Investment Company Reporting Modernization

Federal RegisterNov 18, 2016

Ask Donna

What actually matters in this document.

Text

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 210, 232, 239, 240, 249, 270, 274

[Release Nos. 33-10231; 34-79095; IC-32314; File No. S7-08-15]

RIN 3235-AL42

Investment Company Reporting Modernization

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission is adopting 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 adopting new Form N-PORT, which will 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 adopting amendments to Regulation S-X, which will require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The Commission is adopting new Form N-CEN, which will 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. The Commission is adopting amendments to Forms N-1A, N-3, and N-CSR to require certain disclosures regarding securities lending activities. Finally, the Commission is rescinding current Forms N-Q and N-SAR and amending certain other rules and forms. Collectively, these amendments will, 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 can also utilize this information to help investors make more informed investment decisions.

DATES:

Effective Dates:

This rule is effective January 17, 2017, except for the following:

• The amendments to 17 CFR 200.800, 232.105, 232.301, 240.10A-1, 240.12b-25, 240.13a-10, 240.13a-11, 240.13a-13, 240.13a-16, 240.15d-10, 240.15d-11, 240.15d-13, 240.15d-16, 249.322, 249.330, 270.8b-16, 270.10f-3, 270.30a-1, 270.30a-4, 270.30b1-1, 270.30b1-2, 270.30b1-3, 274.101, and 274.218, and in Instruction 55 amending § 270.30d-1 are effective June 1, 2018; and

• The amendments to 17 CFR 232.401, 249.332, 270.8b-33, 270.30a-2, 270.30a-3, 270.30b1-5, and 274.130, and in Instruction 54 amending § 270.30d-1, Instruction 57 amending Form N-1A (referenced in §§ 239.15A and 274.11A), Instruction 59 amending Form N-2 (referenced in §§ 239.14 and 274.11a-1), and Instruction 61 amending Form N-3 (referenced in §§ 239.17a and 274.11b) are effective August 1, 2019.

Compliance Dates:

The applicable compliance dates are discussed in section II.H. of this final rule.

FOR FURTHER INFORMATION CONTACT:

Daniel K. Chang, Senior Counsel, J. Matthew DeLesDernier, Senior Counsel, Jacob D. Krawitz, Senior Counsel, Andrea Ottomanelli Magovern, Senior Counsel, Naseem Nixon, Senior Counsel, Michael C. Pawluk, Senior Special Counsel, or Sara Cortes, Assistant Director, at (202) 551-6792, Investment Company Rulemaking Office, Matt Giordano, Chief Accountant, or Kristy Von Ohlen, 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 adopting new Form N-PORT [referenced in 17 CFR 274.150] and 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] and 30b1-9 [17 CFR 270.30b1-9] under the Investment Company Act; rescinding 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; adopting 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], and Form N-8F [referenced in 17 CFR 274.218] under the Investment Company Act; adopting 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”); adopting amendments to Form N-14 [referenced in 17 CFR 239.23] under the Securities Act; rescinding Form N-SAR [referenced in 17 CFR 274.101 and Form N-Q [referenced in 17 CFR 274.130] and adopting 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”); adopting 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], 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; rescinding section 332 [17 CFR 249.332] and adopting amendments to sections 322 [17 CFR 249.322] and 330 [17 CFR 249.330] of 17 CFR part 249; adopting 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]; adopting amendments to section 800 of 17 CFR part 200 [17 CFR 200.800]; and adopting 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].

Table of Contents

I. Background

A. Changes in the Industry and Technology

B. Summary of Changes to Current Reporting Regime

1. Form N-PORT and Amendments to Regulation S-X

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. 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

C. Amendments to Regulation S-X

1. Overview

2. Enhanced Derivatives Disclosures

3. Amendments to Current Rules 12-12 through 12-12C

4. Instructions Common to Rules 12-12 through 12-12B and 12-13 through 12-13D

5. Investments In and Advances to Affiliates—Rule 12-14

6. Form and Content of Financial Statements

D. 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 Will be Eliminated by Form N-CEN

E. Option for Web site Transmission of Shareholder Reports

F. Amendments to Forms Regarding Securities Lending Activities

1. Determination to Adopt Requirements as Amendments to Registration Statement and Annual Report Forms

2. Requirement to Disclose Securities Lending Income, Expenses, and Services

3. Required Disclosures of Monthly Average Value on Loan

G. Technical and Conforming Amendments

H. 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, Rescission of Form N-SAR, and Amendments to the Exhibit Requirements of Form N-CSR

3. Regulation S-X, Statement of Additional Information, and Related Amendments

III. Economic Analysis

A. Introduction

B. Form N-PORT, Rescission of Form N-Q, and Amendments to Form N-CSR

1. Introduction and Economic Baseline

2. Benefits

3. Costs

4. Alternatives

C. Amendments to Regulation S-X

1. Introduction and Economic Baseline

2. Benefits

3. Costs

4. Alternatives

D. Form N-CEN and Rescission of Form N-SAR

1. Introduction and Economic Baseline

2. Benefits

3. Costs

4. Alternatives

E. Amendments to Forms Regarding Securities Lending Activities

1. Introduction and Economic Baseline

2. Benefits

3. Costs

4. Alternatives

F. Other Alternatives to the Reporting Requirements

IV. 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. Amendments to Registration Statement Forms

E. Amendments to Form N-CSR

V. Final Regulatory Flexibility Analysis

A. Need for and Objectives of the Forms and Form Amendments and Rules and Rule Amendments

B. Significant Issues Raised by Public Comments

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. Amendments to Registration Statement Forms

7. Amendments to Form N-CSR

E. Agency Action To Minimize Effect on Small Entities

VI. Statutory Authority

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”)

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.

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 new or amended forms or rules.

Commission staff estimates that there were approximately 17,052 funds registered with the Commission, as of December 2015.

Commission staff further estimates that there were nearly 12,000 investment advisers registered with the Commission, along with another 3,138 advisers that file reports with the Commission as exempt reporting advisers, as of January 2016.

At year-end 2015, assets of registered investment companies exceeded $18 trillion, having grown from about $5.8 trillion at the end of 1998.

At the same time, the industry has developed new product structures, such as ETFs,

new fund types, such as target date funds with asset allocation strategies,

and increased its use of derivatives and other alternative strategies.

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.

Based on data obtained from the Investment Company Institute (“ICI”) and reports filed by registrants on Form N-SAR. The 17,052 funds include mutual funds (including funds of funds and money market funds), closed-end funds, exchange-traded funds (“ETFs”), and unit investment trusts (“UITs”).

See

ICI, 2016 Investment Company Fact Book (56th ed., 2016) (“2016 ICI Fact Book”) at 22,

available at

https://www.ici.org/pdf/2016_factbook.pdf; see also infra

footnote 1259 and accompanying and following text.

Based on Investment Adviser Registration Depository (“IARD”) 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

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376, 1570-80 (2010).

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

. The Commission recently adopted amendments to Form ADV.

See

Form ADV and Investment Adviser Act Rules, Investment Advisers Act Release No. 4509 (August 25, 2016) [81 FR 60417 (September 1, 2016)] (“Form ADV Release”).

See

2016 ICI Fact Book,

supra

footnote 2, at 9.

See generally

Exchange-Traded Funds, Securities Act Release No. 8901 (Mar. 11, 2008) [73 FR 14618 (Mar. 18, 2008)] (“ETF Proposing Release”) at 14619; Request for Comment on Exchange-Traded Products, Securities Exchange Act Rel. No. 34-75165 (June 12, 2015);

see also

ICI, Exchange-Traded Funds April 2016 (May 27, 2016),

available at

https://www.ici.org/research/stats/etf/etfs_04_16

(discussing April 2016 statistics on ETFs). As of April 2016, there were 1,630 ETFs with over $2 trillion in assets. Over the twelve-month period ending April 2016, assets of ETFs increased $89.63 billion.

See id.

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”).

See

Use of Derivatives by Registered Investment Companies and Business Development Companies, Investment Company Act Release No. 31933 (Dec. 11, 2015) [80 FR 80884 (Dec. 28, 2015)] (“Derivatives Proposing Release”) (noting “dramatic growth in the volume and complexity of the derivatives markets over the past two decades, and the increased use of derivatives by certain funds”);

see also

Investment Company Reporting Modernization, Investment Company Act Release No. 31610 (May 20, 2015) [80 FR 33590 (June 12, 2015)] (“Proposing Release”) at n. 7.

While these changes have been taking place in the fund industry, there have also been significant advances in the technology that can be used to report and analyze information. We have started to use structured 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.

See

Proposing Release,

supra

footnote 7, at nn. 12-16 and accompanying text (discussing the use

of eXtensible Business Reporting Language (“XBRL”) with open-end fund risk/return summaries and the use of Extensible Markup Language (“XML”) with Forms N-MFP, PF and 13F, as well as in other contexts).

As we noted in the Proposing Release, 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.

In May 2015, we again acted to modernize our forms and the manner in which information is filed and disclosed by proposing a number of reforms for investment company reporting.

Our proposal included four sets of reforms: (1) The creation of a new portfolio holdings reporting form, Form N-PORT, and the rescission of Form N-Q; (2) the creation of a new census reporting form, Form N-CEN, and the rescission of Form N-SAR; (3) amendments to Regulation S-X, largely designed to improve derivatives disclosure; and (4) a proposed new rule, rule 30e-3, which would provide funds with an optional method to satisfy shareholder report transmission requirements by posting their reports online if they met certain conditions.

See supra

footnote 8 and accompanying text;

see also

Proposing Release,

supra

footnote 7, at nn. 8-9 and accompanying text (discussing the adoption of Form N-SAR and the adoption of rules requiring the use of the IARD for investment adviser filings);

see also

Derivatives Proposing Release,

supra

footnote 7 (proposing, among other things, reporting requirements in Forms N-PORT and N-CEN related to derivatives); Investment Company Liquidity Risk Management Programs; Investment Company Act Release No [x] (October 13, 2016) (“Liquidity Adopting Release”); Investment Company Swing Pricing; Investment Company Release No. [x] (October 13, 2016) (“Swing Pricing Adopting Release”).

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, including on additional data or information that would be helpful to regulators and market participants.

See

FSOC, Notice Seeking Comment on Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Dec. 24, 2014) (“FSOC Notice”),

available at

http://www.treasury.gov/initiatives/fsoc/rulemaking/Documents/Notice%20Seeking%20Comment%20on%20Asset%20Management%20Products%20and%20Activities.pdf

. Although our proposal was independent of FSOC, several commenters responding to the notice discussed issues concerning data that were relevant to our proposal and those comments were discussed in the Proposing Release, as relevant.

See

Proposing Release,

supra

footnote 7, at nn. 17-18 and accompanying text.

See

Proposing Release,

supra

footnote 7.

The proposed reforms were designed 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. These reforms also sought 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.

B. Summary of Changes to Current Reporting Regime

We received 1,003 comments

on our proposed reforms from a variety of interested parties, including investment companies, industry groups, investors, academics and others. As discussed in greater detail below in the relevant sections of this release, commenters generally supported our efforts to modernize the investment company reporting regime, but had varying comments on a number of specific items in each of the respective sets of reforms. Commenters were generally supportive of proposed new Form N-PORT;

however, we received many comments relating to the data to be collected by the form, the frequency of filing reports on the form, and whether reports on the form or certain information in the reports should be made public. Commenters were also generally supportive of proposed new Form N-CEN,

agreeing that Form N-CEN will provide both the Commission and the public with enhanced and updated census-type information. Similar to Form N-PORT, however, commenters also provided many comments on the data to be collected by the form and whether certain information in reports on the form should be made public. In addition, commenters were largely supportive of our efforts to improve the information that funds report to shareholders and the Commission through the proposed amendments to Regulation S-X,

but had specific comments on certain disclosures. Comments on proposed rule 30e-3, which would allow funds to transmit reports to shareholders via the internet subject to a number of conditions, were mixed, with some commenters supporting the rule and others opposing it.

Of these, about 574 were individualized letters, and the rest were one of a number of types of form letters.

See

Comments on Investment Company Reporting Modernization, File No. S7-08-15,

available at

http://www.sec.gov/comments/s7-08-15/s70815.shtml

. The comment period for the proposal closed on August 11, 2015, but was re-opened until January 13, 2016 when the Commission proposed liquidity risk management programs for open-end funds.

See

Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment Company Reporting Modernization Release, Investment Company Act Release No. 31835 (Sept. 22, 2015) [80 FR 62274 (Oct. 15, 2015)] (“Liquidity Proposing Release”).

See infra

footnotes 46, 64, 100, 115, 123, 145, 193, 197, 198, 245, 275, 283, 293, 330, 350, 379, 423, 432, 443, 455 and 475.

See infra

footnotes 745, 759, 769, 779, 819, 832, 857, 870, 883, 907, 940, 989, 1008, 1045, 1061, 1070, 1080, 1101 and 1107.

See infra

footnotes 527, 537, 556, 558, 566, 648, 665, 701 and 711.

See infra

footnotes 1178-1179.

Today, after consideration of the comments we received, we are adopting new Forms N-PORT and N-CEN, as well as amendments to Regulation S-X. We continue to believe that with the industry changes and technological advances that have occurred over the years, we need to improve the type and format of the information that funds provide to us and to investors, and 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. We are not adopting proposed rule 30e-3 at this time as we believe, in light of the comments received, that additional consideration regarding the rule is appropriate. We are adopting amendments to Forms N-1A, N-3, and N-CSR to require certain disclosures regarding securities lending activities.

If any provision of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application.

1. Form N-PORT and Amendments to Regulation S-X

We are adopting Form N-PORT, largely as proposed, with certain modifications in response to commenters. We are also rescinding, as proposed, Form N-Q. Form N-PORT is a new portfolio holdings reporting form that will be filed by all registered management investment companies, other than money market funds and small business investment companies (“SBICs”),

and by UITs that operate as

ETFs.

Currently, management investment companies (other than SBICs) are required to report their complete portfolio holdings to the Commission on a quarterly basis on Forms N-Q

and N-CSR.

See infra

footnote 49 (discussing why money market funds and SBICs will not be required to file reports on Form N-PORT).

ETFs will 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.

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.

See

rule 30b2-1 under the Investment Company Act [17 CFR 270.30b2-1].

Form N-PORT requires reporting of a fund's complete portfolio holdings. The form also requires additional information concerning fund portfolio holdings that is not currently required by Forms N-Q and N-CSR, and that will facilitate risk analyses and other Commission oversight. For example, Form N-PORT requires reporting of additional information relating to derivative investments. The form also includes certain risk metric calculations that measure a fund's exposure and sensitivity to changing market conditions, such as changes in asset prices, interest rates, or credit spreads. As was proposed, reports on Form N-PORT will be filed in a structured data format 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.

We continue to believe that more timely and frequent reporting of portfolio holdings information to the Commission, as well as the additional information Form N-PORT requires, will enable us to further our mission to protect investors by assisting the Commission and its staff in carrying out its regulatory responsibilities related to the asset management industry. These responsibilities include its examination, enforcement, and monitoring of funds, its 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 its staff, we also continue to believe that information in Form N-PORT will 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 required on Form N-PORT useful. For example, Form N-PORT's structured format will allow the Commission, investors, and other potential users to better collect and analyze portfolio holdings information.

While we do not anticipate that many individual investors will analyze data using Form N-PORT, although some may, we believe that individual investors will 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 and other parties, such as industry observers and academics.

As we noted in the Proposing Release, portfolio holdings information currently filed on Form N-Q 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.

See

Proposing Release,

supra

footnote 7.

In addition, we are adopting, largely as proposed, amendments to Regulation S-X with certain modifications in response to comments. These amendments in large part require standardized enhanced derivatives disclosures in fund financial statements. Currently, Regulation S-X does not prescribe specific information for most types of derivatives, including swaps, futures, and forwards. While many fund groups provide disclosures regarding the terms of their derivatives contracts, the lack of standard disclosure requirements has resulted in inconsistent disclosures in fund financial statements.

We continue to believe that the amendments to Regulation S-X to enhance and standardize derivatives disclosures in financial statements will allow comparability among funds and help all investors better assess funds' use of derivatives. Reports on Form N-PORT will contain similar derivatives disclosures to facilitate analysis of derivatives investments across funds. Because Form N-PORT is not primarily designed for individual investors, the amendments to Regulation S-X require disclosures concerning the fund's investments in derivatives in the financial statements that are provided to investors. We also have endeavored to mitigate burdens on the industry by conforming the derivatives disclosures that are required by both Regulation S-X and Form N-PORT.

2. Form N-CEN

We are adopting, substantially as proposed and with certain modifications in response to comments, Form N-CEN, a new form on which funds will report census-type information to the Commission. We are also rescinding, as proposed, Form N-SAR, the current form on which the Commission collects census-type information on management investment companies and UITs.

As we discussed in the Proposing Release, Form N-SAR was adopted in 1985 and, 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 plus years since Form N-SAR's adoption, changes in the industry have reduced the utility of some of the currently required data elements.

Commission staff believes that obtaining certain additional census-type information not currently collected by Form N-SAR will improve the staff's ability to carry out regulatory functions, including risk monitoring and analysis of the industry.

See

rules 30a-1 and 30b1-1 under the Investment Company Act [17 CFR 270.30a-1 and 17 CFR 270.30b1-1].

See

Proposing Release,

supra

footnote 7 (noting that when adopted, Form N-SAR was intended to reduce reporting burdens and better align the information that was required to be reported with the characteristics of the fund industry). Also as noted in the Proposing Release, the filing format that is required for reports on Form N-SAR limits our ability to use the reported information for analysis.

Form N-CEN includes many of the same data elements as Form N-SAR, but, in order to improve the quality and utility of information reported, replaces 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 eliminating items that are reported on other Commission forms, or are available elsewhere. In addition, reports on Form N-CEN will be filed in a structured XML format, which, we believe, will 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, reports on new Form N-CEN will be filed annually, rather than semi-annually as is required for reports on Form N-SAR by management companies, which will further reduce current burdens on funds.

See infra

footnotes 750-752 and accompanying text.

II. Discussion

A. Form N-PORT

As discussed above, we are adopting a new monthly portfolio reporting form, Form N-PORT. Form N-PORT requires 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 reports in an XML format no later than 30 days after the close of each month.

Except as discussed below in section II.A.4, only information reported for the third month of each fund's fiscal quarter on Form N-PORT will be publicly available, and that information will not be made public until 60 days after the end of the fiscal quarter.

See

new rule 30b1-9.

As used throughout this section, the term “fund” generally refers to investment companies that will file reports on Form N-PORT.

As discussed further in section II.A.4, the Commission does not intend to make public the information reported on Form N-PORT for the first and second months of each fund's fiscal quarter that is identifiable to any particular fund or adviser or any information reported with regard to country of risk and economic exposure, delta, or miscellaneous securities, or explanatory notes related to any of those topics that is identifiable to any particular fund or adviser. However, the Commission may use such information in its regulatory programs, including examinations, investigations, and enforcement actions.

See infra

footnote 500;

see also

General Instruction F of Form N-PORT.

As the primary regulator of the asset management 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-CSR. 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.

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, and commenters generally agreed, that more frequent and timely information concerning fund portfolios than we currently receive, will assist the Commission in its role as the primary regulator of funds, as discussed further below.

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.

See, e.g.,

Comment Letter of Morningstar, Inc. (Aug. 21, 2015) (“Morningstar Comment Letter”) (expressing belief that timelier information to investors through monthly public disclosures of portfolios would assist the Commission in monitoring the financial system, while also providing suggested revisions to enhance the proposal.); Comment Letter of Vanguard (Aug. 11, 2015) (“Vanguard Comment Letter”) (stating that the proposal strikes the appropriate balance between disclosures to the Commission and protecting funds and their investors from front-running, and providing suggested modifications to the proposal).

The information we will collect on Form N-PORT will be important to the Commission and its staff 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, as we discuss in the Liquidity Adopting Release that we are adopting concurrently Form N-PORT will help the Commission better understand liquidity risks through additional Form N-PORT disclosure requirements discussed in that release.

The information collected on Form N-PORT will also assist with understanding whether and to what extent a fund's exposure to price movements is leveraged, either through borrowings or the use of derivatives.

See generally

Liquidity Adopting Release,

supra

footnote 9.

Many commenters generally agreed with us that the information required on Form N-PORT will assist the Commission in better understanding each of these risks in the fund industry.

These commenters also generally agreed with us that the ability to understand the risks that funds face will help Commission staff better understand and monitor risks and trends in the fund industry as a whole, facilitating the Commission's informed regulation of the fund industry.

We also believe, and some commenters agreed, that information obtained from Form N-PORT filings will facilitate the Commission's 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 will 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.

See, e.g.,

Comment Letter of BlackRock (Aug. 11, 2015) (“BlackRock Comment Letter”) (“Importantly, the greater depth and frequency of information requested by the Commission will help the Commission better identify and monitor emerging risks associated with specific RICs or categories of RICs as well as asset management activities.”); Comment Letter of Wells Fargo Funds Management, LLC (Aug. 11, 2015) (“Wells Fargo Comment Letter”) (“we believe that the enhanced disclosure requirements of the Proposals represent appropriate valuable information for the Commission to have in order to assess trends in risks, for example, across the mutual fund industry.”);

but see, e.g.,

Comment Letter of Federated Investors, Inc. (January 13, 2016) (“Federated Comment Letter) (“A majority of the Commission's proposed amendments to Form N-1A, N-PORT, and N-CEN would require a large effort from funds while offering data that is, at best, of little utility, and, at worst, misleading. Many of these deficiencies relate to flaws inherent in a security-level disclosure scheme.”). We disagree with the commenter that a security-level disclosure scheme is of little utility.

See infra

footnote 1283 and accompanying and following text (discussing the utility of the security-level information that will be reported on Form N-PORT).

Id.

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; Amendments to Form PF, Investment Company Act Release No. 31166 (July, 23 2014) [79 FR 44076 (July 29, 2014)] (“Money Market Fund Reform 2014 Release”) 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).

In addition to assisting the Commission in its regulatory functions, we believe, and some commenters agreed, that investors and other potential users will benefit from the

periodic public disclosure of the information reported on Form N-PORT.

Form N-PORT is primarily designed for use by the Commission and its staff, and not for disclosing information directly to individual investors. The information we are requiring on Form N-PORT is more voluminous than on a schedule of investments. We believe, and some commenters agreed, however, that some investors, particularly institutional investors, could directly use the data from the information on 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, and some commenters agreed, that entities providing services to investors, such as investment advisers, broker-dealers, and entities that provide information and analysis for fund investors, will also utilize and analyze the information that will be required by Form N-PORT to help all investors make more informed investment decisions.

Accordingly, whether directly or through third parties, we believe, and some commenters agree, that the periodic public disclosure of the information on Form N-PORT will benefit all fund investors.

As discussed further below, in order to mitigate the risk that the information on Form N-PORT will be used in ways that might ultimately result in investor harm, we are limiting the public availability of Form N-PORT to reports filed as of quarter-end, as well as delaying public availability of those reports by 60 days and keep certain discrete information items nonpublic.

See, e.g.,

Comment Letter of Joseph A. Franco (Aug. 11, 2015) (“Franco Comment Letter”); Morningstar Comment Letter;

but see, e.g.,

Comment Letter of the Investment Company Institute (Aug. 11, 2015) (“ICI Comment Letter”).

Id.

See id.

We intend to increase transparency of fund investments through Form N-PORT in several ways. First, Form N-PORT will improve reporting of fund derivative usage. As the Commission has previously noted, we have observed a dramatic growth in the volume and complexity of the derivatives markets over the past two decades.

Additionally, funds that are considered “alternative” funds, which often use derivatives for implementing their investment strategy, are becoming increasingly popular among investors.

Although Regulation S-X establishes general disclosure requirements for financial statements in fund registration statements and shareholder reports, 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 better understand the investment.

This hinders both an analysis of a particular fund's investments, as well as comparability among funds.

See

Derivatives Proposing Release,

supra

footnote 7, at n. 6 and accompanying text;

see also

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”) at n. 7 and accompanying text.

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 2015, alternative mutual funds and exchange-traded funds had more than $200 billion in assets. Although alternative mutual funds only accounted for 1.23% of the mutual fund market as of December 2015, the almost $17.3 billion of inflows into these funds in 2015 represented 7% 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.

For example, we understand that some funds provide a description of all of the holdings in an index or custom basket underlying a swap contract, while others only provide a short description.

See also

Proposing Release,

supra

footnote 7, at n. 31 and accompanying text.

See, e.g.,

current rule 12-13 of Regulation S-X [17 CFR 210.12-13] (requiring funds to disclose “other” investments, which includes derivatives); 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); FASB ASC 815, Disclosures about Derivative Instruments and Hedging Activities (“ASC 815”) (discussing general derivative disclosure); FASB ASC 820, Fair Value Measurements (“ASC 820”) (requiring disclosure of valuation information for major categories of investments).

See also infra

section II.C.

The information and reporting format required by Form N-PORT will create a more detailed, uniform, and structured reporting regime. We believe and several commenters agreed that this will allow the Commission and investors to better analyze and compare 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.

See, e.g.,

Comment Letter of Fidelity Investments (Aug. 10, 2015) (“Fidelity Comment Letter”) (generally supporting Commission's focus on modernizing the way data is collected from funds and reported to shareholders and providing suggestions for modifications to the final rule); Comment Letter of Capital Research and Management Company (Aug. 11, 2015) (“CRMC Comment Letter”) (supporting Commission's efforts to take advantage of technology in order to assist the staff, investors, and other market participants to better assess different fund products and assist the Commission in carrying out its mission; and providing suggestions for modifications to the final rule).

Furthermore, as discussed further below, Form N-PORT requires 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 (prior to the Commission issuing the Proposing Release), discussed further below, we believe that fund portfolio managers and risk managers commonly calculate risk metrics to analyze the exposures in their portfolios.

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.

See generally

John C. Hull, Options, Futures, and Other Derivatives (9th ed., 2015) (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 of changes in underlying asset prices or interest rates); Sheldon Natenberg, Option Volatility and Pricing (1994) (same).

Form N-PORT will also require information about certain fund transactions and 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. We believe and several commenters agreed that such information will increase transparency concerning these transactions and activities and will

provide better information regarding counterparties, which will be useful in assessing both individual and multiple fund exposures to a single counterparty.

This will allow the Commission to better assess and monitor counterparty risk for individual funds, as well as across the industry.

See, e.g.,

Morningstar Comment Letter (“By collecting and making available additional information about counterparty risk and other important factors, the SEC will make it easier for investors and financial advisors to monitor portfolio risks.”).

As discussed further below, Form N-PORT will be filed electronically in a structured, XML format. This format will 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 will 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.

See, e.g.,

Fidelity Comment Letter (“Collecting data in a structured format should allow the Commission to use information from market participants in rigorous empirical examinations of the industry in furtherance of the SEC's goals.”); ICI Comment Letter (“Obtaining that information in a structured data format will help the SEC to better analyze information and improve its ability to carry out its regulatory mission.”).

Many commenters were generally supportive of our proposal.

However, we received many comments relating to the structure of the proposed form, data to be collected, frequency of filings, and whether reports on the form should be made public. We address these comments below and discuss modifications we made from the proposal in response to comments.

See, e.g.,

Comment Letter of Charles Schwab Investment Management, Inc. (Aug. 11, 2015) (“Schwab Comment Letter”) (“Form N-Port [sic] will provide substantial additional information to the Commission and strengthen its ability to oversee and carry out its regulatory responsibilities for the asset management industry.”); Vanguard Comment Letter (“Vanguard generally supports the proposed reporting initiatives because we believe these reporting obligations will provide the Commission with the tools necessary to monitor portfolio composition and risk exposure among funds, without exposing fund investors to potentially harmful front-running activities.”); Comment Letter of Pioneer Investments (Aug. 11, 2015) (“Pioneer Comment Letter”) (“Pioneer supports the Commission's effort to modernize the regime whereby funds report information about their portfolio holdings to the Commission.”); Comment Letter of the Securities Industry and Financial Markets Association Asset Management Group (Aug. 11, 2015) (“SIFMA Comment Letter I”) (“We support the Commission's initiative in proposing monthly reports on Form N-PORT in order to strengthen its regulatory oversight of the asset management industry and protect investors by obtaining more frequent and substantially expanded information about funds, in a structured format.”); ICI Comment Letter (“ICI broadly supports the Commission's efforts to update fund reporting.”).

1. Who Must File Reports on Form N-PORT

We are adopting, as proposed, the requirement that each registered management investment company and each ETF organized as a UIT file a report on Form N-PORT.

Registrants offering multiple series will 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 will not be required to file reports on Form N-PORT.

See

new rule 30b1-9.

As further discussed below, in part to harmonize definitions between Forms N-PORT and N-CEN, and in part to parallel identical changes to the definition of “exchange-traded fund” in Form N-CEN, we have revised Form N-PORT's proposed definition of “exchange-traded product” to refer instead to “exchange-traded fund,” which as revised includes each series of a UIT that meets that definition.

See

General Instruction E of Form N-PORT;

infra

footnote 896 (discussing changes to definitions in Form N-CEN).

Money market funds already file their monthly portfolio investments with the Commission.

See

Form N-MFP. SBICs are unique investment companies that operate differently and are subject to a different regulatory regime 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

SBA, SBIC Program Overview,

available at

https://www.sba.gov/content/sbic-program-overview

. As a result of these differences, SBICs are not required to file reports on Form N-Q. As of December 31, 2015, only one SBIC had publicly offered securities outstanding.

We are adopting, as proposed, the requirement that all ETFs 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.

ETFs organized as UITs have significant numbers of investors who we believe can benefit from the disclosures required in Form N-PORT.

We received no comments on this aspect of the proposal.

There are currently eight ETFs organized as UITs that have registered with the Commission.

Commission staff estimates that as of December 2015, ETFs organized as UITs represented 12% of all assets invested in registered ETFs. This analysis is based on data from Morningstar Direct.

One commenter suggested that reports on Form N-PORT should be filed by all registered investment companies, including UITs, in order to have comparable filing information across registered investment products, although the commenter did suggest that less frequent filing requirements might be appropriate based on the structure of the investment company.

We note that UITs have fixed portfolios that do not change over time, and thus, unlike most other investment companies which are required to file quarterly reports with their current portfolio holdings, UITs are not currently required to file periodic reports other than on an annual basis.

Based on these differences, as reflected in the current reporting regime, we have determined not to extend Form N-PORT filing requirements to UITs that are not ETFs at this time.

See

Morningstar Comment Letter.

UITs currently file annual reports on Form N-SAR. In contrast, management investment companies currently file reports for their first and third fiscal quarters on Forms N-Q and reports for their second and fourth fiscal quarters on Form N-CSR, as well as semi-annual reports on Form N-SAR.

See supra

footnotes 19-20 and accompanying text.

The same commenter also recommended that reports on Form N-PORT be filed by business development companies (“BDCs”).

BDCs are a category of closed-end funds that are operated for the purpose of investing in, and providing managerial assistance to, small and developing businesses, and financially troubled businesses. BDCs are not required to register as investment companies under the Investment Company Act although they do elect to be subject to certain specialized provisions, and they are subject to a different reporting regime than registered investment companies.

Based on these differences, and as reflected in the current reporting and registration regime, we have determined not to extend Form N-PORT filing requirements to BDCs at this time.

See

Morningstar Comment Letter (recommending that “business development companies . . . and other [registered investment companies]” should be required to file reports on Form N-PORT).

See

Adoption of Permanent Notification Forms for Business Development Companies; Statement of Staff Position, Investment Company Act Release No. 12274 (Mar. 5, 1982) [47 FR 10518-02 (Mar. 11, 1982)]; and Interim Notification Forms for Business Development Companies, Investment Company Act Release No. 11703 (Mar. 26, 1981) [46 FR 19459 (Mar. 31, 1981)] for a discussion of the regulatory system applicable to BDCs.

Although BDCs will not be subject to Form N-PORT filing requirements, the amendments being adopted to Regulation S-X will apply to both registered investment companies and BDCs.

See infra

footnote 700.

Another commenter suggested that the Commission and the CFTC should agree on and implement a substituted

compliance regime.

Although we recognize that there are various alternative reporting requirements imposed in other contexts and by other regulators, the reporting requirements imposed by Form N-PORT have been designed specifically to meet the Commission's regulatory needs with regards to monitoring and oversight of registered funds.

See

SIFMA Comment Letter I (“Under our suggested approach, funds required to report on new Form N-PORT would be excused from reporting on Form CPO-PQR.”).

Finally, one commenter stated that we should not require funds to directly report information on their own behalf, but instead require other entities such as transfer agents and custodians to report information on behalf of funds.

Given our expertise and experience in regulating, examining, and overseeing funds, including fund reporting, recordkeeping, and compliance, we continue to believe that obtaining such information directly from funds is appropriate.

See

Federated Comment Letter (“It would also reduce the reporting burden on funds for the Commission to acquire information directly from custodians and transfer agents, which are proficient in maintaining and reporting portfolio holdings and other information.”).

2. Information Required on Form N-PORT

We are adopting, substantially as proposed, the requirements in Form N-PORT 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. We are adopting these information requirements substantially as proposed, although we are making some modifications from the proposal in response to comments. Each of these is discussed in more detail below.

a. General Information and Instructions

Part A of Form N-PORT requires, as proposed, general identifying information about the fund. This information includes the name of the registrant, name of the series, and relevant file numbers.

Funds will also report the date of their fiscal year end, the date as of which information is reported on the form, and indicate if they anticipate that this will be their final filing on Form N-PORT.

This information will be used to identify the registrant and series filing the report, track the reporting period, and identify final filings. No comments were received on this aspect of our proposal. We are adopting these elements as proposed.

See

Item A.1 and Item A.2 of Form N-PORT. Funds will 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 will also provide the name of and EDGAR identifier (if any) for the series.

See

Item A.3 and Item A.4 of Form N-PORT.

As proposed, funds will also provide the Legal Entity Identifier (“LEI”) number of the registrant and series.

The LEI is a unique identifier generally associated with a single corporate entity and is intended to provide a uniform international standard for identifying counterparties to a transaction.

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 is widely and freely available and not subject to any usage restrictions. Funds or registrants that have not yet obtained an LEI will be required to obtain one, which currently entails a one-time fee of $219 plus $119 per year in annual maintenance costs and fees.

See

Item A.1.d and Item A.2.c of Form N-PORT. The Commission has begun to require disclosure of the LEI in other contexts.

See, e.g.,

Form PF, Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors,

available at

http://www.sec.gov/rules/final/2011/ia-3308-formpf.pdf

; Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Securities Exchange Act Release No. 74244 (Feb. 11, 2015) [80 FR 14564 (Mar. 19, 2015)] (“Regulation SBSR Adopting Release”).

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 requirement to report LEIs if the operation of the LEI system were to change significantly.

As of June 30, 2016, the cost of obtaining an LEI from the Global Markets Entity Identifier (“GMEI”) Utility in the United States was $200, plus a $19 surcharge for the LEI Central Operating Unit. The annual cost of maintaining an LEI from the GMEI Utility was $100, plus a $19 surcharge for the LEI Central Operating Unit.

See

GMEI Utility, Frequently Asked Questions,

available at

https://www.gmeiutility.org/frequentlyAskedQuestions.jsp

Commenters were generally supportive of this aspect of our proposal, with most endorsing the use of LEI for identification of funds, as well as for fund counterparties.

However, one commenter suggested that certain funds should be permanently exempted from such requirements as such funds would not need an LEI for any other purpose.

Lastly, another commenter suggested that, to better assist academic researchers with identification of entities, every filing by a mutual fund should require an exhaustive list of the tickers and CUSIPs associated with that mutual fund.

See, e.g.,

Comment Letter of State Street Corporation (Aug. 11, 2015) (“State Street Comment Letter”); Comment Letter of Depository Trust & Clearing Corporation (Aug. 11, 2015); Comment Letter of Interactive Data Pricing and Reference Data LLC (Aug. 10, 2015) (“Interactive Data Comment Letter”); Comment Letter of Global Legal Entity Identifier Foundation (Aug. 5, 2015).

See

Comment Letter of Carol Singer (June 24, 2015) (“Carol Singer Comment Letter”) (suggesting that a small closed-end fund that is not listed on an exchange should not be required to obtain an LEI identifier).

See

Comment Letter of Russ Wermers (Aug. 4, 2015) (“Russ Wermers Comment Letter”) (arguing that this information could help with the identification of entities. The commenter did not discuss the utility of the LEI specifically).

We are adopting the requirement that funds report LEI information for the registrant and for each series, as proposed. We acknowledge that funds will incur some costs to obtain and maintain an LEI, although we believe the cost to obtain and maintain an LEI identifier is modest.

Uniform reporting of LEIs by funds, however, will help provide a consistent means of identification that will facilitate the linkage of data reported on Form N-PORT with data from other filings and sources that is or will be reported elsewhere as LEIs become more widely used by regulators and the financial industry.

Using alternate means of identification or providing exemptions to this requirement could hinder the ability of Commission staff as well as investors and other potential users of this information to use the data on Form N-PORT as discussed above. For these

reasons, we anticipate that the benefits of requiring funds to report the LEI number of the registrant and series on Form N-PORT will justify the costs of obtaining and reporting this information, and thus we are adopting this requirement as proposed.

See supra

footnote 63.

See, e.g.,

Commodities Futures Trading Commission (“CFTC”), CFTC Announces Mutual Acceptance of Approved Legal Entity Identifiers, Press Release: PR6758-13 (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 (Apr. 11, 2014),

available at

http://www.sifma.org/comment-letters/2014/sifma-submits-comments-to-fsoc-encouraging-us-regulators-to-adopt-and-use-the-legal-entity-identifiers

; Regulation SBSR Adopting Release,

supra

footnote 61.

Commenters to the FSOC Notice expressed support for regulatory acceptance of LEI identifiers.

See, e.g.,

Joint Comment Letter of SIFMA/Investment Adviser Association to FSOC Notice (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).

Furthermore, in response to the request that an exhaustive list of the tickers and CUSIPs associated with the fund be reported to help with the identification of entities, we note that Form N-PORT requires funds to report various identifying information, including name of the registrant, Investment Company Act file number of the registrant, CIK number of the registrant, LEI of the registrant, name of each series, EDGAR identifier (if any) for each series, and LEI for each series.

We believe this information is sufficient for Commission staff, as the primary user of the form, to identify funds filing reports on Form N-PORT, and could also be useful for investors and other potential users. As discussed further below, funds will also be reporting additional identifying information on Form N-CEN in a structured format that can be used to identify those funds and link information reported by them on Forms N-PORT and N-CEN with information available in other Commission filings and sources that is similarly structured.

See

Item A.1 and Item A.2 of Form N-PORT.

Form N-CEN requires funds to report additional information for each share class outstanding, including name of the class, class identification number, and ticker symbol.

See

Item C.2.d of Form N-CEN.

Form N-PORT also includes general filing and reporting instructions, as well as definitions of specific terms referenced in the form.

These instructions and definitions are intended to provide clarity to funds and to assist them in filing reports on Form N-PORT.

See

General Instruction 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) and G (Responses to Questions) of Form N-PORT.

See id.

For example, General Instructions A, B, C and G provide specific filing and reporting instructions (including how to report entity names, percentages, 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.

Proposed Form N-PORT would have required funds to report information about their portfolios as of the last business day, or calendar day, of the month, but did not provide specific instructions on the appropriate basis for reporting such information, such as whether the information should be reported as of the trade date (“T+0”), which is required for financial reporting purposes, or the trade date plus one day (“T+1”), which is currently permitted under rule 2a-4 for the calculation of funds' net asset values (“NAV”). Several commenters requested clarification on this issue and specifically requested that Form N-PORT allow reporting on a T+1 basis.

See, e.g.,

ICI Comment Letter; Fidelity Comment Letter; Schwab Comment Letter; Comment Letter of OppenheimerFunds (Aug. 10, 2015) (“Oppenheimer Comment Letter”).

Many commenters noted that most funds use T+1 accounting to record their day-to-day transactions, and only convert their records to T+0 for quarterly portfolio holdings reporting purposes on Forms N-CSR and N-Q.

These commenters further noted that our proposal would require funds to file monthly reports 30 days after each reporting period, whereas funds currently have at least 60 days after the end of each fiscal quarter to report similar information on a T+0 basis on Forms N-CSR and N-Q. Accordingly, commenters suggested that allowing funds to file on a T+1 basis would reduce filing burdens relative to requiring reporting on a T+0 basis, while not meaningfully changing the substance of the information reported. One commenter explicitly recommended that funds be allowed to choose whether to file on a T+0 or T+1 basis, so that funds that prefer to align their Form N-PORT reporting with their reporting on Forms N-Q and/or N-CSR could do so, while other commenters that suggested this modification did not specify whether all funds should be required to report on a T+1 basis uniformly.

See, e.g.,

Pioneer Comment Letter; Comment Letter of Invesco Advisers (Aug. 11, 2015) (“Invesco Comment Letter”); Schwab Comment Letter; ICI Comment Letter; Comment Letter of the Securities Industry and Financial Markets Association Asset Management Group (Jan. 13, 2016) (“SIFMA Comment Letter II”).

See

SIFMA Comment Letter I.

As discussed above, the Commission did not specify the appropriate basis for reporting, and we agree with commenters that an explicit instruction on the basis on which to report is appropriate. We are persuaded by commenters that explicitly instructing funds file on the same basis for which they calculate their NAV (generally a T+1 basis) would not be as burdensome as instructing all funds to file on a T+0 basis, and would still maintain the utility of the information reported. As noted by commenters, we acknowledge that reporting monthly information on Form N-PORT on a T+1 basis may result in differences between quarterly portfolio holdings information currently reported on a T+0 basis on Forms N-CSR and N-Q. However, any such differences are unlikely to affect the utility of the information for the Commission and other potential users, because our primary purpose for using the information is to analyze and assess the various risks in a particular fund and monitoring risks and trends in the fund industry as a whole, rather than to align the information reported with the fund's financial statements.

Nonetheless, we do not agree that funds should be permitted to file either on the basis of calculating its NAV (generally T+1) or on the basis of how they prepare financial reports (T+0) at the fund's option, as having funds report their portfolio holdings on different bases would reduce the comparability of the data reported on Form N-PORT among funds and across the industry. Accordingly, we have modified the proposal to add an instruction to Form N-PORT instructing funds that they must report portfolio information on Form N-PORT on the same basis they use to calculate their NAV, which we understand is generally T+1.

See General Instruction A of Form N-PORT (“Reports on Form N-PORT must disclose portfolio information as calculated by the fund for the reporting period's ending net asset value (commonly, and as permitted by rule 2a-4, the first business day following the trade date).”). We understand that funds generally calculate their NAV on a T+1 basis pursuant to rule 2a-4, although under certain circumstances funds might record particular transactions on a T+0 basis, such as when correcting a pricing error. The instructions in Form N-PORT are intended to be flexible enough to allow funds to report information on Form N-PORT on the same basis used in calculating NAV.

Commenters also requested confirmation that different internal methodologies could be applied in responding to certain items on Form N-PORT, such as those that may require subjective judgments on the part of funds.

Furthermore, two commenters urged the Commission to explicitly state that funds may make and rely on reasonable assumptions in providing responses to information items on Form N-PORT.

In response to these comments, we have modified the proposal by adding an instruction clarifying that in reporting information on Form N-PORT, the fund may

respond using its own methodology and the conventions of its service provider, so long as the methodology and conventions are consistent with the way the fund reports internally and to current and prospective investors.

This approach, which we have modeled after a similar instruction in Form PF, is intended to strike an appropriate balance between easing the reporting burden on funds by allowing them to rely on their existing practices, while still providing useful information to the Commission, investors, and other potential users.

The new instruction also explains that funds may explain any of their methodologies, including related assumptions, in Part E of Form N-PORT.

See, e.g.,

SIFMA Comment Letter I (requesting confirmation that funds may use classifications generated by existing methodologies or available service providers in reporting country of risk for portfolio holdings); ICI Comment Letter (asserting that funds should have the flexibility to make country of risk determinations using their own good faith judgment).

See

ICI Comment Letter; Oppenheimer Comment Letter.

See

General Instruction G of Form N-PORT (“Funds may respond to this Form using their own internal methodologies and the conventions of their service providers, provided the information is consistent with information that they report internally and to current and prospective investors. However, the methodologies and conventions must be consistently applied and the Fund's responses must be consistent with any instructions or other guidance relating to this Form.”).

See

General Instruction 15 of Form PF. Periodic reports on Form PF must be filed by registered investment advisers with at least $150 million in private fund assets under management. Form PF is designed, among other things, to assist the Financial Stability Oversight Council in its assessment of systemic risk in the U.S. financial system.

See generally

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”).

See

General Instruction G of Form N-PORT (“A Fund may explain any of its methodologies, including related assumptions, in Part E.”).

One commenter recommended that we include a definition of “forward contract,” that references the settlement time of a contract, noting that from their experience, there are several interpretations of what constitutes a forward contract and without a standard definition, funds might categorize products inconsistently.

We disagree that we should define forward contracts with regard to the settlement time, and believe that adopting a specific definition like the one that the commenter suggested could be overbroad or under-inclusive based on the settlement time selected. Also, based on staff experience reviewing fund disclosures, we note that funds have generally been able to classify forwards in their current disclosures even though there is not a specific definition that references the settlement date of the contract. Finally, the approach we are adopting allows flexibility as forward products evolve.

See

Comment Letter of T. Rowe Price (Aug. 21, 2015) (“T. Rowe Price Comment Letter”).

Similarly, one commenter noted that it is unclear if a credit default swap should be reported as an option or a swap on Form N-PORT since it has the characteristics of both types of investments.

As discussed further below, we are revising Form N-PORT to include a clarification that specifically identifies that total return swaps, credit default swaps, and interest rate swaps should all be categorized under the “swap” instrument type.

See

Morningstar Comment Letter.

See infra

footnote 340 and accompanying text.

A few commenters also asked for guidance as to what investments would fall within the category of “other derivatives” in Item C.11.g.

The commenters noted that funds already rely upon the definition of “derivatives” provided in U.S. Generally Accepted Accounting Principles (“GAAP”) for financial statement reporting purposes and recommended that funds be allowed to rely upon the same definition for determining what to report as “other derivatives” on Form N-PORT (

i.e.,

investments reported as derivatives for financial statement reporting purposes, but that do not fall within the categories of derivatives enumerated in Form N-PORT such as futures, forwards, etc.).

We agree that this approach will generally promote consistency in how such information is reported and will provide more certainty to funds reporting “other derivatives” on Form N-PORT, and we understand that funds may choose to utilize this approach. However, we are not requiring that funds do so since we anticipate most derivative investments held by funds will fall within one of the categories of derivatives previously enumerated in Form N-PORT, and thus we expect few investments to be reported within the “other derivatives” category. Moreover, this “other derivatives” category is intentionally designed to be flexible enough to allow funds to capture and categorize investments in the future that are not currently traded by funds, and for these reasons we are not requiring funds to adhere to any specific process in determining what should fall within this category, provided that none of the previously enumerated categories apply.

See

ICI Comment Letter; T. Rowe Price Comment Letter.

See generally

ASC 815 (Derivatives and Hedging).

We note that definitions related to derivatives have been proposed in other contexts, for example “derivatives transaction” in our recent proposal regarding the use of derivatives by registered investment companies and BDCs.

See

Derivatives Proposing Release,

supra

footnote 7 (defining the term “derivatives transaction” to mean “any swap, security-based swap, futures contract, forward contract, option, any combination of the foregoing, or any similar instrument (`derivatives instrument') under which a fund is or may be required to make any payment or delivery of cash or other assets during the life of the instrument or at maturity or early termination.” However, that proposed definition is limited to derivatives transactions where the fund may be required to make a payment or delivery of cash or other assets. In contrast, for purposes of Form N-PORT, we seek to obtain information about all of a fund's derivative investments, regardless of whether the fund has a payment or delivery obligation. As a result of these differences, we continue to believe that it is preferable for Form N-PORT to not incorporate a specific definition, but rather to retain the flexibility to encompass the changing types of products that may evolve and emerge.

Several commenters also asked that the definition of “investment grade” be revised to follow standards generally used by the industry by replacing references to liquidity with references to credit quality.

In response to these comments, we are removing the definition of “investment grade” that we proposed to be included in Form N-PORT. Consistent with our other changes discussed herein that permit funds to rely on their existing practices and methodologies, Form N-PORT provides funds with the flexibility, in determining what constitutes “investment grade,” to generally use their own methodology and the conventions of their service providers, as provided in General Instruction G. Given this clarification in the adopted form, we do not believe any definition of investment grade is necessary.

See

ICI Comment Letter; Oppenheimer Comment Letter; Pioneer Comment Letter; Comment Letter of MFS Investment Management (Aug. 11, 2015) (“MFS Comment Letter”); Comment Letter of the Dreyfus Corporation (Aug. 11, 2015) (“Dreyfus Comment Letter”).

See supra

footnote 79 and accompanying text.

We have also made several changes to certain definitions and instructions related to the way in which funds will provide information on Form N-PORT, largely relating to the formatting of the information reported. Among other things, we have revised the instruction in the proposal that directed funds to respond to every item of the form.

As proposed, the instruction would have required funds to respond to each sub-item and item on Form N-PORT even if the item was inapplicable. The revised instruction indicates that funds are not required to respond to items that are wholly inapplicable.

For example, no

response is required for Item C.11, which concerns derivatives, when reporting information about an investment that is not a derivative. We believe this revision will decrease burdens upon filers and reduce the file size of Form N-PORT submissions, while still maintaining the clarity of the data reported on Form N-PORT.

See

General Instruction G of proposed Form N-PORT (“A Fund is required to respond to every item of this form. If an item requests information that is not applicable (for example, an LEI for a counterparty that does not have an LEI), respond N/A”).

See

General Instruction G of Form N-PORT (“A Fund is not required to respond to an item that is wholly inapplicable (for example, no response would be required for Item C.11 when reporting information about an investment that is not a

derivative). If a sub-item requests information that is not applicable, for example, an LEI for a counterparty that does not have an LEI, respond N/A”).

We have also eliminated certain instructions from proposed Form N-PORT relating to the formatting of information reported on the form that, upon further consideration, we believe are unnecessary in Form N-PORT. In particular, we have eliminated instructions requiring the rounding of percentages, monetary values, and other numeric values.

Elimination of the instructions regarding the rounding of such figures should allow funds to report such information in the same way such information is currently recorded in their books and records. We also have eliminated instructions regarding the signature and filing of reports, because we believe that the general rules and regulations applicable under the Act provide sufficient guidance with regard to those issues.

See

General Instruction G of proposed Form N-PORT (instructions regarding rounding of percentages, monetary values, and other numerical values).

See

General Instruction B of Form N-PORT (“The General Rules and Regulations under the Act contain certain general requirements that are applicable to reporting on any form under the Act. These general requirements shall be carefully read and observed in the preparation and filing of reports on this Form, except that any provision in the Form or in these instructions shall be controlling.”)

See also

General Instruction H of proposed Form N-PORT (instructions regarding signature and filing of reports).

We have also made clarifying revisions to certain definitions. As discussed above, we have revised the proposed definition of “exchange-traded product” to refer instead to “exchange-traded fund” to harmonize the definitions used in Forms N-PORT and N-CEN.

The revision also clarifies that a separate report on Form N-PORT must be filed by each series of a UIT organized as an ETF, and parallels similar revisions to the definition of ETF in Form N-CEN.

We have also revised the definition of “LEI” to reflect new terminology regarding LEIs.

See supra

footnote 48 and accompanying text. Although the definition of “exchange-traded fund” being adopted on Form N-PORT is narrower than the definition of “exchange-traded product” as proposed on Form N-PORT, the universe of filers on Form N-PORT is not changing because exchange-traded managed funds that would have been encompassed in the proposed definition of “exchange-traded product” will be encompassed in the adoption through references to managed investment companies.

See

rule 30b1-9 (requiring certain funds to file reports on Form N-PORT); Form N-PORT (“Form N-PORT is to be used by a registered management investment company, or an exchange-traded fund organized as a unit investment trust, or series thereof (`Fund'). . . .”).

See infra

footnote 896.

Form N-PORT's revised definition of “LEI” refers to the legal entity identifier “endorsed” by the Regulatory Oversight Committee Of The Global Legal Entity Identifier System (“LEI ROC”) or “accredited” by the Global Legal Entity Identifier Foundation (“GLEIF”), as opposed to “assigned or recognized” by those two entities.

Finally, regarding General Instruction F, which provides information regarding the public availability of the information in Form N-PORT, the final Instruction clarifies, similar to language that is contained in current Form PF, that we do not intend to make public certain information reported on Form N-PORT “that is identifiable to any particular fund or adviser.”

This modification makes clear, for example, that the Commission or Commission staff could issue analyses and reports that are based on aggregated, non-identifying Form N-PORT data, which would otherwise be nonpublic, such as information reported on Form N-PORT for the first and second months of each fund's fiscal quarter.

See supra

footnote 26.

b. Information Regarding Assets and Liabilities

Part B of Form N-PORT seeks certain portfolio level information about the fund. As we proposed, Part B includes questions requiring funds to report their total assets, total liabilities, and net assets.

Funds will also separately report certain assets and liabilities, as follows. First, as we proposed, funds will report the aggregate value of any “miscellaneous securities” held in their portfolios.

As currently permitted by Regulation S-X, and as further discussed below, Form N-PORT permits funds to report an aggregate amount not exceeding 5 percent of the total value of their 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 report to shareholders or otherwise made available to the public.

We received only one comment on this aspect of our proposal, which supported the reporting of aggregate information for miscellaneous securities.

100

See

Item B.1 of Form N-PORT.

See

Item B.1.a and Item B.2.a of Form N-PORT. As discussed further below, Form N-PORT will require funds to also report information about miscellaneous securities on an investment-by-investment basis, although such information will be nonpublic and will be used for Commission use only.

See infra

footnote 420 and accompanying text.

See

rule 12-12 of Regulation S-X;

see also

Parts C and D of Form N-PORT.

100

See

SIFMA Comment Letter I.

Second, as we proposed, funds will 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”).

101

We received no comments on this aspect of the proposal. Some funds use CFCs for making certain types of investments, particularly commodities and commodity-linked derivatives, often for tax purposes. Form N-PORT requires funds to disclose each underlying investment in a CFC, rather than just the investment in the CFC itself, which will increase transparency on fund investments through CFCs.

102

These disclosures will allow investors to look through CFCs and understand the specific underlying holdings that they are investing in, which will in turn allow investors to better analyze their fund holdings and risk, and hence enable investors to make more informed investment decisions.

101

See

General Instruction E (providing that “Controlled Foreign Corporation” has the meaning provided 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) of Form N-PORT.

102

See

Instruction to Part B of Form N-PORT (“Report the following information for the Fund and its consolidated subsidiaries.”).

In addition, as discussed further below in section II.D.4, we believe it will be beneficial for the Commission to have certain information about funds' use of CFCs. The information we will be obtaining in Form N-PORT, combined with additional information we are requiring on Form N-CEN regarding CFCs, discussed below, will 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.

Third, as we proposed, we are requiring that funds report the amounts 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.

103

We received no comments on this aspect of the proposal. This information will allow Commission staff, as well as investors and other potential users, to better understand a fund's borrowing activities and payment obligations associated with these transactions. This in turn will facilitate analysis of the fund's use of financial leverage, as well as the fund's liquidity profile and ability to meet redemptions or share repurchases, which are important to understanding the risks such borrowings might create.

103

See

Item B.2.c-Item B.2.e of Form N-PORT.

One commenter suggested that certain fee and expense information currently reported on Form N-SAR, and Item 75 of Form N-SAR in particular—which relates to average net assets during the current reporting period—be reported on Form N-PORT.

104

The commenter acknowledged that much of this information is already publicly reported in or can be derived from information reported in other fund documents filed with the Commission, but argued that this information should also be reported on Form N-PORT because the structured format of Form N-PORT would make information reported on Form N-PORT easier to aggregate and analyze.

105

We are not making this suggested change because similar and complementary information will be reported on Form N-PORT in a structured format going forward (

i.e.,

monthly net assets for funds more generally) and is currently available in a structured format for mutual funds in their risk/return summaries (certain fee and expense data).

106

Also, as discussed further below, we are revising Form N-CEN to require funds to report average net assets on an annual basis.

107

104

See

Morningstar Comment Letter.

105

Id.

106

See

SEC, Interactive Data and Mutual Fund Risk/Return Summaries,

available at https://www.sec.gov/spotlight/xbrl/mutual-funds.shtml

; Item B.6 of Form N-PORT (requiring funds to report monthly flow information).

107

See infra

footnotes 1016-1017 and accompanying text.

For these reasons, we are adopting this aspect of Form N-PORT as proposed.

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.

108

See, e.g.,

section 408 of the Sarbanes-Oxley Act of 2002, Public Law 107-204, 116 Stat. 745, 790-791 (2002) (requiring the Commission to engage in enhanced review of periodic disclosures by certain issuers every three years).

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 disclosure documents 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.

109

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 the staff's outreach to funds prior to our proposal, 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.

110

109

See

Morningstar Comment Letter.

110

See

Proposing Release,

supra

footnote 7, at 33598.

Accordingly, we believe, and some commenters agreed, that it is appropriate to require funds to report quantitative measurements of certain risk metrics that will provide information beyond the narrative, often qualitative disclosures about investment strategies and risks in the fund's registration statement.

111

Monthly reporting on these risk measures, in particular, will 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.

112

111

See

Morningstar Comment Letter (noting a range of fund disclosures relating to fund synthetic disclosures, with some more helpful to investors than others); Franco Comment Letter (supporting the Commission's proposal relating to disclosures of risk metrics).

112

See

Morningstar Comment Letter.

Specifically, we proposed to require certain funds to report 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.

113

As discussed in section II.A.2.g below, we proposed to require risk measures at the investment level for options and convertible bonds. We continue to 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. As a result, we are adopting these risk measures substantially as proposed, subject to the modifications discussed below.

114

113

See

Item B.3 of proposed Form N-PORT.

114

See

Item B.3 of Form N-PORT.

While we received some comments generally supporting our proposal to require portfolio-level risk metrics,

115

some suggested alternative methods for collecting risk metrics,

116

or opposed

our proposal to make certain of the risk metrics public.

117

These comments are discussed in more detail below.

115

See, e.g.,

SIFMA Comment Letter I (“We support the Commission's proposal to require funds to provide the Commission with portfolio level risk metrics, and generally would defer to the Commission as to the information the Commission would consider useful for its regulatory purposes.”); State Street Comment Letter; Wells Fargo Comment Letter (“We are in agreement with the Commission's request for risk metrics as it relates to duration and spread duration; however, we suggest that the calculation for providing such risk metrics are defined differently than proposed.”).

116

See, e.g.,

BlackRock Comment Letter (Commission should use the same interest rate and credit risk questions as is required in Form PF; Commission should consider implementing a reporting requirement to obtain a comprehensive measure of fund's use of leverage); Morningstar Comment Letter (but also urging the Commission to collect more position level information which will enable the Commission, investors, and service providers to independently calculate risk);

see also

Interactive Data Comment Letter (“[P]osition level reporting aligns with what is standard practice in the industry and so would not be burdensome. Position level reporting would provide the

Commission with greater insight into sources of risk within a portfolio.”); Comment Letter of Simpson Thacher & Bartlett LLP (Aug. 11, 2015) (“Simpson Thacher Comment Letter”) (derivatives reporting should focus on portfolio-level risk metrics, such as “value at risk” models)

117

See, e.g.,

Comment Letter of the Independent Directors Council (Aug. 11, 2015) (“IDC Comment Letter”); SIFMA Comment Letter I; Simpson Thacher Comment Letter; Invesco Comment Letter; Schwab Comment Letter; ICI Comment Letter; Comment Letter of Dechert LLP (Aug. 11, 2015) (“Dechert Comment Letter”) (or, in the alternative, include a disclaimer that risk metrics are an estimate); T. Rowe Price Comment Letter; BlackRock Comment Letter; Oppenheimer Comment Letter. Our decision to make [certain] Items in Parts C, D, and E of the Form non-public is discussed in more detail below.

See infra

section II.A.4.

We believe, and some commenters agreed, that institutional investors, as well as entities that provide services to both institutional and individual investors, could use these risk metrics to conduct their own analyses in order to help them better understand fund composition, investment strategy, and interest rate and credit spread risk the fund is undertaking. As discussed further below, however, other commenters, were mixed as to whether this information would be useful for investors and if this information should be made public.

118

These measures can complement the risk disclosures that are contained in the registration statement, thereby potentially helping investors to make more informed investment choices. Accordingly, we disagree with commenters that argued this information has no utility for investors. We also continue to believe that requiring 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 debt than they currently have.

119

As discussed further in Section II.A.4 below, we are adopting, largely as proposed, the requirement that funds provide public disclosure of portfolio-level risk metrics on a quarterly basis.

120

For these reasons, and as discussed further below in section II.A.4, we were not persuaded by commenters that such information should be nonpublic.

118

See

Franco Comment Letter (Noting that the information on Form N-PORT is relevant to information intermediaries and market professionals and would assist them in assessing individual fund performance or comparing among funds);

see also

Morningstar Comment Letter (same);

but see

Invesco Comment Letter (stating that Form N-PORT's disclosures would not complement fund registration statements, nor be useful in helping investors make more informed investing decisions); SIFMA Comment Letter I (same); Federated Comment Letter.

119

See

Franco Comment Letter (“The rule proposal's various disclosure and reporting requirements, especially those requirements relating to portfolio disclosure, risk metrics and fund use of derivatives, serve the public interest and/or the protection of investors.”).

120

See

Item B.3 of Form N-PORT;

see also

Instruction 4 to Item 9(b)(1) of Form N-1A (“Disclose any policy to concentrate in securities of issuers in a particular industry or group of industries (

i.e.

investing more than 25% of a Fund's net assets in a particular industry or group of industries).”); Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998)] at nn. 100-101 and accompanying text (“. . . the Commission continues to believe that 25% is an appropriate benchmark to gauge the level of investment concentration that could expose investors to additional risk.”).

126

See, e.g.,

ICI Comment Letter; MFS Comment Letter; Dreyfus Comment Letter.

We believe that a 25% threshold, as several commenters suggested, will still allow the Commission to receive measurements of duration and spread duration from funds that make investments in debt instruments as a significant part of their investment strategy because we do not believe many, if any, funds that make investments in debt instruments as a significant part of their investment strategy have less than 25% of their NAV invested in such instruments. Commenters persuaded us that some funds that primarily invest in assets other than debt instruments, such as equities, could, at times, have more than 20% of the net asset value of the fund

invested in debt instruments for cash management or other purposes.

127

Thus raising the threshold from 20% to 25% will relieve more funds of having to monitor each month whether they trigger the requirement for making such calculations, while still achieving the goal the Commission stated in the Proposing Release of requiring funds that make investments in debt instruments as a significant part of their investment strategy to report such metrics.

128

127

See, e.g.

Pioneer Comment Letter.

128

See, e.g.,

State Street Comment Letter.

We agree with commenters that using the same thresholds we use for discussing industry concentration in current prospectuses is appropriate as it will achieve an objective that is similar to the one in Form N-1A of requiring funds to disclose only where such investments are a central part of the fund's investment objectives. We are therefore adopting a 25% threshold for reporting portfolio-level risk metrics.

129

See supra

footnote 125.

We are also modifying the rule from the proposal to require funds to calculate this threshold on the

three-month average

of a fund's value as percentage of NAV (rather than, as proposed, value as percentage of NAV at the

reporting date

(

i.e.

month-end)) because we agree with commenters who pointed out that this should mitigate the chance that short-term market fluctuations could cause a fund that does not typically use such instruments as part of its investment strategy to temporarily exceed the threshold and be required to report the metrics.

130

See

Item B.3 of Form N-PORT;

see, e.g.

Pioneer Comment Letter; Oppenheimer Comment Letter. One commenter requested that the threshold be based on the fund's net asset value and not notional value.

See

MFS Comment Letter. We continue to believe that basing the threshold on notional amount, especially for derivatives, is a better measure of a fund's exposure than the just the investment's value because some derivatives may have a negligible net asset value, but represent significant exposures to the fund. We have, however, made a clarifying change to the terminology from the proposal, and instruction B.3 now refer to “value” rather than “notional value.”

See infra

footnote 165.

Finally, another commenter opposed requiring risk metrics data for index funds because it believed that this requirement would be unnecessarily burdensome for those funds.

131

However, index funds incorporate a wide variety of funds—some of which are primarily invested in debt securities, including derivatives based on debt securities. It is our view that if a fund is exposed to debt instruments or interest rates in amounts that trigger the reporting of risk metrics, they have an exposure large enough to warrant reporting. Moreover, some index funds have indexes that change weekly or daily. Accordingly, because we believe it is important to monitor the risk metrics for all funds with exposures to debt instruments exceeding the threshold, we do not believe it would be appropriate to exempt index funds from Form N-PORT's requirements for risk metric reporting.

131

See

ICI Comment Letter.

For duration, we proposed 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.

132

We realized 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, we proposed that a fund only report the key rates that are applicable to the fund. We proposed that funds report zero for maturities to which they have no exposure.

133

For exposures outside of the range of listed maturities listed on Form N-PORT, we proposed that funds include those exposures in the nearest maturity.

132

See

Item B.3.aof proposed Form N-PORT.

133

For funds with exposures that fall between any of the listed maturities in the form, we proposed in the Instructions to Item B.3 that funds use linear interpolation to approximate exposure to each maturity listed above.

One commenter stated that calculating DV01 along key rates of the Treasury curve is “common and intuitive” to analyzing shifts of the yield curve.

134

However, some commenters suggested that calculating the DV01 and SDV01 for 11 proposed key rates could be burdensome, and requested that we limit the number of applicable key rates along the risk-free curve.

135

For example, commenters recommended that the Commission limit the calculations to the key rates to those most representative of bond fund overall exposures by limiting the calculation to the 1-, 2-, 5-, 10-, 20-, and 30-year rates.

136

Another commenter recommended collapsing the 1-, 3-, and 6-month exposures into the 1-year exposure, as a detailed breakout inside 1-year is not informative for most instruments.

137

Commenters argued that reducing the number of key rates will reduce burdens for fund companies while providing the Commission with sufficient information on yield curve exposures for staff analysis.

138

Finally, one commenter suggested that we only require a single measure of duration (

i.e.,

total portfolio duration) that is the weighted average of the top 5 currencies (including the base currency) rather than providing duration calculations for key rates along the Treasury curve, arguing that a single measure would capture the majority of a fund's portfolio risk.

139

134

See

Wells Fargo Comment Letter.

135

See, e.g.,

Fidelity Comment Letter; Dreyfus Comment Letter; Simpson Thacher Comment Letter.

136

See

Dreyfus Comment Letter; Simpson Thacher Comment Letter.

137

See

Fidelity Comment Letter.

138

See id.;

Dreyfus Comment Letter.

139

See, e.g.,

ICI Comment Letter (suggesting as an alternative, a single duration measurement that is the weighted average of the top 5 currencies (including the base currency)); SIFMA Comment Letter I (duration disclosure should be limited to top 5 exposures); ICI Comment Letter (report only total portfolio duration and credit spread duration—

i.e.,

single measures—rather than multiple points along the yield curve).

We continue to believe that requiring funds to provide further detail about their exposures to interest rate changes along the risk-free rate curve will 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 5 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 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 DV01 calculations along the risk-free interest rate curve, as opposed to a single measure of duration suggested by one commenter, will clarify this difference. Moreover, as one commenter noted, “DV01 and SD01 [spread duration] are likely the measures that will be least subject to differences based on assumptions within risk models employed by fund companies” and therefore minimizes variation based on the disparate risk metrics models used by funds.

140

The Commission staff will use this information to better understand how funds are achieving their exposures to interest rates, and to perform analysis across funds with similar strategies to identify outliers for potential further inquiry, as appropriate.

140

See

Morningstar Comment Letter.

We were, however, persuaded by commenters that reducing the number of key rates that funds must report could reduce the reporting burden, while still

providing the staff with sufficient information and flexibility to analyze how debt portfolios will react to different interest rates and credit spreads along the Treasury curve. We are therefore modifying this requirement from the proposal to require fewer key rates—specifically 3-month, 1-year, 5-year, 10-year, and 30-year—which will provide, as commenters suggested, the rates most representative to bond funds' overall exposures. The key rates Form N-PORT will require, as adopted, are substantially similar to the key rates suggested by commenters;

141

however, we believe that some granularity for short term debt is important, especially in the context of short and ultra-short duration funds, and therefore, unlike the commenters' suggestions for collapsing all short-term exposures to one-year, Form N-PORT will require reporting for the 3-month maturity.

142

141

See

Dreyfus Comment Letter; Simpson Thacher Comment Letter; Fidelity Comment Letter.

142

See

Item B.3.a and Item B.3.bof Form N-PORT;

see also

Item B.3.c of Form N-PORT;

see also

Fidelity Comment Letter (collapse the 1-, 3-, and 6-month exposures into the 1-year exposure, as a detailed breakout inside 1-year is not informative for most instruments); Dreyfus Comment Letter (focus should be on portfolio level statistics; alternative six key rates 1-, 2-, 5-, 10-, 20, and 30-years).

Form N-PORT will also require, as proposed, funds to provide the key rate duration for each applicable currency in a fund. One commenter recommended that we limit the duration to the top 5 currencies.

143

Some commenters requested that we not include currency in the reporting of duration for funds because currency risk is not relevant to duration.

144

Others supported a

de minimis

reporting threshold for exposure to different currencies that would be based on the notional value of the instruments, relative to NAV.

145

These commenters noted that including all currency exposures, regardless of size, would result in a long list of exposures that would have little impact on a fund.

146

As a result, the commenters believed that the Commission would receive data that would add little to the staff's ability to understand a fund's portfolio risk, but would add significant reporting and compliance burdens to funds.

147

143

See, e.g.,

SIFMA Comment Letter I.

144

See, e.g.,

Dreyfus Comment Letter.

145

See

CRMC Comment Letter (supporting a 5%

de minimis

threshold for currencies); MFS Comment Letter (same); SIFMA Comment Letter I (same); ICI Comment Letter (5% or top 5 currencies or those currencies representing at least 50% of the portfolio's exposure); Morningstar Comment Letter (same); Oppenheimer Comment Letter (one percent).

146

Id.

147

Id.

We continue to believe that funds should generally be required to provide the key rate duration for each applicable currency in the fund in order to understand interest rate risk to funds with significant currency risk. Nonetheless, we were persuaded by commenters that a

de minimis

threshold is appropriate. Based on staff experience analyzing similar data, however, we believe that a 5%

de minimis,

as suggested by some commenters, could hinder the staff's ability to measure smaller fund exposures that could have large effects across the fund industry as a whole. We agree with one comment that Form N-PORT should provide for a 1%

de minimis

threshold, calculated as the notional value of relevant investments in each currency relative to the fund's NAV.

148

We believe that setting the

de minimis

at this level will balance the need for the staff to identify and monitor not only a fund's currency risk, but also the risks of small fund positions that could aggregate into large positions across the industry, as the Commission will still be receiving information about the majority of a fund's currency exposures with this threshold.

148

SIFMA Comment Letter I.

For both duration and spread duration, we proposed 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. As we noted in the Proposing Release, based on staff outreach, we believed 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.

149

We requested comment on whether we should require or permit funds to report a larger change in interest rates or credit spreads, such as 5 or 25 basis points.

149

See

Proposing Release,

supra

footnote 7, at 33600.

See also

Morningstar Comment Letter (“The use of a bottom-up approach and the limited movement of 1 basis point are likely to provide standardization.”).

Additionally, while we did not propose requiring convexity, the Commission also considered and requested comment on whether funds should be required to report convexity, which facilitates more precise measurement of the change in a bond price with larger changes in interest rates because this measure captures changes in the shape of the yield curve.

150

See

Proposing Release,

supra

footnote 7, at 33600. 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 (8th ed., 2012) at 149-152.

Commenters suggested that we adopt risk metrics that would provide a better measure of risk over time than just DV01.

151

For example, one commenter, noting that, while DV01 and SDV01 are typically used as daily risk measures, larger shifts in the curve, such as DV25 or DV50, may be appropriate for measures with a significant lag, such as reporting on Form N-PORT.

152

151

See

Morningstar Comment Letter;

see also

Interactive Data Comment Letter (noting that fund managers often consider moves greater than 1 basis point when managing interest rate risks in their portfolios, particularly for funds with exposure to bonds with call or prepayment risk.).

152

See

Morningstar Comment Letter (also noting that DV01 and SDV01 are less likely to be subject to model risk).

We also received several comment letters recommending that we include a measure of convexity as it is a valuable method of measuring the change of the shifting yield curve, as well as a comment to require stress tests of the portfolio of small and large changes in spreads, interest rates, and volatility.

153

We agree with commenters that a measurement that captures larger changes in the yield curve will be useful. We additionally agree with commenters that argued that a measure for changes in the shape of the yield curve such as convexity would be useful, but are sensitive to the burdens that requiring a measurement of convexity may impose on filers that do not currently calculate convexity internally.

153

Interactive Data Comment Letter (“portfolio managers consider convexity to be critical when measuring the interest rate risk of their funds”); Dreyfus Comment Letter (“Convexity is valuable as a risk measure because it captures the change in the curvature (the `flattening' or `steepening') of the shifting yield curve.”).

Accordingly we believe that requiring a risk measure that shows the effect of a larger change in interest rates, coupled with DV01 as we proposed, both provides information that commenters said would be useful (

i.e.,

how the exposure changes with different changes in interest rate), while not requiring filers that do not calculate convexity internally to begin to do so. We are therefore adopting a requirement that funds provide both DV01

154

(a one basis point change in interest rate) and DV100 (a 100 basis point change in interest rates).

155

Based on staff experience, we believe that DV100 is among the most

common measures of interest rate sensitivity and it will, in conjunction with DV01, provide more useful information about non-parallel shifts in the yield curve than smaller measures, such as DV25 and DV50. Moreover, DV100 will allow the staff to capture larger changes to interest rates (and corresponding “shocks” to the markets) than DV25 and DV50. Finally, based on staff experience, it is our belief that DV100 is a standard measure of interest rate sensitivity and is a common measure of duration and is therefore unlikely to require filers to change current internal measurement practices, thereby mitigating the increase in reporting costs relative to the proposal.

154

See

B.3.a of Form N-PORT.

155

See

B.3.b of Form N-PORT.

We also proposed to require that 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.

156

This would measure the fund's sensitivity to changes in credit spreads (

i.e.,

a measure of spread above the risk-free interest rate). 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.

156

As proposed, Form N-PORT would have included 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

proposed General Instruction E of Form N-PORT. As discussed above in section H.A.2.a, we received comments relating to our proposed definition of “Investment Grade”. For the reasons discussed above, we have determined to remove these definitions from the Form.

One commenter stated that spread duration is a more representative measure of bond fund portfolio risk than duration alone because it “captures both interest rate risk and credit risk” and that staff should therefore use spread duration when analyzing funds.

157

However, that commenter and others recommended that we require funds to report a single spread duration for the portfolio, as spread rates are generally calculated as a parallel shift, making calculations at key rates less useful than they are for analyzing shifts in interest rates.

158

Because credit spreads can vary based on the maturity of the bonds, we continue to believe that providing credit spread measures for the key rates along the yield curve, as with DV01, will help the Commission and its staff better analyze credit spreads of investments in funds than a single measure for the entire portfolio. For example, this data could be 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 step, particularly during times of market stress.

159

157

See

Dreyfus Comment Letter.

158

See supra

footnotes 134-137;

see, e.g.,

Wells Fargo Comment Letter (noting that, unlike interest rate spreads, credit spreads are not typically calculated at all key rates); Fidelity Comment Letter (“A single CR01 without reference to maturity is a standard risk metric and should be familiar to market participants.”); Dreyfus Comment Letter (recommending a single measure for spread duration); ICI Comment Letter (same).

159

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.

For the same reasons discussed above for interest rate risk, however, we are limiting the required key rates for credit spread risk to 3-month, 1-year, 5-year, 10-year, and 30-year.

160

Commenters also suggested either only requiring spread duration (as opposed to both credit and spread duration) or further refining the measure of credit spreads, for example, by breaking out government related spreads from other investment-grade spreads.

161

However, we continue to believe that our current measure of spread risk provides adequate information to the staff, investors, and other potential users to better understand industry and fund credit spreads, and the risk associated with credit spreads, while appropriately balancing the costs of calculating such measures. We are therefore adopting the credit spread risk as proposed, subject to the previously discussed key rate refinements discussed above.

162

160

See

B.3.c of Form N-PORT.

161

See, e.g.,

Fidelity Comment Letter (Suggesting breaking out government-related credit spreads from other investment-grade credit spreads because it would be more useful for monitoring fund credit risk); Dreyfus Comment Letter (“Spread duration is a more important measure of overall bond fund portfolio risk than duration alone because it captures both interest rate risk and credit risk.”).

162

See

Item B.3.c of Form N-PORT.

We also proposed to include an instruction to Item B.3 to assist funds with calculating the threshold and to allow better comparability among funds. One commenter recommended that our proposed calculation for the threshold, which the proposal defined as “notional value,” include the “contract value of each futures contract for which the underlying reference asset or assets are debt securities or an interest rate.”

163

The commenter noted that funds may use fixed income futures for similar purposes as fixed income swaps, for example, to adjust duration, and including futures in the calculation would give the Commission more accurate reporting and is consistent with how the industry typically does these types of calculations.

164

We agree and are modifying our instructions to require that funds include futures in the calculation of notional value.

165

163

See

CRMC Comment Letter.

164

Id.

165

We have also decided to make a clarifying change by using the term “value” as opposed to the proposal's “notional value.” We believe that this could reduce confusion in the reporting of these measures. Since our proposed calculation of “notional value” requires the sum of “absolute” values, which may be different than how funds currently define “notional value,” we are changing the instructions from requiring notional value to requiring “value,” which is defined to include the notional value of certain derivatives instruments.

See

Instruction to Item B.3 of Form N-PORT. Moreover, this is consistent with Form PF which describes “value” in General Instruction 15.

See

General Instruction 15 of Form PF.

Another commenter noted that non-investment grade portfolios often hold “equity-like securities,” such as convertible bonds and preferred stocks.

166

The commenter argued that DV01 is not appropriate for these types of portfolios and requested that Form N-PORT clarify how funds should calculate interest-rates in such situations.

167

Other commenters suggested that we further refine our proposed methodology by providing more details relating to the relevant interest rate and credit spread calculations such as whether the credit spread to be shifted is the nominal or option adjusted spread (OAS).

168

In determining the proposed methodology for the 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 proposed methodology was 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.

166

See

Fidelity Comment Letter.

167

Id.

168

See, e.g.,

Interactive Data Comment Letter (Clarify whether interest rate shifts should be applied to a par yield curve or a spot yield curve and specify that the measurement procedure should include shifting rates both upward and downward. Clarify whether the curve segments should be defined based on maturity or average life, particularly for amortizing assets such as MBS and consider excluding certain issues, such as US treasuries; clarify whether the credit spread to be shifted is the nominal or option adjusted spread (OAS) and recommending OAS.); State Street Comment Letter (requesting clarity whether the Commission wants notional value versus delta adjusted or duration equivalent value, but also suggesting that the SEC should not be too prescriptive and give managers discretion within guidelines, so long as they can validate and justify their approach.).

While the Commission continues to believe that the methodologies for reporting duration and spread duration will allow for better comparability across funds, as discussed above, we are adopting a new instruction to Form N-PORT, subject to the specific instruction in Item B.3 to calculate value, that funds may use their own internal methodologies and the conventions of their service providers, which should help minimize reporting burdens.

169

As in Form PF, we believe that this approach strikes an appropriate balance between easing the burdens on funds by allowing them to rely on their existing practices while still providing the Commission's staff with comparable data across the industry.

170

However, we agree with the commenter that requested that we clarify whether the shift is the nominal or option-adjusted spread. We believe that measuring credit risk by shifting option adjusted spread provides a more robust measure of credit risk for investments with embedded optionality because it captures how embedded options alter the payment obligations of counterparties.

171

Thus measuring credit risk by shifting the option adjusted spread will allow the Commission and other interested parties to more accurately monitor this effect. We are therefore adding one clarification to Item B.3.c., Credit Spread Risk, to clarify that funds should provide the change in value of the portfolio from a 1 basis point change in credit spreads where the shift is applied to the option adjusted spread.

172

169

See

General Instruction G of Form N-PORT.

170

See

Form PF Adopting Release,

supra

footnote 80, at n. 187 and accompanying text Based on staff experience, we believe that we will still find the data useful even when funds use different methodologies, despite the fact that varying methodologies could reduce the comparability of data across funds because this data will still provide information that can be compared to a fund's previous filings, as well as a baseline measurement for the industry that can be monitored for changes from one month to the next.

171

See also

Interactive Data Comment Letter.

172

See

Item B.3.c of Form N-PORT.

While we proposed that funds provide a calculation of each of these measures at a portfolio level, we also considered whether to require, and requested comment on the alternative that, instead, funds report these risk metrics for each debt instrument or derivative that has an interest rate or credit exposure.

173

We had asked what the benefits would be to having more precise data for analysis of various movements in interest rates and credit spreads.

173

See

Proposing Release,

supra

footnote 7, at 33601.

Several commenters supported reporting at the portfolio-level rather than at the position-level.

174

One commenter suggested that, rather than report risk measures at the portfolio-level, funds should report risk exposures at the position-level, as this is current industry practice and would therefore not be burdensome.

175

Other commenters generally noted that providing position specific details would better enable investors and service providers to calculate risk, without relying on the reporting fund's models or assumptions.

176

Finally, another commenter recommended that the Commission, with respect to derivatives, focus on metrics based on a portfolio-level analysis, as such an analysis would more accurately reflect a fund's use of, and net exposure to, derivatives.

177

174

See, e.g.,

SIFMA Comment Letter I (supporting the Commission's proposal to require funds to provide the Commission with portfolio level risk metrics and requesting that the information not be made public); Wells Fargo Comment letter (supporting the Commission's request for duration and spread duration, but suggesting that the calculation for providing risk metrics be defined differently).

175

See

Interactive Data Comment Letter (recommending that the Commission consider several alternatives, including requiring funds to report aggregate risk metrics at the asset class level and composite portfolio-level, and to require risk metric calculations to account for the “interactions among the investments being aggregated.”).

176

See

Morningstar Comment Letter; Vanguard Comment Letter.

177

See

Simpson Thacher Comment Letter.

As discussed in the Proposing Release, we believe that most funds likely 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. Therefore, on balance, we continue to believe 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. We also believe that there are certain efficiencies for the Commission, its staff, 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 users of the information to calculate the portfolio-level measures from the position-level measures.

178

Commenters also requested that we clarify that the fixed income exposure as calculated by a top tier in a fund-of-fund investment structure would not include the top tier fund's exposure to the underlying fund's exposure to debt.

See

ICI Comment Letter; MFS Comment Letter. Since Item B.3 requires aggregated portfolio-level risk metrics, we generally would not expect funds to look through to the underlying funds' holdings. Rather, funds only will need to look to the top level fund investments in calculating their exposure to risk measures.

In order to allow better comparability among funds, some commenters recommended that the Commission omit risk metrics in favor of more data on the specific investments, stating that raw data would allow the staff, investors, and other potential users to perform their own risk calculations.

179

According to the commenters, providing position specific details would better enable investors and service providers to calculate risk, without relying on the reporting fund's models or assumptions.

180

While we agree that reporting raw data on specific investments would provide users of the data with more flexibility in calculating risk, we do not believe that the benefits of reporting this information sufficiently justify the burdens of requiring funds to report substantially more detailed information on Form N-PORT at this time. Moreover, as discussed above, we believe that requiring funds to report the portfolio-level risk measures required on Form N-PORT, as well as delta for options, warrants, and convertible securities, which is discussed further below in section II.A.2.g.iv, provides the Commission, investors, and other potential users with a sufficient level of granularity for purposes of analysis at this time.

179

See, e.g.,

Vanguard Comment Letter; Morningstar Comment Letter (“Rather than collecting model assumptions or additional standardization of the calculations, we believe providing additional detail with position information, specifically for bespoke derivatives and syndicated loans, will enable investors and service providers to independently calculate risk measures based on a model of the investor's choice.”).

180

Id.

Finally, commenters requested that we collect alternative risk metrics, such as the same interest rate and credit risk questions as are required by Form PF in order to improve the interoperability of the data collected for private funds and registered investment companies.

181

However, while some of our Form N-PORT risk metric disclosures are based on Form PF, for the reasons stated above, the position-level information that we will receive in reports on Form N-PORT make more detailed reporting unnecessary for registered funds.

182

Another commenter suggested that we focus on alternative portfolio-level risk metrics, such as Value at Risk (“VaR”).

183

Based on staff experience, for purposes of monitoring a fund's sensitivity to changes in interest rates and credits spreads, we believe that requiring funds to calculate duration and spread duration along key rates will provide the Commission with more sensitive information than would be provided by an overall portfolio-level risk metric such as VaR. Accordingly, we are not adopting these suggested alternative risk metrics.

181

See, e.g.,

BlackRock Comment Letter (Commission should use the same interest rate and credit risk questions as is required in Item 42 of

Form PF; Commission should consider implementing a reporting requirement to obtain a comprehensive measure of fund's use of leverage); Simpson Thacher Comment Letter. Item 42 of Form PF requires an adviser to report the impact on the fund's portfolio from specified changes to certain identified market factors, if regularly considered in formal testing in the fund's risk management, broken down by the long and short components of the qualifying fund's portfolio.

See

Item 42 of Form PF;

see also

Form PF Adopting Release,

supra

footnote 80, at nn. 270-272 and accompanying text.

182

Unlike with Form PF, which does not require position-level reporting, with Form N-PORT the staff will be able to calculate alternative risk measures using the detailed position-level information provided in reports on Form N-PORT.

183

See

Simpson Thacher Comment Letter (derivatives reporting should focus on portfolio-level risk metrics, such as “value-at-risk” models).

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. To protect the fund from the risk of borrower default (

i.e.,

the borrower failing to return the borrowed security or returning it late), the borrower 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.

184

Funds generally demand 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.

184

See

SIFMA, Master Securities Loan Agreement, §§ 4 (Collateral), 9 (Mark to Market) (2000) (“Master Securities Loan Agreement”),

available at http://www.sifma.org/Services/Standard-Forms-and-Documentation/MRA,-GMRA,-MSLA-and-MSFTAs/MSLA_Master-Securities-Loan-Agreement-(2000-Version)

See also

Division of Investment Management, SEC,

Securities Lending by U.S. Open-End and Closed-End Investment Companies

(2014) (“Securities Lending Summary”),

available at http://www.sec.gov/divisions/investment/securities-lending-open-closed-end-investment-companies.htm

A fund's income from these activities may come from fees paid by the borrowers to the fund and/or from the reinvestment of collateral.

185

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 borrower has been paid any rebate owed to it.

186

185

If a security is not in high demand, a lender typically pays the borrower a cash collateral fee, commonly called a “rebate.” 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

Master Securities Loan Agreement,

supra

footnote 184, at § 5 (Fees for Loan).

186

See

Securities Lending Summary,

supra

footnote 184.

Securities lending may implicate 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.

187

Funds that rely on these letters and orders are subject to conditions on a number of aspects of their securities lending activities, including loan collateralization and termination, fees and compensation, board approval and oversight, and voting of proxies.

187

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.

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.

188

Funds generally also disclose additional information regarding their securities lending programs in their registration statements.

189

In addition, consistent with current industry practices, many funds identify particular securities that are on loan in their schedules of portfolio investments prepared pursuant to Regulation S-X. These disclosures do not address other pertinent considerations, such as the extent to which a fund lends its portfolio securities, the borrower 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.

188

Item 70.N of Form N-SAR.

189

See, e.g.,

Item 9(c) (disclosures regarding risks), Item 16(b) (disclosures of investment strategies and risks), Item 17(f) (disclosures of proxy voting policy), and Item 28(h) (exhibits of other material contracts) of Form N-1A.

As proposed, 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 requiring funds to report certain borrower information and position-level information monthly on Form N-PORT.

190

Also, as to other securities lending 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), funds will report such information annually on Form N-CEN, as proposed and as discussed below in section II.D. In addition, as discussed below in section II.C.6, we have made a modification from the proposal to require 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 fund's Statement of Additional Information (or, for closed-end funds, reports on Form N-CSR) or in Form N-CEN, instead of a fund's financial statements as we had originally proposed.

191

190

See infra

text following footnote 195 (discussing the reporting of counterparty information); section 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 (“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. to FSOC Notice (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).

191

See infra

footnotes 724-725 and accompanying text (discussing new required disclosures in funds' Statement of Additional Information (or, for closed-end funds, funds' reports on Form N-CSR) that will allow investors to better understand the income generated from, as well as the expenses associated with, securities lending

activities) and 1224-1225 and accompanying text (discussing new required disclosures of monthly average value of portfolio securities on loan in Form N-CEN).

The new reporting requirements we are adopting are intended, in part, to increase the transparency of information available related to the lending of securities by funds as a subset of the universe of market participants engaged in securities lending activities.

192

Commenters were generally supportive of increased reporting about securities lending activities, although they suggested modifications to certain aspects of the proposal and expressed concerns with some of the specific proposed reporting.

193

These comments, and the modifications we are making in response to comments, are discussed in more detail below.

192

See, e.g.,

section 984(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, 1933 (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).

193

See, e.g., infra

footnotes 199-201 and accompanying and following text (recommending that the collection of securities lending information should be limited to the top 5 or 10 securities lending borrowers with the greatest exposure) and footnotes 205-208 and accompanying and following text (suggestions regarding how to report non-cash collateral posted by securities lending borrowers).

Borrower Information.

194

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. In the U.S., cash collateral is more typical than non-cash collateral and loans are often over-collateralized. The collateral requirements thereby mitigate the extent of a fund's counterparty risk. This risk is further mitigated for the fund if the fund's securities lending agent indemnifies the fund against default by the borrower.

194

In the Proposing Release, we referred to “securities lending counterparties,” but have made a clarifying change to “securities lending borrowers” in the form. As discussed above, when funds are engaged in securities lending transactions, they are securities lenders because they lend their portfolio securities to other financial institutions, such as broker-dealers, who are securities borrowers. The change in terminology is not intended to alter the substance of reporting from what we proposed.

As we explained in the Proposing Release, while we believe there is value to having information on borrowers of fund securities to monitor risk, as well as information with which to evaluate compliance with conditions set forth in staff no-action letters and exemptive orders,

195

we proposed to require that funds report the full name and LEI (if any) of each borrower, as well as the aggregate value of all securities on loan to the particular borrower, rather than at the loan level.

196

We believe that reporting of borrower information at an aggregate portfolio level will provide the Commission, investors, and other potential users 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.

195

See generally

Securities Lending Summary,

supra

footnote 184.

196

Item B.4 of proposed Form N-PORT.

Commenters generally supported our proposal to increase reporting relating to securities lending borrowers, although one commenter questioned the usefulness of borrower information given that securities lending agreements are generally indemnified by securities lending agents.

197

Most commenters also specifically supported our approach of assessing the counterparty risk of securities lending transactions on an aggregate basis for each borrower, as opposed to a loan-by-loan or security-by-security basis.

198

197

See, e.g.,

Comment Letter of Independent Directors of the BlackRock Equity-Liquidity Funds (Oct. 2, 2015) (“Blackrock Directors Comment Letter”) (supporting this aspect of our proposal); BlackRock Comment Letter (same); Fidelity Comment Letter (same); Comment Letter of the Risk Management Association (Aug. 11, 2015) (“RMA Comment Letter”) (same); SIFMA Comment Letter I (same); Comment Letter of CFA Institute (Aug. 10, 2015) (“CFA Comment Letter”) (same).

But see

MFS Comment Letter (arguing that disclosure of borrower information may not be relevant in understanding a fund's counterparty exposure, because if the fund has been indemnified then the counterparty exposure rests with the lending agent).

198

See, e.g.,

BlackRock Comment Letter; Morningstar Comment Letter.

However, many commenters recommended limiting the collection of securities lending information to the top 5 or 10 securities lending borrowers presenting the greatest exposure.

199

These commenters argued that the top 5 securities lending borrowers generally represent the majority of a fund's securities lending exposure and that further disclosure would impose unnecessary costs on funds and shareholders to the extent it would be capturing borrowers to which the fund does not have material exposure.

200

Likewise, several commenters suggested that borrower information for securitie

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.