102.J, 102.K, 102.M, 102.O, 102.P.1, 102.P.2,
and 102.P.3 of Form N-SAR.
\591\ Form N-SAR requires only management companies to file
attachments to reports on the form, whereas proposed Form N-CEN
would require certain attachments for all Registrants.
\592\ With respect to certain attachments currently in Form N-
SAR, we propose to integrate the data requirements into the form
itself, rather than keep the attachment requirements. See, e.g.,
Items 77.G and 102.F of Form N-SAR; Item 48 and Item 49 of proposed
Form N-CEN. However, not all of the attachments currently required
by Form N-SAR lend themselves to integration into the form, either
because of the amount of information reported in the attachment or
because the attachment is a standalone document (e.g., the
accountant's report on internal control).
\593\ But see supra note 591.
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Thus, all funds that would be required to file Form N-CEN would,
where applicable, be required to file attachments regarding legal
proceedings,\594\ provision of financial support,\595\ changes in the
fund's independent public accountant,\596\ independent public
accountant's report on internal control,\597\ and changes in accounting
principles and practices.\598\ In addition, all funds would be
[[Page 33649]]
required, where applicable, to provide attachments relating to
information required to be filed pursuant to exemptive orders,\599\ and
other information required to be included as an attachment pursuant to
Commission rules and regulations.\600\ Moreover, closed-end funds and
SBICs would also be required, where applicable, to provide attachments
relating to material amendments to organizational documents,\601\
instruments defining the rights of the holders of any new or amended
class of securities,\602\ new or amended investment advisory
contracts,\603\ information called for by Item 405 of Regulation S-
K,\604\ and, for SBICs only, senior officer codes of ethics.\605\ Each
attachment proposed to be required by Form N-CEN includes instructions
describing the information that should be provided in the
attachment.\606\
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\594\ Item 79.a.i of proposed Form N-CEN.
\595\ Item 79.a.ii of proposed Form N-CEN.
\596\ Item 79.a.iii of proposed Form N-CEN.
\597\ Item 79.a.iv of proposed Form N-CEN. As noted in Item
79.a.iv, this item would only apply to management companies, other
than SBICs.
\598\ Item 79.a.v of proposed Form N-CEN.
\599\ Item 79.a.vi of proposed Form N-CEN.
\600\ Item 79.a.vii of proposed Form N-CEN.
\601\ Item 79.b.i of proposed Form N-CEN. Unlike open-end funds,
closed-end funds and SBICs do not otherwise update or file the
information requested by this item with the Commission and, thus, we
believe the information should continue to be filed as an attachment
to the census reporting form.
\602\ Item 79.b.ii of proposed Form N-CEN.
\603\ Item 79.b.iii of proposed Form N-CEN. Unlike open-end
funds, closed-end funds and SBICs do not otherwise update or file
the information requested by this item with the Commission and,
thus, we believe the information should continue to be filed as an
attachment to the census reporting form.
\604\ Item 79.b.iv of proposed Form N-CEN.
\605\ Item 79.b.v of proposed Form N-CEN.
\606\ For example, the instructions to Item 79.b.v require SBICs
to attach detailed information regarding the senior officer code of
ethics and certain information regarding the audit committee. The
instructions also require SBICs to meet certain requirements
regarding the availability of their senior office code of ethics.
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As noted earlier, all of the attachments, except one, are currently
required by Form N-SAR.\607\ The new attachment relates to the
provision of financial support and would be filed by a fund if an
affiliate, promoter or principal underwriter of the fund, or affiliate
of such person, provided financial support to the fund during the
reporting period. As discussed in Part II.E.4.b, we are proposing to
include this requirement in Form N-CEN because we believe that it is
important that the Commission understand the nature and extent that a
fund's sponsor provides financial support to a fund.
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\607\ See supra note 593 and accompanying text.
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We request comment on the following information requirements
relating to attachments to the Form:
Should any additional attachments be required to be
attached to Form N-CEN? Are any proposed attachments unnecessary and,
if so, why? Should any of the attachments requested for all Registrants
be limited to only certain Registrants?
Should we require that the information be reported as
attachments to the form or in narrative text-boxes embedded in the
form?