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Proposed Rule

Investment Company Reporting Modernization

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AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission is proposing new rules and forms as well as amendments to its rules and forms to modernize the reporting and disclosure of information by registered investment companies. The Commission is proposing new Form N-PORT, which would require certain registered investment companies to report information about their monthly portfolio holdings to the Commission in a structured data format. In addition, the Commission is proposing amendments to Regulation S-X, which would require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The Commission is also proposing new rule 30e-3, which would permit but not require registered investment companies to transmit periodic reports to their shareholders by making the reports accessible on a Web site and satisfying certain other conditions. The Commission is proposing new Form N-CEN, which would require registered investment companies, other than face amount certificate companies, to annually report certain census-type information to the Commission in a structured data format. Finally, the Commission is proposing to rescind current Forms N-Q and N-SAR and to amend certain other rules and forms. Collectively, these amendments would, among other things, improve the information that the Commission receives from investment companies and assist the Commission, in its role as primary regulator of investment companies, to better fulfill its mission of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. Investors and other potential users could also utilize this information to help investors make more informed investment decisions.

DATES:

Comments should be received on or before August 11, 2015.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

Paper Comments

  • Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-08-15. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/​rules/​proposed.shtml). Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information you wish to make available publicly.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's Web site. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email.

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FOR FURTHER INFORMATION CONTACT:

Daniel K. Chang, Senior Counsel, J. Matthew DeLesDernier, Senior Counsel, Jacob D. Krawitz, Senior Counsel, Andrea Ottomanelli Magovern, Senior Counsel, Michael C. Pawluk, Branch Chief, or Sara Cortes, Senior Special Counsel, at (202) 551-6792, Investment Company Rulemaking Office, Alan Dupski, Assistant Chief Accountant, Chief Accountant's Office, at (202) 551-6918, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-8549.

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SUPPLEMENTARY INFORMATION:

The Securities and Exchange Commission (the “Commission”) is proposing for comment new Form N-PORT [referenced in 17 CFR 274.150], new Form N-CEN [referenced in 17 CFR 274.101] under the Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] (“Investment Company Act”); new rules 30a-4 [17 CFR 270.30a-4], 30b1-9 [17 CFR 270.30b1-9] and 30e-3 [17 CFR 270.30e-3] under the Investment Company Act; rescission of rules 30b1-1 [17 CFR 270.30b1-1], 30b1-2 [17 CFR 270.30b1-2], 30b1-3 [17 CFR 270.30b1-3], and 30b1-5 [17 CFR 270.30b1-5] under the Investment Company Act; amendments to rules 8b-16 [17 CFR 270.8b-16], 8b-33 [17 CFR 270.8b-33], 10f-3 [17 CFR 270.10f-3], 30a-1 [17 CFR 270.30a-1], 30a-2 [17 CFR 270.30a-2], 30a-3 [17 CFR 270.30a-3], and 30d-1 [17 CFR 270.30d-1] under the Investment Company; amendments to Forms N-1A [referenced in 17 CFR 274.11A], N-2 [referenced in 274.11a-1], N-3 [referenced in 274.11b], N-4 [referenced in 17 CFR 274.11c], and N-6 [referenced in 17 CFR 274.11d] under the Investment Company Act and the Securities Act of 1933 [15 U.S.C. 77a et seq.] (“Securities Act”); amendments to rule 498 [17 CFR 230.498] and Form N-14 [referenced in 17 CFR 239.23] under the Securities Act; rescission of Form N-SAR [referenced in 17 CFR 274.101 and Form N-Q [referenced in 17 CFR 274.130] and amendments to Form N-CSR [referenced in 17 CFR 274.128] under the Investment Company Act and Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (“Exchange Act”); amendments to rules 10A-1 [17 CFR 240.10A-1], 12b-25 [17 CFR 240.12b-25], 13a-10 [17 CFR 240.13a-10], 13a-11 [17 CFR 240.13a-11], 13a-13 [17 CFR 240.13a-13], 13a-16 [17 CFR 240.13a-16], 14a-16 [17 CFR 240.14a-16]; 15d-10 [17 CFR 240.15d-10], 15d-11 [17 CFR 240.15d-11], 15d-13 [17 CFR 240.15d-13], and 15d-16 [17 CFR 240.15d-16] under the Exchange Act; rescission of section 332 [17 CFR 249.332] and amendments to sections 322 [17 CFR 249.322] and 330 [17 CFR 249.330] of 17 CFR part 249; amendments to Article 6 [17 CFR 210.6-01 et seq.] and Article 12 [17 CFR 210.12-01 et seq.] of Regulation S-X [17 CFR 210]; amendments to section 800 of 17 CFR part 200 [17 CFR 200.800]; and amendments to rules 105 [17 CFR 232.105], 301 [17 CFR 232.301], and 401 [17 CFR 232.401] of Regulation S-T [17 CFR 232].Start Printed Page 33591

Table of Contents

I. Background

A. Changes in the Industry and Technology

B. Changes to Current Reporting Regime

1. Form N-PORT, Amendments to Regulation S-X, and Option for Web Site Transmission of Shareholder Reports

2. Form N-CEN

II. Discussion

A. Form N-PORT

1. Who Must File Reports on Form N-PORT

2. Information Required on Form N-PORT

3. Reporting of Information on Form N-PORT

4. Public Disclosure of Information Reported on Form N-PORT

B. Rescission of Form N-Q and Amendments to Certification Requirements of Form N-CSR

1. Rescission of Form N-Q

2. Amendments to Certification Requirements of Form N-CSR

3. Request for Comment

C. Amendments to Regulation S-X

1. Overview

2. Enhanced Derivatives Disclosures

3. Amendments to Rules 12-12 Through 12-12C

4. Investments In and Advances to Affiliates

5. Form and Content of Financial Statements

D. Option for Web Site Transmission of Shareholder Reports

1. Overview

2. Discussion

3. Rule 30e-3

4. Use of Summary Schedule of Investments

5. Related Disclosure Amendments

6. Requests for Comment

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

1. Overview

2. Who Must File Reports on Form N-CEN

3. Frequency of Reporting and Filing Deadline

4. Information Required on Form N-CEN

5. Items Required by Form N-SAR That Would Be Eliminated by Form N-CEN

F. Technical and Conforming Amendments

G. Compliance Dates

1. Form N-PORT, Rescission of Form N-Q, and Amendments to the Certification Requirements of Form N-CSR

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

3. Option for Web Site Transmission of Shareholder Reports

4. Regulation S-X and Related Amendments

5. Request for Comment

III. General Request for Comment

IV. Economic Analysis

A. Introduction

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

C. Amendments to Regulation S-X

D. Option for Web Site Transmission of Shareholder Reports

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

F. Alternatives to the Reporting Requirements

G. Request for Comments

V. Paperwork Reduction Act

A. Portfolio Reporting

1. Form N-PORT

2. Rescission of Form N-Q

B. Census Reporting

1. Form N-CEN

2. Rescission of Form N-SAR

C. Amendments to Regulation S-X

1. Rule 30e-1

2. Rule 30e-2

D. Option for Web Site Transmission of Shareholder Reports

1. Availability of Report and Other Materials and Delivery Upon Request

2. Shareholder Consent and Notice

3. Impact on Information Collections for Rules 30e-1 and 30e-2

E. Amendments to Certification Requirements of Form N-CSR

F. Amendments to Registration Statement Forms

G. Request for Comments

VI. Initial Regulatory Flexibility Analysis

A. Reasons for and Objectives of the Proposed Actions

B. Legal Basis

C. Small Entities Subject to the Rule

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

1. Form N-PORT

2. Rescission of Form N-Q

3. Form N-CEN

4. Rescission of Form N-SAR

5. Regulation S-X Amendments

6. Web Site Transmission of Shareholder Reports

7. Amendments to Form N-CSR

8. Amendments to Registration Statement Forms

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

G. General Request for Comment

VII. Consideration of Impact on the Economy

VIII. Statutory Authority and Text of Proposed Amendments

I. Background

A. Changes in the Industry and Technology

As the primary regulator of the asset management industry, the Commission relies on information included in reports filed by registered investment companies (“funds”) [1] and investment advisers for a number of purposes, including monitoring industry trends, informing policy and rulemaking, identifying risks, and assisting Commission staff in examination and enforcement efforts. Over the years, however, as assets under management and complexity in the industry have grown, so too has the volume and complexity of information that the Commission must analyze to carry out its regulatory duties.

Commission staff estimates that there were approximately 16,619 funds registered with the Commission, as of December 2014.[2] Commission staff further estimates that there were about 11,500 investment advisers registered with the Commission, along with another 2,845 advisers that file reports with the Commission as exempt reporting advisers, as of January 2015.[3] At year-end 2014, assets of registered investment companies exceeded $18 trillion, having grown from about $4.7 trillion at the end of 1997.[4] At the same time, the industry has developed new product structures, such as exchange-traded funds (“ETFs”) [5] , new fund types, such as target date funds with asset allocation strategies,[6] and increased its use of derivatives and Start Printed Page 33592other alternative strategies.[7] These products and strategies can offer greater opportunities for investors to achieve their investment goals, but they can also add complexity to funds' investment strategies, amplify investment risk, or have other risks, such as counterparty credit risk.

While these changes have been taking place in the fund industry, there has also been a significant increase in the use of the Internet as a tool for disseminating information and advances in the technology that can be used to report and analyze information. As discussed below, we have allowed the use of the Internet as a platform for providing required disclosure to investors. We have also started to use structured and interactive data formats to collect, aggregate, and analyze data reported by registrants and other filers. These data formats for information collection have enabled us and other data users, including investors and other industry participants, to better collect and analyze reported information and have improved our ability to carry out our regulatory functions.

We have historically acted to modernize our forms and the manner in which information is filed with the Commission and disclosed to the public in order to keep up with changes in the industry and technology. For example, in 1985, the Commission replaced five different reporting forms with Form N-SAR, which was designed to require reporting of data in a structured manner so that the Commission could construct a comprehensive database of information about the fund industry.[8] In 2000, we adopted new rules and rule amendments under the Investment Advisers Act of 1940 (“Advisers Act”) to require advisers registered with the Commission to make filings under the Advisers Act with the Commission electronically through the Investment Adviser Registration Depository (IARD).[9] In 2007, we sought to enhance the ability of investors to make informed voting decisions and to expand the use of the Internet to ultimately lower the costs of proxy solicitations by requiring Internet availability of proxy materials.[10]

In 2009, we amended Form N-1A, the registration form for open-end funds, to enhance the information provided to investors by requiring these funds to include a summary of key information in the front of their prospectuses.[11] The 2009 amendments to Form N-1A also sought to harness the benefits of technological advances and increased Internet usage by allowing mutual funds to satisfy their prospectus delivery obligations by delivering a summary prospectus to investors and posting the statutory prospectus and other materials on an Internet Web site.

Also in 2009, the Commission sought to take advantage of new technology by adopting amendments requiring open-end funds to file their prospectus risk/return summaries in eXtensible Business Reporting Language (“XBRL”).[12] In doing so, the Commission noted that this interactive data format would make “risk/return summary information easier for investors to analyze [and] assist in automating regulatory filings and business information processing.” Additionally, in 2010, the Commission adopted Form N-MFP, which requires money market funds to report detailed portfolio holdings information on a monthly basis in Extensible Markup Language (“XML”).[13] Because these disclosures and reports are filed in a structured data format using XBRL or XML, Commission staff, investors and other potential users are able to aggregate and analyze the data in a much less labor-intensive manner than plain text or hypertext filing formats would allow. The Commission also now uses the XML data format to collect and analyze certain information from advisers to private funds on Form PF [14] and has modernized the reporting of securities holdings by institutional investment managers on Form 13F,[15] which we believe resulted in efficiencies for data users.[16]

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As these industry changes and technological advances have occurred over the years, we recognize a need to improve the type and format of the information that funds provide to us and to investors. We also recognize the need to improve the information that the Commission receives from funds in order to improve the Commission's monitoring of the fund industry in its role as the primary regulator of funds and investment advisers. As discussed below, today we are proposing a set of reporting and disclosure reforms designed to take advantage of the benefits of advanced technology and to modernize the fund reporting regime in order to help the Commission, investors, and other market participants better assess different fund products and to assist us in carrying out our mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Our proposed reforms seek to (1) increase the transparency of fund portfolios and investment practices both to the Commission and to investors, (2) take advantage of technological advances both in terms of the manner in which information is reported to the Commission and how it is provided to investors and other potential users, and (3) where appropriate, reduce duplicative or otherwise unnecessary reporting burdens on the industry.

We also note that in December 2014, the Financial Stability Oversight Council (“FSOC”) issued a notice requesting comment on aspects of the asset management industry, which includes, among other entities, registered investment companies.[17] The notice included requests for comment on additional data or information that would be helpful to regulators and market participants. Although this rulemaking proposal is independent of FSOC, several commenters responding to the notice discussed issues concerning data that are relevant to the rules we are proposing today, including data regarding derivatives, global identifiers, and securities lending activities and are cited in the discussions below, as relevant.[18]

B. Changes to Current Reporting Regime

1. Form N-PORT, Amendments to Regulation S-X, and Option for Web Site Transmission of Shareholder Reports

Currently, management investment companies (other than small business investment companies (“SBICs”)) are required to report their complete portfolio holdings to the Commission on a quarterly basis.[19] These funds are required to provide this information in reports on Form N-Q under the Investment Company Act and the Exchange Act as of the end of each first and third fiscal quarter,[20] and in reports on Form N-CSR under those Acts as of the end of each second and fourth fiscal quarter.[21]

As discussed in Parts II.A and II.B of this release, we propose to rescind Form N-Q and adopt a new portfolio holdings reporting form, Form N-PORT, which would be filed by all registered management investment companies and unit investment trusts (“UITs”) that operate as ETFs,[22] other than money market funds and SBICs.[23] We are proposing that reports on Form N-PORT would be filed with the Commission on a monthly basis, with every third month available to the public 60 days after the end of the fund's fiscal quarter. The reports on Form N-PORT would include a fund's complete portfolio holdings in a structured data format. Additionally, as discussed below, proposed Form N-PORT would include additional information concerning fund portfolio holdings that are not currently provided on Forms N-Q and N-CSR, but that would facilitate risk analyses and other Commission oversight. For example, Form N-PORT would require reporting of additional information relating to derivative investments. It would also include certain risk metric calculations that would measure a fund's exposure and sensitivity to changing market conditions, such as changes in asset prices, interest rates, or credit spreads.

We believe that more timely and frequent reporting of portfolio holdings information, as well as the additional information we are proposing to require, would enable the Commission to further its mission to protect investors by assisting the Commission and Commission staff in carrying out its regulatory responsibilities related to the asset management industry. These responsibilities include its examination, enforcement, and monitoring of funds, the Commission's formulation of policy, and the staff's review of fund registration statements and disclosures.

While Form N-PORT is primarily designed to assist the Commission and Commission staff, we believe that information in Form N-PORT would be beneficial to investors and other potential users. In particular, we believe that both sophisticated institutional investors and third-party users that provide services to investors may find the information we propose to require on Form N-PORT useful. For example, Form N-PORT's structured format would allow the Commission, investors, and other potential users to better collect and analyze portfolio holdings information. The portfolio holdings information currently filed on Form N-Q, in contrast, is filed in a plain text or hypertext format, which often requires labor-intensive manual reformatting by Commission staff and other potential users in order to prepare the reported data for analysis. While we do not anticipate that many individual investors would analyze data using Form N-PORT, although some may, we believe that individual investors would benefit indirectly from the information collected on reports on Form N-PORT, through enhanced Commission monitoring and oversight of the fund industry and through analyses prepared by third-party service providers.

In addition, we are proposing amendments to Regulation S-X that would require standardized enhanced derivatives disclosures in fund financial statements, as well as other amendments. Currently, Regulation S-X does not prescribe specific information for most types of derivatives, including swaps, futures, and forwards. While we recognize that many fund groups provide disclosures regarding the terms Start Printed Page 33594of their derivatives contracts, the lack of standard disclosure requirements has resulted in inconsistent disclosures in fund financial statements.

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

Finally, we are also proposing a rule that would provide funds with an optional method to satisfy shareholder report transmission requirements by posting such reports online if they meet certain conditions. In order to rely on the rule, funds would be required to make the report and other required materials publicly accessible and free of charge at a Web site address specified in a notice to shareholders, and meet certain conditions relating to shareholder consent, and notice to shareholders of the Web site availability of shareholder reports and of the methods by which shareholders would be able to request a paper copy of the materials. This optional method is intended to modernize the manner in which periodic information is transmitted to shareholders, which we believe would improve the information's overall accessibility while reducing burdens such as the costs associated with printing and mailing shareholder reports.

2. Form N-CEN

Currently, the Commission collects census-type information on management investment companies and UITs on reports on Form N-SAR.[24] As discussed above, Form N-SAR was adopted in 1985 and, at that time, was intended to reduce reporting burdens and better align the information that was required to be reported with the characteristics of the fund industry. While Commission staff has indicated that the census-type information reported on Form N-SAR is useful in its support of the Commission's regulatory functions, staff has also indicated that in the thirty years since Form N-SAR's adoption, changes in the industry have reduced the utility of some of the currently required data elements. Additionally, the filing format that is required for reports on Form N-SAR limits our ability to use the reported information for analysis. Commission staff also believes that obtaining certain additional census-type information not currently collected by Form N-SAR would improve the staff's ability to carry out regulatory functions, including risk monitoring and analysis of the industry.

Accordingly, we are proposing to rescind Form N-SAR and replace it with Form N-CEN, a new form on which funds will report census-type information to the Commission. Form N-CEN would include many of the same data elements as Form N-SAR, but, in order to improve the quality and utility of information reported, would replace those items that are outdated or of limited usefulness with items that we believe to be of greater relevance today. Where possible, we are also proposing to eliminate items that are reported on other Commission forms, or are available elsewhere. In addition, we are proposing to require that reports on Form N-CEN be filed in a structured XML format, which, we believe, could reduce reporting burdens for current Form N-SAR filers and yield data that can be used more effectively by the Commission and other potential users. Finally, we are proposing that reports on new Form N-CEN be filed annually, rather than semi-annually as is required for reports on Form N-SAR by management companies, which would further reduce current burdens on funds.

II. Discussion

A. Form N-PORT

As discussed above, we are proposing to create a new monthly portfolio reporting form, Form N-PORT. Our proposal would require registered management investment companies and ETFs organized as UITs, other than money market funds and SBICs, to electronically file with the Commission monthly portfolio investments information on new Form N-PORT in an XML format no later than 30 days after the close of each month.[25] As discussed below in Part II.A.4, only information reported for the third month of each fund's fiscal quarter on Form N-PORT would be publicly available, and that information would not be made public until 60 days after the end of the fiscal quarter.[26]

As the primary regulator of the fund industry, the Commission relies on information that funds file with us, including their registration statements, shareholder reports, and various reporting forms such as Form N-SAR, Form N-CSR, and Form N-Q. The Commission and its staff use this information to understand trends in the fund industry and carry out regulatory responsibilities, including formulating policy and guidance, reviewing fund registration statements, and assessing and examining a fund's regulatory compliance with the federal securities laws and Commission rules thereunder.

Information on fund portfolios is currently filed with the Commission quarterly with up to a 70-day delay.[27] Moreover, the reports are currently filed in a format that does not allow for efficient searches or analyses across portfolios, and even limits the ability to search or analyze a single portfolio. Based on staff experience with data analysis of funds, including staff experience using Form N-MFP, we believe that more frequent and timely information concerning fund portfolios than we currently receive through registration statements, shareholder reports on Form N-CSR, and reports on Form N-Q will assist the Commission in Start Printed Page 33595its role as the primary regulator of funds, as discussed further below.

The information we are proposing to collect on Form N-PORT would be important to the Commission in analyzing and understanding the various risks in a particular fund, as well as risks across specific types of funds and the fund industry as a whole. These risks can include the investment risk that the fund is undertaking as part of its investment strategy, such as interest rate risk, credit risk, volatility risk, other market risks, or risks associated with specific types of investments, such as emerging market debt or commodities. Additionally, the information is helpful to understanding liquidity risks and counterparty risks, and determining whether a fund's exposure to price movements is leveraged, either through borrowings or the use of derivatives. We believe that information we are proposing to require on Form N-PORT will assist the Commission in better understanding each of these risks in the fund industry. We believe that the ability to understand the risks that funds face will help our staff better understand and monitor risks and trends in the fund industry as a whole, facilitating our informed regulation of the fund industry.

We also believe that information obtained from Form N-PORT filings would facilitate our oversight of funds and assist Commission staff in examination, enforcement, and monitoring, as well as in formulating policy and in its review of fund registration statements and disclosures. In this regard, we expect that Commission staff would use the data reported on Form N-PORT for many of the same purposes as Commission staff has used data reported on Form N-MFP by money market funds. The data received on Form N-MFP has been used extensively by Commission staff, including for purposes of assessing regulatory compliance, identifying funds for examination, and risk monitoring. Form N-MFP data has also informed Commission policy; for example, staff used Form N-MFP data in analyses that informed the Commission's considerations when it proposed and adopted money market fund reform rules in 2013 and 2014.[28]

We recognize that, unlike money market funds, which as cash management vehicles generally share common investment objectives and strategies and thus invest in a relatively small number of common security types, other funds invest in a much more diverse manner. Accordingly, Form N-PORT, as proposed, would require reporting of additional information relative to Form N-MFP, in order to facilitate understanding and analysis of the investment strategies that funds pursue, as well as the large variety of securities, commodities, currencies, derivatives, and other investments that funds may invest in.

In addition to assisting the Commission in its regulatory functions, we believe that investors and other potential users could benefit from the periodic public disclosure of the information reported on Form N-PORT. Proposed Form N-PORT is primarily designed for use by the Commission and its staff, and not for disclosing information directly to individual investors. This is because the form's structured format, while needed for quantitative analysis within a fund and across funds, is not an easily human-readable format. Additionally, the information we are proposing to require on Form N-PORT is more voluminous than on a schedule of investments. We believe, however, that some investors, particularly institutional investors, could directly use the data from the information on proposed Form N-PORT for their own quantitative analysis of funds, including to better understand the funds' investment strategies and risks, and to better compare funds with similar strategies. Additionally, we believe that entities providing services to investors, such as investment advisers, broker-dealers, and entities that provide information and analysis for fund investors, could also utilize and analyze the information that would be required by proposed Form N-PORT to help all investors make more informed investment decisions. Accordingly, whether directly or through third parties, we believe that the periodic public disclosure of the information on proposed Form N-PORT could benefit all fund investors. As discussed further below, in order to mitigate the risk that the information on Form N-PORT could be used in ways that might ultimately result in investor harm, we are proposing to limit the public availability of Form N-PORT reports to those reports filed as of quarter end, as well as delay public availability of those reports by 60 days after quarter end.

We intend to increase transparency of fund investments through proposed Form N-PORT in several ways. First, N-PORT would improve reporting of fund derivative usage. As the Commission has previously noted, we have observed significant increases in the use of derivatives by funds, which have highlighted the need for more robust and standardized derivatives disclosures.[29] Additionally, funds that are considered “alternative” funds, which often use derivatives for implementing their investment strategy, are becoming increasingly popular among investors.[30] Although Regulation S-X establishes general disclosure requirements for financial statements in fund registration statements, based on staff review of fund filings, the lack of standardized requirements as to the terms of derivatives that must be reported has sometimes led to inconsistent approaches to reporting derivatives information and, in some cases, insufficient information concerning the terms and underlying reference assets of derivatives to allow the Commission or investors to understand the investment. This hinders both an analysis of a particular fund's investments, as well as comparability among funds.[31] The information requested in Form N-PORT would create a more detailed, uniform, and structured reporting regime. This would allow the Commission and investors to better analyze and compare Start Printed Page 33596funds' 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.

Furthermore, as discussed further below, proposed Form N-PORT would require funds to report certain risk metrics that would provide measurements of a fund's exposure to changes in interest rates, credit spreads and asset prices, whether through investments in debt securities or in derivatives. Financial statement information provides historical information over a particular time period (e.g., a statement of operations), or information about values of assets at a particular point in time (e.g., a balance sheet including, for funds, a schedule of investments). Risk metrics, on the other hand, measure the change in value of an investment in response to small changes in the underlying reference asset of an investment, whether the underlying reference asset is a security (or index of securities), commodity, interest rate, or credit spread over an interest rate. Based on staff experience, as well as staff outreach to asset managers and entities that provide risk management services to asset managers, discussed further below, we believe that fund portfolio managers and risk managers commonly calculate these risk metrics to analyze the exposures in their portfolios.[32] The Commission believes that staff can use these risk measures to better understand the exposures in the fund industry, thereby facilitating better monitoring of risks and trends in the fund industry as a whole.

Form N-PORT would also require information about certain fund activities such as securities lending, repurchase agreements, and reverse repurchase agreements, including information regarding the counterparties to which the fund is exposed in those transactions, as well as in over-the-counter derivatives transactions. Such information would increase transparency concerning these activities and would provide better information regarding counterparty information, which would be useful in assessing both individual and multiple fund exposures to a single counterparty.[33]

Proposed Form N-PORT also requires information that would assist the Commission in assessing fund liquidity risk by, for example, requiring funds to provide information about the market liquidity and pricing of portfolio investments, as well as information regarding fund flows, which is helpful to understanding the liquidity pressures a fund might experience due to investor redemption activity.

Finally, as discussed further below, Form N-PORT would be filed electronically in a structured, XML format. This format would enhance the ability of the Commission, as well as investors and other potential users, to analyze portfolio data both on a fund-by-fund basis and also across funds. As a result, although we are proposing to collect certain information on Form N-PORT that may be similarly disclosed or reported elsewhere (e.g., portfolio investments would continue to be included as part of the schedules of investments contained in shareholder reports, and filed on a semi-annual basis with the Commission on Form N-CSR), we believe that it is appropriate to also collect this information in a structured format for analysis by our staff as well as investors and other potential users.

1. Who Must File Reports on Form N-PORT

Our proposal would require a report on Form N-PORT to be filed by each registered management investment company and each ETF organized as a UIT.[34] Registrants offering multiple series would be required to file a report for each series separately, even if some information is the same for two or more series. Money market funds and SBICs would not be required to file reports on Form N-PORT.[35]

As indicated above, our proposal would require all ETFs to file reports on Form N-PORT, regardless of their form of organization. Although most ETFs today are structured as open-end management investment companies, there are several ETFs that are organized as UITs.[36] ETFs organized as UITs have significant numbers of investors who we believe could benefit from the disclosures required in Form N-PORT.[37]

We request comment on the entities that would be required to file reports on Form N-PORT.

  • Should any funds that we are proposing to require to file reports on Form N-PORT not be required to do so? If so, what types of funds?
  • Should we require SBICs to file reports on Form N-PORT? How useful would the information reported on Form N-PORT be for investors?
  • Our proposal would allow investors in different types of ETFs to compare their portfolio investments by means of identical disclosures on reports on Form N-PORT, regardless of whether an ETF was organized as an open-end management investment company or as a UIT. Should ETFs organized as UITs not be required to file reports on Form N-PORT? If so, why?

2. Information Required on Form N-PORT

Form N-PORT would require a fund to report certain information about the fund and the fund's portfolio investments as of the close of the preceding month, including: (a) General information about the fund; (b) assets and liabilities; (c) certain portfolio-level metrics, including certain risk metrics; (d) information regarding securities lending counterparties; (e) information regarding monthly returns; (f) flow information; (g) certain information regarding each investment in the portfolio; (h) miscellaneous securities (if any); (i) explanatory notes (if any), and (j) exhibits. Each of these is discussed in more detail below.

a. General Information and Instructions

Part A of Form N-PORT would require general identifying information about the fund, including the name of the registrant, name of the series, and relevant file numbers.[38] Funds would Start Printed Page 33597also report the date of their fiscal year end, the date as of which information is reported on the form, and indicate if they anticipated that this would be their final filing on Form N-PORT.[39] This information would be used to identify the registrant and series filing the report, track the reporting period, and identify final filings.

Additionally, we are proposing that funds provide the Legal Entity Identifier (“LEI”) number of the registrant and series.[40] The LEI is a unique identifier associated with a single corporate entity and is intended to provide a uniform international standard for identifying counterparties to a transaction.[41] Fees are not imposed for the usage of or access to LEIs, and all of the associated reference data needed to understand, process, and utilize the LEIs are widely and freely available and not subject to any usage restrictions. Funds or registrants that have not yet obtained an LEI would be required to obtain one, which would entail a modest fee.[42] The inclusion of LEI information on Form N-PORT, however, would facilitate the ability of investors and the Commission to link the data reported on Form N-PORT with data from other filings or sources that is or will be reported elsewhere as LEIs become more widely used by regulators and the financial industry.[43]

Form N-PORT would also include general filing and reporting instructions, as well as definitions of specific terms referenced in the form.[44] These instructions and definitions are intended to provide clarity to funds and to assist them in filing reports on Form N-PORT.[45]

We seek comment on these proposed disclosures and instructions.

  • Is there any additional or alternative information that should be required to facilitate identification of funds and analysis of the reported information with information from other filings or otherwise available elsewhere?
  • Should the Commission require funds to obtain LEIs? Is it appropriate for the Commission to require LEIs, which are only available through the global LEI system? Why or why not? In the case of funds that have not obtained an LEI, will those funds seek to obtain an LEI in the future absent any regulatory requirement to do so? In addition to the fees for obtaining and maintaining an LEI, would there be other costs associated with funds obtaining LEIs? [46]
  • Are there any instructions or definitions that should be revised? If so, how? Should any instructions or definitions be added to provide additional clarity, or deleted to avoid confusion with conflicting instructions, definitions, or industry practices?

b. Information Regarding Assets and Liabilities

Part B of proposed Form N-PORT would seek certain portfolio level information about the fund. Part B would include questions requiring funds to report their total assets, total liabilities, and net assets.[47] Funds would separately report certain assets and liabilities, as follows. First, funds would report the aggregate value of any “miscellaneous securities” held in their portfolios.[48] Currently, Regulation S-X permits funds to report an aggregate amount not exceeding five percent of the total value of the portfolio investments in one amount as “Miscellaneous securities,” provided that securities so listed are not restricted, have been held for not more than one year prior to the date of the related balance sheet, and have not previously been reported by name to the shareholders, or set forth in any registration statement, application, or annual report or otherwise made available to the public, and, as discussed further below, we are proposing the same conditions for Form N-PORT.[49]

Funds would also report any assets invested in a controlled foreign corporation for the purpose of investing in certain types of investments (“controlled foreign corporation” or “CFC”).[50] Some funds use CFCs for making certain types of investments, particularly commodities and commodity-linked derivatives, often for tax purposes. Our proposal would require funds to disclose each underlying investment in a CFC, rather than just the investment in the CFC itself, which would increase transparency on fund investments through CFCs.[51] These disclosures would allow investors to look through CFCs and understand the specific underlying holdings that they are Start Printed Page 33598investing in, which would in turn allow investors to better analyze their fund holdings and risk associated with CFC investments, and hence enable investors to make more informed investment decisions. In addition, as discussed further below in Part II.E.4, we believe it would be beneficial for the Commission to have certain information about funds' use of CFCs. The information we are proposing to obtain in Form N-PORT, combined with additional information we are proposing to require on Form N-CEN regarding CFCs, discussed below, would help the Commission better monitor funds' compliance with the Investment Company Act and assess funds' use of CFCs, including the extent of their use by reporting of total assets in CFCs.[52]

Second, we are proposing to require that funds report the amount of certain liabilities, in particular: (1) Borrowings attributable to amounts payable for notes payable, bonds, and similar debt, as reported pursuant to rule 6-04(13)(a) of Regulation S-X [17 CFR 210.6-04(13)(a)]; (2) payables for investments purchased either (i) on a delayed delivery, when-delivered, or other firm commitment basis, or (ii) on a standby commitment basis; and (3) liquidation preference of outstanding preferred stock issued by the fund.[53] This information would allow Commission staff, as well as investors and other potential users, to better understand a fund's borrowing activities and payment obligations for assets that have been already received, which would facilitate analysis of the fund's use of financial leverage, as well as the fund's liquidity and ability to meet redemptions, which are important to understanding the risks such borrowings might create.

We request comment on the reporting of assets and liabilities proposed on Form N-PORT.

  • As discussed above, our proposal would require funds to disclose each underlying investment in a CFC. Should we consider modifying the information we propose to require, or require additional information? How commonly do funds invest in CFCs that in turn invest their assets in underlying investments? Should we provide instructions to clarify how funds should report investments in this situation? If so, should the Commission permit funds to disclose only the ultimate underlying investments, or should the Commission require disclosure of each layer of investment?
  • Are there other methods of reporting the assets (including assets in CFCs) and liabilities described above that we should consider?
  • Are there other assets and liabilities that funds should be required to separately report? If so, why? For example, should the Commission require funds to separately break out categories of assets and liabilities similar to what is currently required by Form N-SAR? [54] What would be the costs associated with providing such information on a monthly basis?

c. Portfolio Level Risk Metrics

One of the purposes of Form N-PORT is to provide the Commission with information regarding fund portfolios to help us better monitor trends in the fund industry, including investment strategies funds are pursuing, the investment risks that funds undertake, and how different funds might be affected by changes in market conditions. As discussed above, the Commission uses information from fund filings, including a fund's registration statement and reports on Form N-CSR (which includes the fund's shareholder report) and Form N-Q, to inform its understanding and regulation of the fund industry. Additionally our staff reviews fund disclosures—including registration statements, shareholder reports, and other documents—both on an ongoing basis as well as retroactively every three years.[55]

The disclosures in a fund's registration statement about its investment objective, investment strategies, and risks of investing in the fund, as well as the fund's financial statements, are fundamental to understanding a fund's implementation of its investment strategies and the risks in the fund. However, the financial statements and narrative disclosures in fund registration statements and shareholder reports do not always provide a complete picture of a fund's exposure to changes in asset prices, particularly as fund strategies and fund investments become more complex. The financial statements, including a fund's schedule of portfolio investments, provide data regarding investments' values as of the end of the reporting period—a “snapshot” of data at a particular point in time—or, in the case of the statement of operations, for example, historical data over a specified time period. By contrast, based on staff experience and outreach to funds, we understand that funds commonly internally use multiple risk metrics that provide calculations that measure the change in the value of fund investments assuming a specified change in the value of underlying assets or, in the case of debt instruments and derivatives that provide exposure to interest rates and debt instruments, changes in interest rates or in credit spreads above the risk-free rate.

Accordingly, we believe it is appropriate to propose requiring funds to report quantitative measurements of certain risk metrics that would provide information beyond the narrative, often qualitative disclosures about investment strategies and risks in the fund's registration statement, as well as a fund's historical financial statement disclosures. Monthly reporting on these risk measures, in particular, would help provide the Commission with more current information on how funds are implementing their investment strategies through particular exposures. Receiving this information on a monthly basis could help the Commission, for example, more efficiently analyze the potential effects of a market event on funds.

Specifically, we are proposing to require certain funds to provide portfolio level measures on Form N-PORT that will help Commission staff better understand and monitor funds' exposures to changes in interest rates and credit spreads across the yield curve. As discussed in Part II.A.2.g below, we are also proposing to require risk measures at the investment level for options and convertible bonds. We believe that the staff can use these measures, for example, to determine whether additional guidance or policy measures are appropriate to improve disclosures in order to help investors better understand how changes in interest rate or credit spreads might affect their investment in a fund.

Additionally, as we discussed above, we believe that institutional investors, as well as entities that provide services to both institutional and individual investors, would be able to use these risk metrics to conduct their own analyses in order to help them better understand fund composition, investment strategy, and interest rate Start Printed Page 33599and credit spread risk the fund is undertaking. This would complement the risk disclosures that are contained in the registration statement, thereby potentially helping all investors to make more informed investment choices. We believe that our proposal to require these funds to publicly disclose these measures quarterly, like other information in the schedule of investments, will also help provide investors with more specific, quantitative information regarding the nature of a fund's exposure to particular asset classes than they do currently. Providing this more specific and current information through periodic public disclosure of such risk metrics could be especially important for investors with respect to funds that continuously offer new shares to the public, because such funds are generally required to maintain an updated or “evergreen” prospectus that must precede or accompany delivery of those securities.[56]

In particular, for funds that invest in debt instruments, or in derivatives that provide exposure to debt or debt instruments, we believe it is important for the Commission staff, investors, and other potential users to have measures that would help them analyze how portfolio values might change in response to changes in interest rates or credit spreads.[57] To improve the ability of the Commission staff, investors, and other potential users to analyze how changes in interest rates and credit spreads might affect a fund's portfolio value, we are proposing that a fund that invests in debt instruments, or derivatives that provide exposure to debt instruments or interest rates, representing at least 20% of the fund's notional exposure, provide a portfolio level calculation of duration and spread duration across the applicable maturities in the fund's portfolio.

We are proposing to limit this requirement to funds that invest in debt instruments or derivatives that provide exposure to debt instruments or interest rates that represent at least 20% of the fund's notional value as of the reporting date.[58] We are proposing the 20% threshold because we believe that at this level, the Commission would still receive measurements of duration and spread duration from funds that make investments in debt instruments as a significant part of their investment strategy, while providing an appropriate threshold so that funds that do not invest in debt to achieve their investment strategy would not have to monitor each month whether they trigger the requirement for making such calculations. Funds that primarily invest in assets other than debt instruments, such as equities, might have some level of investments in debt instruments for cash management or other purposes. We do not believe that requiring such funds to provide monthly calculations of duration or spread duration would be helpful for understanding such funds' investment strategy or risk exposures, and we believe that the 20% threshold will provide a de minimis level to relieve the burden of calculating these measures for such funds. We believe that information would be most useful from funds that actually use debt exposures as part of their investment strategy. Based on staff experience, we believe that such funds have a debt exposure of at least 20%, and commonly greater than that. As discussed below, we request comment on the proposed de minimis threshold.

For duration, we are proposing to require that a fund calculate the change in value in the fund's portfolio from a 1 basis point change in interest rates (commonly known as DV01) for each applicable key rate along the risk-free interest rate curve, i.e., 1 month, 3 month, 6 month, 1 year, 2 year, 3 year, 5 year, 7 year, 10 year, 20 year, and 30 year interest rate, for each applicable currency in the fund. We realize that funds might not have exposures for every applicable key rate. For example, a short-term bond fund is unlikely to have debt exposures with longer maturities. Accordingly, a fund would only report the key rates that are applicable to the fund. Funds would report zero for maturities to which they have no exposure.[59] For exposures outside of the range of listed maturities listed on Form N-PORT (i.e., maturities shorter than one month or longer than 30 years), funds would be instructed to include those exposures in the nearest maturity.

We believe that requiring funds to provide further detail about their exposures to interest rate changes along the risk-free rate curve would provide the Commission with a better understanding of the risk profiles of funds with different strategies for achieving debt exposures. For example, funds targeting an effective duration of five years could achieve that objective in different ways—one fund could invest predominantly in intermediate-term debt; another fund could create a long position in longer-term bonds, matched with a short position in shorter-term bonds. While both funds would have an intermediate-term duration, the risk profiles of these two funds, that is, their exposures to changes in long-term and short-term interest rates, are different. Having the proposed DV01 calculations along the risk-free interest rate curve would clarify this difference. The Commission staff could use this information to better understand how funds are achieving their exposures to interest rates, and use this information to perform analysis across funds with similar strategies to identify outliers for potential further inquiry, as appropriate.

Additionally, we are proposing to require that the same funds provide a measure of spread duration (commonly known as SDV01) at the portfolio level for each of the same maturities listed above, aggregated by non-investment grade and investment grade exposures.[60] This would measure the fund's sensitivity to changes in credit spreads, i.e., a measure of spread above the risk-free interest rate. This is helpful for analyzing shifts in credit spreads for non-investment grade and investment grade debt, respectively, over the yield curve, as credit spreads for investment grade and non-investment grade debt do not always shift in parallel or in lock Start Printed Page 33600step, particularly during times of market stress.[61] Because credit spreads can also vary based on the maturity of the bonds, we believe that providing credit spread measures for the key rates along the yield curve, as with DV01, would help the Commission better analyze credit spreads of investments in funds.[62] Again, similar to the example above regarding the potential use of the DV01 metric, SDV01 can provide more precise information regarding funds' exposures to credit spreads when they engage in a strategy investing in investment-grade or non-investment grade debt.

In determining the methodology for the proposed measures of duration and spread duration, staff engaged in outreach to asset managers and risk service providers that provide risk management and other services to asset managers and institutional investors. The methodology proposed is both based on staff experience in using duration and spread duration, as well as this outreach to better understand common fund practices for calculating such measures. The Commission recognizes that particular funds might currently vary their methodology for calculating duration and spread duration by, for example, only providing a single measure of duration or spread duration or by only reporting key rate durations for particular maturities. Based on staff experience and outreach, the Commission believes that the proposed methodologies for reporting duration and spread duration will allow for better comparability across funds.

Also, based on outreach, Commission staff believes that service providers that provide risk management services to funds generally use a “bottom up” approach to calculating duration and spread duration, meaning that such measures are first calculated at the position level and then aggregated at the portfolio level. Accordingly, we believe that providing the specific methodology for aggregation of duration and spread duration would not significantly increase the burden of calculating such metrics by funds, even if funds analyze such measures at the portfolio level using a methodology different from what we are proposing. As discussed below, however, we request comment on the proposed methodologies, including whether such methodologies should be modified.

For both duration and spread duration, we are proposing to require that funds provide the change in value in the fund's portfolio from a 1 basis point change in interest rates or credit spreads, rather than a larger change, such as 5 basis points or 25 basis points. Based on staff's outreach, we believe that a 1 basis point change is the methodology that many funds currently use to calculate these risk measures at the position level for internal risk monitoring and would provide sufficient information to assist the Commission in analyzing fund exposures to changes in interest rate or credit spreads. We believe that requiring funds to calculate such measures based on a larger basis point change could require more customized calculations, and therefore increase costs to funds, relative to the approach proposed. We request comment on this aspect of the proposed methodology.

While the Commission is proposing that funds provide a calculation of each of these measures at a portfolio level, the Commission has considered whether to propose, instead, that funds report these risk metrics for each debt instrument or derivative that has an interest rate or credit exposure. This would provide more precise data for analysis of various movements in interest rates and credit spreads. Additionally, as discussed above, the Commission believes that most funds currently calculate these risk metrics at a position level; however, we recognize that even if such calculations are available at a position level, reporting these metrics could cause funds to make additional systems changes to collect such position-level data for reporting, as well as potential burdens related to increased review time and quality control in submitting the reports. Based on staff's outreach and staff's experience, the Commission believes that requiring funds to provide this information for each maturity at the portfolio level would provide a sufficient level of granularity for purposes of Commission staff analysis. Finally, we believe that there would be certain efficiencies for the Commission, investors, and other potential users to having funds report the portfolio-level calculations relative to reporting position-level calculations, as this could allow for more timely and efficient analysis of the data by not requiring the Commission or other potential users to calculate the portfolio-level measures from the position-level measures. We request comment below on the relative burdens and benefits of providing portfolio level and position level data.

The Commission also considered whether to require funds to report a portfolio level measure (or, for the same reasons discussed immediately above in connection with how risk measures are calculated, position level measures) for convexity, which facilitates more precise measurement of the change in a bond price with larger changes in interest rates.[63] We have preliminarily determined not to require reporting of this metric, however, because we believe, based on staff outreach, that funds more commonly analyze non-linear changes to interest rates through stress testing, rather than through calculating convexity. We request comment, however, on whether requiring funds to report a portfolio-level measure of convexity would be useful to the Commission, investors, and other potential users, and the relative burdens and benefits of reporting convexity.

We request comment on the proposed requirements to provide risk measures at the portfolio level.

  • We are proposing a 20% threshold because, based on staff experience, we believe that this would require funds that use debt and exposure to debt or interest rate changes as part of their investment strategy to provide those metrics, while providing a minimum threshold so that funds that invest in debt for cash management or other purposes unrelated to implementing their investment strategy would not be required to collect, calculate, or report such data. Given this objective, is 20% the appropriate threshold for determining which funds must provide these risk metrics? Should this threshold be lower, such as 5% or 10% or higher, such as 30% or 35%? Are there alternative methodologies that the Commission should consider for determining which funds should be required to provide this information? Should we, instead, base the threshold directly on the net asset value (“NAV”) of the fund's debt securities and interest rate investments, rather than the fund's notional exposure to debt securities or interest rates as a percentage of the fund's NAV?
  • We are proposing to require reporting information on DV01 and SDV01 at the portfolio level because we believe that this can provide the Start Printed Page 33601Commission and investors with useful information regarding funds' exposures to changes in interest rate and credit spreads, without imposing a potential burden that might be involved in providing such risk metrics at a position level. We believe, however, based on staff outreach that funds or their service providers generally do calculate such information at a position level. We request comment on the relative burdens and benefits of requiring funds to report portfolio level calculations of duration and spread duration, as opposed to providing those for each relevant instrument in the portfolio. What, if any, would be the added costs and burdens associated with adapting systems in order to centrally collect and report such information? What would be the benefits to the Commission, investors, and other potential users to having more precise information in order to evaluate such exposures? Conversely, are there benefits to having funds report these measures at the portfolio level rather than the position level, even if reporting at the position level would not significantly increase costs?
  • To what extent would the values reported for these risk metrics be affected by the inputs and assumptions underlying the methodologies by which funds would calculate these metrics, including assumptions regarding the valuation of the investments or underlying securities of investments, particularly for investments that have pre-payment options, such as mortgage-backed securities? Specifically, how would the comparability of information reported by different funds be affected if funds used different inputs and assumptions in their methodologies? Do funds have concerns regarding reporting measures that include such assumptions, such as proprietary or liability concerns? Are there ways the Commission could improve the standardization of the calculation of these risk metrics? If so, how?
  • To the extent that funds are calculating such measures using a methodology other than what the Commission is proposing, what would the associated costs and other burdens be for funds to calculate and report these measures according to a different methodology than that typically used by the fund?
  • Are there any alternatives or modifications to the methodologies that the Commission is proposing that the Commission should consider? [64] For example, should the Commission require, or permit, funds to report duration and spread duration only for the maturities that represent the highest exposures in the fund, such as the top three or the top five (or another quantity)? Should the Commission require, or permit, funds to report duration and spread duration based on a larger change in interest rates or credit spreads, such as 5 basis points or 25 basis points? How would these methodologies affect the burden on funds of reporting duration and credit spread duration? Are there more efficient ways for the Commission to collect information to increase the transparency of funds' duration and spread duration?
  • Should we provide a de minimis amount for exposure to different currencies, under which level a fund would not have to report the DV01 or SDV01 for exposures in that currency? For example, should we only require funds with exposure to a currency equal to 5% or more of the fund's NAV to provide a DV01 and SDV01 calculation for such currency? If we were to provide a de miminis, should the threshold be higher or lower?

d. Securities Lending

To increase the rate of return on their portfolios, some funds engage in securities lending activities whereby a fund lends certain of its portfolio securities to other financial institutions such as broker-dealers. In return for the security lent, funds receive collateral and sometimes a fee. To protect the fund from the risk of borrower default, the borrower generally posts collateral with the fund in an amount at least equal to the value of the borrowed securities, and this amount of collateral is adjusted daily as the value of the borrowed securities is marked to market.[65] Funds generally receive cash as collateral. A fund will typically invest cash collateral that it receives in short-term, highly liquid instruments, such as money market funds or similar pooled investment vehicles, or directly in money market instruments.[66]

The fund's income from these activities may come from fees paid by the borrowers to the fund and/or from the reinvestment of collateral. Many funds engage an external service provider—commonly called a “securities lending agent”—to administer the securities lending program. The securities lending agent is typically compensated by being paid a share of the fund's securities lending revenue after the counterparty has been paid any rebate due to it.[67]

Securities lending implicates certain provisions of the Investment Company Act, and funds that engage in securities lending do so in reliance on Commission staff no-action letters, and in some circumstances, exemptive orders.[68] These letters and orders address a number of areas, including loan collateralization and termination, fees and compensation, board approval and oversight, and voting of proxies.

Currently, the information that funds are required to report about securities lending activity, whether in a structured format or otherwise, is limited. For example, funds disclose on Form N-SAR whether they are permitted under their investment policies to, and whether they did engage during the reporting period in, securities lending activities.[69] Funds generally also disclose additional information regarding their securities lending programs in their registration statements.[70] In addition, consistent with current industry practices, many funds voluntarily identify particular securities that are on loan in their schedules of portfolio investments prepared pursuant to Regulation S-X. These requirements do not address other pertinent considerations, such as Start Printed Page 33602the extent to which a fund lends its portfolio securities, the counterparties to which the fund is exposed, the fees and revenues associated with those activities, and the significance of securities lending revenue to the investment performance of the fund.

To address these data gaps and provide additional information to the Commission, investors, and other potential users regarding a fund's securities lending activities, we are proposing that funds report certain counterparty information and position-level information monthly on Form N-PORT.[71] Also, as to other information for which annual reporting would be sufficient because it is unlikely to change on a frequent basis (e.g., name and other identifying information for a fund's securities lending agent), we are proposing that funds report this information annually on Form N-CEN as discussed below in Part II.E. We are also proposing, as discussed below in Part II.C.5, to require that certain information about the income from and fees paid in connection with securities lending activities, and the monthly average of the value of portfolio securities on loan, be disclosed as part of the notes to funds' financial statements.[72]

Our proposals today are intended, in part, to increase the transparency of information available related to the lending and borrowing of securities with respect to funds as a subset of the universe of market participants engaged in securities lending activities.[73]

Counterparty Information. One risk that funds engaging in securities lending are exposed to is counterparty risk because borrowers could fail to return the loaned securities. In this event, the lender would keep the collateral. Collateral is generally posted in cash and, in practice, the loan is generally over-collateralized. The collateral requirements thereby mitigate the extent of a fund's counterparty risk. In some cases, this risk is further mitigated for the fund if the fund's securities lending agent indemnifies the fund against default by the borrower.

While we believe there is value to having information concerning securities lending counterparties to monitor risk, as well as to monitor compliance with conditions set forth in staff no-action letters and exemptive orders,[74] we are proposing to require that funds report, for each of their securities lending counterparties as of the reporting date, the full name and LEI of the counterparty (if any), as well as the aggregate value of all securities on loan to the counterparty, rather than at the loan level.[75] We believe that disclosure of counterparty information at an aggregate portfolio level would provide the Commission and investors with information to better understand the level of potential counterparty risk assumed as part of the fund's securities lending program, with a lower relative burden on funds than requesting such information on a per loan level.

We request comment on the portfolio level securities lending information requirements we are proposing.

  • As discussed above, Form N-PORT would require funds to disclose the aggregate value of all securities on loan to each securities lending counterparty and the name and LEI (if any) of the counterparty. Should we instead require funds to report this information on a loan-by-loan or security-by-security basis? To what extent, if any, would such information be used by investors and other potential users? What, if any, additional issues would funds face in tracking and reporting such information on a loan-by-loan or security-by-security basis? Do funds currently track or have the ability to readily determine their counterparty exposure on a loan-by-loan or security-by-security basis? If securities lending counterparty information should be reported on a loan-by-loan or security-by-security basis, is there any additional or alternative information we should require funds to report, such as the rebate or compensation to the securities lending agent?
  • Instead of requiring funds to report the aggregate value of all securities on loan to each securities lending counterparty, should we limit such disclosures to counterparties to which the fund has the greatest exposure, such as the top five or top ten counterparties? [76] Alternately, should we require funds to report aggregate exposure to a given counterparty only if such exposure constitutes more than a certain percentage of the NAV of the fund (e.g., one percent)? Would either approach more appropriately consider the costs of tracking and reporting such information and the benefits that increased transparency would provide to the Commission and other potential users?
  • Alternately, or in addition, should the Commission request information regarding other types of counterparty exposures? For example, should the Commission require funds to report counterparty exposures based on the amount of unsettled trades with each counterparty? If so, should such information be reported in terms of aggregate or net exposure, and why?

e. Return Information

We are proposing to require funds to provide monthly total returns for each of the preceding three months.[77] If the fund is a multiple class fund, it would report returns for each class.[78] Funds with multiple classes would also report their class identification numbers.[79] Funds would calculate returns using the same standardized formulas required for calculation of returns as reported in the performance table contained in the risk-return summary of the fund's prospectus and in fund sales materials.[80]

We are proposing to require this information on Form N-PORT because we believe it would be useful to have such information in a structured format to facilitate comparisons across funds. For example, analysis of return information over time among similar funds could reveal outliers that might merit further inquiry by Commission staff. Additionally, performance that appears to be inconsistent with a fund's investment strategy or other benchmarks Start Printed Page 33603can form a basis for further inquiry and monitoring.[81]

Because only quarter-end reports on Form N-PORT would be made public, we are proposing that funds provide return information for each of the preceding three months.[82] This would provide investors and other potential users with monthly return information, so that they would have access to each month's return on a quarterly basis. Otherwise, we are concerned that investors might potentially confuse the month's disclosed return as representing the return for the full quarter.

We are also proposing that funds report, for each of the preceding three months, monthly net realized gain (or loss) and net change in unrealized appreciation (or depreciation) attributable to derivatives for each of the following categories: Commodity contracts, credit contracts, equity contracts, foreign exchange contracts, interest rate contracts, and other derivatives contracts.[83] This item is modeled after disclosure requirements in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, which governs the accounting disclosure for derivatives and hedging. This information would help the Commission staff, investors, and other potential users better understand how a fund is using derivatives in accomplishing its investment strategy and the impact of derivatives on the fund's returns. In order to provide a point of comparison, we are also proposing that funds report, for each of the last three months, monthly net realized gain (or loss) and net change in unrealized appreciation (or depreciation) for investments other than derivatives.[84]

We request comment on the return information we are proposing in Form N-PORT.

  • Should the Commission consider, as an alternative, requiring funds to provide monthly return information annually on Form N-CEN, rather than on Form N-PORT? Would this significantly reduce the burden of reporting such information?
  • We are proposing to require that funds report three months of returns so that investors and other potential users, who would only observe reports on Form N-PORT on a quarterly basis, would still receive return data for each month of the year. Do commenters agree that such disclosure of monthly returns would be helpful to investors? Are there preferable alternatives for providing such information to investors? Are there potential negative consequences of reporting monthly returns? For example, could the availability of this information cause investors to emphasize short-term returns?
  • We request comment on alternative requirements for fund reporting of return information. For example, the Commission requests comment on whether to require reporting by funds of gross returns. Would gross information, with or without accompanying fee information for each class, be confusing for investors? If so, are there ways to mitigate the risk of investor confusion? Instead of requiring reporting of returns for all classes, should the Commission, for example, require funds to report return information for a single class, such as the class with the highest expense ratio or the largest share class in terms of assets under management? What would be the relative benefits and burdens of only requiring disclosure of a single class?
  • Are there alternative methods that the Commission should consider for requiring funds to report the effect of derivatives on the return of the fund? For example, should the Commission require that funds report the monthly net realized gain or loss and net change in unrealized appreciation or depreciation attributable to derivatives by type of derivative (i.e., forward, future, option, swap), rather than by category of exposure? What would be the burden and benefits of reporting such information relative to the proposed requirement?

f. Flow Information

Form N-PORT would require funds to separately report, for each of the preceding three months, the total net asset value of: (1) Shares sold (including exchanges but excluding reinvestment of dividends and distributions); (2) shares sold in connection with reinvestments of dividends and distributions; and (3) shares redeemed or repurchased (including exchanges).[85] This information is similar to what is currently reported on Form N-SAR, and would be generally reported subject to the same guidelines that currently govern reporting of flow information on that form.[86] We propose to require this information on Form N-PORT because we believe that this information would be more helpful if reported on a monthly basis rather than retrospectively on an annual basis on Form N-CEN.

We believe that having flow information reported to us monthly will help us better monitor trends in the fund industry. For example, it could help us analyze types of funds that are becoming more popular among investors and areas of high growth in the industry. It could help us better examine investor behavior in response to market events. Finally, in combination with other information reported on Form N-PORT regarding liquidity of fund positions, it could also help us identify funds that might be at risk of experiencing liquidity stress due to increased redemptions.

  • What would be the costs and burdens of providing flow information on a monthly basis on Form N-PORT? Should the Commission consider, as an alternative, requiring funds to provide monthly flow information annually on Form N-CEN, rather than on Form N-PORT?
  • To what extent would the usefulness of the flow information be Start Printed Page 33604affected by the fact that omnibus accounts, which generally have significant amounts of purchases and redemptions, typically net their transactions prior to executing with the funds' transfer agents? Should the Commission revise the proposed flow disclosures to address this issue and, if so, how?
  • Form N-SAR currently also requires funds to report flow information related to “other” shares sold (i.e., other than through new sales and exchanges and reinvestments of dividends and distributions).[87] Should the Commission also require funds to report this category of flow information on Form N-PORT? What would be the utility of requesting flow information to be separately reported in this additional category?
  • Should we require that flow information be reported as to each class of the fund? Would such additional information be helpful to investors and other potential users? What would be the burdens to funds with multiple classes of reporting such information?

g. Schedule of Portfolio Investments

Part C of proposed Form N-PORT would require funds to report certain information on an investment-by-investment basis about each investment held by the fund and its consolidated subsidiaries as of the close of the preceding month. Funds would respond to certain questions that would apply to all investments (i.e., the investment's identification, amount, payoff profile, asset and issuer type, country of investment or issuer, and fair value level, and whether the investment was a restricted security or illiquid asset). Funds would also respond, if relevant, to additional questions related to specific types of investments (i.e., debt securities, repurchase and reverse repurchase agreements, derivatives, and securities lending).

Funds would have the option of identifying any investments that are “miscellaneous securities.” [88] Unless otherwise indicated, funds would not report information related to those investments in Part C, but would instead report such information in Part D.[89]

i. Information for All Investments

Proposed Form N-PORT would require funds to report certain basic information about each investment. In particular, funds would report the name of the issuer and title of issue or description of the investment, as they are currently required to do on their reported schedules of investments.[90]

To facilitate analysis of fund portfolios, it is important for Commission staff to be able to identify individual portfolio securities, as well as the reference instruments of derivative investments through the use of an identifying code or number, which is not currently required to be reported on the schedule of investments. Fund shareholders and potential investors that are analyzing fund portfolios or investments across funds could similarly benefit from the clear identification of a fund's portfolio securities across funds. The staff has found that some securities reported by funds lack a securities identifier, and this absence has reduced the usefulness of other information reported.[91]

To address this issue, we propose to require that funds report additional information about the issuer and the security. Funds would report certain securities identifiers, if available.[92] For example, for swaps and security-based swaps, funds could report the product identification number used for reporting such instrument to a swap data repository or securities-based swap data repository, if available.[93] If a unique identifier is reported, funds would also indicate the type of identifier used.[94] Such an identifier may be internally generated by the fund or provided by a third party, but should be consistently used across the fund's filings for reporting that investment so that the Commission, investors, and other potential users of the information can track the investment from report to report.

We also propose to require funds to report the amount of each investment as of the end of the reporting period, as is currently required under Regulation S-X.[95] Funds would report the number of units or principal amount for each investment, as well as the value of each investment at the close of the period, and the percentage value of each investment when compared to the net assets of the fund.[96] Funds would also report the currency in which the investment was denominated, and, if not denominated in U.S. dollars, the exchange rate used to calculate value.

Our proposal would also require funds to report the payoff profile of the investment, indicating whether the investment is held long, short, or N/A, which would serve the same purpose as the current requirement in Regulation S-X to disclose investments sold short.[97] Funds would respond N/A for derivatives and would respond to relevant questions that indicated the payoff profile of each derivative in the derivatives portion of the form. These disclosures would identify short positions in investments held by funds.

Funds would also report the asset type for the investment: Short-term investment vehicle (e.g., money market fund, liquidity pool, or other cash management vehicle), repurchase agreement, equity-common, equity-preferred, debt, derivative-commodity, derivative-credit, derivative-equity, derivative-foreign exchange, derivative-interest rate, structured note, loan, ABS-mortgage backed security, ABS-asset backed commercial paper, ABS-collateralized bond/debt obligation, ABS-other, commodity, real estate, other) and issuer type (corporate, U.S. Treasury, U.S. government agency, U.S. government sponsored entity, municipal, non-U.S. sovereign, private fund, registered fund, other).[98] We have based these categories in part on staff review of how funds currently categorize investments on their schedule of investments, and in part on the categories of investments required by private funds under Form PF.[99] These disclosures would allow the Commission, investors, and other potential users to assess the composition of fund portfolios in terms of asset and issuer types and also Start Printed Page 33605facilitate comparisons among similar types of investments.

Our proposal would also require funds to report, for each investment, whether the investment is a restricted security and whether the investment is an illiquid asset.[100] These disclosures would provide investors and the Commission staff with more information about liquidity risks associated with the fund's investments.

Each fund would also report whether the investment is categorized by the fund as a Level 1, Level 2, or Level 3 fair value measurement in the fair value hierarchy under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”).[101] Commission staff could use this information to identify and monitor investments that may be more susceptible to increased valuation risk and identify potential outliers that warrant additional monitoring or inquiry.[102] In addition, Commission staff would be better able to identify anomalies in reported data by aggregating all fund investments industry-wide into the various level categories. Currently, funds are required to evaluate the fair value level measurement of each investment as part of the fair value level hierarchy disclosure in their financial statements.[103] We believe that based on this requirement, funds should have pricing information available to determine the categorization of their portfolio investments as Level 1, Level 2, or Level 3 within the fair value hierarchy.

Form N-PORT would also require funds to report the country that corresponds to the country of investment or issuer based on the concentrations of the risk and economic exposure of the investment. Additionally, funds would be required to report the country in which the issuer is organized if that is different from the country of risk and economic exposure.[104]

These disclosures would provide the Commission staff and investors with more information about country-specific exposures associated with the fund's investments. Specifically, the Commission believes that providing both the country based on concentrations of risk and economic exposure and also the country in which the issuer is organized would assist the Commission, investors, and other potential users in understanding the country-specific risks associated with such investments. For example, knowing the country of risk and economic exposure is important for understanding the effect of such investments in a portfolio when that country might be going through times of economic or political stress, regardless of whether the investment is issued in a different country. Knowing the country in which the issuer is organized would be important information for analyzing the effect of any events that could affect the country in which the issuer is organized, such as sanctions or monetary controls, as this could affect the ability of the fund to liquidate the investment.

We request comment on our proposed disclosure requirements.

  • Our proposal would require funds to report certain identifiers for their investments. Should the Commission include additional specific identifiers in Form N-PORT, such as the Financial Instrumental Global Identifier (“FIGI”) or other similar identifier, if available? [105] If so, which identifier or identifiers would be expected to be reported? Are there any special considerations relating to the use of any identifiers (e.g., licensing fees associated with certain identifiers, the prevalence of a particular identifier as adopted by the marketplace, etc.) that could be addressed through these reporting requirements? If so, how should the requirements be restructured to address those considerations while still providing the Commission and investors the necessary identifying information?
  • We request comment on our proposal to require funds to provide other unique identifiers for investments that do not have ISIN or ticker identifiers. Should the Commission require, in certain circumstances, specific identifiers to be reported as other unique identifiers? For example, in the case of security-based swaps, should the Commission require funds to report unique product identifiers? [106] If so, why?
  • How, if at all, should we modify our proposed disclosures for the amount of each investment at the end of the reporting period (as well as the currency in which it is denominated)? Likewise, should we modify our proposed disclosures for the payoff profile of each investment and the restricted/illiquid nature of securities? If so, why?
  • Would our proposed asset and issuer categories allow funds to readily categorize the investments typically held in fund portfolios? Should we include additional or alternative categories, and if so why? For example, are there any specific asset subcategories with sufficiently unique features as to warrant their own asset category? To the extent that funds currently are not categorizing their investments as proposed in Form N-PORT, what costs would be associated with providing such information?
  • Should any of these disclosures be aggregated and reported on a portfolio Start Printed Page 33606basis, rather than at an individual investment level? Alternately, should any of the proposed portfolio level information be reported on an individual investment level?
  • We request comment on the incremental burden of reporting this information for each investment held by the fund, relative to the current burden of reporting the total value of each class of investments categorized in each level of the fair value hierarchy, as currently required by U.S. GAAP. Are there other ways in which a fund could identify and disclose investments that do not have readily available market quotations or observable inputs as an alternative to disclosing each investment's categorization as a Level 1, Level 2, or Level 3 measurement?
  • Are there additional items that should be included on Form N-PORT in order to improve the transparency regarding the liquidity and valuation of investments? For example, should the Commission require additional disclosure regarding the fund's valuation of its investments, such as the primary pricing source used (e.g., exchange, broker quote, third-party pricing service, internal fair value), the name of any third-party pricing source, or whether an independent consultant or appraiser assisted with development of internal fair value? If so, should such information be disclosed on an individual security basis? Would such information increase the transparency of the pricing of thinly traded securities? Would investors benefit from such information and, if so, how? What costs and burdens would be associated with providing such information?
  • Should the Commission require funds to report both the country in which the issuer is organized and also the country with the greatest concentrations of risk and economic exposure of the investments? What is the burden of reporting both elements, if different? Should the Commission provide specific guidance or instructions for determining the country with the greatest concentration of risks and economic exposure? Should funds have the option of reporting more than one country of economic risk, or a geographic region of economic risk?
  • Should funds not be required to report country codes for U.S. investments? Would such an exclusion result in reduced burdens for funds that held only domestic securities? On the other hand, would such an exclusion result in investor confusion or complicate data validation efforts, by, for example, rendering it unclear whether an investment with N/A reported for its country code was a U.S. investment or was instead a foreign investment for which a country code had not been properly reported?

ii. Debt Securities

In addition to the information required above, Form N-PORT would require additional information about each debt security held by the fund in order to gain transparency into the payment flows and convertibility into equity of such investments, as such information can be used to better understand the payoff profile and credit risk of these investments. First, funds would report the maturity date and coupon (reporting annualized rate and indicating whether fixed, floating, variable, or none).[107] Funds would also indicate whether the security is currently in default, whether interest payments for the security are in arrears or whether any coupon payments have been legally deferred by the issuer, as well as whether any portion of the interest is paid in kind.[108]

Finally, we are proposing to require additional information for convertible securities, to indicate whether the conversion is mandatory or contingent.[109] We are also proposing to require funds to disclose for each convertible security the conversion ratio, information about the asset into which the debt is convertible, and the delta, which is the ratio of the change in the value of the option to the change in the value of the asset into which the debt is convertible. This reflects the sensitivity of the debt's value to changes in the price of the asset into which the debt is convertible. The proposed requirement to provide the delta would also be required for options, as discussed further below, because convertible securities have optionality.[110] For similar reasons discussed below regarding options, the Commission believes that providing the delta for convertible securities is important to understand the extent of both the credit exposure of the debt portion of the convertible bond as well as the market price exposure relative to the underlying security into which it can be converted or exchanged.

We request comment on our proposed disclosure requirements for debt securities.

  • Are there additional or alternative characteristics of debt securities that we should require to be disclosed to assist the Commission, investors, or other potential users in understanding the nature and risks of a fund's debt security investments? For example, would disclosure of which debt securities are guaranteed, the nature of such guarantee (e.g., guarantee insurance or letter of credit), and the identity of the guarantor, be useful to investors? Alternately, or in addition, should the Commission require disclosure regarding the frequency of coupon payments, principal payback schedule, priority in security structure (e.g., senior, subordinated, etc.), embedded options (if any), insurance wrapper (if any), and whether the debt is secured?
  • We request comment on our proposed disclosure requirements for convertible securities. With regard to the delta, to what extent would the inputs and assumptions underlying the methodology by which funds calculate price changes affect the values reported? Are there liability or other concerns associated with the reporting of such measures with such inputs and assumptions? How would the comparability of information reported between funds be affected if funds used different inputs and assumptions in calculating delta, such as different assumptions regarding the values of the funds' portfolios? Are there ways the Commission could improve the standardization of the calculation of delta? If so, how? What would the associated costs and other burdens be for funds to calculate and report these measures according to a different methodology than that typically used by the fund?

iii. Repurchase and Reverse Repurchase Agreements

In addition to the information required above for all investments, Form N-PORT would require each fund to report additional information for each repurchase and reverse repurchase agreement held by the fund. The fund would report the category that reflects the transaction from the perspective of the fund (repurchase, reverse repurchase), whether the transaction is cleared by a central counterparty—and if so the name of the central counterparty—or if not the name and LEI (if any) of the over-the-counter counterparty, repurchase rate, whether the repurchase agreement is tri-party (to distinguish from bilateral transactions), and the maturity date.[111] Funds would also report the principal amount and value of collateral, as well as the Start Printed Page 33607category of investments that most closely represents the collateral.[112]

These disclosures would enhance the information currently reported regarding funds' use of repurchase agreements and reverse repurchase agreements. Information regarding repurchase agreements would be comparable to similar disclosures currently required to be made by money market funds on Form N-MFP. The categories used for reporting collateral would track the categories currently used to report tri-party repurchase agreement information to the Federal Reserve Bank of New York. We believe that conforming the categories that would be used in Form N-PORT to categories used in other reporting contexts would ease reporting burdens and enhance comparability.[113]

We request comment on our proposed disclosure requirements above.

  • As discussed above, the reporting requirements contained in Form N-PORT would be comparable to similar disclosures currently required to be made by money market funds on Form N-MFP concerning repurchase agreements. Should we collect different or additional information? For example, should the proposed reporting requirements be revised to encompass characteristics of bilateral repurchase and reverse repurchase agreements, which are not typically held by money market funds but we understand are more commonly held by funds that would be reporting on Form N-PORT? If so, how? Should the categories used for reporting collateral, which as proposed would track the categories currently used to report tri-party repurchase agreement information to the Federal Reserve Bank of New York, be revised? If so, how and why?
  • We believe that funds already track the characteristics of their repurchase and reverse repurchase agreements that we would require to be reported on Form N-PORT. To the extent this is true, what would be the incremental cost and burden of reporting such information to the Commission?
  • Are there additional or alternative disclosures that we should require to be reported to assist investors in understanding counterparty and other risks associated with the fund's repurchase and reverse repurchase agreements?

iv. Derivatives

As discussed above, the current reporting regime for derivatives has led to inconsistent approaches to reporting derivatives information and, in some cases, insufficient information concerning the terms and underlying reference assets of derivatives to allow the Commission or investors to understand the investment. Additionally, as discussed further below, for options, the Commission believes that it would be important to have a measurement of “delta,” a measure not reported in the financial statements or schedule of investments, to better understand the exposure to the underlying reference asset that the options produce in the portfolio. Currently, the Commission and investors are sometimes unable to accurately assess funds' derivatives investments and the exposures they create, which can be important to understanding funds' investment strategies, use of leverage, and risk of loss. Our proposal is intended to increase transparency into funds' derivatives investments by requiring funds to disclose certain characteristics and terms of derivative contracts that are important to understand the payoff profile of a fund's investment in such contracts, as well as the exposures they create or hedge in the fund. This would include, for example, exposures to currency fluctuations, interest rate shifts, prices of the underlying reference asset, and counterparty credit risk. As discussed further below, we are also amending Regulation S-X to make similar changes to the reporting regime for derivatives disclosures in fund financial statements.

Consequently, in addition to the information required above for all investments, Form N-PORT would require additional information about each derivative contract in the fund's portfolio. Funds would report the category of derivative that most closely represents the investment (e.g., forward, future, option, etc.).[114] Funds would also report the name and LEI (if any) of the counterparty (including a central counterparty).[115] This identifying information should assist the Commission, investors, and other potential users in better identifying and monitoring the categories of derivatives held by funds and the associated counterparty risks.[116]

Form N-PORT would also require funds to report terms and conditions of each derivative investment that are important to understanding the payoff profile of the derivative.[117] For options and warrants, including options on a derivative (e.g., swaptions), funds would report the type (e.g., put), payoff profile (e.g., written), number of shares or principal amount of underlying reference instrument per contract, exercise price or rate, expiration date, and the unrealized appreciation or depreciation of the option or warrant.[118] Start Printed Page 33608Form N-PORT would require funds to provide a description of the reference instrument, including name of issuer, title of issue, and relevant securities identifier.[119]

We recognize that some derivatives have underlying assets that are indices of securities or other assets or a “custom basket” of assets, the components of which are not publicly available. We are proposing requirements to ensure that the Commission, investors, and other potential users are aware of the components of such indices or custom baskets. If the reference instrument is an index for which the components are publicly available on a Web site and are updated on that Web site no less frequently than quarterly, funds would identify the index and provide the index identifier, if any.[120] We are proposing to require at least quarterly public disclosure for the components of the index because it matches the frequency with which funds are currently required and, as proposed in this release, would continue to be required, to disclose their portfolio holdings.[121] If the index's components are not publicly available as provided above, and the notional amount of the derivative represents 1% or less of the NAV of the fund, the fund would provide a narrative description of the index.[122] If the index's components are not publicly available in that manner, and the notional amount of the derivative represents more than 1% of the NAV of the fund, the fund would provide the name, identifier, number of shares or notional amount or contract value as of the trade date (all of which would be reported as negative for short positions), value, and unrealized appreciation or depreciation of every component in the index.[123]

We are proposing this requirement because we believe that it is important for the Commission, investors, and other potential users to have transparency into all exposures to assets that the fund has, regardless of whether the fund directly holds investments in those assets or chooses to create those exposures through a derivatives contract.[124] We are proposing the 1% notional amount threshold based on our experience with the summary schedule of investments, which requires funds to disclose investments for which the value exceeds 1% of the fund's NAV in that schedule.[125] We believe that, similar to this threshold in the summary schedule of investments, providing a 1% de minimis for disclosing the components of a derivative with nonpublic reference assets considers the need for the Commission, investors, and other potential users to have transparency into the exposures that derivative contracts create while not requiring extensive disclosure of multiple components in a non-public index for instruments that represent a small amount of the fund's overall value.

If the reference instrument is a derivative, funds would indicate the category of derivative (e.g., swap) and would provide all information required to be reported on Form N-PORT for that type of derivative.[126]

We are also proposing to require funds to report the delta of the option, which is the ratio of the change in the value of the option to the change in the value of the reference instrument.[127] This measure reflects the sensitivity of the option's value to changes in the price of the reference instrument. Disclosure of delta for options and warrants would provide the Commission, investors, and other potential users a more accurate measure of a fund's full exposure to the reference instrument than the option's notional amount, which we would otherwise not be able to determine. Accordingly, having the measurement of delta for options is important for the Commission, as well as investors and other potential users, to measure the impact, on a fund or group of funds that holds options on an asset, of a change in such asset's price. Also, as the Commission has previously observed, funds can use options as a form of obtaining a leveraged position in an underlying reference asset.[128] Having a measurement of exposures created through this type of leverage can help the Commission, investors, and other potential users better understand the risks that the fund faces as asset prices change, since the use of this type of leverage can magnify losses or gains in assets.

For futures and forwards (other than foreign exchange forwards, which share similarities with foreign exchange swaps and should be reported accordingly as discussed below), Form N-PORT would require funds to report a description of the reference instrument, the payoff profile (i.e., long or short), expiration date, aggregate notional amount or contract value as of the trade date, and unrealized appreciation or depreciation.[129] The description of the reference instrument would conform to the same requirements as the description of reference instruments for warrants and options.[130]

For foreign exchange forwards and swaps, funds would report the amount and description of currency sold, amount and description of currency purchased, settlement date, and unrealized appreciation or depreciation.[131]

For swaps (other than foreign exchange swaps), funds would report the description and terms of payments necessary for a user of financial information to understand the nature and terms of payments to be paid and received, including, as applicable: a description of the reference instrument, obligation, or index; financing rate to be paid or received; floating or fixed rates to be paid and received; and payment frequency.[132] The description of the reference instrument would conform to the same requirements as the description of reference instruments for forwards and futures.[133] Funds would also report upfront payments or receipts, unrealized appreciation or Start Printed Page 33609depreciation, termination or maturity date, and notional amount.[134]

Finally, for derivatives that do not fall into the categories enumerated in Form N-PORT, funds would provide a description of information sufficient for a user of financial information to understand the nature and terms of the investment. This description would include, as applicable, currency, payment terms, payment rates, call or put features, exercise price, and a description of the reference instrument, among other things.[135] The description of the reference instrument would conform to the same requirements as the description of reference instruments for swaps.[136] Funds would also report termination or maturity (if any), notional amount(s), unrealized appreciation or depreciation, and the delta (if applicable).[137] We recognize that new derivative products will continue to evolve, and thus the disclosures for this category are intended to be flexible enough to encompass the changing needs and products that may emerge.

We request comment on our proposed disclosure requirements for derivatives.

  • Is there additional or alternative information about derivative contracts that we should be requiring? Should we modify the information we are proposing to require for any derivatives contracts? Should other terms and conditions, categories of derivatives, payoff profiles, or identifiers be included in Form N-PORT so that all material elements of derivatives contracts can be reported?
  • For options, should funds be required to identify the option exercise type (e.g., American, European, Bermudan, Asian, other) or report any additional information for more exotic option exercise types (e.g., rainbow, barrier, lookback, etc.)?
  • We recently adopted Regulation SBSR, which will require one of the parties to security-based swap transactions to report certain information to registered security-based swaps data repositories or the Commission.[138] The reporting party will report certain identifying information, including unique product identifiers to identify each security-based swap, as well as certain primary and secondary trade information, including the terms of any standardized fixed or floating rate payments, the frequency of any such payments, and any additional data elements included in the agreement between the counterparties that are necessary for a person to determine the market value of the transaction.[139] The Commodities Futures Trading Commission has engaged in similar efforts with regards to unique product identifiers that would be reported with regards to swaps.[140] Are there methods the Commission should consider to harmonize the SBSR reporting requirements with the proposed reporting requirements on Form N-PORT? For example, should we consider ways to allow a fund to import the data reported to swap and security-based swap data repositories automatically into the fund's reports on Form N-PORT? How would this affect investors' ability to analyze this data for swaps and security-based swaps held by funds? Should we require funds to report the product identifiers or any other data we are not currently proposing to require on Form N-PORT that will be required to be reported for swaps or security-based swaps? If so, why?
  • Proposed Form N-PORT would require funds to list all underlying reference assets unless the underlying reference asset is an index whose components are publicly available on a Web site and are updated on that Web site no less frequently than quarterly, in which case funds would identify the index and publisher of the index, or unless the notional amount of the derivative represents 1% or less of the NAV of the fund, in which case funds would provide a narrative description of the index.[141] To the extent such indices are proprietary or subject to licensing agreements, what would be the effect of this requirement? For example, would funds incur costs for amending licensing agreements? Would index providers be willing to amend existing licensing agreements? If not, how would this impact funds that make such investments and the marketplace of fund options available to investors generally? Are there other concerns about disclosing the components of proprietary indices? Should we alter this requirement, and if so how? For example, should we not require funds to report underlying index components for derivatives unless the derivative's notional amount represents at least 5%, or some other percentage, of the NAV of the fund? Alternatively, should we limit the required disclosure of index components to the top 50 components and/or components that represent more than 1% of the index? If the reference asset is a modified version of an index whose components are publicly available on a Web site, for example a version that is customized to exclude certain issuers that the fund is restricted from owning, would requiring a narrative of those modifications be preferable to funds and investors rather than requiring each holding of the modified index to be listed? If so, should such narrative disclosure be reported in the “explanatory notes” section of Form N-PORT? [142]
  • How, if at all, should we modify the proposed requirement to report delta? To what extent would the inputs and assumptions underlying the methodology by which funds calculate this measure affect the value reported? Are there potential liability or other concerns associated with the reporting of such measures according to such inputs and assumptions? For example, how would the comparability of information reported between funds be affected if funds used different inputs and assumptions in their methodologies?
  • Are there additional or alternative metrics that we should consider requiring to be reported? Would the disclosure of risk metrics such as vega—which measures the amount that an option contract's price changes in relation to a 1% change in the volatility of the underlying asset—or gamma—which measures the sensitivity of delta in response to price changes in the underlying instrument—enhance the utility of the derivatives information reported in Form N-PORT? What would be the costs and burdens to funds and benefits to investors and other potential users of requiring funds to report such additional or alternative metrics? How would the comparability of information reported by different funds be affected if funds used different inputs and assumptions in their methodologies, such as different assumptions regarding the values of the funds' portfolios?
  • We believe that funds already track the characteristics of their derivatives that we would require to be reported on Form N-PORT. To the extent this is correct, what would be the incremental Start Printed Page 33610cost and burden of reporting such information to the Commission?

v. Securities on Loan and Cash Collateral Reinvestment

As discussed above, our proposal would require funds to report on Form N-PORT, for each of their securities lending counterparties as of the reporting date, the full name and LEI of the counterparty (if any), as well as the aggregate value of all securities on loan to the counterparty.[143] We are also proposing that funds report on Form N-PORT, on an investment-by-investment level, information about securities on loan and the reinvestment of cash collateral that secures the loans. For each investment held by the fund, a fund would report: (1) Whether any portion of the investment was on loan by the fund, and, if so, the value of the securities on loan; [144] (2) whether any amount of the investment represented reinvestment of the cash collateral and, if so, the dollar amount of such reinvestment; [145] and (3) whether any portion of the investment represented non-cash collateral received to secure loaned securities and, if so, the value of the securities representing such non-cash collateral.[146]

These disclosures would provide information about how funds reinvest the cash collateral received from securities lending activity and should allow for more accurate determination of the value of collateral securing such loans. This could improve the ability of Commission staff, as well as investors, brokers, dealers, and other market participants to assess collateral reinvestment risks and associated potential liquidity and loss risks, as well as better understand leverage creation through the reinvestment of collateral.[147] These disclosures could also help identify those investments that one or more funds might have to sell or redeem in the event of widespread termination or default by borrowers. More generally, this information could help to address concerns expressed by industry participants about the lack of transparency in funds' securities lending transactions.[148]

We request comment on our proposed disclosure requirements for securities loans and cash collateral reinvestment.

  • Should the Commission require funds to report information about securities on loan or reinvestment of cash collateral at the portfolio level, rather than at the individual security level? If so, what categories should be used to report such reinvestment? For example, would it be appropriate to use the same collateral categories for securities lending that we are proposing to be used for repurchase and reverse repurchase agreements?
  • As discussed, Form N-PORT would require funds to indicate, for each investment, whether any portion of the investment represented non-cash collateral received to secure loaned securities. To what extent would this information be helpful to brokers, dealers, and investors? To what extent do funds receive collateral other than cash?
  • Is there additional or alternative information regarding securities lending transactions that the Commission should require to be disclosed in reports on Form N-PORT?
  • We believe that funds already track the characteristics of their securities lending and cash collateral reinvestment transactions that we would require to be reported on Form N-PORT. Is this belief correct? What would be the burden of reporting such information to the Commission?

h. Miscellaneous Securities

In Part D of Form N-PORT, as currently permitted by Regulation S-X, funds would have the option of identifying and reporting certain investments as “miscellaneous securities.” [149] Funds electing to separately report miscellaneous securities would use the same Item numbers and report the same information that would be reported for each investment if it were not a miscellaneous security.[150] Consistent with the disclosure regime established by Regulation S-X, all such responses regarding miscellaneous securities would be nonpublic and would be used for Commission use only, notwithstanding the fact that all other information reported for the third month of each fund's fiscal quarter on Form N-PORT would otherwise be publicly available.[151] Keeping information related to these investments nonpublic may serve to guard against the premature release of those securities positions and thus deter front-running and other predatory trading practices, while still allowing the Commission to have a complete record of the portfolio for monitoring, analysis, and checking for compliance with Regulation S-X.[152] The only information publicly reported for miscellaneous securities would be their aggregate value, which would be consistent with current practice as permitted by Regulation S-X.[153]

  • Should funds continue to be allowed to use the category of miscellaneous securities, either on Form N-PORT or in publicly disclosed schedules of investments pursuant to instruction 1 to rule 12-12 and instruction 5 to rule 12-12C of Regulation S-X? To what extent do funds currently use “miscellaneous securities” as a line item in their schedule of investments, as opposed to disclosing all investments in securities of unaffiliated issuers? For what purposes? Should we continue to allow funds to exclude the full disclosures of such securities from funds' schedules of investments? Alternatively, should we consider lowering the threshold, such as to two percent or one percent of the total value of securities of unaffiliated issuers?

i. Explanatory Notes

In Part E of Form N-PORT, funds would have the option of providing explanatory notes relating to the filing, if any.[154] Any notes provided in public reports on Form N-PORT (i.e., reports on Form N-PORT for the third month of the fund's fiscal quarter) would be publicly available, whereas notes provided in nonpublic filings of Form N-PORT would remain nonpublic.[155] Funds would also report, as applicable, the Item number(s) to which the notes are related.[156]

These notes, which would be optional, could be used to explain assumptions that funds made in responding to specific items in Form N-PORT. Funds could also provide context for anomalous responses or discuss issues that could not be adequately addressed elsewhere given the constraints of the form. Similar Start Printed Page 33611information in other contexts has assisted Commission staff in better understanding the information provided by funds, and we expect that explanatory notes provided on Form N-PORT would do the same.[157]

We request comment on our proposed disclosure requirements.

  • Would the format outlined above for the explanatory notes allow funds to adequately discuss their responses on Form N-PORT? If not, how should the format be modified?
  • Should explanatory notes in publicly available filings of Form N-PORT be nonpublic? If so, why?

j. Exhibits

In Part F of Form N-PORT, for reports filed for the end of the first and third quarters of the fund's fiscal year, a fund would also attach the fund's complete portfolio holdings as of the close of the period covered by the report. These portfolio holdings would be presented in accordance with the schedules set forth in §§ 210.12-12 to 12-14 of Regulation S-X.

As discussed further below in Part B, we are proposing to rescind Form N-Q because reports on Form N-PORT for the first and third fiscal quarters would make similar reports on Form N-Q unnecessarily duplicative. While we recognize that the quarterly, publicly disclosed reports on Form N-PORT will provide structured data to investors and other potential users, we recognize that the amount and structured format of the data contained in those reports are not primarily designed for individual investors. We believe that such investors might prefer that portfolio holdings schedules for the first and third quarters continue to be presented using the form and content specified by Regulation S-X, which investors are accustomed to viewing in reports on Form N-Q and in shareholder reports. Therefore, we are proposing to require that, for reports on Form N-PORT for the first and third quarters of a fund's fiscal year, the fund would attach its complete portfolio holdings for that fiscal quarter, presented in accordance with the schedules set forth in §§ 210.12-12 to 12-14 of Regulation S-X.

Requiring funds to attach these portfolio holdings schedules to reports on Form N-PORT would provide the Commission, investors, and other potential users with access to funds' current and historical portfolio holdings for those funds' first and third fiscal quarters. Our proposal would also consolidate these disclosures in a central location, together with other fund portfolio holdings disclosures in shareholder reports and reports on Form N-CSR for funds' second and fourth fiscal quarters.

Under our proposal, and consistent with current practice, funds would have until 60 days after the end of their second and fourth fiscal quarters to transmit reports to shareholders containing portfolio holdings schedules prepared in accordance with Regulation S-X for that reporting period.[158] In contrast, under our proposal, funds would have 30 days after the end of their first and third fiscal quarters to file reports on Form N-PORT that would include portfolio holdings schedules prepared in accordance with Regulation S-X, although such reports would not be required to be made public until 60 days after the close of the reporting period. Although our proposal would require funds to prepare Regulation S-X compliant portfolio holdings schedules for their first and third fiscal quarters 30 days more rapidly than they do currently, we believe that this would be reasonable given the significant overlap with information that would be required to be reported on Form N-PORT, and the fact that funds would be required to file reports on Form N-PORT within 30 days after the end of each month. In addition, the portfolio schedules attached to Form N-PORT would be neither audited nor certified, which we believe would significantly reduce the time required for preparation and validation. We request comment below on the timing of preparing this attachment.

As discussed below, we are proposing to allow funds to transmit reports to shareholders by posting online those reports, together with the funds' complete portfolio holdings for the first and third fiscal quarters presented in accordance with the schedules set forth in §§ 210.12-12 to 12-14 of Regulation S-X disclosures.[159] We recognize that there would be duplication between the portfolio schedules posted online for funds relying upon proposed rule 30e-3 and the portfolio schedules for funds attached on reports on Form N-PORT. However, we believe that requiring the Regulation S-X schedules to be filed as exhibits to Form N-PORT reports would serve the purpose of making the schedules permanently available on the Commission's Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) (even when such schedules are no longer required to be maintained online pursuant to proposed rule 30e-3).

We request comment on our proposed exhibits.

  • Should funds be required to attach portfolio holdings schedules to reports on Form N-PORT? Is there an alternative that would be better for funds and investors in terms of informing investors' investment decisions with regards to current and historical portfolio holdings?
  • As discussed above, the attached portfolio holdings schedules are intended for investors, but would not be required to be made publicly available to investors until 60 days after the close of the reporting period; however, as proposed, funds would be required to prepare and file this attachment within 30 days of the end of the reporting period. Should funds be allowed to file reports on Form N-PORT for the first and third fiscal quarters without Regulation S-X compliant schedules, but then be required to amend those reports on Form N-PORT to attach Regulation S-X compliant schedules no later than 60 days after the end of the reporting period?
  • Should the portfolio schedules attached to Form N-PORT, which are similar to reports funds are providing currently on Form N-Q, be certified, as is currently required by Form N-Q?

k. General Request for Comments Regarding the Information on Form N-PORT

In addition to the requests for comment above, we request general comment on feasible alternatives to the information we would be requiring funds to report on Form N-PORT that would minimize the reporting burdens on funds while maintaining the anticipated benefits of the reporting and disclosure.[160] We also request comment on the utility of the information proposed to be included in reports to the Commission, investors, and the public in relation to the costs to funds of providing the reports.[161]

Start Printed Page 33612
  • Would Form N-PORT, as proposed, appropriately consider the usefulness of the information to the Commission, investors, and other potential users of the required information and the costs that would be associated with reporting this information? If not, which data points or items should be enhanced or scaled back? Are there any proposed items in Form N-PORT that should be revised to avoid duplication of reporting requirements in different Commission rules or forms? If so, please explain. On the other hand, are there any elements in Form N-PORT that the Commission should carry over to other Commission forms or rules?
  • Are there specific items that the proposed form would require that are unnecessary or otherwise should not be required in the manner that we propose? Alternately, is there different or additional information that we have not identified that could be useful to us or investors in monitoring funds? For example, to the extent there are fund-specific, sector-specific, or industry-wide risks that would not be addressed by the information we are proposing to collect today, should we require additional or alternative information that would be relevant to an evaluation of the risk characteristics of the fund and its portfolio investments? Likewise, is there any investment- or entity-specific information that should be included in Form N-PORT to facilitate analysis of the information that would be reported? Should the manner in which information would be reported in Form N-PORT be revised to improve the clarity of disclosures or reduce reporting burdens?
  • We believe that the information we are proposing to require would be readily available to funds as a matter of general business practice. Do commenters agree with this assumption? For example, do fund accounting or financial reporting systems, or those of a fund's custodian, generally contain the investment information that we are requesting in our proposal? What is the feasibility and burden of requiring funds to report information that is not contained in such systems? To the extent that any items that we have requested are not contained in fund accounting or financial reporting systems, are there other types of readily available data that would provide us with similar information?

3. Reporting of Information on Form N-PORT

As discussed above, the Commission proposes that funds would report information on Form N-PORT in XML, so that Commission staff, investors, and other potential users could create databases of fund portfolio information to be used for data analysis. Forms N-CSR and N-Q are not currently filed in a structured format, which results in reports that are comprehensible to a human reader, but are not suitable for automated processing, and generally require filers to reformat the required information from the way it is stored for normal business uses.[162] By contrast, requiring that reports on Form N-PORT be structured would allow the Commission and other potential users to combine information from more than one report in an automated way to, for example, construct a data base of fund portfolio investments without additional formatting. Based upon our experiences with Forms N-MFP and PF, both of which require filers to report information in an XML format, we believe that requiring funds to report information on Form N-PORT in an XML format would provide the information that we seek in the most timely and cost-effective manner.[163] As discussed further below in the economic analysis, the XML format may also improve the quality of the information disclosed by imposing constraints on how the information would be provided, by providing a built-in validation framework of the data in the reports.[164]

  • What would be the costs to funds of providing data conforming to a Form N-PORT XML Schema? How would costs be affected, if at all, by the size of the funds and fund complexes reporting this data? How would this affect smaller fund companies?
  • Should the Commission allow or require the form to be provided in an XML Schema derived from existing XML based languages, such as Financial products Markup Language (“FpML”) or XBRL? FpML is an industry standard created by ISDA for exchanging and reporting the terms and conditions of derivatives contracts. XBRL is another industry standard used by the Commission for many reporting forms.
  • Is there another structured format that would allow investors and analysts to easily download and analyze the data?

The Commission is considering whether reports on Form N-PORT should be submitted through EDGAR or another electronic filing system, either maintained by the Commission or by a third-party contractor. If reports on Form N-PORT were required to be submitted through EDGAR, the electronic filing requirements of Regulation S-T would apply.[165]

We request comment on this aspect of our proposal.

  • Are there specific other capabilities that the Commission should consider in developing or selecting an electronic filing system? For example, should the system have the capability to cross-check information reported to other electronic filing systems, such as the Investment Adviser Registration Depository (where registration forms for investment advisers are filed)? If so, which platforms and why?
  • Is EDGAR the optimal vehicle for filing reports on Form N-PORT with the Commission? If not, what vehicle would be optimal for filing reports and why? Should the Commission allow the filing of documents in electronic media other than on EDGAR? If so, please make specific recommendations.
  • Are there any particular concerns with filing such reports on EDGAR as opposed to a third party system or vice versa? If so, what are those concerns and what are potential remedies for such concerns? For example, as discussed further below, as proposed, reports on Form N-PORT for the first and second month of each fiscal quarter would not be made public. Accordingly, any filing would need to have confidentiality protections to keep the information on such Forms non-public. How should EDGAR or an alternative filing platform best address the confidentiality of this information?
  • How important to investors and other interested parties is the fact that EDGAR currently serves as the filing system for fund filings with the Commission, and thus serves as a single repository where investors may examine historical filings by a given fund on related forms and generally compare reports made by other funds? To what extent, if at all, could investors become confused by the use of a new filing system for Form N-PORT and the use of EDGAR for other fund filings? How should any such investor confusion be mitigated by funds and the Commission?Start Printed Page 33613

Our proposal would require funds to report information on Form N-PORT no later than 30 days after the close of each month.[166] We request comment on this aspect of our proposal.

  • Would 30 days be sufficient for funds to gather and report this information to the Commission? If not, what amount of time would be required and why? Conversely, could funds easily and reliably gather and report this information in less than 30 days, which would provide the Commission staff with more timely data? [167] If so, what amount of time would be appropriate? To what extent, if at all, should this determination be affected by the fact that funds would have 60 days to report their schedule of investments in their financial statements prepared pursuant to Regulation S-X?

As an alternative to monthly reports filed on Form N-PORT, should the Commission require quarterly reports that include portfolio information for each month of that quarter? How would the viability of this alternative be affected, if at all, by the technological challenges and inadvertent disclosure risks associated with combining in a single form nonpublic portfolio information relating to the first two months of each quarter with public portfolio information relating to the third month of that quarter? We note that this alternative would eliminate many of the benefits of monthly reporting, such as the ability of monthly data to address the staleness of quarterly data and to assist in monitoring funds by decreasing the delay between reports. However, this alternative would still provide twelve data points per year, which should improve the Commission staff's ability to perform analyses of portfolios, and would discourage various forms of portfolio manipulation, as discussed above. What, if any, other factors should the Commission consider in evaluating this alternative?

4. Public Disclosure of Information Reported on Form N-PORT

We are proposing that funds report information on Form N-PORT on a monthly basis, no later than 30 days after the close of each month.[168] For reasons discussed below, and consistent with current disclosure practices, only information reported for the third month of each fund's fiscal quarter would be publicly available, and such information would not be made public until 60 days after the end of the third month of the fund's fiscal quarter.[169]

The quarterly portfolio reports that the Commission currently receives on Forms N-Q and N-CSR can quickly become stale due to the turnover of portfolio securities and fluctuations in the values of portfolio investments. Monthly portfolio reporting would decrease the delay between reports, which should prove useful to the Commission for fund monitoring, particularly in times of market stress. This would also triple the number of data points reported to the Commission in a given year, as well as ensure that the Commission has current information, which should in turn enhance the ability of Commission staff to perform analyses of funds in the course of monitoring for industry trends, or identifying issues for examination or inquiry.

As discussed above, the Commission generally believes that public availability of information, including the types of information that would be collected on Form N-PORT that may not currently be reported or disclosed by funds, can benefit investors by assisting them in making more informed investment decisions. Although Form N-PORT is not primarily designed for disclosing information to individual investors, we believe that many investors, particularly institutional investors, as well as academic researchers, financial analysts, and economic research firms, could use the information reported on Form N-PORT to evaluate fund portfolios and assess the potential for returns and risks of a particular fund. Accordingly, whether directly or through third parties, we believe that the periodic public disclosure of the information on proposed Form N-PORT could benefit all fund investors.

The Commission, however, recognizes that more frequent portfolio disclosure could potentially harm fund shareholders by expanding the opportunities for professional traders to exploit this information by engaging in predatory trading practices, such as trading ahead of funds, often called “front-running.” [170] Similarly, the Commission is sensitive to concerns that more frequent portfolio disclosure may facilitate the ability of outside investors to “free ride” on a mutual fund's investment research, by allowing those investors to reverse engineer and “copycat” the fund's investment strategies and obtain for free the benefits of fund research and investment strategies that are paid for by fund shareholders.[171] Both front-running and copycatting can reduce the returns of shareholders who invest in actively managed funds.[172]

We discussed these concerns when we first proposed and adopted Form N-MFP, and made the determination to make each monthly report on Form N-MFP public, with a 60 day delay.[173] In that release, however, we noted that, due to the short-term and restricted nature of money market fund securities, and because shares of money market funds are ordinarily purchased and redeemed at a stable share price, we believed opportunities for such activities were curtailed.[174] By contrast, funds other than money market funds can pursue a variety of investment strategies and invest in a variety of securities and other investments. Accordingly, we do not believe that the factors that mitigated our concerns about the potential for front running or free-riding in money market funds are as equally applicable to mutual funds.

Empirical studies indicate that the portfolio holdings information that investment companies disclose to the Commission and to shareholders contains information that can be used by other investors to front-run and Start Printed Page 33614copycat the positions of reporting funds.[175] Based on these studies, as well as experience and discussions with fund groups and market participants, the Commission is sensitive to the possibility that increasing the frequency of public portfolio disclosures to a monthly basis could further enable others to discern trading strategies of the funds, potentially subjecting registered investment companies to such predatory trading practices, resulting in competitive harms to the fund and its investors.

We recognize that some free-riding and front running activity can occur even with quarterly disclosure, with the potential for investor harm. Conversely, however, investors previously petitioned for quarterly disclosures, noting numerous benefits that quarterly disclosure of portfolio schedules could provide, including allowing investors to better monitor the extent to which their funds' portfolios overlap, and hence enabling investors to make more informed asset allocation decisions, and providing investors with greater information about how a fund is complying with its stated investment objective.[176] The Commission cited many of these benefits when it adopted Form N-Q, and based on staff experience and outreach, believes that the current practice of quarterly portfolio disclosures provides benefits to investors, notwithstanding the opportunities for front-running and reverse engineering it might create.

Our proposal is intended to appropriately consider the benefits to the Commission, investors, and other potential users of public portfolio disclosures, including the reporting of such disclosures in a structured format and additional portfolio information that would be required on proposed Form N-PORT and the potential costs associated with making that information available to the public, which could be ultimately borne by investors. Accordingly, in an attempt to minimize these potential costs and harms, we propose to require public disclosure of fund reports on Form N-PORT once each quarter, rather than monthly, thereby maintaining the status quo regarding the frequency of public portfolio disclosure. As discussed above, funds are currently required to disclose their portfolio investments quarterly, via public filings with the Commission and semi-annual reports distributed to shareholders. Consequently, the Commission is not currently proposing to make public the information reported for the first and second months of each fund's fiscal quarter on Form N-PORT. Only information reported for the third month of each fund's fiscal quarter on Form N-PORT would be made publicly available, and such information would not be made public until 60 days after the end of the third month of the fund's fiscal quarter. We believe that maintaining the status quo with regard to the frequency and the time lag of portfolio reporting would allow the Commission, the fund industry, and the marketplace to assess the impact of the structured and more detailed data reported on Form N-PORT on the mix of information available to the public, and the extent to which these changes might affect the potential for predatory trading, before determining whether more frequent or more timely public disclosure would be, beneficial to investors in funds.

We are proposing to maintain the status quo of public disclosure of quarterly information based upon each fund's fiscal quarters, rather than calendar quarters, to ensure that public disclosure of information filed on Form N-PORT would be the same as the portfolio disclosures reported on a semi-annual fiscal year basis on Form N-CSR. We believe that such overlap would minimize the risks of predatory trading, because otherwise funds with fiscal year-ends that fall other than on a calendar quarter- or year-end would have their portfolios publicly available more frequently than funds with fiscal year-ends that fall on a calendar quarter- or year-end, thus increasing the risks to those funds discussed above related to potential front-running or reverse engineering.

We request comment on the proposed frequency and delay of public disclosure of information reported on Form N-PORT.

  • Should we require information on Form N-PORT reported for the first and second month of each fund's fiscal quarter be made public? Are the concerns about front-running or other possible harms discussed above warranted given the 60-day delay? Would a different combination of public disclosure frequency and delay better protect funds and their investors from the risks of predatory trading, while still providing timely and regular information to investors? To what extent would investors benefit from receiving monthly data as opposed to quarterly data?
  • Are there alternatives we should consider to provide investors and other potential users with the information reported on Form N-PORT for the first and second months of each quarter? For example, would the potential harms discussed above be mitigated if reports on Form N-PORT for the first and second months were made public 60 days (or a shorter or longer time period) after the end of each quarter, or 60 days (or a shorter or longer time period) after the end of each fund's fiscal year, thereby increasing the time lag of such information? If monthly information were to be provided quarterly or annually, how would that affect the benefits of such information to investors and other potential users?
  • Would Form N-PORT contain the type of information that, if disclosed on a monthly basis, could reveal information that a fund would consider proprietary or confidential or that could place the fund at a competitive disadvantage? If so, please explain and provide examples, as applicable.
  • Would restricting public disclosure of the information reported on Form N-PORT to information reported for the third month of each fund's fiscal quarter alleviate concerns about front-running or other possible harms that might be caused by making the monthly information reported on Form N-PORT public? Should we instead provide that all or a portion of the requested information on Form N-PORT be submitted in nonpublic reports to the Commission? If so, please identify the specific items that should remain nonpublic and explain why.
  • Do commenters believe that our proposed 60-day delay in making the information public would be helpful in protecting against possible front running or free riding? Would a shorter delay (e.g., 45 or 30 days) or a longer delay (e.g., 70 days) be more appropriate? If so, why? For example, should we provide for a longer delay to prevent investors other than shareholders from trading along with the fund, to the possible detriment of the fund and its shareholders? Alternately, would a shorter delay, for example 30 days, better serve the needs of shareholders Start Printed Page 33615and potential fund investors while still appropriately protecting the interests of funds?
  • Should information be reported on Form N-PORT as of the third month of each fund's fiscal year, as proposed, or should we instead require a uniform public reporting schedule for all funds to facilitate comparison of information reported on Form N-PORT (e.g., March 31, June 30, September 30, and December 31)? To what extent would a uniform public disclosure schedule increase burdens to funds, given that one of the purposes for selecting fiscal year-ends that vary from calendar year-ends is to spread out filing burdens throughout the year for fund complexes?

B. Rescission of Form N-Q and Amendments to Certification Requirements of Form N-CSR

1. Rescission of Form N-Q

Along with our proposal to adopt new Form N-PORT, we are proposing to rescind Form N-Q. Management companies other than SBICs are currently required to report their complete portfolio holdings as of the end of their first and third fiscal quarters on Form N-Q. Because the data reported on proposed Form N-PORT would include the portfolio holdings information contained in reports on Form N-Q, we believe that Form N-PORT, if adopted, would render reports on Form N-Q unnecessarily duplicative. Therefore, we believe it is appropriate to rescind Form N-Q rather than require funds to report similar information to the Commission on two separate forms.

However, as noted earlier, we believe that individual investors and other potential users might prefer that portfolio holdings schedules for the first and third quarters continue to be presented using the form and content specified by Regulation S-X, which investors are accustomed to viewing in reports on Form N-Q and in shareholder reports. Therefore, we are proposing to require that, for reports on Form N-PORT for the first and third quarters of a fund's fiscal year, the fund would attach its complete portfolio holdings for that fiscal quarter, presented in accordance with the schedules set forth in §§ 210.12-12 to 12-14 of Regulation S-X [17 CFR 210.12-12—12-14]. Also, as discussed below, proposed new rule 30e-3 would allow funds to satisfy requirements to transmit reports to shareholders by posting on a Web site those shareholder reports and these same portfolio schedules for the funds' first and third quarters.[177]

2. Amendments to Certification Requirements of Form N-CSR

In connection with the Commission's implementation of the Sarbanes-Oxley Act of 2002, Form N-Q and Form N-CSR require the principal executive and financial officers of the fund to make quarterly certifications relating to (1) the accuracy of information reported to the Commission, and (2) disclosure controls and procedures and internal control over financial reporting.[178] Rescission of Form N-Q would eliminate certifications as to the accuracy of the portfolio schedules reported for the first and third fiscal quarters.

Under today's proposal, the certifications as to the accuracy of the portfolio schedules reported for the second and fourth fiscal quarters on Form N-CSR would remain. However, we are proposing to amend the form of certification in Form N-CSR to require each certifying officer to state that he or she has disclosed in the report any change in the registrant's internal control over financial reporting that occurred during the most recent fiscal half-year, rather than the registrant's most recent fiscal quarter as currently required by the form.[179] Lengthening the look-back of this certification to six months, so that the certifications on Form N-CSR for the semi-annual and annual reports would cover the first and second fiscal quarters and third and fourth fiscal quarters, respectively, would fill the gap in certification coverage that would otherwise occur once Form N-Q is rescinded. To the extent that certifications improve the accuracy of the data reported, removing such certifications could have negative effects on the quality of the data reported. Likewise, if the reduced frequency of the certifications affects the process by which controls and procedures are assessed, requiring such certifications semi-annually rather than quarterly could reduce the effectiveness of the fund's disclosure controls and procedures and internal control over financial reporting are assessed. However, we expect such effects, if any, to be minimal because certifying officers would continue to certify portfolio holdings for the fund's second and fourth fiscal quarters and would further provide semi-annual certifications concerning disclosure controls and procedures and internal control over financial reporting that would cover the entire year.

3. Request for Comment

We request comments on the proposed rescission of Form N-Q and related rule and form amendments.

  • Should we rescind Form N-Q, as we have proposed? Should we instead retain Form N-Q, and not require Regulation S-X compliant schedules to be attached to reports for the first and third fiscal quarters on Form N-PORT? Why or why not?
  • Would the proposed amendments to the certification requirements in Form N-CSR be an appropriate substitute for the certification requirements in Form N-Q? Would the change from quarterly to semiannual certifications have an effect on the quality of funds' internal controls or on other costs associated with certifications? If so, are those changes appropriate?

C. Amendments to Regulation S-X

1. Overview

As part of our larger effort to modernize the manner in which funds report holdings information to investors, today we are proposing amendments to Regulation S-X, which prescribes the form and content of financial statements required in registration statements and shareholder reports.[180] As discussed above, many of the proposed amendments to Regulation S-X, particularly the amendments to the disclosures concerning derivative contracts, are similar to the proposed requirements concerning disclosures of derivatives that would be required on reports on proposed Form N-PORT. The proposed amendments to Regulation S-X would, among other things, require similar disclosures in a fund's financial Start Printed Page 33616statements in its shareholder reports and, as applicable, Web site disclosures in order to provide investors, particularly individual investors, with clear and consistent disclosures across funds concerning fund investments in derivatives in a human-readable format, as opposed to the structured format of proposed Form N-PORT.

As outlined below, we are proposing amendments to Articles 6 and 12 of Regulation S-X that would: (1) Require new, standardized disclosures regarding fund holdings in open futures contracts, open forward foreign currency contracts, and open swap contracts,[181] and additional disclosures regarding fund holdings of written and purchased option contracts; (2) update the disclosures for other investments, as well as reorganize the order in which some investments are presented; and (3) amend the rules regarding the general form and content of fund financial statements. Our amendments would also require prominent placement of disclosures regarding investments in derivatives in a fund's financial statements, rather than allowing such schedules to be placed in the notes to the financial statements. Finally, our amendments would require a new disclosure in the notes to the financial statements relating to a fund's securities lending activities.

As discussed above, the proposed rules will renumber the current schedules in Article 12 of RegulationS-X and break out the disclosure of derivatives currently reported on Schedule 12-13 into separate schedules. These changes are summarized in Figure 1, below.

Proposed Changes to Article 12 of Regulation S-X

Current rulesProposed rules
12-12 (Investments in securities of unaffiliated issuers)12-12 (Investments in securities of unaffiliated issuers).
12-12A (Investments—securities sold short)12-12A (Investments—securities sold short).
12-12B (Open option contracts written)12-13 (Open option contracts written).*
12-12C (Summary schedule of investments in securities of unaffiliated issuers)12-12B (Summary schedule of investments in securities of unaffiliated issuers).*
12-13 (Investments other than securities)12-13A (Open futures contracts).*
12-13B (Open forward foreign currency contracts).*
12-13C (Open swap contracts).*
12-13D (Investments other than those presented in §§ 210.12-12, 12-12A, 12-12B, 12-13, 12-13A, 12-13B, and 12-13C)*
12-14 (Investments in and advances to affiliates)12-14 (Investments in and advances to affiliates).
* Denotes new or renumbered schedules.

Figure 1

We believe the proposed amendments will assist comparability among funds, and increase transparency for investors regarding a fund's use of derivatives and the liquidity of certain investments. We have endeavored to mitigate burdens on the industry by proposing to require similar disclosures both on Form N-PORT and in a fund's financial statements.[182] As a further consideration, we believe that the amendments we are proposing today are generally consistent with how many funds are currently reporting investments (including derivatives), and other information according to current industry practices.

2. Enhanced Derivatives Disclosures

In 2011, as part of a wider effort to review the use of derivatives by management investment companies, we issued a concept release and request for comment on a range of issues.[183] We received comment letters from a variety of stakeholders, including investors, fund groups, and third-party users of the information, who commented on a number of issues. Several commenters noted that holdings of derivative investments are not currently reported by funds in a consistent manner.[184] Commenters also suggested that more disclosure on underlying risks was necessary, including more information on counterparty exposure and reporting relating to the notional amount of certain derivatives.[185] Another commenter specifically requested that we revise Regulation S-X in order to keep “financial reporting current with developments in the financial markets.” [186]

While the rules under Regulation S-X establish general requirements for portfolio holdings disclosures in fund financial statements, they do not prescribe standardized information to be included for derivative instruments Start Printed Page 33617other than options. Currently, rule 12-13 of Regulation S-X (Investments other than securities) requires limited information on the fund's investments other than securities—that is, the investments not disclosed under rules 12-12, 12-12A, 12-12B, and 12-14.[187] Thus, under Regulation S-X, a fund's disclosures of open futures contracts, open forward foreign currency contracts, and open swap contracts are generally reported in accordance with rule 12-13.

To address issues of inconsistent disclosures and lack of transparency as to derivative instruments, we are proposing to amend Regulation S-X by proposing new schedules for open futures contracts, open forward foreign currency contracts, and open swap contracts. We are also proposing to modify the current disclosure requirements for purchased and written option contracts. Finally, we are proposing to include certain instructions regarding the presentation of derivatives contracts that are generally consistent with instructions that are currently included, or that we are proposing to add, in either rule 12-12 (Investments in securities of unaffiliated issuers) or rule 12-13 (Investments other than securities).[188]

a. Open Option Contracts Written—Rule 12-13 (Current Rule 12-12B) and Options Purchased

Our proposed rule would modify the current disclosure of written option contracts.[189] First, we are adding new columns to the schedule for written option contracts that would require a description of the contract (replacing the current column for name of the issuer), the counterparty to the transaction,[190] and the contract's notional amount.[191] Thus, under the new rule 12-13, for each open written options contract, funds would be required to disclose: (1) Description; (2) counterparty; (3) number of contracts; (4) notional amount; (5) exercise price; (6) expiration date; and (7) value.[192] Second, we are proposing to add an instruction to current rule 12-12, which is the schedule on which purchased options are required to be disclosed, that would require funds to provide all information required by proposed rule 12-13 for written option contracts.[193]

We are also proposing for options where the underlying investment would otherwise be presented in accordance with another provision of rule 12-12 or proposed rules 12-13 through 12-13D that the presentation of that investment must include a description, as required by those provisions.[194] Thus, if another investment contains some sort of optionality (e.g., put or call features), the investment's disclosure must include both a description of the optionality (as required by proposed rule 12-13), and a description of the underlying investments, as required by the applicable provisions of proposed rules 12-12, 12-12A, and 12-13 through 12-13D. For example, reporting for a swaption would include the disclosures required under both the swaps rule (proposed rule 12-13C) and the options rule (proposed rule 12-13).

As required in proposed Form N-PORT,[195] in the case of an option contract with an underlying investment that is an index or basket of investments whose components are publicly available on a Web site as of the fund's balance sheet date,[196] or if the notional amount of the holding does not exceed one percent of the fund's NAV as of the close of the period, we are proposing that the fund provide information sufficient to identify the underlying investment, such as a description.[197] If the underlying investment is an index whose components are not publicly available on a Web site as of the fund's balance sheet date, or is based upon a custom basket of investments, and the notional amount of the option contract exceeds one percent of the fund's NAV as of the close of the period, the fund would list separately each of the investments comprising the index or basket of investments.[198] We believe that disclosure of the underlying investments of an option contract is an important element to assist investors in understanding and evaluating the full risks of the investment. We are also proposing to include a similar instruction for swap contracts.[199] The disclosures in proposed instruction 3 would provide investors with more transparency into both the terms of the underlying investment and the terms of the option.

We are also proposing several instructions to rule 12-13 and the other rules we are proposing concerning derivatives holdings (e.g., open futures contracts, open swap contracts) in order to maintain consistency with the disclosures required by current rule 12-13. Current rule 12-13 contains an instruction requiring identification of “each investment not readily marketable.” [200] We are proposing to modify this requirement in proposed rule 12-13 and the other rules concerning derivatives holdings in order to increase transparency into the marketability of, and observability of valuation inputs for, a fund's investments by requiring separate identification of investments that are restricted securities, as well as those investments that were fair valued using significant unobservable inputs. Thus, we are proposing to require funds to indicate if an investment cannot be sold because of restrictions or conditions applicable to the investment.[201] We are also proposing to require funds to indicate if a security's fair value was Start Printed Page 33618determined using significant unobservable inputs.[202]

Current rule 12-13 likewise contains an instruction to include tax basis disclosures for investments other than securities.[203] We are extending this requirement to proposed rule 12-13, as well as the other rules concerning derivatives holdings.[204] We believe that this type of tax basis information is important to investors in investment companies, which are generally pass-through entities pursuant to Subchapter M of the Internal Revenue Code.[205]

In order to provide greater transparency to investors into which investments are deemed illiquid, we are also proposing to require funds to identify illiquid investments.[206] Liquidity is an important consideration for a fund's investors in understanding the risk exposure of a fund. For example, in times of market stress, illiquid investments may not be readily sold at their approximate value. Indicating which investments are illiquid would allow an investor to understand which holdings in a fund are likely to be sold at a discount if a portion of the fund's investments must be sold to meet cash needs, such as redemptions or distributions.

Proposed rule 12-13 would also include other new instructions.[207]

b. Open Futures Contracts—New Rule 12-13A

We are proposing new rule 12-13A, which would require standardized reporting of open futures contracts.[208] For open futures contracts, funds are currently required to report under rule 12-13 a description of the futures contract (including its expiration date), the number of contracts held (under the balance held—quantity column), and any unrealized appreciation and depreciation (under the value column).[209] In order to allow investors to better understand the economics of a fund's investment in futures contracts, our proposal would also require funds to report notional amount and value.[210] Therefore, under the proposal, funds with open futures contracts would report: (1) Description; (2) number of contracts; (3) expiration date; (4) notional amount; (5) value; and (6) unrealized appreciation and depreciation.[211] In addition, instruction 7 would include the new requirement that funds should reconcile the total of Column F (unrealized appreciation/depreciation) to the total variation margin receivable or payable on the related balance sheet.[212] We believe that proposed instruction 7 would improve transparency by linking the information in the schedule of open futures contracts with the related balance sheet.

As discussed above, our proposal also contains certain new instructions for rule 12-13A that are generally the same across all of the schedules for derivatives contracts.[213] Based on staff review of disclosures of open futures contracts of funds, we believe that these proposed disclosures are generally consistent with current industry practice.[214]

c. Open Forward Foreign Currency Contracts—New Rule 12-13B

We are also proposing new rule 12-13B, which would require standardized disclosures for open forward foreign currency contracts.[215] Currently, under rule 12-13, funds are required to report a description of the contract (including a description of what is to be purchased and sold under the contract and the settlement date), the amount to be purchased and sold on settlement date (under the balance held—quantity column), and any unrealized appreciation or depreciation (under the value column).[216] In order to allow investors to better understand counterparty risk for forward foreign currency contracts, our proposal would additionally require funds to disclose the counterparty to each transaction.[217] As proposed, funds holding open forward foreign currency contracts would therefore report the: (1) Amount and description of currency to be purchased; (2) amount and description of currency to be sold; (3) counterparty; (4) settlement date; and (5) unrealized appreciation/depreciation.[218] Based on staff review of disclosures of open forward foreign currency contracts of funds, we believe that these proposed disclosures are generally consistent with current industry practice. Our proposal would also include certain new instructions to the schedule that are similar to the other derivatives disclosure requirements we are proposing today.[219]

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d. Open Swap Contracts—New Rule 12-13C

We are also proposing new rule 12-13C, which would require standardized reporting of fund positions in open swap contracts.[220] Under rule 12-13, funds currently report description (including a description of what is to be paid and received by the fund and the contract's maturity date), notional amount (under balance held—quantity column), and any unrealized appreciation or depreciation (under the value column).[221] Our proposal would additionally require funds to report the counterparty to each transaction (except for exchange-traded swaps), the contract's value, and any upfront payments or receipts.[222] This additional information would allow investors to both better understand the economics of the transaction, as well as its associated risks.[223] Thus, as proposed, funds would report for each swap the: (1) Description and terms of payments to be received from another party; (2) description and terms of payments to be paid to another party; (3) counterparty; (4) maturity date; (5) notional amount; (6) value; (7) upfront payments/receipts; and (8) unrealized appreciation/depreciation.[224] We are proposing these categories of information in an effort to increase transparency of swap contracts, while maintaining enough flexibility for the variety of swap products that currently exist and future products that might come to market.[225]

While instruction 3 of proposed rule 12-13C provides specific examples for the more common types of swap contracts (e.g., credit default swaps, interest rate swaps, and total return swaps), we recognize that other types of swaps exist (e.g., currency swaps, commodity swaps, variance swaps, and subordinated risk swaps).[226] For example, a cross-currency swap has two notional amounts, one for the currency to be received and one for the currency to be paid. For a cross-currency swap, funds would report for purposes of Column A of proposed rule 12-13C, a description of the interest rate to be received and the notional amount that the calculation of interest to be received is based upon. Column B of proposed rule 12-13C would include a description of the interest rate to be paid and the notional amount that the calculation of interest to be paid is based upon. Column E would include both notional amounts and the currency in which each is denominated, or the same information could be presented in two separate columns.

As required in our proposed disclosures for open option contracts [227] and in proposed Form N-PORT,[228] in the case of a swap with a referenced asset that is an index whose components are publicly available on a Web site as of the fund's balance sheet date, or if the notional amount of the holding does not exceed one percent of the fund's NAV as of the close of the period, we are proposing that the fund provide information sufficient to identify the referenced asset, such as a description.[229] If the referenced asset is an index whose components are not publicly available on a Web site as of the fund's balance sheet date, or is based upon a custom basket of investments, and the notional amount of the holding exceeds one percent of the fund's NAV as of the close of the period, the fund would list separately each of the investments comprising the referenced assets.[230] As with underlying investments for option contracts, we believe that disclosure of the underlying referenced assets of a swap would assist investors in better understanding and evaluating the full risks of investments in swaps.

For swaps which pay or receive financing payments, funds would disclose variable financing rates in a manner similar to disclosure of variable interest rates on securities in accordance with instruction 4 to proposed rule 12-12.[231] Our proposal would also include other instructions to this rule that are similar across all of our proposed rules for derivatives contracts.[232]

e. Other Investments — Rule 12-13D (Current Rule 12-13)

We are also proposing to amend current rule 12-13 and, for organization and consistency, renumber it as proposed rule 12-13D. Proposed rule 12-13D is intended to continue, as is currently required by rule 12-13, to be the schedule by which funds report investments not otherwise required to be reported pursuant to Article 12.[233] As proposed, rule 12-13D would require reporting of: (1) Description; (2) balance held at close of period-quantity; and (3) value of each item at close of period.[234] We expect that funds would report, among other holdings, investments in physical holdings, such as real estate or commodities, pursuant to proposed rule 12-13D. As discussed above, our proposal would also modify current rule 12-13's requirement that funds disclose “each investment not readily marketable” [235] in favor of disclosures concerning whether an investment is restricted and if an investment's fair value was determined using significant unobservable inputs.[236] Our proposal would also include certain new instructions to the schedule that are generally the same across all the schedules for derivatives contracts.[237]

Start Printed Page 33620

We request comment on our proposed amendments to rules 12-13 through 12-13D of Regulation S-X:

  • Many of our proposed portfolio holdings disclosure requirements in Article 12 conform with similar requirements on proposed Form N-PORT. Are our proposed amendments to Article 12 appropriate for fund financial statements? Is there information that is currently proposed in Form N-PORT, but not in Article 12, that would benefit investors? For example, to the extent that proposed Form N-PORT instructs filers to report the country code that corresponds to the country of investment or issuer based on the concentrations of the risk and economic exposure of the investments, or, if different, the country where the issuer is organized, should those same instructions be integrated into Regulation S-X to standardize how funds report that information in their financial statements and in Form N-PORT? [238]
  • Are there other categories of investments not specifically covered in Article 12 that should be specifically addressed in a new rule or directly addressed in rule 12-13D?
  • To what extent are proposed rules 12-13 through 12-13D consistent with industry practices? How are our proposed amendments different? Are there other industry practices that we should include in our proposal with respect to the disclosure of derivative investments?
  • The schedules to rules 12-13 through 12-13D use the term “description” to require funds to disclose the information sufficient for a user of financial information to identify the investment. Should the instructions to any of those rules be enhanced or modified to clarify what is meant by the term “description?” If so, how should these be enhanced or modified?
  • The schedules to rules 12-13 (Open option contracts written), 12-13B (Open forward foreign currency contracts), 12-13C (Open swap contracts), and 12-13D (Other investments) would require disclosure of the counterparty to the transaction for non-exchange traded instruments. Should we, as proposed, require disclosure of the counterparty to certain transactions? Should the exchange or clearing member be disclosed for exchange-traded derivatives? Are there any additional counterparty or exchange risks that should be disclosed? If so, why? Are there any confidentiality or other concerns with requiring the disclosure of counterparties?
  • We request comment on our proposed amendments to rule 12-13 (Open option contracts written). Should we require different or additional information about these contracts? Should any of the proposed information requirements be excluded? Is it appropriate to require disclosure of “notional amount” for option contracts? Is this metric useful to investors? Should we require the disclosures of open option contracts written to be grouped or subtotaled? For example, should we require over-the-counter option contracts to be grouped by counterparty?
  • As proposed, rule 12-13 would require disclosure of each option contract with an underlying investment that is an index or basket of investments whose components are not publicly available on a Web site and the notional amount of the holding exceeds one percent of the NAV of the fund. Are there better alternatives to disclose the underlying investments for an options contract if it consists of a custom basket of securities? If so, what alternatives and why? To the extent such indices are proprietary or subject to licensing agreements, what would be the effect of this requirement? For example, would funds incur costs for amending licensing agreements? Would index providers be unwilling to amend existing licensing agreements? If so, how would this impact funds that make such investments and the marketplace generally? Are there other concerns about disclosing the components of proprietary indices? Should we alter this requirement, and if so how? Is our exceeding one percent of the NAV disclosure threshold appropriate? Should there be a different disclosure threshold applied to an option contract's underlying investments? If so, what threshold and why? For example, should there be a disclosure threshold applied to individual holdings (e.g., if the notional amount of a single underlying investment in a custom basket is less than a certain percentage of a fund's net assets)? Should we use a different percentage for the disclosure threshold, such as exceeding five percent of the NAV? Alternatively, would summary disclosure be adequate to inform investors, similar to instruction 3 of rule 12-12C, which requires disclosure of the 50 largest issues and any other issue the value of which exceeded one percent of net asset value of the fund as of the close of the period? If so, how should such a disclosure be handled? If the reference asset is a modified version of an index whose components are publicly available on a Web site as of the fund's balance sheet date, for example a version that is customized to exclude certain issuers that the fund is restricted from owning, would requiring a narrative of those modifications be preferable to funds and investors rather than requiring each holding of the modified index to be listed?
  • We request comment on proposed rule 12-13A (Open futures contracts). Should we require different or additional information about these contracts? Should any of the proposed information requirements be excluded? Our proposed rule would require disclosure of notional amount and value on open futures contracts. Should we require disclosure of notional amount for futures contracts? Should we require disclosure of value for futures contracts? Should we require the disclosures of open futures contracts to be grouped or subtotaled? If so, how? For example, should we require open futures contracts to be organized by country of issuance?
  • We request comment on proposed rule 12-13B (Open forward foreign currency contracts). Should we require different or additional information about these contracts? Should any of the proposed information requirements be excluded? Rule 12-13B, as proposed, is limited to forward foreign currency contracts. Are there other types of forwards that should be addressed in this section that would not otherwise be presented as other derivative investments, such as swaps? Should we require the disclosures of open forward foreign currency contracts to be grouped or subtotaled? If so, how? For example, should we require open forward foreign currency contracts to be organized by currency or type of transaction (e.g., purchased or sold U.S. dollars)?
  • We request comment on proposed rule 12-13C (Open swap contracts). Should we require different or additional information about these contracts? Should any of the proposed information requirements be excluded? Instruction 1 to proposed rule 12-13C requires the schedule to be organized by descriptive title (e.g., credit default swaps, interest rate swaps). Should we require additional subgrouping of the schedules beyond what is already required? For example, should we Start Printed Page 33621require over-the-counter swaps to be grouped by counterparty?
  • Instruction 3 of proposed rule 12-13C contains examples of information that could be included for credit default swaps, interest rate swaps, and total return swaps. Is the example contained in proposed rule 12-13C adequate? Is there any other information that should be disclosed as part of the description for credit default swaps, interest rate swaps, and total return swaps? Are there other types of swaps that should be included as examples within proposed rule 12-13C? If so, what information should be included in the example?
  • As proposed, rule 12-13C would require disclosure of each investment with a referenced asset that is an index whose components are not periodically publicly available on a Web site and the notional amount of the holding exceeds one percent of the NAV of the fund. Are there better alternatives to disclose the underlying assets of a swap if it consists of a custom basket of securities? If so, what alternative and why? To the extent such indices are proprietary or subject to licensing agreements, what would be the effect of this requirement? For example, would funds incur costs for amending licensing agreements? Would index providers be unwilling to amend existing licensing agreements? If so, how would this impact funds that make such investments and the marketplace generally? Are there other concerns about disclosing the components of proprietary indices? Should we alter this requirement, and if so how? Is our exceeding one percent of the NAV disclosure threshold appropriate? Should there be a different disclosure threshold applied to a swap's referenced assets? If so, what threshold and why? For example, should there be a disclosure threshold applied to individual holdings (e.g., if the notional amount of a single underlying investment in a custom basket is less than a certain percentage of a fund's net assets)? Should we use a different percentage for the disclosure threshold, such as exceeding five percent of the NAV? Alternatively, would summary disclosure be adequate to inform investors, similar to instruction 3 of rule 12-12C, which requires disclosure of the 50 largest issues and any other issue the value of which exceeded one percent of net asset value of the fund as of the close of the period? If so, how should such a disclosure be handled? Should we include this disclosure requirement for other investments? For example, should we require funds to disclose the referenced asset for futures contracts or forward foreign currency contracts if their underlying investments are composed of an index or custom basket of securities?
  • We request comment on our proposed amendments in rule 12-13D (Investments other than those presented in rules 12-12, 12-12A, 12-12B, 12-13, 12-13A, 12-13B, and 12-13C). Should we require different or additional information about these contracts? Should any of the proposed information requirements be excluded?
  • We request comment on our proposed requirements in rules 12-13 through 12-13D that the fund identify investments which cannot be sold because of restrictions or conditions applicable to the investment. Is this requirement appropriate? Why or why not? Would this requirement assist investors and other interested parties with understanding the marketability of an investment? Why or why not?
  • We request comment on our proposed requirements in rules 12-13 through 12-13D that the fund identify investments whose fair value was determined using significant unobservable inputs. Is this requirement appropriate? Why or why not? Would this requirement assist investors and other interested parties with understanding risks associated with valuation?
  • Should we propose a disclosure relating to “investments not readily marketable” as is currently required by rule 12-13? Why or why not?
  • We request comment on our proposed requirements in rules 12-13 through 12-13D that the fund identify investments that are considered to be illiquid. Is this requirement appropriate? Why or why not? What are the costs and benefits associated with this requirement? Will independent accountants be able to audit this disclosure?
  • We request comment on our proposed disclosures based on cost for Federal income tax purposes under proposed rule 12-12A and rules 12-13 through 12-13D. Do these disclosures provide meaningful information for investors in addition to tax basis disclosures required under U.S. GAAP? What are the costs and benefits associated with providing this disclosure? Should our proposed disclosures be reported in a separate stand-alone disclosure or, as proposed, as a note to each separate schedule? Should we eliminate the current disclosure requirement to present tax-basis cost and unrealized appreciation and depreciation in both semi-annual and annual shareholder reports? Why or why not? As an alternative, should we make the tax-basis disclosure an annual requirement?

3. Amendments to Rules 12-12 Through 12-12C

While we are not proposing changes to the schedules for rules 12-12, 12-12A, and 12-12C, we are proposing certain additional rule instructions that would include new disclosures, as well as certain clarifying changes, including renumbering several of the schedules.

We are proposing several modifications to the instructions to rule 12-12, the rule concerning disclosure of investments in securities of unaffiliated issuers. We are proposing to modify instruction 2 to rule 12-12 (and the corresponding instructions to proposed rules 12-12A, 12-12B, 12-13D, and12-14) which would require funds to categorize the schedule by type of investment, the related industry, and the related country, or geographic region.[239] U.S. GAAP requires investment companies that are nonregistered investment partnerships to categorize investments in securities by type, country or geographic region, and industry.[240] In order to provide more transparency into the industry and the country or geographic region of a fund's investments in securities, we believe that the disclosures provided by funds should provide investors with the same categorization as nonregistered investment partnerships. We also believe that disclosure of both the industry and the country or geographic region would be particularly beneficial for investors in global and international funds, where currently funds are only required to categorize their schedule by industry, country, or geographic region, as it would provide additional transparency into the investments owned by the fund.

In order to provide more transparency to a fund's investments in debt securities, we are proposing an instruction to rule 12-12 requiring the fund to indicate the interest rate or preferential dividend rate and maturity rate for certain enumerated debt instruments.[241] When disclosing the interest rate for variable rate securities, we are proposing that the fund describe the referenced rate and spread.[242] In proposing disclosures for variable rate securities, we considered other alternatives, such as period-end interest rate (e.g. the investment's interest rate in effect at the end of the period). Start Printed Page 33622However, we believe that disclosure of both the referenced rate and spread allow investors to better understand the economics of the fund's investments in variable rate debt securities, such as the effect of a change in the reference rate on the security's income. This proposal is intended to result in more consistency across funds in disclosures of the interest rate for variable rate securities. For securities with payments-in-kind, we are proposing that the fund provide the rate paid in-kind in order to provide more transparency to investors when the fund is generating income that is not paid in cash.[243]

Our proposal would modify the current instruction to rule 12-12 [244] that requires a fund to identify each issue of securities held in connection with open put or call option contracts and loans for short sales, by adding the requirement to also indicate where any portion of the issue is on loan.[245] We believe that this disclosure would increase the transparency of the fund's securities lending activities. We are also proposing to modify current instruction 3 of rule 12-12 concerning the organization of subtotals for each category of investments, making the instructions consistent with those in proposed rule 12-12B (current rule 12-12C), Summary schedule of investments in securities of unaffiliated issuers.[246]

As in our proposed derivatives disclosures,[247] in order to increase transparency into the observability of inputs used in determining the value of individual investments, we are adding the requirement for funds to disclose those investments whose fair value was determined using significant unobservable inputs.[248] Here, as in our proposed derivatives disclosures, we would expect funds to identify each investment categorized in Level 3 of the fair value hierarchy in accordance with ASC Topic 820. We are also extending this requirement to proposed rules 12-12A and 12-12B.[249]

As in proposed rules 12-13 through 12-13D,[250] proposed instruction 10 to rule 12-12 would contain a requirement to identify each issue of illiquid securities.[251] Like other proposed rules, we believe that this requirement would provide investors with greater transparency and understanding of the liquidity of a fund's investments.[252]

Likewise, we are proposing several modifications to rule 12-12A regarding the presentation of securities sold short, in order to conform the instructions to proposed rule 12-12.[253]

Funds are permitted to include in their reports to shareholders a summary portfolio schedule, in lieu of a complete portfolio schedule, so long as it conforms with current rule 12-12C (Summary schedule of investments in securities of unaffiliated issuers).[254] In order to maintain numbering consistency and organization throughout the regulation, we are proposing to rename current rule 12-12C (Summary schedule of investments in securities of unaffiliated issuers) as rule 12-12B. As in rule 12-12 and 12-12A, we are not proposing to modify the schedule of proposed rule 12-12B (current rule 12-12C), but again added similar changes to its instructions.[255]

We request comment on our amendments to proposed rules 12-12 through 12-12B of Regulation S-X:

  • Are our proposed amendments to rule 12-12 through 12-12B appropriate? Are there other amendments to rules 12-12 through 12-12B that should be made to improve disclosures regarding the investments that would be reported under the rules? If so, what amendments and why?
  • We request comment on proposed amendments to rule 12-12 (Investments in securities of unaffiliated issuers). For variable rate securities, we propose to require disclosure of a description of the reference rate and spread (e.g., USD LIBOR 3-month + 2%). Is this requirement appropriate? Should we alternatively require disclosure of the period end interest rate?
  • We request comment on instruction 2 to proposed rule 12-12 (and the corresponding instructions to rules 12-12A, 12-12B, and 12-14) which would require funds to categorize the schedule by type of investment, the related industry, and the related country, or geographic region. Should we include this instruction in our proposed rules? What are the costs or benefits associated with such a requirement?
  • We request comment our proposed modifications in rules 12-12 and 12-12B that would require a fund to indicate where any portion of the issue is on loan. Should we include this requirement in our proposed rules? Why or why not?
  • We request comment on instruction 4 to proposed rule 12-12. Should we require funds to disclose the interest rate or preferential dividend rate and maturity rate for certain debt instruments? Are there any types of securities that should (or should not) be included in instruction 4's list of applicable debt instruments?
  • We request comment on our proposal to require a fund to disclose each issue of illiquid securities. Should we include this requirement in our proposed rules? Why or why not? Would the fund's independent accountants be able to audit this disclosure?
  • We request comment on our proposed requirements in rules 12-12, 12-12A, and 12-12B that the fund identify investments whose fair value Start Printed Page 33623was determined using significant unobservable inputs. Is this requirement appropriate? Why or why not? Would this requirement assist investors and other interested parties with understanding risks associated with valuation?
  • Are our amendments to proposed rules 12-12 through 12-12B consistent with industry practices? If not, how are our amendments different and what would be the costs and benefits associated with such differences? Are there other industry practices that we should include in our proposal?

4. Investments In and Advances to Affiliates

We are proposing amendments to rule 12-14 (Investments in and advances to affiliates).[256] Rule 12-14 requires a fund to make certain disclosures about its investments in and advances to any “affiliates” or companies in which the investment company owns 5% or more of the outstanding voting securities.[257] The rule currently requires that a fund disclose the “amount of equity in net profit and loss for the period” for each controlled company, but does not require disclosure of realized or unrealized gains or losses. Based upon staff experience, we believe that the presentation of realized gains or losses and changes in unrealized appreciation or depreciation would assist investors with better understanding the impact of each affiliated investment on the fund's statement of operations. As a result, we are proposing to modify column C of the schedule to rule 12-14 to require “net realized gain or loss for the period,” [258] and column D to require “net increase or decrease in unrealized appreciation or depreciation for the period” for each affiliated investment.[259]

Likewise, in instruction 6(e) and (f), we are proposing to require disclosure of total realized gain or loss and total net increase or decrease in unrealized appreciation or depreciation for affiliated investments in order to correlate these totals to the statement of operations.[260] Disclosure of realized gains or losses and changes in unrealized appreciation or depreciation, in addition to the current requirement to disclose the amount of income, would allow investors to understand the full impact of an affiliated investment on a fund's statement of operations.

Additionally, we are proposing a new instruction 7 in order to make the categorization of investments in and advances to affiliates consistent with the method of categorization used in proposed rules 12-12, 12-12A, and 12-12B.[261] We are also proposing several other modifications to the instructions to rule 12-14 in order to, in part, conform the rule to our proposed disclosure requirements in rules 12-12 and 12-13.[262]

We request comment on our proposed amendments to rule 12-14 of Regulation S-X:

  • Are our proposed amendments to rule 12-14 appropriate? Are there other amendments to rule 12-14 that should be made to improve disclosures regarding the investments that would be reported under the rule? If so, what amendments and why?
  • In proposed rule 12-14, we are no longer requiring information about the fund's equity in the profit or loss of each controlled portfolio company. Instead, we are proposing to require the realized gain or loss and change in unrealized appreciation or depreciation for all affiliated investments. Is this change appropriate? Is it still important to understand the equity in the profit or loss of each controlled company in addition to the controlled portfolio company's effect on the fund's statement of operations? Would the presentation of realized gains or losses and changes in unrealized appreciation or depreciation assist investors with better understanding the impact of each affiliated investment on the fund's statement of operations? Why or why not? Are there other changes to the disclosure of affiliated transactions that would better assist investors with understanding the impact of affiliated investments on the fund's statement of operations?
  • In addition to those discussed above, what are the costs and benefits associated with the proposed changes? Would the proposed changes under rule 12-14 reduce any burdens on filers? If so, how?
  • Are our amendments to proposed rule 12-14 consistent with industry practices? If not, how are our amendments different? Are there other industry practices that we should include in our proposal with respect to the disclosure of affiliated investments?

5. Form and Content of Financial Statements

Finally, we are proposing revisions to Article 6 of Regulation S-X, which prescribes the form and content of financial statements filed for funds. Many of the revisions we are proposing today are intended to conform Article 6 with our proposed changes to Article 12 and update other financial statement requirements.[263] As part of these changes, we are proposing to modify the title and description of Article 6 from “Registered Investment Companies” to “Registered Investment Companies and Business Development Companies” to clarify that BDCs are subject to Article 6 of Regulation S-X.[264] This does not Start Printed Page 33624change existing requirements for BDCs.[265]

In order to allow a more uniform presentation of investment schedules in a fund's financial statements, we are proposing to rescind subparagraph (a) of rule 6-10 under Regulation S-X, regarding which schedules are to be filed.[266] We believe that a fund and its consolidated subsidiaries should present their consolidated investments for each applicable schedule, without indicating which are owned directly by the fund or which are owned by the consolidated subsidiaries.

Moreover, current rule 6-10(a) provides that if the information required by any schedule (including the notes thereto) is shown in the related financial statement or in a note thereto without making such statement unclear or confusing, that procedure may be followed and the schedule omitted.[267] We believe that some funds may have interpreted this guidance as allowing presentation of some Article 12 schedules (e.g., rules 12-13 and 12-14) in the notes to the financial statements, as opposed to immediately following the schedules required by rules 12-12, 12-12A, and 12-12C, and are therefore proposing to eliminate rule 6-10(a). In light of the increased use of derivatives by funds, we believe that all schedules required by rule 6-10 should be presented together within a fund's financial statements, and not in the notes to the financial statements. We recognize that our proposal would change current practice for some funds but believe that, coupled with more detailed disclosure rules for derivatives, this amendment would provide more consistent disclosure and improve the usability of financial statements for investors.[268]

We are also proposing changes to rules 6-03 and 6-04 to specifically reference the investments required to be reported on separate schedules in amended Article 12.[269] Additionally, we are proposing to eliminate current rule 6-04.4, which requires disclosure of “Total investments” on the balance sheet under “Assets,” recognizing that investments reported under proposed rules 12-13A through 12-13D could potentially be presented under both assets and liabilities on the balance sheet.[270] For example, a fund may hold a forward foreign currency contract with unrealized appreciation and a different forward foreign currency contract with unrealized depreciation. The fund presents on its balance sheet an asset balance for the contract with unrealized appreciation and a liability balance for the contract with unrealized depreciation. Totaling the amounts of investments reported under assets could be misleading to investors in this example, or in other examples where a fund holds derivatives in a liability position (e.g., unrealized depreciation on an interest rate swap contract). A “Total investments” amount in the Assets section of the fund's balance sheet would include the fund's investments in securities and derivatives that are in an appreciated position, but it would not include the unrealized depreciation on the interest rate swap contract, which would be classified under the Liabilities section of the fund's balance sheet. Given the increasing use of derivatives by funds, we believe eliminating current rule 6-04.4 would provide more complete information to investors. We are also proposing a corresponding change in rule 6-03(d) to remove the reference to “total investments reported under [rule 6-04.4].” [271]

We are also proposing to amend rule 6-04 to refer individually to our derivatives disclosures in proposed rules 12-13A through 12-13C.[272] As is currently the case, these proposed amendments are not meant to require gross presentation where netting is allowed under U.S. GAAP.[273] For example, if a fund held a forward foreign currency contract which had unrealized appreciation and another forward foreign currency contract which had unrealized depreciation, the fact that forward foreign currency contracts are mentioned in proposed rules 6-04.3(b) and 6-04.9(d) is not meant to require both contracts to be presented gross on the balance sheet if netting were allowed under U.S. GAAP.

Proposed rule 6-05.3 would also specifically require presentation of items relating to investments other than securities in the notes to financial statements.[274] Current rule 6-05.3 only requires presentation in the notes to financial statements of disclosure required by rules 6-04.10 through 6-04.13, which include information relating to securities sold short and open option contracts written.[275] Our proposal would also amend rule 6-05.3 to require fund financial statements to reflect all unaffiliated investments other than securities presented on separate schedules under Article 12.[276]

We are also proposing to add new disclosure requirements that are designed to increase transparency to investors about certain investments and activities. First, we are proposing to add new subsection (m) to rule 6-03 that would require funds to make certain disclosures in connection with a fund's securities lending activities and cash collateral management.[277] Specifically, we are proposing to require disclosure of (1) the gross income from securities lending, including income from cash collateral reinvestment; (2) the dollar amount of all fees and/or compensation paid by the registrant for securities lending activities and related services, including borrower rebates and cash collateral management services; (3) the net income from securities lending activities; (4) the terms governing the compensation of the securities lending agent, including any revenue sharing split, with the related percentage split between the registrant and the securities lending agent, and/or any fee-for-service, and a description of services included; (5) the details of any other fees paid directly or indirectly, including any fees paid directly by the registrant for cash collateral management and any management fee deducted from a pooled investment vehicle in which cash collateral is invested; and (6) the monthly average of the value of portfolio securities on loan.[278] We believe that these proposed disclosures would allow investors to better understand the income generated from, as well as the expenses associated with, securities lending activities. Second, our proposal would also amend rule 6-07 to require funds to make a separate disclosure for income from Start Printed Page 33625non-cash dividends and payment-in-kind interest on the statement of operations.[279] Our proposed amendment to rule 6-07 is intended to increase transparency for investors in order to allow them to better understand when fund income is earned, but not received, in the form of cash.

We are proposing to amend rule 6-07.7(a) in order to conform statement of operations disclosures of the net realized gains or losses from investments to include our additional derivatives disclosures in proposed rules 12-13A through 12-13C.[280] Likewise, we are proposing similar changes to proposed 6-07.7(c) (current rule 6-07.7(d)) in order to conform statement of operations disclosures of the net increase or decrease in the unrealized appreciation or depreciation of investments to include our new derivatives disclosures.[281] We recognize that Regulation S-X, which organizes net realized gains and losses (and net increases or decreases in the unrealized appreciation or depreciation) by investment type, diverges from our approach in proposed Form N-PORT, which organizes net realized gain or loss and net change in unrealized appreciation or depreciation attributable to derivatives by each instrument's primary underlying risk exposure.[282] While we believe that organizing these disclosures by exposure type, which are derived from ASC Topic 815, are appropriate for Form N-PORT; we also believe that it is more appropriate for statement of operations disclosures to be organized by major types of investment transactions, as doing so would be consistent with the types of investments requiring separate schedules in Article 12 and allow investors to relate the disclosures in the schedule of investments with the statement of operations.[283]

We are also proposing to eliminate Regulation S-X's requirement for specific disclosure of written options activity under current rule 6-07.7(c).[284] This provision was adopted prior to FASB adopting disclosures generally applicable to derivatives, including written options, now required by ASC Topic 815.[285] We are proposing that the requirement for specific disclosures for written options activity be removed because they are generally duplicative of the requirements of ASC Topic 815, which include disclosure of the fair value amounts of derivative instruments, gains and losses on derivative instruments, and information that would enable users to understand the volume of derivative activity.[286]

We are also proposing to eliminate the exception in Schedule II of current rule 6-10 which does not require reporting under current rule 12-13 if the investments, at both the beginning and end of the period, amount to one percent or less of the value of total investments.[287] We believe that it is appropriate to propose eliminating this exception, because a fund may have significant notional amount in its portfolio that could be valued at one percent or less of the value of total investments. Accordingly, removing this exception would provide more transparency to investors regarding a fund's derivatives activity.

We request comment on our proposed changes to Article 6 of Regulation S-X.

  • Are our proposed amendments to Article 6 of Regulation S-X appropriate? If not, which amendments are not appropriate and why? Are there other amendments to Article 6 of Regulation S-X that we should propose? If so, what amendments and why?
  • Are there alternative methods of presentation of derivatives that we should consider, rather than the proposed requirement that all schedules be presented in the same location? If so, what method and why is it preferable?
  • As we discussed above, among others, our basis for proposing to eliminate rule 6-10(a) was our belief that a fund and its consolidated subsidiaries should present their consolidated investments for each applicable schedule, without indicating which are owned directly by the fund and which are owned by the consolidated subsidiaries. Is this proposed change appropriate? Why or why not? Should we require different or additional information about consolidated investments?
  • We request comment on our proposal to eliminate rule 6-04.4, which requires disclosure of “Total investments” on the balance sheet under “Assets,” and the corresponding reference to rule 6-04.4 in rule 6-03(d). Are these proposed changes appropriate? Why or why not? Would eliminating current rule 6-04.4 provide more complete information to investors?
  • We request comment on our proposal to amend rule 6-05.3 to specifically require presentation of items relating to investments other than securities in the notes to the financial statements, as well as require fund financial statements to reflect all unaffiliated investments presented on separate schedules under Article 12. Are our proposed changes appropriate? Why or why not?
  • Would the disclosure required under proposed rule 6.03(m) concerning income and expenses in connection with securities lending activities provide meaningful information to investors or other potential users? For example, would the disclosures regarding compensation and other fee and expense information relating to the securities lending agent and cash collateral manager be useful to fund boards in evaluating their securities lending arrangements? Would these disclosures be sufficient for this purpose, or would additional information be necessary, for example, to put the fee and expense information in context (e.g., the nature of the services provided by the securities lending agent and cash collateral manager)? Should the Commission instead require that these or other similar disclosures, be provided elsewhere in the fund's financial statements (e.g., the Statement of Operations), or provided as part of other disclosure documents (e.g., the Statement of Additional Information) or reporting forms (e.g., proposed Form N-CEN)? Why or why not?
  • Is the proposed disclosure under rule 6-07.1 for non-cash dividends and payment-in-kind interest on the statement of operations meaningful to investors or other potential users of the fund's financial statements? Should all non-cash interest be disclosed, including amortization and accretion, or should just payment-in-kind interest be disclosed?
  • Do our proposed amendments to rules 6-07.7(a) and 6-07.7(c) omit any classifications of gains or loss or changes in unrealized appreciation or Start Printed Page 33626depreciation that should be disclosed? If so, which categories and why?
  • We request comment on our proposal to eliminate Regulation S-X's requirements for specific disclosure of written options activity under rule 6-07.7(c). Does the current requirement for specific disclosure of written options activity under rule 6-07.7(c) provide a user of financial statements with sufficient incremental benefit to merit retaining this disclosure in addition to the disclosures required by ASC Topic 815? Why or why not?
  • Proposed rule 6-10(b) would no longer allow funds to omit the schedule of investments other than securities if the investments, other than securities, at both the beginning and end of the period amount to one percent or less of the value of total investments. Is this change appropriate? Are there any costs associated with this change? If so, what are they?
  • Are our amendments to Article 6 of Regulation S-X generally consistent with industry practices, except where specifically noted in the discussion above? If not, how are our amendments different? Are there other industry practices that we should include in our proposal with respect to the form and content of financial statements?

D. Option for Web Site Transmission of Shareholder Reports

1. Overview

The Commission is proposing new rule 30e-3 under the Investment Company Act, which would, if adopted, permit, but not require, a fund to satisfy requirements under the Act and rules thereunder to transmit reports to shareholders if the fund makes the reports and certain other materials accessible on its Web site. Reliance on the rule would be subject to certain conditions, including conditions relating to (1) the availability of the shareholder report and other required information, (2) prior shareholder consent, (3) notice to shareholders of the availability of shareholder reports, and (4) shareholder ability to request paper copies of the shareholder report or other required information.

This new option is intended to modernize the manner in which periodic information is transmitted to shareholders. We believe it would improve the information's overall accessibility while reducing burdens such as printing and mailing costs borne by funds, and ultimately, by fund shareholders. As described below, today's proposal draws on the Commission's experience with use of the Internet as a medium to provide documents and other information to investors. The proposal is supported by recent Commission investor testing efforts and other empirical research concerning investors' preferences about report transmission methods and use of the Internet for financial and other purposes generally. At the same time, the Commission recognizes that empirical research, discussed below, demonstrates that some investors continue to prefer to receive paper reports. The proposal therefore incorporates a set of protections intended to avoid investor confusion and protect the ability of investors to choose their preferred means of communication.

Reliance on the rule would be optional. Funds that do not maintain Web sites or that otherwise wish to transmit shareholder reports in paper or pursuant to the Commission's existing electronic delivery guidance would continue to be able to satisfy transmission requirements by those transmission methods. Furthermore, under the rule as proposed, a fund relying on the rule to satisfy shareholder report transmission obligations with respect to certain shareholders would not be precluded from transmitting shareholder reports to other shareholders pursuant to the Commission's electronic delivery guidance. We expect that funds would continue to rely on the Commission's guidance to electronically transmit reports to shareholders who have elected to receive reports electronically, and rely on the rule with respect to shareholders who have not so elected (i.e., those who currently receive printed shareholder reports by mail).

2. Discussion

Funds are generally required to transmit reports to shareholders on a semiannual basis.[288] Historically, these reports have been printed and mailed to shareholders. With advances in technology and, in particular, the increasing use of the Internet as a medium through which information, financial or otherwise, is made accessible, we have previously issued guidance describing the circumstances under which transmission of disclosure documents may be effected through electronic means.[289] Under that guidance, funds may transmit documents electronically provided that a number of conditions related to shareholder notice, access, and evidence of delivery are met.[290]

Recent investor testing and Internet usage trends have highlighted that preferences about electronic delivery of information have evolved, and that many investors would prefer enhanced availability of fund information on the Internet. For example, investor testing sponsored by the Commission and conducted in 2011 [291] suggested that an Start Printed Page 33627investor looking for a fund's annual report is most likely to seek it out on the fund's Web site, rather than request it by mail or phone or by retrieving it from the Commission's EDGAR system.[292] Many investors indicated that they would prefer that fund information be made available in both electronic and print versions, with a plurality of respondents preferring electronic transmission by email with the option to easily request a print copy of a particular report, though a significant minority indicated that they would still prefer to receive a print copy through the mail.[293]

In the time since this investor testing was conducted, access to and use of the Internet has continued to increase significantly, including among demographic groups that have previously been less apt to use the Internet. For example, a study conducted by the Pew Research Center's Internet & American Life Project in 2013 found that only 15% of American adults ages 18 and older do not use the Internet or email—falling from 26% in 2011, when our investor testing was conducted, and from 39% a decade before in 2001.[294] These researchers also found that for the first time in 2012, more than half of adults over the age of 64 used the Internet, a figure that climbed to 59% in 2013.[295]

These trends have also extended to use of the Internet for financial purposes. For example, a recent survey by the Investment Company Institute found that in 2014, 94% of U.S. households owning mutual funds had Internet access (up from 68% in 2000), with widespread use among various age groups, education levels and income levels.[296] The year before, the Investment Company Institute found that 82% of U.S. households owning mutual funds used the Internet for financial purposes.[297]

Given the evolving preferences and trends in Internet usage, in particular with regard to the delivery of financial information, we believe that it is appropriate to propose a rule that would permit the Web site transmission of fund shareholder reports, while maintaining the ability of shareholders who prefer to receive reports in paper to receive reports in that form. Funds and their shareholders would benefit from the reductions in related printing and mailing costs. Also, the rule, as proposed, would consolidate current and historical portfolio holdings information in one location (i.e., a particular Web site, as opposed to having some information on one Web site and other information on EDGAR), whereas currently, funds are not required to transmit or otherwise make accessible to investors holdings information as to the first and third fiscal quarters.[298]

Although we believe the proposed rule would benefit many investors, we recognize that there are concerns associated with how some investors may be affected. For example, as discussed above, investor testing suggests that a significant minority of investors prefer to receive paper reports and that some demographic groups of investors may be less likely to use the Internet. Some of these investors might not fully understand the actions they would need to take under the proposed rule to continue to receive their reports in paper. We believe that it is critical that these investors continue to receive disclosure in a means that is convenient and accessible for them. In addition, there is a risk that even some investors that prefer to use the Internet might be less likely to review reports electronically than they would in paper. We also believe it is critical that the proposed rule communicate the importance of the information that would be made available on the Web site.

Accordingly, as discussed below, the proposed rule would include certain safeguards for investors who wish to continue to receive shareholder reports in paper, by requiring prior consent of investors, and continuing to make shareholder reports and other required information available in paper upon request. The proposed rule would also include requirements intended to emphasize the importance of the information available on the Web site. These protections are intended to maintain the ability of investors who prefer to receive reports in paper to continue to do so without confusion, as well as to provide to investors clear and prominent printed notifications each time a new shareholder report is made available online. We request comment below on the potential concerns articulated above, as well as the steps we are proposing to address them while capturing the potential benefits for investors and funds of electronic communication.

3. Rule 30e-3

As proposed, new rule 30e-3 would provide that a fund's annual or semiannual report to shareholders would be considered transmitted to a shareholder of record if certain conditions set forth in the rule are satisfied as to (a) availability of the report and other materials, (b) shareholder consent, (c) notice to shareholders, and (d) delivery of materials upon request of the shareholder.[299] As discussed below, these conditions are generally consistent with similar conditions in other rules adopted by the Commission, including its rules regarding the use of a summary prospectus, internet delivery of proxy materials, and “householding” of certain disclosure documents.

a. Availability of Report and Other Materials

Under the rule as proposed, the fund's report to shareholders under rule 30e-1 or 30e-2 would be required to be publicly accessible, free of charge, at a Start Printed Page 33628specified Web site address.[300] The report would need to be accessible beginning no later than the date of the transmission in reliance on this option, and ending no earlier than the date when the fund next “transmits” a report required by rule 30e-1 or 30e-2.[301] This requirement is intended to provide shareholders with the opportunity for ongoing access from the date of intended transmission until the date that the fund transmits its next shareholder report.[302]

In addition to the most current shareholder report, the rule as proposed would require that the fund post on its Web site (1) any previous shareholder report transmitted to shareholders of record within the last 244 days,[303] and (2) in the case of a fund that is not a money market fund or an SBIC, the fund's complete portfolio holdings as of the close of its most recent first and third fiscal quarters, if any, after the date on which its registration statement became effective.[304] In addition, a fund that is not a money market fund or an SBIC would be required to make its portfolio holdings as of the end of the next fiscal quarter accessible in the same manner within 60 days after the close of that period.[305] We are proposing exceptions to the posting requirement of first and third fiscal quarter portfolio holdings schedules for money market funds and SBICs because money market funds are currently required to post certain portfolio holdings and other information on their Web sites pursuant to rule 2a-7,[306] and because SBICs are neither currently required to file reports on Form N-Q,[307] nor would SBICs be required to file reports on proposed Form N-PORT.[308]

These materials would also be required to be publicly accessible in the same manner and for the same time period as the current shareholder report.[309] We are proposing this requirement so that shareholders have access to a complete year of portfolio holdings information in one location (i.e., the Web site on which the report transmitted under the proposed rule is made accessible), rather than have to separately access portfolio holdings information for the first and third quarters by accessing the fund's reports on Form N-PORT for those periods.

To conform the form and content of the portfolio holdings schedules for the first and third quarters to those schedules presented in the fund's shareholder reports for the second and fourth quarters, the proposed rule would require the schedules for the first and third quarters to be presented in accordance with the schedules set forth in §§ 210.12-12—12-14 of Regulation S-X [17 CFR 210.12-12—12-14], which need not be audited.[310] As discussed above, we have also proposed to require that these materials be filed as exhibits to Form N-PORT, regardless of whether the fund intends to rely on the rule to satisfy its shareholder report transmission obligations.[311]

These Web site portfolio disclosure requirements would be generally consistent with funds' current disclosure obligations under Regulation S-X for reports filed on Forms N-Q and N-CSR.[312] Accordingly, we anticipate that most funds would have established procedures in place to report and validate such disclosures, and that funds would be familiar with these disclosure requirements. These Web site portfolio disclosure requirements are also intended to provide disclosures that would be easily understood and familiar to investors, because these disclosures would contain similar information and would be presented in a similar manner as those currently included in shareholder reports.

Proposed rule 30e-3 would require compliance with certain conditions designed to ensure the accessibility of shareholder reports and other required materials.[313] First, the Web site address on which the shareholder reports and other required portfolio information are made accessible could not be the Commission's Web site address for electronic filing.[314] Second, the materials required to be posted on the Web site would have to be presented in a format that is convenient for both reading online and printing on paper, and persons accessing the materials would have to be able to permanently retain (free of charge) an electronic copy of the materials in this format.[315] These conditions are designed to ensure that shareholder reports and other information posted on a fund's Web site pursuant to the proposed rule are user-friendly and allow shareholders the same ease of reference and retention abilities they would have with paper copies of the information.

Third, the rule as proposed would include a safe harbor provision that would allow a fund to continue relying on the rule even if it did not meet the posting requirements of the rule for a temporary period of time.[316] In order to rely on this safe harbor, a fund would be required to have reasonable procedures in place to ensure that the required materials are posted on its Web site in the manner required by the rule and take prompt action to correct noncompliance with these posting requirements.[317] We are proposing this safe harbor because we recognize that there may be times when, due to events beyond a fund's control, such as system outages or other technological issues, natural disasters, acts of terrorism, pandemic illnesses, or other circumstances, a fund is temporarily not Start Printed Page 33629in compliance with the Internet posting requirements of the rule.[318]

b. Shareholder Consent

While we believe that many investors would prefer electronic transmission of shareholder reports based on investor testing and Internet usage trends, we also acknowledge that there likely will be investors that may continue to prefer receiving shareholder reports in paper.[319] To maintain the ability of those shareholders to receive paper copies of their shareholder reports, the rule as proposed would require that a fund obtain shareholder consent prior to relying on the rule to satisfy transmission obligations with respect to a particular shareholder.[320] Specifically, rule 30e-3 as proposed would permit electronic transmission of shareholder report to a particular shareholder only if the shareholder has either previously consented to this method of transmission,[321] or has been determined to have provided implied consent under certain conditions specified in the rule.[322] Under the proposed rule, each series of a registrant offering multiple series would need to obtain separate consent as to a shareholder, regardless of whether consent was obtained from that shareholder by other series offered by that registrant.[323]

To obtain implied consent as to a shareholder, the fund would be required to transmit to the shareholder a separate written statement (“Initial Statement”), at least 60 days before it begins to rely on the rule, notifying the shareholder of the fund's intent to make future shareholder reports available on the fund's Web site until the shareholder revokes consent.[324] As proposed, the Initial Statement must be written using plain English principles so that it will be easily understood by most investors [325] and:

  • State that future shareholder reports will be accessible, free of charge, at a Web site; [326]
  • explain that the fund will no longer mail printed copies of shareholder reports to the shareholder unless the shareholder notifies the fund that he or she wishes to receive printed reports in the future; [327]
  • include a toll-free telephone number and be accompanied by a reply form that is pre-addressed with postage-paid and that includes the information that the fund would need to identify the shareholder, and explain that the shareholder can use either of those two methods at any time to notify the fund that he or she wishes to receive printed reports in the future; [328]
  • state that the fund will mail printed copies of future shareholder reports within 30 days after the fund receives notice of the shareholder's preference; [329] and
  • contain a prominent legend in bold-face type that states: “How to Continue Receiving Printed Copies of Shareholder Reports.” [330]

The Initial Statement is designed to permit funds to infer that a shareholder has consented to electronic transmission of future shareholder reports by alerting the shareholder to the fact that the shareholder will no longer receive printed copies in the future unless the shareholder notifies the fund that he or she wishes to receive print copies of such reports in the future. Because of the importance of this information, in addition to the required prominent legend on the envelope in which the Initial Statement is delivered or on the Initial Statement itself, the proposed rule would require certain conditions intended to ensure that the Initial Statement is not obscured by other materials. Specifically, the proposed rule would require that the Initial Statement could not be incorporated into or combined with another document,[331] nor could it be sent along with other shareholder communications (with the exception of the fund's current summary prospectus, statutory prospectus, statement of additional information, or Notice of Internet Availability of Proxy Materials under rule 14a-16 under the Exchange Act).[332]

If the fund does not receive the reply form or other notification indicating that a particular shareholder wishes to continue to receive paper reports by mail within 60 days after the fund sends the Initial Statement, then the fund may begin to transmit shareholder reports to that shareholder electronically, provided that it meets the other conditions of the rule.[333]

c. Notice

Proposed rule 30e-3 would require funds relying on the rule with respect to a shareholder who has consented to electronic transmission pursuant to the conditions of paragraph (c)(1) of the rule to send a notice (“Notice”) within 60 days of the close of the fiscal period to which the report relates.[334] The proposed requirements for a Notice largely mirror the notice requirements under the Commission's rules mandating the posting of proxy materials online.[335]

As proposed, the Notice, like the Initial Statement, would be required to Start Printed Page 33630be written using plain English principles so that it will be easily understood by most investors.[336] and:

  • Contain a prominent legend in bold-face type stating that an important report to shareholders is available online and in print by request; [337]
  • state that each shareholder report contains important information about the fund, including its portfolio holdings, and is available on the Internet or, upon request, by mail, and encouraging shareholders to access and review the report; [338]
  • include a Web site address that leads directly to each report the fund is transmitting to the recipient shareholder in reliance on rule 30e-3; [339]
  • include the Web site address where the shareholder report and other required portfolio information is posted; [340]
  • provide instructions on how a shareholder may request, at no charge, a paper copy of the shareholder report or other materials required to be made accessible online, and an indication that the shareholder will not receive a paper copy of the report unless requested; [341] and
  • include a toll-free telephone number and must be accompanied by a reply form that is pre-addressed with postage-paid and that includes the information that the fund would need to identify the shareholder, and explain that the shareholder can use either of those two methods at any time to notify the fund that he or she wishes to receive printed reports in the future.[342]

The proposed Notice is designed to alert shareholders to the availability of a shareholder report online and to provide shareholders with information on how to obtain a paper copy of the report if they should want one. We believe it is important to limit the information in the Notice and the other materials sent along with the Notice in order to ensure that shareholders are made aware of the availability of a shareholder report and so that the availability of the report does not become obscured. Therefore, the rule as proposed would limit the information contained in the Notice to the information required by the rule.[343] The Notice also could not be incorporated into or combined with another document,[344] nor could it be sent along with other shareholder communications (with the exception of the fund's current summary prospectus, prospectus, statement of additional information, or Notice of Internet Availability of Proxy Materials under rule 14a-16 under the Exchange Act).[345]

Similar to the Commission's rules on householding prospectuses, shareholder reports, and proxy statements and information statements,[346] proposed rule 30e-3 also would allow funds to send one Notice to shareholders who share an address so long as the fund addresses the Notice to the shareholders individually or as a group.[347] In addition, the proposed rule would require funds to file a form of the Notice with the Commission not later than 10 days after the Notice is sent to shareholders.[348] This filing would occur on a new EDGAR submission type which would be created by the Commission. We believe the Notice filing requirement would assist us in overseeing compliance with the rule.

d. Delivery Upon Request

Proposed rule 30e-3 would also require, as a condition to reliance on the rule to transmit shareholder reports electronically, that the fund (or a financial intermediary through which shares of the fund may be purchased or sold) must send, at no cost to the requestor and by U.S. first class mail or other reasonably prompt means, a paper copy of any of the materials discussed above—viz., the fund's most recent annual and semiannual reports, and the fund's portfolio holdings as of its most recent first and third fiscal quarters—to any person requesting such a copy within three business days after receiving a request for a paper copy.[349] This requirement is intended to allow for investors to receive shareholder reports and portfolio information in print format, if they so prefer, even if they have consented to electronic transmission without revoking the consent.[350]

e. Prospectuses and Statements of Additional Information Transmitted Under Rule 30e-1(d)

Rule 30e-1(d) under the Investment Company Act permits an open-end management investment company to transmit a copy of its prospectus or statement of additional information in place of its shareholder report, if it includes all of the information that would otherwise be required to be contained in the shareholder report.[351] We recognize that the nature and purpose of the fund prospectus is different from that of fund shareholder reports. Accordingly, at this time, we are not proposing to permit a similar regime for fund prospectus delivery obligations under the Securities Act. As a result, we do not believe that it would be appropriate to permit the transmission of statutory prospectuses in the manner provided under the proposed rule. Therefore, the proposed rule would not be available to a fund seeking to transmit a copy of its currently effective statutory prospectus or statement of additional, or both, as permitted by paragraph (d) of rule 30e-1.[352]

4. Use of Summary Schedule of Investments

Under the current rules, in lieu of providing a complete schedule of portfolio investments as part of the financial statements included in its shareholder report, a fund may provide a summary schedule of portfolio investments (“Summary Schedule”).[353] Pursuant to Rule 12-12C of Regulation S-X, the Summary Schedule generally must list separately the 50 largest issues and any other issue the value of which Start Printed Page 33631exceeded one percent of the net asset value of the fund at the close of the period.[354]

We believe that use of the summary schedule may be unnecessary,[355] and in particular, may be potentially confusing or cumbersome to investors seeking to access the fund's complete portfolio holdings.[356] For these reasons, we are proposing amendments to our registration forms that would restrict funds relying on proposed rule 30e-3 from providing a Summary Schedule in their shareholder reports in lieu of a complete schedule.[357]

5. Related Disclosure Amendments

We are also proposing some related amendments to certain of our rules and forms. First, we are proposing to amend rule 498 under the Securities Act, which concerns the use of a summary prospectus,[358] to require funds relying on proposed rule 30e-3 to include as part of the legend on the cover page of the fund's summary prospectus the Web site address required to be included in the Notice.[359] As proposed, the Web site address that leads to shareholder report information could be the same as the Web site address that leads to prospectus information, provided that the other conditions of each rule are met, but funds would also be permitted to use different Web site addresses for each type of material and provide both addresses in the legend.[360] This requirement is intended to provide investors an additional reminder of the availability of shareholder report and related portfolio holdings information on the fund's Web site.

Second, we are proposing to amend rule 498 under the Securities Act and rule 14a-16 under the Exchange Act to include an Initial Statement or Notice that would be required by proposed rule 30e-3 among the materials that are permitted to accompany and have equal or greater prominence than the summary prospectus prepared in reliance on rule 498 and a notice of Internet availability of proxy materials.[361] These amendments are intended to permit a fund's Initial Statement and Notice to be sent with its summary prospectus or notice of Internet availability of proxy materials if the fund wishes to send them in that manner.[362]

6. Requests for Comment

We request comments on our proposal that would permit electronic transmission of shareholder reports.

  • To what extent are funds currently relying on the Commission's guidance on the use of electronic media to deliver or transmit disclosure documents and other information to shareholders? To what extent have shareholders elected to receive disclosure documents and other information in general, and shareholder reports in particular, through electronic means? In the case of shareholders who have elected electronic delivery of disclosure documents in general, and delivery of shareholder reports in particular, to what extent are those shareholders accessing those materials online? Please provide supportive data to the extent available.
  • If proposed rule 30e-3 is adopted, to what extent would funds (i) choose to rely on the rule, and (ii) continue to rely on guidance concerning electronic transmission that we have already issued?
  • Would availability of the rule change in any way current industry practices on transmitting shareholder reports electronically? For example, we expect that funds would continue to rely on the Commission's guidance to electronically transmit reports to shareholders who have elected to receive reports electronically, and rely on the rule with respect to shareholders who have not so elected. For administrative or other purposes, would funds discontinue their reliance on the Commission's guidance and instead rely on the rule to transmit reports electronically with respect to their entire shareholder base? If so, why? What impact, if any, would the proposed rule have on the transmission of reports to shareholders of UITs required to transmit reports pursuant to rule 30e-2 under the Investment Company Act? What impact, if any, would the proposed rule have on the transmission of reports to shareholders holding fund shares through financial intermediaries or other omnibus type arrangements? Should we permit funds that rely on rule 30e-3 to continue to rely on prior electronic transmission guidance for certain of their shareholders? Why or why not?
  • If rule 30e-3 is adopted as proposed, in the case of funds relying on the rule to transmit reports electronically to one or more shareholders, would funds nonetheless seek shareholder consent to transmit reports to those shareholders pursuant to the Commission's electronic guidance in lieu of the rule? Why or why not?
  • Should we, as we have proposed, allow funds to transmit reports to shareholders electronically by making them accessible on a Web site? Would investors prefer that these materials be transmitted in this manner? What would be the effect of proposed rule 30e-3 on the ability of investors to access shareholder reports? Would the shareholder report information be more useful or less useful if transmitted in the manner proposed? Would investors be more aware or less aware of the availability of the information if transmitted in reliance on the proposed rule?
  • Would any positive or negative effect of the proposed rule on investors be disproportionately greater for certain investors than for others? If so, which investors would be disproportionately affected, to what extent, and how would such effects manifest? What, if any, additional measures could help mitigate any such disproportionate effects? Please provide supportive data to the extent available.
  • Rule 30e-3 as proposed contains a number of conditions to be satisfied for reliance on the rule. Are the proposed conditions appropriate? Are there conditions that should be added or are any of the proposed conditions inappropriate? If so, state the conditions and the reasons why.
  • The rule as proposed would require that the materials required to be accessible online be publicly accessible, free of charge, at the Web site specified in the Notice, and does not expressly require that the Web site be the fund's Web site. Should the rule require that the materials be accessible at the fund's Web site? Why or why not?
  • What materials should be required to be accessible in order for a fund to rely on the rule? For example, we have proposed that a fund relying on the rule would be required to make accessible the shareholder report, the shareholder report for the prior period, and in the case of a fund that is a management Start Printed Page 33632company other than a money market fund or an SBIC, the complete portfolio holdings for the most recent first and third fiscal quarters. Is it appropriate to require funds to post holdings information covering a full year? Should we require information be posted covering a longer period or a shorter period? If so, why? Should money market funds and SBICs relying on the rule be required to post complete portfolio holdings for the first and third quarters? Why or why not?
  • The rule as proposed would require that the materials made accessible on the Web site be presented in a format or formats that are convenient for both reading online and printing on paper. Is the proposed format requirement appropriate? Are there liability or other concerns that would arise in connection with meeting a fund's obligation to transmit shareholder reports under Section 30(e) and the rules thereunder? Should we instead require that the materials be presented in a format or formats that are human-readable and capable of being printed on paper in human-readable format? Why or why not?
  • How soon should each of the materials be required to be accessible, and how long should each be required to remain accessible?
  • The proposed rule would contain a safe harbor for instances in which the materials required to be made accessible are not available for a temporary period of time. Is the safe harbor as proposed appropriate, or should it be modified? For example, should the rule be more proscriptive as to the period of time in which action must be taken to resolve any issues?
  • Should we require the Web site on which the proposed rule's required materials are made accessible to incorporate safeguards to protect the anonymity of its visitors? For example, should we require similar conditions to those provided in rule 14a-16 under the Exchange Act relating to Internet availability of proxy materials? Why or why not? If so, what specific requirements should we consider?
  • Should the proposed rule require that a shareholder consent to electronic transmission of shareholder reports before a fund begins to rely on the rule? Should we permit funds to obtain implied consent, as proposed, or should we require funds to receive express consent? Are there certain circumstances in which funds should not be permitted to obtain implied consent? For example, if an investor upon opening a new account does not opt-in to electronic delivery of documents, should the fund be permitted nonetheless to seek to rely on the proposed rule as to that shareholder? Why or why not?
  • Under the proposed rule, each series of a registrant offering multiple series would need to obtain separate consent as to a shareholder, regardless of whether consent was obtained from that shareholder by other series offered by that registrant. If a fund has obtained implied consent from a shareholder as to a particular series, and subsequently the shareholder invests in one or more other series offered by the fund, should the fund be required to obtain consent as to those other series, or should the fund be permitted to infer consent as to all series offered by the fund? Why or why not? Should the fund be permitted to infer consent as to only other series offered by the registered investment company, or should the fund be permitted to infer consent as to other funds within the fund complex? What, if any, are the special considerations relating to investors who invest through intermediaries?
  • Under the proposed rule, to obtain implied consent as to a shareholder, the fund would be required to transmit to the shareholder an Initial Statement, at least 60 days before it begins to rely on the rule. Are the proposed disclosures for the Initial Statement appropriate? Should a fund be required to provide to a shareholder other disclosures before inferring consent to electronic transmission?
  • Should the rule require funds to provide multiple written statements (i.e., in addition to the Initial Statement) prior to inferring consent to electronic transmission? If so, how many additional statements and how long after the Initial Statement should they be provided? What period of time after a fund transmits the Initial Statement should we permit the fund to infer consent? Is 60 days an appropriate time? Why or why not?
  • What methods should shareholders be permitted to use to deny or revoke consent to electronic transmission?
  • Should we permit the Initial Statement to be incorporated into, or combined with, one or more other documents? If so, which documents should we permit the Initial Statement to be incorporated into or combined with?
  • The rule as proposed would require that the Initial Statement must be sent separately from other types of communications and may not accompany any other document or materials except the fund's current summary prospectus, statutory prospectus, statement of additional information, or Notice of Internet Availability of Proxy Materials. Is this requirement appropriate? Should we permit the Initial Statement to accompany one or more other documents? If so, which documents?
  • Should we, as we have proposed for the Notice, permit the Initial Statement to be sent in a “householded” manner?
  • Should we require that the Initial Statement not contain any additional information other than that specified in the rule? Why or why not? Absent any requirement specified by rule, what other information would funds generally include in the Initial Statement? For example, would funds provide information on how shareholders could elect to receive the shareholder report and other documents and information electronically by satisfying the conditions contained in the Commission's guidance on use of electronic media relating to notice, access, and evidence of delivery?
  • Should the rule permit funds to obtain implied consent from shareholders who have previously revoked consent? If so, should the rule prescribe a minimum period of time after consent was revoked before re-attempting to obtain implied consent from a shareholder? What period should that be and why?
  • Should each fund be required to send a shareholder a Notice each time it transmits a shareholder report electronically under the proposed rule? Why or why not?
  • We anticipate that the Notice would be sent in paper and mailed to shareholders. Should we permit the Notice to be sent by email if the shareholder has provided an email address? Why or why not? For example, are there any concerns that under such an approach, while a shareholder may have provided an email address (e.g., as part of opening an account), the shareholder may nonetheless neither prefer nor expect to receive documents or other information through that medium? To what extent are funds and intermediaries, pursuant to regulatory requirements or otherwise, maintaining up-to-date email addresses for investors? Would an investor be more likely to view a Notice delivered by one method versus another (i.e., print versus electronically)? Would an investor be more likely to access the related shareholder report and other required materials when notified by one method or the other?
  • Are the proposed disclosures for the Notice appropriate? Should we require that the disclosure in the Notice concerning a shareholder's ability to indicate a preference for paper transmission in the future be preceded Start Printed Page 33633by an additional bold-face legend or otherwise made more prominent?
  • Should we permit the Notice to be incorporated into, or combined with, one or more other documents? If so, which documents should we permit the Notice to be incorporated into or combined with?
  • The rule as proposed would require that the Notice must be sent separately from other types of communications and may not accompany any other document or materials except the fund's current summary prospectus, statutory prospectus, statement of additional information, or Notice of Internet Availability of Proxy Materials. Is this requirement appropriate? Should we permit the Notice to accompany one or more other documents? If so, which documents? For example, in the case of a Notice sent to a shareholder for the first time, should we permit or require the Notice to be accompanied with materials explaining the new transmission regime? Why or why not?
  • Should we, as proposed, permit funds to either send separate Notices for each fund or send combined Notices for more than one fund held by a particular shareholder, or should the rule require one or the other of those approaches?
  • Should we require that the Notice not contain any additional information other than that specified in the rule? Why or why not? Absent any restriction by rule, what other information would funds generally include in the Notice? For example, would funds provide information on how shareholders could elect to receive the shareholder report and other documents and information electronically by satisfying the conditions contained in the Commission's guidance on use of electronic media relating to notice, access, and evidence of delivery?
  • In the case of management companies that are not SBICs, should we require such funds to send a notice each time the fund makes accessible its complete portfolio holdings for the first or third fiscal quarters? Why or why not?
  • Should we, as proposed, permit the Notice to be sent in a “householded” manner?
  • We are proposing that funds would file a form of the Notice with the Commission not later than 10 days after it is sent to shareholders. Is 10 days sufficient to meet this proposed filing requirement, or should some other filing period be required? If so, what time period and why?
  • We anticipate that the form of Notice would be filed with the Commission on EDGAR pursuant to a separate EDGAR submission type. Should we instead require that the form of Notice be filed as an exhibit to a report filed with the Commission? For example, should we require that the form of Notice be filed as part of the fund's report on Form N-CSR or Form N-CEN? Why or why not?
  • Should we require, as proposed, that funds send a paper copy of a shareholder report upon request? If so, how soon should a fund be required to send the report after receiving a request?
  • Should we restrict funds relying on the proposed rule from using the summary schedule of investments? Why or why not? Are there considerations relating to the use of the summary schedule of investments other than those relating to printing and mailing costs that would make the summary schedule an important option for funds to provide portfolio holdings disclosures? Should we restrict funds from using the summary schedule only in reports transmitted pursuant to the rule, and permit funds to use the summary schedule in printed reports that are mailed to shareholders? Would funds prefer this additional flexibility? Why or why not?
  • Are the proposed amendments to rule 498 and the registration forms regarding Web site availability of documents appropriate? Should we also, for example, specifically require funds relying on the rule to disclose on the cover page or elsewhere in the summary prospectus or statutory prospectus its reliance on the rule and what specific documents are made available on the Web site?
  • To what extent would the proposed rule reduce burdens such as printing and mailing costs borne by funds? Would these burden reductions ultimately accrue to fund shareholders in the form of lower total fund operating expenses? For example, would these reductions ultimately accrue to shareholders in funds with arrangements that permit or limit payments to service providers or intermediaries such as broker-dealers in connection with the printing and mailing of shareholder reports? Please provide supportive data to the extent available.
  • In addition to allowing funds to electronically transmit reports to shareholders, should we also consider options for permitting similar delivery of summary or statutory prospectuses? Why or why not?

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

1. Overview

We are proposing to amend the framework by which registered investment companies report census-type information to the Commission by rescinding Form N-SAR and replacing it with a new form—Form N-CEN.[363] Form N-SAR was adopted by the Commission in 1985 and requires that funds report a wide variety of census information to the Commission, including information relating to a fund's organization, service providers, fees and expenses, portfolio strategies and investments, portfolio transactions, and share transactions. Funds generally must file reports on Form N-SAR semi-annually, except for UITs, which file annually.[364] By contrast, as discussed further below, we are proposing to have all funds file reports on Form N-CEN annually.[365]

In recent years, Commission staff has found that the utility of the information reported on Form N-SAR has become increasingly limited. We believe there are two primary reasons for this limited utility. First, in the past two decades, we have not substantively updated the information reported on the form to reflect new market developments, products, investment practices, or risks. Second, the technology by which funds file reports on Form N-SAR has not been updated and limits the Commission staff's ability to extract and analyze the data reported. Accordingly, we believe that by updating the content and format requirements for census reporting, as discussed below, the Commission will be better able to carry out its regulatory functions, while at the same time reducing burdens on filers.

Proposed Form N-CEN would gather similar census information about the fund industry that funds currently report on Form N-SAR, which could be aggregated and analyzed by Commission staff to better understand industry trends, inform policy, and assist with the Commission's examination program. However, in order to improve the quality and utility of information reported, proposed Form N-CEN would streamline and update information reported to the Commission to reflect current Commission staff information Start Printed Page 33634needs and developments in the industry.[366] Additionally, where possible, we have endeavored to exclude items from proposed Form N-CEN that are disclosed or reported pursuant to other Commission forms, or are otherwise available; however, in some limited cases, we are proposing to collect information that may be similarly disclosed or reported elsewhere, but that the staff would benefit from collecting in a structured format.

In order to improve the utility of the information reported to the Commission, we are also proposing that reports on Form N-CEN be structured in an XML format.[367] By requiring reports on Form N-CEN to be filed in XML format, filers will no longer be required to use outdated technology for census reporting. Additionally, requiring reports on Form N-CEN to be filed in an updated structured format will allow reported information to be more efficiently and effectively validated, retrieved, searched, and analyzed through automated means and, therefore, more useful to end users.[368]

2. Who Must File Reports on Form N-CEN

We are proposing to require that all registered investment companies, except face amount certificate companies,[369] file reports on Form N-CEN.[370] Funds offering multiple series would be required to report information in Part C of the form as to each series separately, even if some information is the same for two or more series.[371]

Like Form N-SAR, the sections of Form N-CEN that a fund is required to complete would depend on the type of registrant in order to better tailor the disclosure requirements.[372] All funds would be required to complete Parts A and B, and file any attachments required under Part G. In addition, funds would complete the following Parts as applicable:

  • All management companies, other than SBICs, would complete Part C;
  • closed-end funds and SBICs would complete Part D;
  • ETFs (including those that are UITs) would complete Part E; [373] and
  • UITs would complete Part F.[374]

We request comment on who must file Form N-CEN.

  • Should we require any other types of investment companies to file reports on Form N-CEN? For example, should face-amount certificate companies be required to file reports on Form N-CEN?
  • Should funds offering multiple series be required to file a report for each series separately, rather than one report covering multiple series, as proposed?

3. Frequency of Reporting and Filing Deadline

Management investment companies currently file reports on Form N-SAR semi-annually,[375] and UITs file such reports annually.[376] To reduce reporting burdens, we are proposing that reports on Form N-CEN be filed annually, regardless of type of filer.[377] Form N-CEN would require census-type information, which in our experience does not change as frequently as, for example, portfolio holdings information. Accordingly, we believe that an annual filing requirement would be sufficient for purposes of review by Commission staff, as well as investors and other market participants that might use this information.[378]

We are proposing a filing period of 60 days after the end of the fiscal year for funds to file reports on Form N-CEN.[379] This is the same filing period that management companies currently have to file reports on Form N-SAR.[380] As with Form N-SAR, and having considered the amount and nature of the information that would be requested in proposed Form N-CEN, we continue to believe that a sixty-day filing period would appropriately balance the staff's need for timely information against the time necessary for a fund to collect, verify, and report the required information to the Commission.

Rule 30b1-3 under the Investment Company Act currently requires a fund to file a transition report on Form N-SAR when a fund's fiscal year Start Printed Page 33635changes.[381] Because reports on Form N-CEN would be filed annually rather semi-annually, we believe that a rule outlining the requirements for a transition report would no longer be necessary as transition report filing requirements for fiscal year changes involve less complexity in the case of reports required to be filed once a year rather than twice a year. Consequently, we are proposing to rescind rule 30b1-3. We are, however, proposing to require that reports on Form N-CEN not cover a period of more than 12 months.[382] Thus, if a fund changes its fiscal year, a report filed on Form N-CEN may cover a period shorter than 12 months, but would not be permitted to cover a period longer than 12 months or a period that overlaps with a period covered by a previously filed report.[383]

In addition, a fund would be able to file an amendment to a previously filed report on proposed Form N-CEN at any time, including an amendment to correct a mistake or error in a previously filed report.[384] A fund that files an amendment to a previously filed report on the form would provide information in response to all items of Form N-CEN, regardless of why the amendment is filed.[385]

We request comment on the proposed frequency of reporting and proposed reporting deadline:

  • Should reports on Form N-CEN be filed more frequently than annually, as proposed? Should we require management companies to file reports on Form N-CEN semi-annually and UITs to file reports annually, as is currently required by Form N-SAR? Are certain information items on Form N-CEN of a nature that they may change frequently or such that more frequent information about them should be reported to the Commission? If so, should any information items in proposed Form N-CEN be reported on proposed Form N-PORT or another form instead? If so, what items and on which forms?
  • Consistent with the treatment of Form N-SAR filings for management companies, we are proposing that reports be filed 60 days after the end of the fund's fiscal year. Should we require a different filing period? If so, what period should we require and why? How long would it take funds to collect, verify, and file reports covering the information required by proposed Form N-CEN? Would the burdens associated with reports on proposed Form N-CEN be greater or less than those associated with reports on Form N-SAR?
  • We have proposed that reports on Form N-CEN be filed as of the end of the fund's fiscal year. We understand that funds have other filing requirements that are tied to their fiscal-year end. Should we require some other period end date, such as end of calendar year? Should UITs be required to file reports as of the end of their fiscal year, as proposed, or should they file reports as of the end of their calendar year as they currently do with reports on Form N-SAR?
  • We are proposing to eliminate rule 30b1-3 under the Investment Company Act. Should we instead retain the rule? Are the general instructions to Form N-CEN, as proposed, sufficiently clear as to the filing requirements when a fund changes its fiscal year end? If not, how should the general instructions be revised, or in the alternative, should a transition period rule be provided in connection with Form N-CEN? If so, how should a transition period be defined and what deadlines or timeframes should such a rule address?
  • Should a fund be required to file an amendment to its Form N-CEN report or file a current report within a certain period of time if previously reported information changes? If so, what types of changes should trigger an amendment requirement? What filing period should be required for such an amendment requirement?

4. Information Required on Form N-CEN

a. Part A—General Information

Part A of Form N-CEN, which would be completed by all funds, would collect information about the reporting period covered by the report. It would require funds to report the fiscal-year end date and indicate if the report covers a period of less than 12 months.[386]

We request comment on the information items proposed to be reported in Part A.

b. Part B—Information About The Registrant

Part B of Form N-CEN, which would also be completed by all funds, would require certain background and other identifying information about the fund. In the case of funds offering multiple series, if the response to an item in Part B of the form differs between series, the fund would be instructed to provide a response for each series, as applicable, and label the response with the name and series identification number of the series to which a response relates.[387] This background information would allow the staff to quickly categorize filers by fund type and will assist with our oversight of funds.

Included in this background information would be the fund's name,[388] Investment Company Act filing number,[389] and other identifying information, such as its CIK [390] and LEI.[391] In addition, the form would require the fund's address, telephone number, and public Web site (if any),[392] and the location of the fund's books and records.[393] While the fund's name, address, and filing number are currently required by Form N-SAR,[394] some of the additional information, such as the fund's CIK, LEI, public Web site and location of books and records would be new. As discussed in the Form N-PORT section above, information such as the CIK and LEI would assist the Commission with organizing the data received by the Commission and allow the staff to cross-reference the data reported on Form N-CEN with data received from other sources.[395] For tracking purposes, the proposed form would require information relating to whether the filing was the initial or final filing.[396]

As discussed above, funds would be required to include the location of their books and records in reports on proposed Form N-CEN. We note that books and records information is currently required by fund registration forms; [397] however, this information is not filed with us in a structured format. We believe that having books and records information in a structured format would increase our efficiency in preparing for exams as well as our ability to identify current industry trends and practices and, thus, we are Start Printed Page 33636proposing to include this information in proposed Form N-CEN.[398] In addition, so as not to create unnecessary burdens, we are proposing to amend Forms N-1A, N-2, N-3, N-4, and N-6 to exempt funds from those forms' respective books and records disclosure requirements if the information is provided in a fund's most recent report on proposed Form N-CEN.[399]

Similar to Form N-SAR,[400] Form N-CEN would require information regarding whether the fund is part of a “family of investment companies.” The form, which would include a substantially similar definition as Form N-SAR,[401] would define a “family of investment companies” to mean, except with respect to insurance company separate accounts, any two or more registered investment companies that (i) share the same investment adviser or principal underwriter; and (ii) hold themselves out to investors as related companies for purposes of investment and investor services.[402] This item would assist Commission staff with analyzing multiple funds across the same family of investment companies.

Similar to Form N-SAR, proposed Form N-CEN would also require the fund to provide its classification (e.g., open-end fund, closed-end fund).[403] In addition, unlike Form N-SAR, the proposed form would specifically ask whether the fund issues a class of securities registered under the Securities Act.[404] These questions are intended to elicit background information on the fund, which will assist us in our monitoring and oversight functions (for example, identifying those funds that have not issued securities registered under the Securities Act).

Under proposed Form N-CEN, a management company would report information about its directors, including each director's name, whether they are an “interested person” (as defined by section 2(a)(19) of the Investment Company Act), and the Investment Company Act file number of any other registered investment company for which they serve as a director.[405] Although this information is reported in a management company's Statement of Additional Information and provided in annual reports to shareholders, providing this information to the Commission in a structured format will allow the Commission and other potential users to sort and analyze the data more efficiently.[406] In addition, the fund would be required to provide the chief compliance officer's (“CCO's”) name, CRD number (if any), address, and phone number,[407] as well as indicate if the CCO has changed since the last filing.[408] If the fund's CCO is compensated or employed by any person other than the fund, or an affiliated person of the fund, for providing CCO services, the fund would also be required to report the name and Employer Identification Number of the person providing such compensation.[409] Although some funds provide information relating to their CCO in their registration statements, not all funds do.[410] This new requirement would provide staff with information on all fund CCOs and would allow the staff to contact a fund's CCO directly.

Part B would also include an item regarding matters that have been submitted to a vote of security holders during the relevant period.[411] Information regarding submissions of matters to a vote of securities holders is currently reported in Form N-SAR by management companies in the form of an attachment with multiple reporting requirements.[412] In order to alleviate the burden on filers, we are proposing to reduce the information to be reported regarding votes of security holders to a yes/no question that is primarily meant to allow staff to quickly identify funds with such votes, so that they can follow up as appropriate, such as by reviewing more detailed information required by other filings.[413] Like Form N-SAR, the proposed form would also include an item relating to material legal proceedings during the reporting period.[414]

Form N-SAR currently requires management companies to report a number of data points relating to fidelity bond and errors and omissions insurance policy coverage.[415] In order to limit the number of items to those most useful to the Commission staff and reduce burdens on filers, we are proposing to limit this request to two separate items in Form N-CEN. One item would ask if any claims were filed under the management company's fidelity bond and the aggregate dollar amount of any such claims.[416] The other item would ask if the management company's officers or directors are covered under any directors and officers/errors and omissions insurance policy and, if so, whether any claims were filed under the policy during the Start Printed Page 33637reporting period with respect to the registrant.[417] These questions will help alert Commission staff to insurance claims made by the fund or its officers and directors as a result of legal issues related to the fund.[418]

In order to better understand instances when funds receive financial support from an affiliated entity, our proposal would also require new information regarding the provision of such financial support.[419] We recently adopted disclosure requirements relating to fund sponsors' support of money market funds as part of our money market reform amendments in 2014, including a new requirement that money market funds file reports on Form N-CR disclosing, among other things, the receipt of financial support.[420] As with money market funds, we believe that it is important that the Commission understand the nature and extent that a fund's sponsor provides financial support to a fund, and are therefore proposing to extend this requirement to all funds that would file reports on Form N-CEN. Although we believe it is an infrequent practice, based on staff experience, non-money market funds have received sponsor support in the past and we believe this item would allow Commission staff to readily identify any funds that have received such support for further analysis and review, as appropriate. For consistency, Form N-CEN would include a substantially similar definition of “financial support” as provided by Form N-CR.[421] In addition, the definition in Form N-CEN would also explicitly exclude certain routine transactions from the definition of financial support, as is the case for money market funds.[422] If the fund received financial support, it would also be required to provide more detailed information in the form of an attachment as required by Part G of Form N-CEN.[423]

In addition, Form N-CEN would include a new item requiring reporting as to whether the fund relied on orders from the Commission granting the fund an exemption from one or more provisions of the Investment Company Act, Securities Act or Securities Exchange Act during the reporting period.[424] Funds would identify any such order by release number.[425] We are proposing to collect this information in a structured format to better monitor fund reliance on exemptive orders, which will assist us with our oversight functions.

As with Form N-SAR,[426] proposed Form N-CEN would require identifying information for the fund's principal underwriters [427] and independent public accountants,[428] including, as applicable, name, SEC file number, CRD number, PCAOB number, LEI (if any), state or foreign country, and whether a principal underwriter was hired or terminated or if the independent public accountant changed since the last filing.[429] If the independent public accountant changed since the last filing, the fund would have to provide a detailed narrative attachment to Form N-CEN.[430]

We are proposing to include for all funds several other accounting and valuation related items that are currently required for management companies by Form N-SAR, and that provide important information to the Commission regarding possible accounting and valuation issues related to a fund. These items include a question relating to material changes in the method of valuation of the fund's assets.[431] However, unlike reports on Form N-SAR, proposed Form N-CEN would not require a separate attachment detailing the circumstances surrounding a change in valuation methods.[432] Instead, to facilitate review of this information in a structured format, our proposal would include specific items in the form itself, including the date of change, explanation of change, type of investment, statutory or regulatory basis for the change, and the fund(s) involved.[433] We would also carry over to proposed Form N-CEN the requirement from Form N-SAR [434] that the fund identify whether there have been any changes in accounting principles or practices, and, if any, to provide more detailed information in a narrative attachment to the form.[435]

Form N-CEN would also require, like Form N-SAR, that management companies, other than SBICs, file a copy of their independent public accountant's report on internal control as an attachment to their reports on the form.[436] However, Form N-CEN would also include a new question that asks whether the report on internal control found any material weaknesses.[437] Form N-CEN would also contain a new requirement that the fund disclose if the certifying accountant issued an opinion other than an unqualified opinion with respect to its audit of the fund's Start Printed Page 33638financial statements.[438] These questions will elicit information on potential accounting issues identified by a fund's accountant.

Unlike Form N-SAR, proposed Form N-CEN would also include an item relating to whether, during the reporting period, an open-end fund made any payments to shareholders or reprocessed shareholder accounts as a result of an NAV error.[439] Proposed Form N-CEN would also require information from management companies regarding payments of dividends or distributions that required a written statement pursuant to section 19(a) of the Investment Company Act and rule 19a-1 thereunder.[440] These questions will assist the staff in monitoring valuation of fund assets and the calculation of the fund's NAV, as well as compliance with distribution requirements under section 19(a) and rule 19a-1.

We request comment on the proposed information items to be reported in Part B:

  • Should any additional information regarding the fund be requested? Should any of the information that would be requested by proposed Form N-CEN be excluded? Should any of the information requested for all Registrants be limited to only certain Registrants?
  • Should any other identifying number other than file number and LEI be requested?
  • Should another definition or term be used to capture affiliations across related funds rather than “family of investment companies”? Should a broader term, such as “fund complex” as defined by instruction 1(b) to Item 17 of Form N-1A, be used instead? If so, why would a broader definition be better?
  • Should Form N-CEN request any additional information concerning the board of directors or individual directors? For example, should Form N-CEN request information about the length of service of directors?
  • Should Form N-CEN request information regarding a fund's CCO, as proposed? Should we, as proposed, make the CCO's phone number a non-public data field on all Form N-CEN filings? Are there any privacy concerns with the other information that would be requested? Would these concerns still exist if the information is reported in a non-public data field? Are there any other concerns with the information that would be requested? Is there other information we should request in lieu of information that presents such concerns?
  • The current proposal eliminates Form N-SAR's attachment regarding matters submitted to a vote of security holders. Should we retain this requirement in Form N-CEN? Why or why not? Are there any costs to eliminating Form N-SAR's attachment in Item 77C in favor of yes/no type questions? Should the item regarding votes submitted to security holders apply to UITs?
  • We request comment on Item 12 of proposed Form N-CEN. Should this item apply to UITs? Should “legal proceedings” be defined? Should it include administrative, mediated, or arbitrated matters? Are there any other litigation matters that should be deemed inherently material besides those enumerated in the instructions to the item? Is there any additional information that should be requested regarding material legal proceeding matters?
  • Should Form N-CEN request information about the fidelity bond beyond what has been proposed (e.g., bond amount, the cost of the bond, or the number of insured persons)? Should any additional information regarding claims filed or that could have been filed under the fidelity bond be requested? For example, should dates of claims filed or that could have been filed be requested? Should the nature of the claim be disclosed?
  • Is the term “errors and omissions insurance” clear or should the form include a definition? In addition to requesting information on whether any errors and omissions insurance claim was made as proposed, should dates of insurance claims and amounts of claims be requested? Should Form N-CEN permit funds to exclude the advancement of expenses under a policy from disclosure as a claim?
  • The definition of “financial support” in proposed Form N-CEN would include a non-exclusive list of examples of actions that would (and would not) be deemed “financial support.” Money market funds currently report this information in reports on Form N-CR. Should the definition in proposed Form N-CEN be further expanded or limited from our definition in Form N-CR, and if so, how and why? For example, should we include a requirement to report information relating to inter-fund lending? Should we require non-money market funds to report receipt of financial support on a more timely basis? For example, should we require non-money market funds to file reports on Form N-CR or a similar form if they receive financial support?
  • Should any additional information concerning exemptive or other orders be requested?
  • We also considered whether to require funds to disclose reliance on no-action letters. If we were to require this information, should we limit it to certain no-action letters and, if so, which ones?
  • Should we request additional information regarding fund accounting and valuation? If so, what information? Should the items relating to changes in valuation methods and changes in accounting principles and practices apply to UITs, as proposed?
  • We request comment on Items 23 and 24 of proposed Form N-CEN. Should we request information regarding NAV errors and/or dividend and distribution payments that required a written statement pursuant to section 19(a) and rule 19a-1? Why or why not? Is there additional information we should request?

c. Part C—Items Relating to Management Investment Companies

i. Background and Classification of Funds

Part C of Form N-CEN would be completed by management investment companies other than SBICs. For management companies offering multiple series, this information would be completed separately as to each series.[441] The proposed information requirements in this section are intended to provide the Commission and its staff with background information on the fund industry and to assist us in meeting our legal and regulatory requirements, such as requirements under the Paperwork Reduction Act. Additionally, certain demographic information would allow the Commission to better identify particular types of management companies for monitoring and analysis if, for example, an issue arose with respect to a particular fund type.

Similar to Form N-SAR, proposed Form N-CEN would include general identifying information on management companies and any series thereof, including the full name of the fund, the fund's series identification number and LEI, and whether it is the fund's first Start Printed Page 33639time filing the form.[442] Unlike Form N-SAR, we are proposing to request specific information on the classes of open-end management companies, including information relating to the number of classes authorized, added, and terminated during the relevant period.[443] Form N-CEN would also include a new requirement to specifically provide identifying information for each share class outstanding, including the name of the class, the class identification number, and ticker symbol.[444]

Pursuant to proposed Form N-CEN, a management company also would be required to identify if it is any of the following types of funds: [445] ETF or exchange-traded managed fund (“ETMF”); [446] index fund; [447] fund seeking to achieve performance results that are a multiple of a benchmark, the inverse of a benchmark, or a multiple of the inverse of a benchmark; interval fund; [448] fund of funds; [449] master-feeder fund; [450] money market fund; target date fund; [451] and underlying fund to a variable annuity or variable life insurance contract. ETFs and ETMFs, index funds and master-feeder funds would also be required to provide the additional information discussed below.[452]

First, proposed Form N-CEN would require a management company to further indicate if it is an ETF or an ETMF.[453] Second, index funds would be required to report certain standard industry calculations of relative performance. In particular, index funds would be required to report a measure of the difference between the index fund's total return during the reporting period [454] and the index's return both before and after fees and expenses—commonly called the “tracking difference”—[455] and also a measure of the volatility of the day-to-day tracking difference over the course of the reporting period—commonly called the fund's “tracking error.” [456]

Specifically, the proposed tracking difference data item would equal the annualized difference between the index fund's total return during the reporting period and the index's return during the reporting period, and the proposed tracking error data item would equal the annualized standard deviation of the daily difference between the index fund's total return and the index's return during the reporting period.[457] Reporting of these measures will help data users, including the Commission, investors, and other potential users, evaluate the degree to which particular index funds replicate the performance of the target index.[458] In addition, tracking difference and tracking error before fees and expenses [459] would allow data users to better understand the effect of factors other than fees and expenses on the degree to which the Start Printed Page 33640index fund replicates the performance of the target index.[460]

Finally, master funds would be required to provide identifying information with respect to each feeder fund, including information on unregistered feeder funds (i.e., feeder funds not registered as investment companies with the Commission), such as offshore feeder funds.[461] Similarly, a feeder fund would provide identifying information of its master fund.[462]

Proposed Form N-CEN would also require the management company to report if it seeks to operate as a non-diversified company, as defined in section 5(b)(2) of the Investment Company Act.[463] Form N-SAR, however, asks if the management company was a diversified investment company at any time during the period or at the end of the reporting period.[464] We are proposing to require reporting on the non-diversified status of a management company, rather than the diversified status, because it is less common for funds to be non-diversified.[465] Additionally, the question in proposed Form N-CEN is forward looking rather than backward looking as in Form N-SAR. This change is intended to include as part of the universe of non-diversified funds those funds that seek to operate as non-diversified companies even if they should happen to meet the definition of a “diversified company” as of the end of a particular reporting period.[466] We believe this change will allow our staff to more accurately pinpoint the universe of non-diversified funds and, thus, better able the staff to assist us in our analysis and inspection functions.

We request comment on the Part C questions relating to the fund's background and classification:

  • Should additional identifying information be requested with regard to series or classes of management investment companies? Should any of the information proposed to be included in proposed Form N-CEN be excluded?
  • We request comment on our list of types of fund. Are there any types of funds that we should add to or remove from the list? If so, which ones and why? Should we include additional categories based on investment strategy, as proposed? If so, which categories? Are the definitions in proposed Form N-CEN of the type of funds listed appropriate? Should any different definitions be used for types of funds? If so, what definitions and why? Are any terms that are not defined sufficiently clear or should we provide definitions? If so, what terms and what definitions?
  • We request comment on the information to be required for index funds. Should we require the difference between the fund's total return during the reporting period and the index's return during the reporting period? Is this a meaningful methodology? Is there a better methodology for calculating tracking difference or tracking error?
  • Should the form solicit information about the intent of a management company to operate as a non-diversified fund or should it request information about past operations during the reporting period?

ii. Investments in Certain Foreign Corporations

We are also proposing to require a management company to identify if it invests in a controlled foreign corporation for the purpose of investing in certain types of instruments, such as commodities, including the name and LEI of such corporation, if any.[467] As discussed supra Part II.A.2.b, some funds use CFCs for making certain investments, particularly in commodities and commodity-linked derivatives, often for tax purposes. Information regarding assets invested in a controlled foreign corporation for the purpose of investing in certain types of instruments would provide investors greater insight into special purpose entities, such as CFCs, that may have certain legal, tax, and country-specific risks associated with them. Combined with the information that we are proposing to collect in Form N-PORT, Commission staff would likewise benefit from this information by better understanding the use of CFCs and other similar entities, which could allow for more efficient collaboration with foreign regulatory authorities to the extent the Commission may need books and records or other information for specific funds or general inquiries related to CFCs.

We request comment on the Part C questions relating to the fund's investments in certain foreign corporations:

  • Should we request additional information on whether the management company invested in a foreign corporation or subsidiary, including CFCs? For example, should we request information on the types of investing activities the CFCs engage in or certain balance sheet items from the CFC?

iii. Securities Lending

As discussed above, we are proposing that funds provide certain securities lending information in reports on Form N-PORT to help inform the Commission, investors and other market participants about the scale of securities lending activity by funds and their collateral reinvestments.[468] Additionally, we are proposing to require that funds include in their financial statements certain information concerning their income and expenses associated with securities lending activities in order to increase the transparency of this information to investors and other potential users.[469] We believe, however, that some important information concerning securities lending activity by funds should be reported in a structured format, but on a less frequent basis than reports on proposed Form N-PORT. In this regard, we believe an annual reporting requirement on Form N-CEN may yield sufficiently timely data and may more appropriately balance the requirements' benefits with their associated costs than would additional monthly reporting requirements on Form N-PORT.

Accordingly, we propose to require that each management company report annually on new Form N-CEN, in addition to whether it is authorized to engage in securities lending transactions and whether it loaned securities during the reporting period,[470] information about the fees associated with securities lending activity and information about the management company's relationship with certain securities-lending-related service providers. First, we propose to require that management companies that loaned any securities during the reporting period disclose certain information that would illuminate the commonality of borrower default. Specifically, we propose to require that those management companies disclose annually whether any borrower of securities had defaulted on its Start Printed Page 33641obligations to the management company to return loaned securities or return them on time in connection with a security on loan during that period.[471]

Under proposed Form N-CEN, management companies would also be required to disclose whether a securities lending agent or any other entity indemnifies the fund against borrower default on loans administered by the agent and certain identifying information about the entity providing indemnification if not the securities lending agent.[472] Together, these reporting requirements would yield data that would allow the Commission, investors, and other potential users to assess the counterparty risks associated with borrower default in the securities lending market and the extent to which those risks are mitigated by—or concentrated in—third parties that provide indemnification against default.[473]

Because management companies sometimes engage external service providers as securities lending agents or cash collateral managers, we believe that some of the risks associated with securities lending activities by management companies could be impacted by these service providers and the nature of their relationships with the management companies and one another. Accordingly, we propose to require that management companies report some basic identifying information about each securities lending agent and cash collateral manager.[474] In addition, we propose to require that funds disclose whether each of these service providers is a first- or second-tier affiliated person of the management company,[475] which data would highlight those funds that might be expected to rely on Commission exemptive relief with respect to those transactions.[476] We also propose to require each management company to disclose whether it has made each of several specific types of payments, including a revenue sharing split, non-revenue sharing split (other than an administrative fee), administrative fee, cash collateral reinvestment fee, and indemnification fee, to one or more securities lending agents or cash collateral managers during the reporting period.[477] These disclosures will allow the Commission, investors and other management company boards of directors to understand better the type of fees a management company pays in connection with securities lending activities and whether, for example, the revenue sharing split that the company pays to a securities lending agent includes compensation for other services such as administration or cash collateral management.[478] Finally, our proposed disclosure of whether the cash collateral manager is a first- or second-tier affiliate of the securities lending agent [479] could alert the Commission, investors, and other market participants to potential conflicts of interest when an entity managing a cash collateral reinvestment portfolio is affiliated with a securities lending agent that is compensated with a share of revenue generated by the cash collateral reinvestment pool. Together, the data that these proposed requirements would yield would allow the Commission to monitor the interaction of these service providers with management companies. In addition to informing the Commission's risk analysis and, potentially, future policymaking concerning securities lending activity by management companies, we believe that this information could also help inform other data users about the use of, and possible risks associated with, the lending of portfolio securities by management companies.

We request comment on the Part C questions relating to the management company's securities lending activities:

  • Should management companies be required to report any or all of the proposed information concerning securities lending activity? If not, which items should not be required, and why? Should we collect any additional information?
  • Should we require, as proposed, that management companies disclose annually whether any borrower of securities defaulted on its obligations to the management company? Why or why not? Should we instead, or additionally, require management companies to report monthly on Form N-PORT whether any borrower of securities defaulted on its obligations to the management company?
  • Should we require, as proposed, that management companies report certain information about each securities lending agent and each cash collateral manager? Why or why not? Should we require that these funds disclose whether each of these external service providers is a first- or second-tier affiliate of the fund?
  • In addition to requiring management companies to report whether they made each of the proposed types of payments associated with securities lending, should the Commission also require disclosure of Start Printed Page 33642specific rates and/or amounts paid during the reporting period of each enumerated type of compensation, similar to the disclosures we are proposing to require in the financial statements concerning the terms governing the compensation of the securities lending agent and collateral manager? Would that additional information be useful in proposed Form N-CEN in a structured format for risk monitoring and use by investors or other market participants, including other management company boards of directors that are evaluating securities lending agent services?
  • Would the proposed reporting requirements regarding securities lending yield beneficial information? If not, what information should the Commission collect instead to conduct appropriate risk monitoring of securities lending activity by management companies? How should this information be collected?
  • Would the proposed reporting requirements concerning securities lending activity be burdensome?
  • Should proposed Form N-CEN include a specific definition for “securities lending agent”? Why or why not? If so, how should the term be defined? Should the form include a specific definition for “cash collateral manager”? Why or why not? If so, how should the term be defined?
  • Are there other reporting requirements that the Commission should adopt for securities lending activity? If so, would these additional reporting requirements assist with Commission risk monitoring, inform the public, or both?

iv. Reliance on Certain Rules

Like Form N-SAR, proposed Form N-CEN would include a requirement that management companies report whether they relied on certain rules under the Investment Company Act during the reporting period.[480] However, proposed Form N-CEN would require this information with respect to additional rules not currently covered by Form N-SAR.[481] We are proposing to collect information on these additional rules to better monitor reliance on exemptive rules and to assist us with our accounting, auditing and oversight functions, including, for some rules, compliance with the Paperwork Reduction Act. For example, reporting of reliance on rules 15a-4 and 17a-8 under the Investment Company Act will allow the staff to monitor significant events relating to interim investment advisory agreements and affiliated mergers, respectively.

In addition, we are proposing to amend rule 10f-3 to eliminate the requirement that funds provide the Commission with reports on Form N-SAR regarding any transactions effected pursuant to the rule.[482] Rule 10f-3 currently requires funds to maintain and preserve certain information—the same information also required to be filed pursuant to Form N-SAR—in its records regarding rule 10f-3 transactions.[483] Our proposed amendments to rule 10f-3 would eliminate the requirement to periodically report this information,[484] but would not alter the requirement to maintain and preserve it. The Commission believes it is unnecessary for funds to continue to file this information because Commission staff can request the information in connection with staff inspections, examinations and other inquiries.[485]

We request comment on the Part C questions relating to the management company's reliance on certain exemptive rules and orders:

  • Should any additional information concerning exemptive or other rules be requested?
  • We request comment on our proposal to eliminate the requirement under rule 10f-3 that funds provide the Commission with periodic reports on Form N-SAR. Should we eliminate this requirement or continue it under Form N-CEN? Why or why not? Are there any costs or benefits associated with eliminating this requirement?

v. Expense Limitations

As in Form N-SAR,[486] Form N-CEN would require information regarding expense limitations.[487] The requirements in Form N-CEN, however, would be modified from Form N-SAR by requiring information on whether the management company had an expense limitation arrangement in place, whether any expenses of the fund were waived or reduced pursuant to the arrangement, whether the waived fees are subject to recoupment, and whether any expenses previously waived were recouped during the period.[488] We believe that more specific questions relating to management company expense limitation arrangements would reduce burdens and limit uncertainty for management companies when responding to these items.

We request comment on the Part C questions relating to the management company's expense limitations and fee waivers:

  • Are the proposed Form N-CEN items relating to expense limitations appropriate? Is there any additional information that we should request on the management company's expense limitations? If so, what items and why?

vi. Service Providers

Similar to Form N-SAR,[489] Form N-CEN would collect identifying information on the management company's service providers, including its advisers and sub-advisers,[490] transfer agents,[491] custodians (including sub-Start Printed Page 33643custodians),[492] shareholder servicing agents,[493] third-party administrators,[494] and affiliated broker-dealers.[495] We are also proposing new requirements that the management company provide information on whether the service provider was hired or terminated during the reporting period and whether it is affiliated with the fund or its adviser(s).[496] In addition, like Form N-SAR, Form N-CEN would ask custodians to indicate the type of custody, but would expand upon the types of custody listed.[497] Together, these items would assist the Commission in analyzing the use of third-party service providers by management companies, as well as identify service providers that service large portions of the fund industry.

Based on staff experience, management companies and their boards often rely on pricing agents to help price securities held by the fund. Therefore, we are proposing a new requirement that management companies provide identifying information on persons that provided pricing services during the reporting period,[498] as well as persons that formerly provided pricing services to the management company during the current and immediately prior reporting period that no longer provide services to that company.[499] This would assist the Commission in assessing the use of pricing services by the fund industry and the role they play in valuing fund investments.

Part C would also require identifying information on the ten entities that, during the reporting period, received the largest dollar amount of brokerage commissions from the management company [500] and with which the management company did the largest dollar amount of principal transactions.[501] Form N-SAR also requests identifying information on these entities [502] —information that is not available elsewhere in a structured format. Moreover, we continue to believe that brokerage commission and principal transaction information provides valuable information to Commission staff about management company brokerage practices, and would assist the staff in identifying the types of broker-dealers who service management company clients, monitoring for changes in business practices, and assessing the types of trading activities in which funds are engaged. Finally, similar to Form N-SAR, we are proposing to ask whether the management company paid commissions to broker-dealers for “brokerage and research services” within the meaning of section 28(e) of the Exchange Act.[503]

We request comment on the Part C questions relating to the fund's service providers:

  • Are the proposed Form N-CEN items relating to service providers appropriate? Should any of the service providers or information regarding the service providers included in proposed Form N-CEN be excluded from the form? Are there other service providers for which we should require information? For example, should we request information on index providers and, in particular, affiliated index providers?
  • Are the service providers identified in proposed Form N-CEN sufficiently clear or should we provide definitions for each provider? If so, what definitions should we use and why?
  • Should additional information be requested regarding advisers or sub-advisers? Should the form provide a definition of the term sub-adviser?
  • Should any additional specific service provider information be requested? Is there any proposed service provider information that should not be requested? Should proposed Form N-CEN request information on whether the service provider was hired or terminated, or on the affiliation of the service provider, as proposed?
  • In addition to requesting service provider city and state or foreign country information as proposed, should street address, phone or email information be requested? Would inclusion of this additional information in proposed Form N-CEN raise any privacy or other concerns?
  • Should the form request information regarding sub-transfer agents or other shareholder servicers?
  • Should any additional information on service provider fees be requested? For example, should custodian, audit, or administrator fees be requested? Is certain service provider fee information unnecessary as redundant with financial statements?
  • Is the use of the term “pricing service” appropriate as proposed? Should the form provide a definition of “pricing service”?
  • Should we, as proposed, include custody pursuant to rules 17f-6 and 17f-7 under the Investment Company Act (types of custody not currently listed in Form N-SAR) on the list of types of custody in proposed Form N-CEN?
  • Is there additional information regarding broker-dealers that should be requested? Should we use a different methodology other than largest amount of brokerage commissions or collect information for a larger or smaller number of brokers?
  • Is there additional information regarding payments by the management companies to brokers or dealers for “brokerage and research services” that should be requested?

We request comment on Part C, generally:

  • Are there any additional questions regarding management companies that we should include in proposed Form N-CEN?

d. Part D—Closed-End Management Companies and Small Business Investment Companies

Proposed Form N-CEN would, as Form N-SAR does, recognize that closed-end funds and SBICs have particular characteristics that warrant questions targeted specifically to them.[504] Like Form N-SAR, Form N-CEN would require additional Start Printed Page 33644information to be reported by closed-end funds in Part D of the form and would also treat SBICs differently than other management investment companies, requiring them to complete Part D of the form in lieu of Part C.[505] The information requested in Part D would provide us with information that is particular to closed-end funds and SBICs and, thus, would assist us in monitoring the activities of these funds and our examiners in their preparation for exams of these funds.

Similar to Form N-SAR, we are proposing to require in Part D of proposed Form N-CEN information on the securities that have been issued by the closed-end fund or SBIC, including the type of security issued (common stock, preferred stock, warrants, convertible securities, bonds, or any security considered “other”), title of each class, exchange where listed, and ticker symbol.[506] We are also proposing to require new information relating to rights offerings [507] and secondary offerings by the closed-end fund or SBIC,[508] including whether there was such an offering during the reporting period and if so, the type of security involved.[509] Together, this information will allow the staff to quickly identify and track the securities and offerings of closed-end funds and SBICs when monitoring and examining these funds.

Like Form N-SAR,[510] we are also proposing to require that each closed-end fund or SBIC report information on repurchases of its securities during the reporting period.[511] However, unlike Form N-SAR, which requires information on the number of shares or principal amount of debt and net consideration received or paid for sales and repurchases for common stock, preferred stock, and debt securities, Form N-CEN would only require the closed-end fund or SBIC to indicate if it repurchased any outstanding securities issued by the closed-end fund or SBIC during the reporting period and indicate which type of security.[512]

We are also proposing to carry over Form N-SAR's requirements [513] relating to default on long-term debt [514] and dividends in arrears.[515] However, unlike Form N-SAR, which requires an attachment stating detailed information on defaults and arrears on senior securities,[516] we are proposing that Form N-CEN only require a yes/no question and text-based responses directly in the form.[517] We are similarly proposing to carry over the Form N-SAR requirement [518] regarding modifications to the constituent's instruments defining the rights of holders.[519] Similar to Form N-SAR, if a closed-end fund or SBIC made modifications to such an instrument, it would also be required to file an attachment in Part G of Form N-CEN with a more detailed description of the modification.[520] This item provides the Commission with information on and copies of documents reflecting changes to shareholders' rights.

Part G of proposed Form N-CEN would also require closed-end funds or SBICs to file attachments regarding material amendments to organizational documents,[521] new or amended investment advisory contracts,[522] information called for by Item 405 of Regulation S-K,[523] and, for SBICs only, senior officer codes of ethics.[524] Where possible, we sought to eliminate the need to file attachments with the census reporting form in order to simplify the filing process and maximize the amount of information we receive in a data tagged format. However, the attachments proposed to be required with reports on Form N-CEN, provide us with information that is not otherwise updated or filed with the Commission and, thus, we believe they should continue to be filed in attachment form. All of the attachments in proposed Form N-CEN that are specific to closed-end funds and SBICs are also currently required by Form N-SAR.[525]

Similar to Form N-SAR, we are proposing to require other census-type information relating to management fees and net operating expenses. Closed-end funds would be required to report the fund's advisory fee as of the end of the reporting period as a percentage of net assets.[526] Additionally, closed-end funds and SBICs would both be required to report the fund's net annual operating expenses as of the end of the reporting period (net of any waivers or reimbursements) as a percentage of net assets.[527] Unlike open-end funds, which provide management fee and net expense information to the Commission in a structured format,[528] such information is not reported to or updated with the Commission in a structured format by closed-end funds or SBICs. This information would allow the Commission to track industry trends relating to fees. Like Form N-SAR, proposed Form N-CEN also would Start Printed Page 33645require, for the end of the reporting period, the market price per share [529] and NAV per share [530] of the fund's common stock.

Finally, like Form N-SAR, proposed Form N-CEN would require information regarding an SBIC's investment advisers, transfer agents, and custodians.[531] This information is the same as what would be reported by open-end and closed-end funds in Part C of proposed Form N-CEN, but SBICs would not be required to fill out Part C of the proposed form. As noted above, proposed Form N-CEN, like Form N-SAR, would recognize that SBICs have particular characteristics that warrant questions targeted specifically to them. The majority of questions in Part C of proposed Form N-CEN would be inapplicable to SBICs or otherwise request information that would not be helpful to us in carrying out our regulatory functions with respect to SBICs. Accordingly, we propose to except SBICs from filling out Part C of the form and instead would include certain service provider questions from Part C in Part D of the form as response items for SBICs.

We request comment on the following information requirements relating to closed-end funds and SBICs:

  • Are the proposed Form N-CEN items relating to closed-end funds and SBICs appropriate? Are there other information items relating to closed-end funds and SBICs that we should require? If so, what information and why? Are there any items relating to closed-end funds and SBICs in proposed Form N-CEN that should be excluded from the form?
  • Is there additional information regarding trading in closed-end fund or SBIC securities that should be requested?
  • Is there additional information regarding repurchases that should be requested?
  • Should the form provide specific instructions on the calculation of management fees?
  • Should net annual operating expenses be defined? Should they include amortization and depreciation expenses?
  • Should the management fee for closed-end funds be requested as proposed or should other information such as the absolute amount of fees be requested?

Should we request this information for SBICs? Should the form request information on what the fee is based upon, such as a percentage of income or performance? Should breakpoints used in calculating the management fee be reported at each breakpoint level or should an average management fee be provided? Should the management fee information requested be forward-looking or should it be backward looking, as proposed, providing a management fee based on fees charged during the reporting period and, if so, which NAV (e.g., year-end or average) should be used?

  • If a closed-end fund or SBIC pays a performance fee, should the form provide instructions regarding how they should calculate the fees to be disclosed?
  • In connection with defaults, is reference to a $1,000 face amount appropriate? Would this requirement appropriately provide meaningful information not only on the amount of principal default but default on interest payments? Should the form also require information on the amount of debt outstanding to provide additional context and information related to the default?
  • Regarding dividends in arrears, should the form request per share amounts as proposed or should it request the aggregate amount in arrears?

e. Part E—Exchange-Traded Funds and Exchange-Traded Managed Funds

We are proposing to include a section in Form N-CEN related specifically to ETFs—Part E—which ETFs would complete in addition to Parts A, B, and G, and either Part C (for open-end funds) or Part F (for UITs). For purposes of Form N-CEN, an ETF is a special type of investment company that is registered under the Investment Company Act as either an open-end fund or a UIT. Unlike other open-end funds and UITs, an ETF does not sell or redeem its shares except in large blocks (or “creation units”) and with broker-dealers that have contractual arrangements with the ETF (called “authorized participants”).[532] However, national securities exchanges list ETF shares for trading, which allows investors to purchase and sell individual shares throughout the day in the secondary market. Thus, ETFs possess characteristics of traditional open-end funds and UITs, which issue redeemable shares, and of closed-end funds, which generally issue shares that trade at negotiated prices on national securities exchanges and that are not redeemable.[533]

Currently, ETFs are subject to the same comprehensive information reporting requirements on Form N-SAR as are other open-end funds or UITs, and they are not required to report additional, more specialized information because Form N-SAR predates the introduction of ETFs to the market and has not been amended to address ETFs' distinct characteristics. In 2009, the Commission amended its registration statement disclosure requirements for ETFs [534] that are open-end funds to better meet the needs of investors who purchase those ETF shares in secondary market transactions.[535] We believe that it is appropriate—and accordingly propose—to similarly tailor some of the comprehensive information reporting requirements in proposed new Form N-CEN to the special characteristics of ETFs. Funds and UITs meeting the definition of “exchange-traded fund” in Form N-CEN would be required to disclose information pursuant to the items in Part E of the form, as would certain similar investment products known as “exchange-traded managed funds.” [536]

Some of the new reporting requirements for ETFs that we are proposing today as part of Form N-CEN relate to an ETF's (or its service provider's) interaction with authorized participants. These entities have an important role to play in the orderly distribution and trading of ETF shares and are significant to the ETF marketplace.[537]

Because of the importance of authorized participants, we are proposing new reporting requirements Start Printed Page 33646concerning these entities. Currently, the information we have regarding reliance by ETFs on particular authorized participants is limited, and we believe that collecting information concerning these entities on an annual basis would allow us to understand and better assess the size, capacity, and concentration of the authorized participant framework and also inform the public about certain characteristics of the ETF primary markets. Accordingly, we propose to require each ETF to report identifying information about its authorized participants [538] and the dollar value of the ETF shares the authorized participant purchased and redeemed from the ETF during the reporting period.[539] More specifically, proposed Form N-CEN would require an ETF to report the name of each of its authorized participants (even if the authorized participant did not purchase or redeem any ETF shares during the reporting period),[540] certain other identifying information,[541] the dollar value of the ETF's shares that the authorized participant purchased from the ETF during the reporting period,[542] and the dollar value of the ETF's shares that the authorized participant redeemed during the reporting period.[543] Collection of this additional information may allow the Commission staff to monitor how ETF purchase and redemption activity is distributed across authorized participants and, for example, the extent to which a particular ETF—or ETFs as a group—may be reliant on one or more particular authorized participants.

Other proposed new reporting requirements relate to certain characteristics of ETF creation units—the large blocks of shares that authorized participants may purchase from or redeem to the ETF. In the primary market, ETF shares, bundled in creation units, are sold or redeemed either primarily “in kind”—i.e., in the form of the ETF's constituent portfolio securities—or primarily in cash. When transacting in kind or in cash, the particular authorized participant wishing to purchase (or redeem) shares typically bears, in the form of a fixed fee, the transactional costs associated with assembling (or disassembling) creation units. Those costs, therefore, are not mutualized to non-transacting shareholders. When an authorized participant purchases (or redeems) ETF shares all or partly in cash, absent a countervailing effect, the ETF would experience additional costs (e.g., brokerage, taxes) involved with buying the securities with cash or selling portfolio securities to satisfy a cash redemption. Therefore, in order to ensure that the purchasing or redeeming party bears these costs rather than the non-transacting shareholders, the ETF may charge a “variable” fee, so called because it is often computed as a percentage of the value of the creation unit. We understand that such variable fees also can take the form of a dollar amount.

In order to better understand the capital markets implications of different creation unit requirements, primary market transaction methods, and transaction fees, we are proposing to require that ETFs annually report summary information about these characteristics of creation units and primary market transactions. ETFs are not currently required to report the information discussed below in a structured format, and public availability of many of the proposed data items is limited and indeterminable. To better understand the commonality of different transaction methods and the degree to which it varies across ETFs and over time, we propose to require that ETFs report the total value (i) of creation units that were purchased by authorized participants primarily in exchange for portfolio securities on an in-kind basis; [544] (ii) of those that were redeemed primarily on an in-kind basis; [545] (iii) of those purchased by authorized participants primarily in exchange for cash; [546] and (iv) of those that were redeemed primarily on a cash basis.[547] For purposes of these proposed reporting requirements concerning transaction methods and transaction fees, “primarily” would mean greater than 50% of the value of the creation unit.[548] To better understand the effects of primary market transaction fees on ETF pricing and trading and to better inform the public about such fees, we also propose to require that ETFs report applicable transactional fees—including each of “fixed” and “variable” fees—applicable to the last creation unit purchased and the last creation unit redeemed during the reporting period of which some or all of the creation unit was transacted on a cash basis, as well as the same figures for the last creation unit purchased and the last creation unit redeemed during the reporting period of which some or all of the creation unit was transacted on an in-kind basis.[549]

We also propose to require ETFs to report the number of ETF shares required to form a creation unit as of the last business day of the reporting period,[550] which we believe would also allow the Commission and other data users to better analyze any effects that ETFs' creation unit size requirements may have on ETF pricing and trading. We are proposing that this information be as of the last business day of the reporting period because we understand that these fees sometimes vary over the course of the reporting period, and the fee level information is likely to be most current if provided as of the last business day of the period. In addition to information about authorized participants and creation units, we propose to require that ETFs, like closed-end funds, disclose the exchange on which the ETF is listed so that Commission staff may be better able to quickly gather information as to which ETFs may be effected should an idiosyncratic risk or market event arise in connection with a particular exchange.[551]

Finally, with respect to ETFs that are UITs, we ask for information regarding tracking difference and tracking error.[552] This information is requested of open-end index funds in Item 27(b) and, for the same reasons discussed in Part II.E.4.c.i of this release, the proposed form would request this information of ETFs that are UITs.

Taken together, we believe that, in addition to informing the Commission's risk analysis and, potentially, future policymaking concerning ETFs, the information these proposed requirements would yield could also help inform the interested public about the operation of, and possible risks associated with, these funds.

We request comment on the proposed reporting requirements for ETFs and ETMFs:

  • Should ETFs be required to report the proposed additional information in Part E of proposed Form N-CEN that other funds would not be required to report?
  • Should ETFs that are UITs and ETFs that are open-end funds be subject to the same special reporting requirements, or should the requirements be different from one Start Printed Page 33647another? If so, how? Should ETFs and ETMFs be subject to the same special reporting requirements, or should the requirements be different from one another? If so, how and why?
  • Should the proposed items concerning authorized participants be required? Why or why not? Should we require additional information about authorized participants? For example, should we require funds to report the volume of shares purchased and redeemed in each month of the reporting period by each authorized participant, in order to better understand how primary market transactions are distributed across authorized participants and over the course of the reporting period? Should we require funds to report information on purchases and redemptions by each authorized participant on days when the most primary or secondary market activity is observed, which could be used to better understand how primary market activity responds to periods of unusual activity? Why or why not? If so, what specific information should be required?
  • Should the proposed items concerning creation unit characteristics and primary market transactions be required? Why or why not?
  • Should the ETFs and ETMFs that are subject to the proposed special reporting requirements be defined as proposed? If not, how should the group be defined? Are there certain entities that are not included in the proposed definitions that should be? Are there certain entities that are included in the proposed definitions that should not be?
  • Would the proposed reporting requirements yield beneficial information? If not, what information should the Commission collect instead to conduct appropriate risk monitoring of ETFs? How should this information be collected?
  • Would any of the proposed reporting requirements conflict with agreements between private parties, such as ETFs and authorized participants, to keep information confidential? If so, should the information nonetheless be required to be disclosed?
  • How might the proposed reporting requirements concerning ETF primary market transaction fees be used by others outside the Commission, if at all? Are the proposed fee categories (viz., fixed fees and variable fees) appropriate, or would alternative categories be more suitable? If so, what should those categories be?
  • How costly would the proposed reporting requirements for ETFs be? In addition to reporting and recordkeeping costs, are there competitive or other costs that should be considered in connection with these proposed requirements?
  • Are there other reporting requirements that the Commission should adopt for ETFs? If so, would these additional reporting requirements assist with Commission risk monitoring, inform the public, or both?

f. Part F—Unit Investment Trusts

Part F of Form N-CEN would require information specific to UITs. Like Form N-SAR, proposed Form N-CEN would recognize that UITs have particular characteristics that warrant questions targeted specifically to them.[553] The information requested in Part F would inform us further about the scope and composition of the UIT industry and, thus, would assist us in monitoring the activities of UITs and our examiners in their preparation for exams of UITs. Accordingly, similar to Form N-SAR,[554] proposed Form N-CEN would require certain identifying information relating to a UIT's service providers and entities involved in the formation and governance of UITs, including its depositor,[555] sponsor,[556] trustee,[557] and third party administrator.[558]

Proposed Form N-CEN would also ask whether a UIT is a separate account of an insurance company.[559] Depending on a UIT's response to this item, it would proceed to answer certain additional questions in Part F.[560] While Form N-SAR generally does not differentiate between UITs that are and are not separate accounts of insurance companies, proposed Form N-CEN would make this distinction. We believe that by distinguishing between these different types of UITs, the form will allow us to better target the information requests in the form appropriate to the type of UIT. We also believe this new approach will allow filers to better understand the information being requested of them because it will be more reflective of their operations and should thus improve the consistency of the information reported.

Accordingly, similar to Form N-SAR,[561] a UIT that is not a separate account of an insurance company would provide the number of series existing at the end of the reporting period that had securities registered under the Securities Act [562] and, for new series, the number of series for which registration statements under the Securities Act became effective during the reporting period [563] and the total value of the portfolio securities on the date of deposit.[564] Proposed Form N-CEN would also carry over from Form N-SAR [565] requirements relating to the number of series with a current prospectus,[566] the number of existing series (and total value) for which additional units were registered under the Securities Act,[567] and the value of units placed in portfolios of subsequent series.[568] Our proposal would also require that a UIT that is not a separate account of an insurance company provide the total assets of all series combined as of the reporting period,[569] which is also currently required by Form N-SAR.[570]

As proposed, Form N-CEN would also require certain new information to be reported by separate accounts offering variable annuity and variable life insurance contracts. Specifically, if the UIT is a separate account of an insurance company, proposed Form N-CEN would require disclosure of its series identification number [571] and, for each security that has a contract identification number assigned pursuant to rule 313 of Regulation S-T, the number of individual contracts that are in force at the end of the reporting period.[572]

With respect to insurance company separate accounts, our proposal would also require new identifying and census information for each security issued Start Printed Page 33648through the separate account.[573] This requirement would include the name of the security,[574] contract identification number,[575] total assets attributable to the security,[576] number of contracts sold,[577] gross premiums received,[578] and amount of contract value redeemed.[579] This item would also require additional information relating to section 1035 exchanges, including gross premiums received pursuant to section 1035 exchanges,[580] number of contracts affected in connection with such premiums,[581] amount of contract value redeemed pursuant to section 1035 redemptions [582] and the number of contracts affected by such redemptions.[583] In addition, insurance company separate accounts would be required to provide information on whether they relied on rules 6c-7 [584] and 11a-2 [585] under the Investment Company Act. This information, which is specific to UITs that are separate accounts of insurance companies and is either not otherwise filed with the Commission or is not filed in a structured format, will further assist the Commission in its oversight of UITs, including monitoring trends in the variable annuity and variable life insurance markets.

Finally, Form N-CEN would carry over the Form N-SAR [586] requirement that a UIT provide certain information relating to divestments under section 13(c) of the Investment Company Act.[587] Thus, if a UIT intends to avail itself of the safe harbor provided by section 13(c) with respect to its divestment of certain securities, it will continue to make the following disclosures on Form N-CEN: Identifying information for the issuer, total number of shares or principal amount divested, date that the securities were divested, and the name of the statute that added the provisions of section 13(c) in accordance with which the securities were divested.[588] If the UIT holds any securities of the issuer on the date of the filing, it would also provide the ticker symbol, CUSIP number, and total number of shares or, for debt securities, the principal amount held on the date of the filing.[589]

We request comment on the following information requirements relating to UITs:

  • Is there any additional information regarding series of UITs that should be requested? For example, are there other special UIT account types that should also be included in the form? Is there any information regarding UITs that is included in proposed Form N-CEN that should be excluded from the form?
  • Is there any additional information regarding those involved in the formation and governance of the UIT and service providers to the UIT that should be requested? Should the form provide instructions or a definition regarding depositor or sponsor?
  • Is there any additional information regarding the number of series that should be requested?
  • We request comment on the requirement to provide asset information for the UIT. Is there any other information regarding the series' assets that should be provided? Form N-SAR item 127 contains a detailed list of asset types held by the UIT. The requirement in Form N-CEN is limited to total assets. Should we require more granular asset information in Form N-CEN, as we did in Form N-SAR item 127? If so which items should we include?
  • We request comment on our items relating specifically to insurance company separate accounts. Should we include items relating solely to insurance company separate accounts? Are there any UIT items that insurance company separate accounts should be subject to that they would not be subject to under our proposal? Is there any other information that we should require for insurance company separate accounts?

g. Part G—Attachments

Like Form N-SAR,[590] we are proposing that Part G of Form N-CEN require some descriptive attachments to the filing in order to provide the staff with more granular information regarding certain key issues.[591] Where possible, we sought to eliminate the need to file attachments with the census reporting form in order to simplify the filing process and maximize the amount of information we receive in a data tagged format.[592] Accordingly, we have attempted to limit the number of attachments to the form to those that are most useful to the staff, either because of investor protection issues or because the information is not available elsewhere. Moreover, all except one of the proposed attachments to Form N-CEN are current requirements in Form N-SAR.[593]

Thus, all funds that would be required to file Form N-CEN would, where applicable, be required to file attachments regarding legal proceedings,[594] provision of financial support,[595] changes in the fund's independent public accountant,[596] independent public accountant's report on internal control,[597] and changes in accounting principles and practices.[598] In addition, all funds would be Start Printed Page 33649required, where applicable, to provide attachments relating to information required to be filed pursuant to exemptive orders,[599] and other information required to be included as an attachment pursuant to Commission rules and regulations.[600] Moreover, closed-end funds and SBICs would also be required, where applicable, to provide attachments relating to material amendments to organizational documents,[601] instruments defining the rights of the holders of any new or amended class of securities,[602] new or amended investment advisory contracts,[603] information called for by Item 405 of Regulation S-K,[604] and, for SBICs only, senior officer codes of ethics.[605] Each attachment proposed to be required by Form N-CEN includes instructions describing the information that should be provided in the attachment.[606]

As noted earlier, all of the attachments, except one, are currently required by Form N-SAR.[607] The new attachment relates to the provision of financial support and would be filed by a fund if an affiliate, promoter or principal underwriter of the fund, or affiliate of such person, provided financial support to the fund during the reporting period. As discussed in Part II.E.4.b, we are proposing to include this requirement in Form N-CEN because we believe that it is important that the Commission understand the nature and extent that a fund's sponsor provides financial support to a fund.

We request comment on the following information requirements relating to attachments to the Form:

  • Should any additional attachments be required to be attached to Form N-CEN? Are any proposed attachments unnecessary and, if so, why? Should any of the attachments requested for all Registrants be limited to only certain Registrants?
  • Should we require that the information be reported as attachments to the form or in narrative text-boxes embedded in the form?
  • Should attachment requirements concerning copies of all constituent instruments defining the rights of the holders of any new class of securities and of any amendments to constituent instruments be limited to closed-end funds and SBICs as proposed? Should such requirements apply to all funds?
  • Should the attachments regarding material amendments to organizational documents and new or amended advisory contracts apply only to closed-end funds and SBICs as proposed? Should these requirements apply to all funds? Should the advisory contract requirement apply only to advisory contracts to which the fund is a party or should it include all advisory contracts, including subadvisory contracts?
  • Should any of the attachment filing requirements without materiality qualifiers be limited by materiality qualifiers?
  • With Form N-CEN, we are proposing to eliminate a number of attachments currently required by items 77 and 102 of Form N-SAR. Are there any attachments to Form N-SAR, that are proposed to be eliminated, that should be included in Form N-CEN? Which attachments and why? Are there any costs associated with eliminating these attachments?

5. Items Required by Form N-SAR That Would Be Eliminated by Form N-CEN

As we discussed above, with proposed Form N-CEN, we seek to improve the information that we collect in order to reflect changes in the fund industry since Form N-SAR's adoption in 1985. With that in mind, we are proposing to eliminate certain items from Form N-SAR that we believe are no longer needed by Commission staff or are outdated in their current form. For example, we are proposing not to include Form N-SAR's requirement relating to considerations which affected the participation of brokers or dealers or other entities in commissions or other compensation paid on portfolio transactions.[608]

Form N-CEN would similarly eliminate a number of Form N-SAR items where the information is (or would be, under our proposed reforms) reported elsewhere—for example, items relating to fees and expenses, including front-end and deferred/contingent sales loads, redemption and account maintenance fees, rule 12b-1 fees, and advisory fees.[609] Many of the fee and expense items required by Form N-SAR are already disclosed, in a structured format, in the risk-return summary required by Form N-1A for open-end funds, as well as in an unstructured format in other places in fund registration statements.[610] For other fee and expense items, the information is either not frequently used by Commission staff or we believe that the benefit of having such information is minimal while the burden to funds of reporting such information is costly.[611] For similar reasons as above, we are also proposing not to require other information in proposed Form N-CEN, including information relating to adjustments to shares outstanding by stock split or stock dividend, minimum initial investments, investment practices, portfolio turnover, number of shares outstanding, number of shareholder accounts, average net assets, and certain other condensed balance sheet data items.[612]

We are also proposing to eliminate certain information requirements specifically relating to SBICs and UITs that we no longer believe are necessary to collect on a census form because, much like the items discussed above, the benefit of having such information Start Printed Page 33650is minimal to the Commission's oversight and examination functions while the burdens to these funds of reporting such information is costly.[613] Additionally, with respect to the Form N-SAR [614] item relating to closed-end fund monthly sales and repurchases of shares, this information would be reported on proposed Form N-PORT,[615] rather than proposed Form N-CEN.

The full list of items from Form N-SAR that would be included in Form N-CEN, as proposed, or would be eliminated is listed in Figure 2 below.

Inclusion of Form N-SAR Data Items in Proposed Form N-CEN

Form N-SAR Item No.DescriptionIncluded without changeIncluded but modifiedSimilar data would be available through other sources *No longer required to be reported by all funds
1Registrant information
2Registrant address
3First filing
4Final filing
5SBIC identification
6UIT information
7Series or multiple portfolio company
All Management Investment Companies Except SBICS
8Investment adviser
10 **Administrator
11Principal underwriter
12Shareholder servicing agent
13Independent public accountant
14Broker or dealer which is an affiliated person
15Custodian arrangements
18 **Central depository or book-entry system
19Family of investment companies
20Brokerage commissions paid on portfolio transactions
21Aggregate brokerage commissions
22Portfolio transactions with entities acting as principal
23Aggregate principal purchase/sale transactions
24Holding of securities of registrant's regular brokers or dealers
25Holding of securities of registrant's regular brokers or dealers
26Considerations affecting participation of brokers or dealers
27Open-end investment company
28Monthly sales and repurchases of registrant's/series' shares
29Registrant/series imposing a front-end sales load
30Total front-end sales load collected by underwriters and sales load rates
31Net sales loads retained and paid out by underwriters
32Net amount paid to unaffiliated dealers
33Net amount paid to retail sales force
34Deferred or contingent deferred sales loads
35Deferred or contingent deferred sales loads collected
36Deferred or contingent deferred sales loads retained
37Redemption fees
38Redemption fees collected
39Account maintenance fees
40Registrant/series using its assets directly to make payments under a 12b-1 plan
41Direct use of assets under 12b-1 plan
42Percentage of payments under the 12b-1 plan
43Payments under the 12b-1 plan
44Unreimbursed payments under the 12b-1 plan
45Advisory contract
46More than one investment adviser
47Advisory fee based on percentage of assets
48Contractual advisory fee rate
49Advisory fee based on percentage of income
50Advisory fee based on percentage of income and assets
51Performance based advisory fee
52Advisory fee based on assets, income or performance
53Expense limitations or reductions
54Services supplied by investment advisers or administrators
Start Printed Page 33651
55Overdrafts and bank loans
56Advisory clients
57Stock splits or stock dividends
58Fund classifications
59Management investment company
60Diversified investment company
61Minimum required investment
62Percentage of portfolio in various debt securities
63Dollar weighted average maturity
64Insured or guaranteed securities
65Insured or guaranteed securities attributed to value used in computing NAV
66Classification of funds investing in equity securities
67Registrant/series investing primarily and regularly in a balanced portfolio of debt and equity securities
68Investments in issuers engaged in production or distribution of precious metals or located outside the United States
69Registrant/series as an index fund
70Investment policies and practices
71Portfolio purchases, sales, monthly average value, and turnover rate
72Income and expenses
73Dividends and distributions
74Assets, liabilities, net assets
75Computation of average net assets
76Market price per share for closed-end investment companies
77Attachments
78Wholly-owned subsidiaries consolidated in report
79“811” numbers for wholly-owned investment company subsidiaries consolidated in report
80Fidelity bonds in effect
81Joint fidelity bond
82Fidelity bond deductible
83Fidelity bond claims
84Losses that could have been filed as a claim under the fidelity bond
85Errors and omissions insurance policy
Closed-End Management Investment Companies Except SBICs
86Sales, repurchases, and redemptions of securities
87Securities of registrant registered on a national securities exchange or listed on NASDAQ
88Senior securities
SBICs
89Investment adviser
90Transfer agent
91Independent public accountant
92Custodian arrangements
93Advisory clients other than investment companies
94Family of investment companies
95Sales, repurchases, and redemptions of securities
96Securities of registrant registered on a national securities exchange or listed on NASDAQ
97Income and expenses
98Dividends and distributions
99Assets, liabilities and shareholders' equity
100Computation of average net assets
101Market price per share
102Attachments
103Wholly-owned subsidiaries consolidated in report
104“811” numbers for wholly-owned investment company subsidiaries consolidated in report
105Fidelity bonds in effect
106Joint fidelity bond
107Fidelity bond deductible
Start Printed Page 33652
108Fidelity bond claims
109Losses that could have been filed as a claim under the fidelity bond
110Errors and omissions insurance policy
UITs
111Depositor
112Sponsor
113Trustee
114Principal underwriter
115Independent public accountant
116Family of investment companies
117Separate account of an insurance company
118Series having effective registration statements
119New series having effective registration statements
120Value of new series that became effective
121Series for which a current prospectus existed at the end of the period
122New units of existing series
123Value of new securities deposited in existing series
124Value of units of prior series placed in portfolio of subsequent series
125Amount of sales loads collected
126Amount of sales loads collected from secondary market operations
127Classification of series and assets
128Insured or guaranteed securities
129Insured or guaranteed securities
130Insured or guaranteed securities
131Total expenses
132811 number of series included in filing
133Divestment of securities
* While not available in proposed Form N-CEN, similar data is or would be available through other sources, such as proposed Form N-PORT or a fund's prospectus, statement of additional information, or financial statements.
** Items 9, 16, and 17 are reserved in Form N-SAR.

We request comment on the information requirements relating to items required in Form N-SAR, but not required in proposed Form N-CEN, including the following:

  • Should proposed Form N-CEN require more detailed information relating to the fund's 12b-1 plan, as required by items 40 through 44 of Form N-SAR, considering detailed information regarding the fund's 12b-1 plan is otherwise disclosed in response to other reporting requirements?
  • Should proposed Form N-CEN include financial information or balance sheet items, such as those required by item 72 of Form N-SAR?
  • Despite the fact that certain items relating to fee information are required by other forms, should we include fee information in proposed Form N-CEN? If so, what specific information and why?
  • Should proposed Form N-CEN include information relating to number of shares outstanding, total number of shareholder accounts, or average net assets during the reporting period as required by Items 74.U.1, 74.X, and 75 of Form N-SAR?
  • Are there any other items currently in Form N-SAR that are proposed to be eliminated, which should be included in Form N-CEN? Which items and why? Are there any costs associated with eliminating these items?

F. Technical and Conforming Amendments

We are also proposing technical and conforming amendments to various rules and forms. As discussed above, our proposal would rescind Form N-Q and create new Form N-PORT. In order to implement this proposed change, we propose to revise Forms N-1A, N-2, and N-3 to refer to the availability of portfolio holdings schedules attached to reports on Form N-PORT and posted on fund Web sites rather than on reports on Form N-Q.[616] In addition, we propose to rescind 17 CFR 249.332 and revise the following rules to remove references to Form N-Q: 17 CFR 232.401, 17 CFR 270.8b-33, 17 CFR 270.30a-2, 17 CFR 270.30a-3, and 17 CFR 270.30d-1.

Our proposal would also rescind Form N-SAR and replace it with new Form N-CEN. In order to implement this proposed change, we propose to revise the following rules and sections to remove references to Form N-SAR and replace them with references to Form N-CEN: 17 CFR 232.301, 17 CFR 240.10A-1, 17 CFR 240.12b-25, 17 CFR 249.322, 17 CFR 249.330, 17 CFR 270.8b-16, 270.30d-1, and 17 CFR 274.101.[617]

Start Printed Page 33653

Currently, reports on Form N-SAR are filed semi-annually by management investment companies as required by 17 CFR 270.30b1-1, and annually by UITs as required by 17 CFR 270.30a-1. Because our proposal would require reports on Form N-CEN to be filed annually by all registered investment companies, we propose to rescind 17 CFR 270.30b1-1 and revise 17 CFR 270.30a-1 to require all registered investment companies to file reports on Form N-CEN. We also propose to revise the following rules to remove references to 17 CFR 270.30b1-1 and add references to proposed rule 17 CFR 270.30a-1: 17 CFR 240.13a-10, 17 CFR 240.13a-11, 17 CFR 240.13a-13, 17 CFR 240.13a-16, 17 CFR 240.15d-10, 17 CFR 240.15d-11, 17 CFR 240.15d-13, and 17 CFR 240.15d-16.

In addition, as a result of the proposed new annual reporting requirement that would apply to all registered investment companies, we propose to rescind 17 CFR 270.30b1-2—which currently permits wholly-owned management investment company subsidiaries of management investment companies to not file Form N-SAR under certain circumstances—and propose new rule 17 CFR 270.30a-4—which would permit wholly-owned management investment company subsidiaries of management investment companies to not file Form N-CEN under those same circumstances. We also propose to amend 17 CFR 200.800 to display control numbers assigned to information collection requirements for Forms N-PORT and N-CEN by the Office of Management and Budget pursuant to the Paperwork Reduction Act. As discussed further below, an agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number.[618]

Our proposed amendments to Regulation S-X would, among other things, require management investment companies to report new schedules for certain derivatives holdings.[619] To implement these changes, we propose to renumber the sections for schedules required to be reported by management investment companies and renumber the list of schedules provided in 17 CFR 210.6-10, which outlines the schedules to be reported by investment companies.[620] We propose conforming changes to references to Regulation S-X in the following forms: Form N-1A, Form N-2, Form N-3, and Form N-14.[621]

We also propose to amend Form N-CSR to delete instructions addressing how certifications as to changes in the registrant's internal control over financial reporting should be handled during the transition period when certifications were being implemented on Form N-Q, because those instructions are no longer applicable.[622]

We also propose to remove paragraph (a) of 17 CFR 232.105, which currently requires electronic filers to submit Forms N-SAR and 13F in ASCII, and redesignate paragraphs (b) and (c) as (a) and (b), respectively. Our proposal would rescind Form N-SAR, and Form 13F has been submitted by electronic filers in XML, rather than ASCII, since 2013.[623]

We request comment on these technical and conforming amendments.

G. Compliance Dates

Currently, we anticipate the following compliance dates for our proposed amendments, as set forth below.

1. Form N-PORT, Rescission of Form N-Q, and Amendments to the Certification Requirements of Form N-CSR

Given the nature and frequency of filings on proposed Form N-PORT, if Form N-PORT is adopted, the Commission expects to provide for a tiered set of compliance dates based on asset size. Specifically, for larger entities—namely, funds that together with other investment companies in the same “group of related investment companies” [624] have net assets of $1 billion or more as of the end of the most recent fiscal year—we are proposing a compliance date of 18 months after the effective date to comply with the new reporting requirements. For these larger entities, we expect that eighteen months would provide an adequate period of time for funds, intermediaries, and other service providers to conduct the requisite operational changes to their systems and to establish internal processes to prepare, validate, and file reports on proposed new Form N-PORT with the Commission.[625]

For smaller entities (i.e., funds that together with other investment companies in the same “group of related investment companies” have net assets of less than $1 billion as of the end of the most recent fiscal year),[626] we are Start Printed Page 33654proposing to provide for an extra 12 months (or 30 months after the effective date) to comply with the new reporting requirements. We believe that smaller groups would benefit from this extra time to comply with the filing requirements for Form N-PORT and would potentially benefit from the lessons learned by larger investment companies and groups of investment companies during the adoption period for Form N-PORT.[627]

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

If Form N-CEN and the related proposals are adopted, we are proposing a compliance date of 18 months after the effective date to comply with the new reporting requirements. We expect that eighteen months would provide an adequate period of time for funds, intermediaries, and other service providers to conduct the requisite operational changes to their systems and to establish internal processes to prepare, validate, and file reports on proposed Form N-CEN with the Commission. We are proposing the same compliance date for the related amendments to other rules and forms we are proposing today.[628]

Unlike Form N-PORT, we do not expect to provide for a tiered compliance date based on asset size. We believe that it is less likely that smaller fund complexes would need additional time to comply with the requirements to file Form N-CEN because the requirements are similar to the current requirements to file Form N-SAR, and we expect that filers will prefer the updated, more efficient filing format of Form N-CEN. We are therefore proposing to require all funds, regardless of size, to file reports on Form N-CEN with the same compliance period.

3. Option for Web Site Transmission of Shareholder Reports

Proposed rule 30e-3, if adopted, would permit (but not require) a fund to satisfy requirements under the Act and rules thereunder to transmit reports to shareholders if the fund makes the reports and certain other materials accessible on its Web site. As reliance on the rule would be optional, we believe a compliance period would not be necessary. Therefore, we expect that funds would be able to rely on the rule immediately after the effective date.

4. Regulation S-X and Related Amendments

As discussed above, our proposed amendments to Regulation S-X are largely consistent with existing fund disclosure practices. As such, we do not expect that fund, intermediaries, or service providers would require significant amounts of time to modify systems or establish internal processes to prepare financial statements in accordance with our proposed amendments to Regulation S-X. Accordingly, we are proposing a compliance date for our proposed amendments to Regulation S-X of eight months after the effective date. We expect the same compliance date would apply to conforming amendments related to our proposed amendments to Regulation S-X, including the related amendment we are proposing today.

5. Request for Comment

We request comment on the compliance dates discussed above.

  • How, if at all, should the proposed compliance dates be modified? What factors should we consider when setting the compliance dates for the proposed rules and forms?
  • We request comment on our proposed tiered compliance dates for filings on Form N-PORT. Is a threshold of $1 billion based on the net assets of funds together with other investment companies in the same “group of related investment companies” as of the end of the most recent fiscal year appropriate? Should the threshold be higher or lower? [629] Should the threshold include aggregation of net assets with other investment companies in the same “group of related investment companies?” Why or why not? In lieu of “group of related investment companies,” should aggregation be based on a different set of related companies? For example, should aggregate assets be based on “family of investment companies,” as such term defined in instruction 1(a) to Item 17 of Form N-1A or “fund complex” as defined in instruction 1(b) to Item 17 of Form N-1A? Should we require administrator-sponsored funds to aggregate assets for purposes of this threshold regardless of whether the individual funds (or series thereof) do not hold themselves out to investors as related companies for purposes of investment and investor services? Why or why not?
  • With respect to Form N-PORT, is our compliance date of eighteen months for larger filers appropriate? If not, what length of time would be appropriate for compliance with Form N-PORT? Would a shorter or longer compliance date be appropriate? For example, would a compliance date of 15 months be sufficient? Conversely, would funds need more time to comply, such as 20 months? Is our 12 month extension of the compliance period for smaller entities appropriate? If not, what length of time would be appropriate for compliance with Form N-PORT? Would a shorter or longer extension, such as 9 months or 15 months, be appropriate? How do we appropriately consider the benefits and costs to receiving the information more quickly and the potential costs and benefits associated with a shorter or longer compliance period?
  • Should the Commission consider the implementation of reporting on Form N-PORT initially through a voluntary pilot program? If so, what length of time would be needed for funds and their service providers to appropriately test their reporting procedures?
  • Is our eighteen-month compliance period for Form N-CEN appropriate? If not, what length of time would be appropriate? Would a shorter or longer compliance date be appropriate? For example, would a compliance date of 15 months be sufficient? Conversely, would funds need more time to comply, such as 20 months? Should the compliance period for Form N-CEN mirror that for Form N-PORT, or should we consider different compliance periods? Should we adopt a tiered compliance period for Form N-CEN? Why or why not?
  • We are proposing to not have a compliance period for the option for Web site transmission of shareholder reports under proposed rule 30e-3. Is this appropriate?
  • Is our eight-month compliance period for our proposed amendments to Regulation S-X adequate? If not, what length of time would be adequate and why?

III. General Request for Comment

We request and encourage any interested person to submit comments Start Printed Page 33655regarding the proposed rules and forms, specific issues discussed in this release, and other matters that may have an effect on the proposed rules and forms. With regard to any comments, we note that such comments are of particular assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments.

IV. Economic Analysis

A. Introduction

The Commission is sensitive to the economic effects, including the benefits and costs and the effects on efficiency, competition, and capital formation that will result from the proposed changes to the current reporting regime. Changes to the current reporting regime include proposed Form N-PORT, the rescission of Form N-Q, amendments to the certification requirements for Form N-CSR, amendments to Regulation S-X, the proposed rule governing electronic transmission of shareholder reports, proposed Form N-CEN, and the rescission of Form N-SAR. The economic effects of the proposed changes are discussed below.

The Commission is proposing to modernize the content and format requirements of reports and disclosures by funds, and the manner in which information is filed with the Commission and disclosed to the public. The intent of the proposal is to enhance the Commission's ability to effectively oversee and monitor the activities of investment companies in order to better carry out its regulatory functions and to aid investors and other market participants to better assess the benefits, costs, and risks of investing in different fund products. In summary, and as discussed in greater detail in Part II above, the Commission is proposing the following changes to its rules and forms:

  • We propose to require registered management investment companies and ETFs organized as UITs, other than money market funds or SBICs, to report monthly portfolio information in a structured data format on a proposed new form, Form N-PORT.
  • Because we believe that monthly portfolio reports on Form N-PORT would render quarterly portfolio reports on current Form N-Q unnecessarily duplicative, we are proposing to rescind Form N-Q. We also propose to lengthen the look-back for Sarbanes-Oxley certifications on Form N-CSR to six months to cover the gap in certification coverage that would otherwise occur once Form N-Q is rescinded.
  • We propose to revise Regulation S-X to require new, standardized enhanced disclosures regarding fund holdings in certain derivatives instruments; update the disclosures for other investments; and amend the rules regarding the general form and content of fund financial statements.
  • We propose new rule 30e-3 under the Investment Company Act, which would allow funds to satisfy shareholder report transmission requirements by posting such reports on their own Web sites if they meet certain conditions, including posting quarterly portfolio holdings on their Web sites and notifying investors of its availability.
  • We propose to rescind Form N-SAR, the form on which funds currently report census-type information on a semi-annual basis, and replace it with Form N-CEN, which would require the annual reporting of similar and additional information in an updated, structured format.

The current disclosure of information by funds serves as the baseline against which the costs and benefits as well as the impact on efficiency, competition, and capital formation of this proposal are discussed. The baseline includes the current set of requirements for funds to file reports on Forms N-CSR, N-Q, and N-SAR with the Commission and the content of such reports, including Regulation S-X, and in particular, its schedule of investments. The baseline also includes guidance from Commission staff and other industry groups that has established industry practices for the disclosure of a fund's schedule of investments and financial statements, and includes Commission guidance that permits funds to transmit these materials electronically today provided that certain other conditions are met. Lastly, the baseline includes the current practice of some funds to voluntarily disclose additional information. For example, some funds disclose monthly or quarterly portfolio investment information on their Web sites or to third-party information providers, and disclose additional information (e.g., particular information on derivative positions) in fund financial statements that is not currently required under Regulation S-X. The parties that would be affected by the proposed amendments are funds that have registered or will register with the Commission; the Commission; and other current and future users of fund information including investors, third-party information providers, and other potential users; and other market participants that could be affected by the change in fund disclosures.

We discuss separately below the economic effects of each part of the proposal: the introduction of Form N-PORT, rescission of Form N-Q, amendments to the certification requirements for Form N-CSR, amendments to Regulation S-X, the electronic transmission of shareholder reports, and the introduction of Form N-CEN and the rescission of Form N-SAR. We identify for each part of the proposal the baseline from which the economic effects will be discussed and the parties most likely to be affected.

As noted above, the assets of registered investment companies exceeded $18 trillion at year-end 2014, having grown from about $4.7 trillion at the end of 1997.[630] In addition, approximately 90 million individuals own mutual funds, representing 53.2 million or 43.3% of U.S. households.[631] Among investment companies, we estimate that, as of December 2014, there were 3,146 investment companies registered with the Commission, of which 1,636 were open-end funds, 780 were closed-end funds (including one SBIC), and 727 were UITs.[632] We further estimate that those registered funds included 16,619 series thereof, of which 1,411 were exchange-traded funds, 528 were money market funds, 5,381 were UITs, and 9,299 were other funds.[633] The following table summarizes the entities likely to be affected by the proposed forms, rescissions, and amendments.

Start Printed Page 33656

Figure 3—Affected Parties

FundsUITS
Money market fundsSBICsOther fundsETFsOther UITs
Current:
Form N-SAR
Form N-CSR
Form N-Q
As proposed:
Form N-PORT
Form N-CEN
Form N-CSR
Form N-SARRescinded
Form N-QRescinded

Figure 3

The Commission relies on information included in reports filed by funds to monitor trends, identify risks, inform policy and rulemaking, and assist Commission staff in examination and enforcement efforts of the asset management industry. An essential factor to the Commission's ability to carry out its regulatory functions is regular, timely information about portfolio holdings and general, census information about funds. In general, this proposal would modernize the fund reporting regime and, among other effects, would result in an increased transparency of fund portfolios and investment practices. The increased transparency would improve the ability of the Commission to fulfill its regulatory functions. These functions include the development of policy and guidance, the staff's review of fund registration statements and disclosures, and the Commission's examination and enforcement programs. The increased transparency would also improve the ability of investors to select funds for investment, and therefore improve their ability to allocate capital across funds and other investments to more closely reflect their investment risk preferences. Increased transparency would also enhance competition among funds to attract investors.

At the outset, the Commission notes that, where possible, it has sought to quantify the costs, benefits, and effects on efficiency, competition, and capital formation expected to result from each part of the proposal and its reasonable alternatives. As discussed in further detail below, in many cases the Commission is unable to quantify the economic effects because it lacks the information necessary to provide a reasonable estimate.

The economic effects of the proposal depend upon a number of factors that we cannot estimate or quantify, such as the extent to which investor protection would increase along with the ability of the Commission to oversee the fund industry; the amount of new information that would become available as a result of requiring such information in regulatory filings (as opposed to information that is provided voluntarily); the increase in the availability of the information to all investors, institutional and individual, as a result of the improved structured format of the information; and the extent to which investors are able to use the information to make more informed investment decisions either through direct use or through third-party service providers. Therefore, much of the discussion below is qualitative in nature although we try to describe where possible the direction of these effects.

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

a. Introduction and Economic Baseline

Form N-PORT, as proposed, would require registered management investment companies and ETFs organized as UITs, other than money market funds or SBICs, to report portfolio investment information to the Commission on a monthly basis. As discussed, only information reported for the last month of each fiscal quarter would be made available to the public in order to minimize potential costs associated with making the information public, including front-running or reverse engineering of a fund's investment strategies. Reports would be filed in a structured format using XML to allow for easier aggregation and manipulation of the data. As discussed above, we are also proposing to rescind Form N-Q but require that funds attach their complete portfolio holdings to Form N-PORT for the first and third fiscal quarters in accordance to Regulation S-X. We are also proposing to amend the form of certification in Form N-CSR to require each certifying officer to state that he or she has disclosed in the report any change in the registrant's internal control over financial reporting that occurred during the most recent fiscal half-year to fill the gap in certification coverage that would otherwise occur once Form N-Q is rescinded.[634]

The current set of requirements under which registered management investment companies (other than money market funds and SBICs) and ETFs organized as UITs publicly report their complete portfolio investments to the Commission on a quarterly basis and certain other information on a semi-annual basis,[635] as well as the current practice of some investment companies to voluntarily disclose portfolio investment information either on their Web sites or to third-party information providers on a more frequent basis, is the baseline from which we will discuss the economic effects of new Form N-PORT.[636] The parties that could be affected by the introduction of Form N-PORT are registered management investment companies (other than money market funds and SBICs) and ETFs organized as UITs, that have registered or will register with the Start Printed Page 33657Commission; the Commission; and other current and future users of investment company portfolio investment information including investors, third-party information providers, other interested potential users; and other market participants that could be affected by the change in fund disclosure of portfolio investment information.

Currently, the Commission requires registered management investment companies (other than money market funds and SBICs) to report their complete portfolio investments to the Commission on a quarterly basis.[637] These funds are required to provide this information in reports on Form N-Q as of the end of the first and third fiscal quarters of each year [638] and in reports on Form N-CSR as of the end of the second and fourth fiscal quarters of each year.[639] Both forms require that the reported schedule of portfolio investments conform to the requirements of Regulation S-X, and the schedule for the close of the fiscal year must be audited (but those schedules for the other three fiscal quarters need not be).[640] These reports are generally required to be filed on the EDGAR system and are made publicly available upon receipt.[641] Reports on Form N-CSR may be filed up to 70 days after the end of the reporting period,[642] and reports on Form N-Q may be filed up to 60 days after the end of the reporting period.

Forms N-CSR and N-Q are required to be filed in HTML or ASCII/SGML format.[643] In order to prepare reports in HTML and ASCII/SGML, reporting persons generally need to reformat information from the way the information is stored for normal business use.[644] The resulting format, when rendered in an end user's web browser, is comprehensible to a human reader, but it is not suitable for automated processing. These formats do not allow the Commission or other interested data users to combine information from more than one report in an automated way to, for example, construct a database of fund portfolio positions without additional formatting.

The economic effects from the introduction of new Form N-PORT would largely result from the disclosure of portfolio investment information in a structured format, as well as the additional information that investment companies would report. The economic effects would depend on the extent to which the portfolios and investment practices of investment companies become more transparent as a result of the increase in the amount and availability of portfolio investment information, and the ability of Commission staff and all investors to utilize the structured data. The current reporting requirements for investment companies, however, reduce the ability of Commission staff to evaluate the potential economic effects. For example, the non-structured format of reported portfolio investment information, the absence of information to identify securities, and reporting inconsistencies between investment companies all reduce the ability of Commission staff to aggregate information across the fund industry and to evaluate the economic effects of the proposal.

The proposal would increase the amount of portfolio investment information available for some investment companies more so than others. For example, investment companies that utilize derivatives as part of their investment strategy, or that otherwise engage in alternative strategies, would have more information become available describing their businesses than other investment companies. Information from Form N-SAR provides some indication as to the current use of derivatives by investment companies. Form N-SAR requires investment companies to identify permitted investment policies, and if permitted, investment policies engaged in during the reporting period. As of the second half of 2014, on average 75.4% of investment companies reported as permitted investment policies involving the writing or investing in options or futures, and on average 5.2% of investment companies reported engaging in each one of these policies during the report period.[645] In addition, the total net assets of alternative funds from which more information would become available were as of year-end 2014 approximately $200 billion or 1.2% of the total net assets of the mutual fund market.[646] Although the percentage of net assets of alternative funds relative to the mutual fund market is currently small, the percentage of flows to alternative funds was 10.2% in 2013 and 4.3% in 2014.[647]

b. Benefits

As discussed, Form N-PORT would improve the information that registered management investment companies and ETFs organized as UITs (other than money market funds and SBICs) disclose to the Commission. The increase in the reporting frequency, the update to the structure of the information that reporting funds would disclose, and the additional information not currently disclosed, discussed in further detail below, would improve the ability of the Commission to understand, analyze, and monitor the fund industry. We believe that the information we receive on these reports would facilitate the oversight of funds and would assist the Commission, as the primary regulator of such funds, to better effectuate its mission to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation, through better informed policy decisions, more specific guidance and comments in the disclosure review process, and more targeted examination and enforcement efforts.

To the extent that monthly portfolio investment information is not currently available, the requirement that all investment companies make available Start Printed Page 33658portfolio investment information on a monthly basis to the Commission would improve the ability of the Commission to oversee investment companies by increasing the timeliness of the information available, and by providing a larger number of data points, would increase the ability of Commission staff to identify trends in investment strategies and fund products as well as industry outliers.[648] As discussed above, the quarterly portfolio reports that the Commission currently receives on Forms N-Q and N-CSR could become stale due to the turnover of portfolio securities and fluctuations in the values of the portfolio's investments. Requiring monthly reports on Form N-PORT would decrease the delay between fund reports, so that the Commission would have more timely information than it has currently; portfolio investment information that is more timely would improve the ability of Commission staff to identify risks a fund is facing, particularly during times of market stress.

The ability of Commission staff to effectively use the information reported in Form N-PORT is dependent on the ability of staff to compile and aggregate information into a single database that can then be utilized to conduct industry-wide analyses. Otherwise, the information would only improve the ability of staff to analyze a single or a small number of funds at any one time. The structuring of the information in an XML format would improve the ability of the Commission to compile and aggregate information across all funds, and to analyze individual funds, a subset of funds, or the fund industry as a whole, and would increase the overall efficiency of staff to analyze the information. For example, the ability to compare portfolio investment information across reporting funds or for a single fund across report dates would improve the ability of the Commission to identify funds for examination and to identify trends in the fund industry.

The structuring of portfolio investment information may also improve the quality of the information disclosed by imposing constraints on how the information would be provided. A feature of XML is a built-in validation framework that can provide precise constraints as to how the information could be provided. These data checks, which are not available in the current formats for Form N-CSR and Form N-Q, are important to ensure that the reports contain information that is accurate and consistent across filings, and therefore usable by Commission staff. An improved, structured format may also promote additional efficiency among investment companies to the extent that the new reporting requirements encourage an update and integration of systems, and standardized formats for the disclosure and transmission of filings.

Form N-PORT would require information that is not currently required to be reported to the Commission, including portfolio and position level risk-sensitivity measures and additional information describing derivatives, securities lending activities, repurchase and reverse repurchase agreements, the pricing and liquidity of securities, and information regarding fund returns and flows. The information would increase the ability of Commission staff to understand the use of these products and activities as part of a fund's investment strategy, as well as the risks of a particular fund, a group of funds, and the fund industry.

The proposed requirement to report portfolio- and position-level risk sensitivity measures would provide Commission staff with a set of estimates that summarizes the risk exposures of a fund. The risk sensitivity measures improve the ability of Commission staff to efficiently analyze information for all funds and identify those funds not only with specific risk exposures but also risk exposures that appear to be outliers among peer funds. An ability to efficiently identify funds based on exposure to certain risks would improve the Commission's ability to analyze fund industry trends, monitor funds, and, as appropriate, engage in further inquiry or timely outreach in case of a market or other event. Commission staff could also use these measures to determine whether additional guidance or policy measures are appropriate to improve disclosures.

The calculation of portfolio- or position-level measures of risk for some derivatives, including derivatives with unique or complicated payoff structures, sometimes requires time-intensive computational methods or additional information that Form N-PORT would not require. As discussed above, based on staff experience and outreach, we understand that most funds calculate risk measures for such securities. Accordingly, we believe that requiring funds to provide these measures is more efficient than requiring funds to provide all of the information that might be necessary for the Commission, investors, or other potential users to calculate these measures. The requirement for investment companies to provide risk measures for derivatives, at the position-level and at the portfolio-level, would therefore improve the ability of staff to efficiently identify the risk exposures of funds regardless of the types of derivatives held or that could be introduced to the marketplace. In addition, the requirement for investment companies to provide portfolio-level measures of risk would also improve the ability of staff to efficiently identify interest rate and credit spread exposures at the fund level and conduct analyses without first aggregating position-level measures.

Form N-PORT would require funds to provide the contractual terms for debt securities and many of the more common derivatives including options, futures, forwards, and swaps; the reference instrument for all convertible debt securities and derivatives, and information describing the size of the position. The information would provide Commission staff an ability to identify funds with interest rate risk exposure or exposure to other risks such as those pertaining to a company, industry, or region.

As discussed, for securities lending activities and reverse repurchase agreements, Form N-PORT would require counterparty identification information, contractual terms, and information describing the collateral and reinvestment of the collateral. The additional information could improve the ability of Commission staff to assess fund compliance with the conditions that they must meet to engage in securities lending, as well as better analyze the extent to which funds are exposed to the creditworthiness of counterparties, the loss of principal of the reinvested collateral, and leverage creation through the reinvestment of collateral.

Form N-PORT would also require additional identification information regarding the reporting fund, the issuers of fund investments, and the investments themselves, including the reference instruments for convertible debt securities and derivatives investments. The additional Start Printed Page 33659identification information would benefit the Commission by improving the ability of staff to link the information from Form N-PORT with information from other sources, such as Form N-CEN, that also identify market participants and investments with these identifiers. The additional identification information would be especially important to identify the issuers of fund investments and the investments themselves. The information would improve the ability of Commission staff, from the current requirement to provide just the issuer name, to identify and compare funds that have exposures to particular investments or issuers regardless of the whether the exposure is direct or indirect such as through a derivative security.

Investors, third-party information providers, and other potential users would also experience benefits from the introduction of Form N-PORT. While the frequency of public disclosure of portfolio information would not change, we believe that the structured format of this information would allow investors and other potential users to more efficiently analyze portfolio information. Investors and other potential users would also have quarterly disclosure of additional information that is currently not included in the schedule of investments reported on Form N-Q and Form N-CSR. The additional information as well as the structure of the information would increase the transparency of funds' investment strategies and improve the ability of investors and other potential users to more efficiently identify the risk exposures of the fund.

Form N-PORT would benefit investors, to the extent that they use the information, to better differentiate investment companies based on their investment strategies and other activities. For example, investors would be able to more efficiently identify funds that use derivatives and the extent to which they use derivatives as part of their investment strategies.[649] In general, we expect that institutional investors and other market participants would directly use the information from Form N-PORT more so than individual investors. As discussed, the format of Form N-PORT is not designed to be human readable and the amount of information could result in reports that are voluminous. The Commission therefore has endeavored to mitigate the potential loss of information to individual investors from the rescission of From N-Q through the additional disclosure requirements for investment companies as part of this proposal, including the requirement for investment companies to attach to Form N-PORT complete portfolio holdings in accordance with Regulation S-X for the first and third fiscal quarters.[650] Individual investors, however, could indirectly benefit from the information in Form N-PORT to the extent that third-party information providers and other interested parties are able to obtain, aggregate, provide, and report on the information. Individual investors could also indirectly benefit from the information in Form N-PORT to the extent that other entities, including investment advisers and broker-dealers, utilize the information to help investors make more informed investment decisions.

Portfolio investment information that investment companies report to the Commission is informative in describing the ongoing investment strategy of the fund,[651] and investors could use the information to select funds based on security selection, industry focus, level of diversification, and the use of leverage and derivatives.[652] An increase in the ability of investors to differentiate investment companies would allow investors to allocate capital across reporting funds more in line with their risk preferences and increase the competition among funds for investor capital. In addition, by improving the ability of investors to understand the risks of investments and hence their ability to allocate capital across funds and other investments more efficiently, the introduction of Form N-PORT could promote capital formation.

Rescission of Form N-Q, along with its certifications of the accuracy of the portfolio schedules reported for each fund's first and third fiscal quarters, may result in some cost savings by funds in terms of administrative or filing costs. However, we expect any such savings, if any, to be minimal, because under our proposal each fund would still be required to file portfolio schedules prepared in accordance with §§ 210.12-12 to 12-14 of Regulation S-X for the fund's first and third fiscal quarters, by attaching those schedules as attachments to its reports on Form N-PORT for those reporting periods.

c. Costs

Form N-PORT, as proposed, would require registered management investment companies and ETFs organized as UITs, other than money market funds or SBICs, to incur one-time and ongoing costs to comply with the new filing requirements. Funds would incur additional ongoing costs to report portfolio investment information on a monthly basis on Form N-PORT instead of a quarterly basis as currently reported on Forms N-Q and N-CSR. Funds that voluntarily provide information to third-party information providers and on its Web site, including monthly portfolio investments, and additional information in fund financial statements, including additional information regarding derivatives similar to the requirements that we are proposing today, would bear fewer costs as a result of the proposal than those that do not.[653] The Commission is aware that these funds would nonetheless likely incur additional costs on reports on proposed Form N-PORT than on voluntary submissions, such as validation and signoff processes, given that reports on Form N-PORT would be a required regulatory filing and would possibly require different data than the funds are currently providing to third-party information providers. Over time, the filings could become highly automated and could involve fewer costs.[654]

Start Printed Page 33660

Funds would also incur costs to file reports on Form N-PORT in a structured format. Based on staff experience with other XML filings, however, these costs are expected to be minimal given the technology that would be used to structure the data.[655] XML is a widely used data format, and based on the Commission's understanding of current practices, most reporting persons and third party service providers have systems already in place to report schedules of investments and other information. Systems would be able to accommodate an alternative format such as XML without significant costs, and large-scale changes would likely not be necessary to output structured data files. In an effort to reduce some of the potential burdens on smaller entities, we are proposing to extend the compliance period to begin filing reports on Form N-PORT to thirty months after the effective date for groups of funds with assets under $1 billion.[656] The additional time could increase the ability of these investment companies to comply with the filing requirements by providing more time for system and operation changes and from observing larger fund groups.

Form N-PORT would also require the disclosure of certain information that is not currently required by the Commission. In some instances, such as in the case of increased disclosures regarding derivatives investments and information concerning the pricing and liquidity of investments, the Commission is proposing to require parallel disclosures in the fund's schedule of investments; accordingly, we expect funds would generally incur one set of costs to adhere to the reporting of new information on Form N-PORT and in its schedule of investments. For other information, such as the reporting of particular asset classifications, identification of investments and reference instruments, and risk measures, the information would be disclosed on Form N-PORT only.

To the extent that our proposal would require information to be reported that is not currently contained in fund accounting or financial reporting systems, funds would bear one-time costs to update systems to adhere to the new filing requirements. The one-time costs would depend on the extent to which investment companies currently report the information required to be disclosed. The one-time costs would also depend on whether an investment company would need to implement new systems, such as to calculate and report risk-sensitivity measures, and to integrate information maintained in separate internal systems or by third parties to comply with the new requirements. Based on staff outreach to funds, we believe that, at a minimum, funds would incur systems or licensing costs to obtain a software solution or to retain a service provider in order to report data on risk metrics, as risk metrics are not required to be reported on the fund financial statements. Our experience with and outreach to funds indicates that the types of systems funds use for warehousing and aggregating data, including data on risk metrics, varies widely.

To the extent possible, we have attempted to quantify these costs. As discussed below, we estimate that funds would incur certain annual paperwork costs associated with preparing, reviewing, and filing reports on Form N-PORT.[657] Assuming that 35% of funds (3,749 funds) would choose to license a software solution to file reports on Form N-PORT, we estimate an upper bound on the initial annual costs to funds choosing this option of $55,970 per fund [658] with annual ongoing costs of $46,745 per fund.[659] We further assume that 65% of funds (6,962 funds) would choose to retain a third-party service provider to provide data aggregation and validation services as part of the preparation and filing of reports on Form N-PORT, and we estimate an upper bound on the initial costs to funds choosing this option of $54,821 per fund [660] with annual ongoing costs of $38,746 per fund.[661] In total, we estimate that funds would incur initial annual costs of $515,537,918 and ongoing annual costs of $444,996,657.[662]

Although under the proposal there would be no change to the frequency or time-lag for which investment company security position information is publicly disclosed, the increase in the amount of publicly available information and the greater ability to analyze the information as a result of its structure may facilitate activities such as “front-running,” “predatory trading,” and “copycatting/reverse engineering of trading strategies” by other investors. For example, Form N-PORT would result in the disclosure of additional information, such as pertaining to derivatives and securities lending activities, which could more clearly reveal the investment strategy of reporting funds and its risk exposures. The structured format of portfolio investments disclosure could also improve the ability of other investors to obtain and aggregate the data, and identify specific funds to front-run or predatory trade. These activities could reduce the profitability from developing new investment strategies, and therefore could reduce innovation and impact competition in the fund industry.

Investors that trade ahead of funds could reduce the profitability of funds by increasing the price of fund purchases and by decreasing the price of fund sales. These activities can reduce the returns to shareholders who invest Start Printed Page 33661in actively managed funds, making actively managed funds less attractive investment options.[663] Portfolio investment information, along with flow information, can also create opportunities for other market participants to front-run the sales of funds that experience large outflows and the purchases of funds that experience large inflows,[664] or create opportunities for other market participants to engage in predatory trading that could lead to further fund distress.[665]

A trading strategy that follows the publicly reported holdings of actively managed funds can also earn similar if not higher after expense returns.[666] An implication of this finding is that the public disclosure of portfolio investment information could induce free-riding by investors that use the information and reduce the potential benefit from developing new investment strategies and engaging in proprietary market research. The effect of free-riding would reduce the ability of an investment companies with longer investment horizons to benefit from researching investment opportunities and developing new strategies more so than investment companies with shorter investment horizons because of the increased likelihood that the disclosed portfolio investment information would reveal their long-term investment strategies.[667]

A comparison can be made between the economic effects from the introduction of Form N-PORT and the economic effects from the introduction of Form N-Q in May 2004 which increased the reporting frequency of portfolio investment information to the Commission from semiannual to quarterly. The introduction of Form N-Q resulted in an increase in the amount of information that could have been acted upon by other investors. For example, evidence indicates that the ability of copycat funds to outperform actively managed funds increased after the introduction of Form N-Q,[668] and additional evidence indicates that the performance of those funds with better previous performance or that invest in low-information stocks decreased following the introduction of Form N-Q.[669] The increase in the frequency of portfolio investment information as a result of Form N-Q resulted in an increase in the amount of portfolio investment information available. Although Form N-PORT would not increase the frequency of public disclosure, Form N-PORT would increase the amount of portfolio investment information available. In addition, Form N-PORT, unlike Form N-Q, would also increase the accessibility of the information as a result of its structured format.

We have endeavored to mitigate the potential for front-running, predatory trading, and copycatting/reverse engineering by other market participants by proposing to maintain the status quo for the frequency and timing of disclosure of publicly available portfolio information. In addition, much, though not all, of the information that Form N-PORT would require, is already disclosed by reporting funds on Form N-CSR and Form N-Q.[670] The additional information and the structure of the information that would be required under Form N-PORT, however, would improve the ability of investors to obtain, aggregate, and analyze all fund investments. Thus, Form N-PORT could negatively affect actively managed funds by increasing the ability of other investors to copycat or front-run investment strategies, and in particular could negatively affect those funds that would have more additional information disclosed, such as funds that use derivatives as part of their investment strategies. The Commission has considered the needs of the Commission, investors, and other users of portfolio investment information and the potential that other investors may use the information to the detriment of the reporting funds.

Form N-PORT would require the disclosure of information that is currently nonpublic that could result in additional costs to funds and market participants. For example, Form N-PORT would require a fund to report the identities and weights of each of the individual components comprising the reference instruments underlying the fund's derivative investments, unless the reference instrument is an index whose components are publicly available on a Web site and are updated on that Web site no less frequently than quarterly, or the notional amount of the derivative represents 1% or less of the net asset value of the fund.[671] We understand that many indices used as reference instruments in derivative investments are proprietary to index providers, and are subject to licensing agreements between the index provider and the fund. Disclosing the components of a non-public index could result in costs to both the index provider, whose proprietary indexing strategy could be imitated, and the fund, whose investments could be front-run.[672] Moreover, disclosing the underlying components of such an index could subject the fund to one-time costs associated with renegotiating licensing agreements and the ongoing payment of fees in order to obtain the rights to disclose the components of the index.[673] Additionally, the increased transparency in proprietary indexes could ultimately decrease the incentives of index providers to license the use of such indices to funds as well as fund demand for securities products that incorporate these indices. Likewise, Form N-PORT, as well as the proposed amendments to regulation S-X, would require funds to report certain information regarding fees and financing terms for certain derivatives contracts, particularly OTC swaps, which are not currently required to be publicly disclosed. The increased transparency could increase the competition among swap and security-based swap dealers to offer favorable fees and financing terms, as the fees and financing terms offered to one fund Start Printed Page 33662would be known to other funds negotiating the terms of such contracts.

As discussed above, although our proposal would rescind Form N-Q, it would also require funds to file portfolio schedules prepared in accordance with §§ 210.12-12 to 12-14 of Regulation S-X for the fund's first and third fiscal quarters, by attaching those schedules as attachments to its reports on Form N-PORT for those reporting periods. Although the schedules attached to Form N-PORT would be largely identical to the information currently reported on Form N-Q, under our proposal funds would have 30 days to prepare and file the attachments to Form N-PORT, as opposed to the 60 days that funds currently have to prepare, certify, and file reports on Form N-Q. The faster turnaround time may result in increased costs to funds, but we expect these costs may be mitigated by removing the requirement that funds certify this information.

Rescission of Form N-Q would also eliminate certifications of the accuracy of the portfolio schedules reported for the first and third fiscal quarters, and would also result in funds providing certifications regarding their disclosure controls and procedures and internal control over financial reporting semi-annually rather than quarterly. To the extent that such certifications improve the accuracy of the data reported, removing such certifications could have negative effects on the quality of the data reported. Likewise, if the reduced frequency of the certifications affects the process by which controls and procedures are assessed, requiring such certifications semi-annually rather than quarterly could reduce the effectiveness of the fund's disclosure controls and procedures and internal control over financial reporting are assessed. However, we expect such effects, if any, to be minimal because certifying officers would continue to certify portfolio holdings for the fund's second and fourth fiscal quarters and would further provide semi-annual certifications concerning disclosure controls and procedures and internal control over financial reporting that would cover the entire year.

C. Amendments to Regulation S-X

a. Introduction and Economic Baseline

The proposed amendments to Regulation S-X would require new, standardized disclosures regarding fund holdings in open futures contracts, open forward foreign currency contracts, and open swap contracts, and additional disclosures regarding fund holdings of written and purchased option contracts; update the disclosures for other investments with conforming amendments, as well as reorganize the order in which some investments are presented; and amend the rules regarding the general form and content of fund financial statements, including requiring prominent placement of investments in derivative investments in a fund's financial statements, rather than allowing such schedules to be placed in the notes to the financial statements.[674] Finally, our amendments would require a new disclosure in the notes to the financial statements relating to a fund's securities lending activities.

The current set of requirements under Regulation S-X, as well as the current practice of many funds [675] to voluntarily disclose additional portfolio investment information in fund financial statements and to follow industry guidance and other industry practices, is the baseline from which we discuss the economic effects of amendments to Regulation S-X.[676] The parties that could be affected by the proposed amendments to Regulation S-X include funds that file or would file reports with the Commission and update or would update registration statements on file with the Commission, the Commission, current and future investors of investment companies, and other market participants that could be affected by the increase in the disclosure of portfolio investment information.

Regulation S-X prescribes the form and content of financial statements required in shareholder reports and registration updates. Today, Regulation S-X does not prescribe specific information to be disclosed under Regulation S-X for many investments in derivatives, which could result in inconsistent reporting between funds and reduced transparency of the information reported, and in some cases could result in insufficient information concerning the terms and underlying reference assets of derivatives to allow investors to understand the investment.

Many of the economic effects from the proposed amendments to Regulation S-X would largely result from an increase in investor ability to make investment decisions dependent on more transparent disclosure in shareholder reports and in the financial statements of registration statements. As discussed above, the economic effects would depend on the extent to which the portfolios and investment practices of investment companies become more transparent, and the ability of investors, and in particular individual investors, to utilize shareholder reports to make investment decisions. The economic effects would also depend on the extent to which investment companies already voluntarily provide disclosures that would be required by the proposed amendments. As a result of these factors, some of which are difficult to quantify or unquantifiable, the discussion below is largely qualitative although certain one-time and ongoing costs associated with the proposed amendments are quantified below.

b. Benefits

The amendments to Regulation S-X could benefit investors by updating the information funds disclose in the financial statements of registration statements and shareholder reports. Our proposed amendments could benefit investors through increased transparency into a fund's investments, particularly for individual investors that we would not expect to use the information in Form N-PORT because of its structured format. In particular, the additional information that Regulation S-X would require for open option contracts both written and purchased, open futures contracts, open forward foreign currency contracts, open swap contracts, and other investments would increase the transparency of the fund's portfolio investments and risk exposures.

Other amendments would also improve the transparency into the fund's investments. For example, we are proposing to require funds to identify each investment whose fair value was determined using significant unobservable inputs.[677] Likewise, we Start Printed Page 33663are proposing a requirement that funds identify illiquid securities,[678] as well as to separately identify investments that are restricted.[679] As discussed above, we believe that the effect of these proposed amendments would be to increase transparency into the liquidity of investments and help investors better understand how fund investments are valued.[680]

In certain circumstances, we are also requiring funds to separately list each of the investments comprising the referenced assets underlying swap [681] and option contracts.[682] We believe that increased disclosure of the investments underlying a referenced asset could benefit investors by making it easier for them to understand and evaluate the specific risk exposures of a fund from certain swap and option contracts.

We also believe that our proposed changes to the form and content of financial statements in Article 6 of Regulation S-X will similarly benefit investors, particularly individual investors, through greater transparency in a fund's financial statements. For example, we are proposing to require funds to disclose their investments in derivatives in the financial statements, as opposed to in the notes to the financial statements.[683] To the extent funds do not do this already, we believe that more prominent placement of investments in derivatives in the financial statements (immediately following the schedules for investments in securities of unaffiliated investors and securities sold short), would benefit investors through increased visibility of fund investments in derivatives. Likewise, we are proposing to eliminate the financial statement disclosure of “Total investments” on the balance sheet under “Assets”.[684] As we discuss in more detail in Part II.C.5, recognizing that investments in derivatives could be presented under both assets and liabilities on the balance sheet, eliminating this disclosure would benefit investors by providing a more accurate representation of the effect of these investments on a fund's balance sheet.[685]

Other parties that would be affected by the amendments to Regulation S-X include the Commission and other market participants that would use shareholder reports and registration statements to obtain fund information. Although the amendments to Regulation S-X would primarily benefit investors and particularly individual investors, the Commission and other market participants could use the information reported in a fund's shareholder report such as the proposed notes to financial statement relating to income and expenses from securities lending activities, as well as the terms governing the compensation of securities lending agents, and would benefit from an increase in transparency into a fund's investments and financial statements during examinations. Commission staff believes that a large number of funds currently adhere to industry practices from which the amendments to Regulation S-X are derived. The proposal to amend Regulation S-X, therefore, would effectively standardize the information that all funds disclose in financial statements, and make the schedule of investments and financial statement disclosures consistent and thus more comparable across funds. Similar to the introduction of Form N-PORT, the amendments to Regulation S-X, to the extent that it increases the transparency of shareholder reports, could improve the ability of investors, particularly individual investors, to differentiate investment companies and make investment decisions. An increase in the ability of investors to differentiate investment companies and allocate capital across reporting funds closer to their risk preferences would increase the competition among funds for investor capital. In addition, by improving the ability of investors to understand investment risks and hence their ability to allocate capital across funds and other investments more efficiently, the introduction of Form N-PORT could also promote capital formation.

c. Costs

We believe that registrants on average will likely incur minimal costs from our proposed amendments to Regulation S-X because, as discussed above, based upon staff experience, we believe that a majority of funds are already providing the information that would be required by the proposed amendments to Regulation S-X in their financial statements.[686] The costs to a fund of complying with the proposed rules would depend upon the extent to which funds are already making such disclosures voluntarily. As discussed above, the Commission is proposing to require parallel disclosures in Form N-PORT, and funds would incur one set of costs, both one-time and ongoing, to obtain the information that would be disclosed in Form N-PORT and in shareholder reports and registration statements. In addition, other costs that relate to the disclosure of portfolio investment information, including the ability of other investors to front-run or copycat the investment strategies of funds, would primarily relate to Form N-PORT because of the additional ability of other interested third-parties and market participants to efficiently obtain, aggregate, and analyze the information as a result of its structured format as compared to the non-structured format of reported portfolio investment information in shareholder reports.

For example, similar to our disclosures proposed in Form N-PORT,[687] proposed rules 12-13 and 12-13C of Regulation S-X would, under certain circumstances, require funds to list separately each of the investments comprising referenced assets underlying swap [688] and option contracts,[689] such as when the referenced asset is an index whose components are not periodically publicly available on a Web site. We understand that many indexes are the proprietary property of an index provider, and may be subject to licensing agreements between the index provider and the fund. Disclosing the underlying components of an index could subject the fund to costs associated with negotiating or renegotiating licensing agreements in order to publicly disclose the components of the index. The Commission does not have information available to provide a reliable estimate of the increased costs of licensing agreements because funds currently are not required to disclose the agreements or the components of the index. In addition, disclosing the components of a non-public index may include costs to both the index provider, whose proprietary indexing strategy could be Start Printed Page 33664reverse engineered, and the fund, whose rebalancing trades could be front-run.[690] However, the underlying components may be more accessible in Form N-PORT as a result of its structured format as compared to the non-structured format of the information in shareholder reports, and the costs of disclosing the information would therefore primarily relate to Form N-PORT.

As another example, the proposal includes an instruction to disclose the variable financing rates for swaps which pay or receive financing payments.[691] It is our understanding that variable financing rates for swap contracts are often commercial terms of a deal that are negotiated between the fund and the counterparty to the swap. Disclosure of favorable variable financing rates could result in costs to the fund in the form of less favorable variable financing rates for future transactions, but may also improve the ability of other funds to negotiate more favorable terms. Similar to the introduction of Form N-PORT, the increased transparency could increase the competition among swap and security-based swap dealers to offer favorable fees and financing terms. As with the disclosure of the components of an index, we believe that the majority of the costs associated with disclosures of variable financing rates, including the increase in competition for favorable fees and terms, would instead derive from the similar requirements in proposed Form N-PORT.[692]

Funds would incur one-time and ongoing costs to comply with the amendments to Regulation S-X in addition to the costs attributable to new Form N-PORT. For the amendments to Regulation S-X, funds would incur one-time and ongoing costs to obtain the additional information that would be disclosed on shareholder reports and registration statements, and that would also not be disclosed on Form N-PORT; and funds would also incur one-time costs to format for presentation all additional information that would be disclosed on shareholder reports and registration statements. In addition, our proposal would require funds, to the extent they do not already do so, to present the schedules associated with rules 12-13 through 12-13D and 12-14 in the financial statements, as opposed to in the notes to the financial statements.[693] Funds that do not currently present their schedule of investments in this manner would incur a one-time cost of modifying the presentation of their financial statements to conform to our proposal.

To the extent possible, we have attempted to quantify these costs. As discussed below, we estimate that management investment companies would incur certain one-time additional paperwork and other costs associated with preparing, reviewing, and filing semi-annual reports in accordance with our proposed amendments to Regulation S-X in the amount of approximately $2,417 per fund [694] and $27,142,910 in the aggregate.[695] We similarly estimate that management investment companies would incur certain ongoing paperwork and other costs associated with preparing, reviewing, and filing semi-annual reports in accordance with our proposed amendments to Regulation S-X in the amount of approximately $806 per fund [696] and $9,051,380 in the aggregate.[697] Likewise, we estimate that UITs would incur certain one-time additional paperwork and other costs associated with preparing, reviewing, and filing semi-annual reports in accordance with our proposed amendments to Regulation S-X in the amount of approximately $2,417 per fund [698] and $1,757,159 in the aggregate.[699] We similarly estimate that UITs would incur certain ongoing paperwork and other costs associated with preparing, reviewing, and filing semi-annual reports in accordance with our proposed amendments to Regulation S-X in the amount of approximately $806 per fund [700] and $585,962 in the aggregate.[701]

D. Option for Web Site Transmission of Shareholder Reports

a. Introduction and Economic Baseline

As discussed above, the Commission is proposing new rule 30e-3 under the Investment Company Act, which would permit, but not require, a fund to satisfy requirements under the Act and rules thereunder to transmit reports to shareholders if the fund meets certain requirements. These requirements include making the reports and certain other materials accessible on its Web site and periodically notifying investors of the materials' availability.[702] Funds that do not maintain Web sites or that otherwise wish to transmit shareholder reports in paper or pursuant the Commission's existing electronic delivery guidance would continue to be able to satisfy the transmission requirements by those transmission methods.

The current set of requirements under which funds transmit shareholder reports to investors is the baseline from which we will discuss the economic effects of proposed rule 30e-3. The baseline also includes the current practice of many funds to make some or all of these reports—or other materials listing portfolio investment information such as reports on Form N-Q—accessible on their own Web sites. The baseline also reflects that some funds transmit these materials electronically today, pursuant to Commission guidance that permits such a transmission method on a shareholder-by-shareholder “opt in” basis, provided that certain other conditions are met.703 Start Printed Page 33665The parties that could be affected by new rule 30e-3 are funds that currently are or would be required to transmit shareholder reports under rule 30e-1 or 30e-2, and other current and future users of fund portfolio investment information, including investors and third-party information providers.

Today, most funds are required to disclose their portfolio holdings on a quarterly basis, with holdings as of the end of the second and fourth fiscal quarters disclosed in the fund's semiannual and annual reports, respectively, and holdings as of the end of the first and third fiscal quarters disclosed in reports on Form N-Q. Funds are generally required to transmit reports to shareholders on a semiannual basis, and these reports have historically been paper copies mailed to shareholders.[704] As of December 31, 2014, about 11,957 funds could rely on proposed rule 30e-3 if it were in effect.[705] As discussed in detail below, we estimate that these funds—and their shareholders—bear aggregate annual paperwork expenses of about $616 million in connection with the required preparation and transmission of shareholder reports (or about $51,539 for each portfolio).[706] Of those estimated expenses, we estimate that about $116 million are associated with the printing and mailing of shareholder reports.[707] Reports on Form N-Q are available on EDGAR.[708] Some funds choose to make some or all of these reports—or other materials listing portfolio holdings at particular times—accessible on their own Web sites, but funds do not do so uniformly.

As technology has developed, so has the need to modernize the manner in which shareholder reports and portfolio investment information are delivered to investors. As discussed above, recent investor testing and Internet usage trends have highlighted that investor preferences about electronic delivery of information have evolved, and that many investors would prefer enhanced availability of fund information on the Internet.[709] In addition, investor testing has suggested that fund investors are much more likely to seek out fund information on the fund's own Web site than they are to seek it out on EDGAR.[710] Moreover, searching for and retrieving individual reports on Form N-Q on EDGAR may, in many cases, be more difficult than navigating a Web site with which the investor is likely to be already familiar. We therefore believe that many investors may not view the information that is available in reports on Form N-Q. Shareholders also pay, pro rata, the expenses associated with printing and mailing reports by default to shareholders, who may nonetheless prefer electronic transmission.

The economic effects of proposed rule 30e-3 are dependent on a number of factors, including the number of funds that would rely on the rule, the number of funds which currently rely on Commission guidance to transmit shareholder reports electronically, and the extent to which shareholders become more aware of the availability of portfolio investment information, view the information, and use the information to make investment decisions. Due to the optionality of the rule, we would expect that, in general, each fund would only rely on the rule if the benefits to that fund exceeded the costs. We have provided estimates of the costs associated with printing and mailing shareholder reports. However, information that would allow the Commission to quantify the other economic effects of the rule, such as how the availability of shareholder reports online will affect investors' use of the information, is not known to us.

Funds can transmit shareholder reports electronically today pursuant to Commission guidance. However, funds wishing to rely on this Commission guidance must satisfy certain conditions, including that shareholders agree to electronic transmission on a shareholder-by-shareholder “opt in” basis. We recognize that express shareholder consent can be difficult to obtain even for practices that many shareholders may prefer.[711] The number of funds that transmit shareholder reports electronically today is unclear to us, because funds are not required to report their reliance on the Commission's electronic delivery guidance or the number of investors that have given opt-in consent to receive electronic delivery. Commission staff is also not aware of information that describes the prevalence of electronic delivery of disclosure documents and other information. In addition, although survey evidence describes certain investor preferences regarding electronic delivery of shareholder report information,[712] we are not aware of information that would describe the effect of this rule on investor ability to choose between funds and allocate capital across all investments. For these reasons, much of the discussion below is qualitative in nature.

b. Benefits

The proposed rule, to the extent that it is relied upon by funds and alters the current transmission of reports, would increase the accessibility of portfolio investment information including information from the first and third fiscal quarters that might otherwise be only available on EDGAR. The proposed rule would thereby increase the awareness of fund shareholders of the availability of portfolio investment information, and therefore also increase the likelihood that fund investors review portfolio investment information. The proposed rule would also increase the likelihood that fund shareholders view the portfolio Start Printed Page 33666investment information in their preferred format, and thereby increase their use of the information to make investment decisions.[713] Similar to the introduction of Form N-PORT and the amendments to Regulation S-X, greater investor use of shareholder reports could result in more informed investment decisions, particularly for individual investors, and an increase in competition among funds for investor capital. A greater understanding of the investment strategy of the fund, its portfolio composition, and its investment risks could also result in a more efficient allocation of capital across funds and other investments, and could thereby promote capital formation.

Funds and their shareholders would also benefit from a reduction in expenses related to the physical distribution of shareholder reports. Although the proposed rule would not have much of an effect, if any, on the expenses associated with the preparation of reports, we expect that the expenses associated with printing and mailing of shareholder reports would be substantially reduced if the rule is adopted. As discussed in detail below, of the estimated $116 million in annual paperwork expenses associated with the printing and mailing of shareholder reports,[714] we estimate that about $105 million would be eliminated if the proposed rule were adopted.[715] The actual reduction in paperwork expenses would depend, in part, upon reliance on the proposed rule by funds and the extent of shareholder consent to electronic transmission of reports, each of which is uncertain.

The expected benefits would not necessarily be distributed uniformly across funds and across a fund's shareholders. Some funds already transmit materials electronically to some or all of their shareholders, and these funds would experience fewer benefits from electing to rely on the proposed rule. Some funds, such as funds that do not currently maintain Web sites, may choose not to rely on the proposed rule.

c. Costs

Although we believe that permitting electronic delivery “by default” would improve overall alignment of transmission method with investor preferences,[716] there may be some investors who would prefer to receive print copies that do not notify their fund of that preference and may be others that would benefit from print copies even though they prefer electronic transmission. These investors, depending on their ability and preference to access shareholder reports and portfolio investment information electronically, could overlook electronic deliveries or otherwise experience a reduction in their ability to access portfolio investment information, and could result in a decrease in their ability to efficiently allocate capital across funds and other investments. We have endeavored, through the consent and notice provisions of the proposed rule, to mitigate the potential costs associated with this possibility by requiring a fund wishing to rely on the proposed rule to alert an investor before beginning to transmit reports electronically and to notify the investor around the time each report is made accessible on the Web site. Although, as discussed above, an increase in investor use of shareholder reports could increase competition among funds for investor capital, funds that do not rely on the rule could be placed at a competitive disadvantage depending on whether investors choose funds based on their preference for Web site transmission.

As discussed above, reliance on proposed rule 30e-3 would be optional, and funds that rely on the rule would incur costs to adhere to the rule. Relying funds would incur paperwork expenses associated with satisfying the conditions of the proposed rule, such as making the materials publicly accessible; preparing, reviewing, and transmitting a notice to shareholders; soliciting the consent of each shareholder by sending them an initial statement; and printing and mailing shareholder reports and other materials upon request. As discussed in detail below, we estimate that these paperwork expenses would be, in the aggregate, about $32 million each year.[717] Relying funds would also incur Start Printed Page 33667initial one-time costs associated with establishing systems and procedures for compliance. We estimate that these expenses would be, in the aggregate, about $16 million.[718]

We have endeavored to mitigate the costs associated with compliance with the rule's conditions by, for example, requiring that the required schedule of portfolio investment information as of the end of the first and third fiscal quarters be presented consistent with the reporting requirements of Regulation S-X. Most funds would have established procedures in place to prepare and review such disclosures and would be familiar with the disclosure requirements. Because reliance on the proposed rule would be optional, a particular fund would not be expected to rely on the proposed rule if the costs of the rule to that fund would exceed its benefits. Funds that do not rely on the proposed rule would therefore not incur compliance costs.

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

a. Introduction and Economic Baseline

Form N-CEN, as proposed, would require funds to report census information to the Commission on an annual basis. Although Form N-CEN would include many of the same data elements as the current census-type reporting form, Form N-SAR, it would replace items that are outdated or no longer informative with items of greater importance. Form N-CEN would also eliminate certain items that are reported to the Commission in other forms. Reports would also be filed in a structured, XML format to allow for easier aggregation and manipulation of the data. Form N-SAR would be rescinded.

The current set of requirements—management companies must file reports on Form N-SAR semi-Start Printed Page 33668annually,[719] and UITs file such reports annually [720] —is the baseline from which we discuss the economic effects of Form N-CEN. The parties that could be affected by the rescission of Form N-SAR and the introduction of Form N-CEN include funds that currently file reports on Form N-SAR and funds that would file reports on Form N-CEN; the Commission; and, other current and future users of fund census information including investors, third-party information providers, and other interested potential users.

At the time it was adopted, Form N-SAR was intended to reduce reporting burdens and better align the information reported with the characteristics of the fund industry. As the fund industry has developed, including the development of new products, so has the need to update the information the Commission requires in order to improve its ability to monitor the compliance and risks of reporting funds. The format in which information is reported in Form N-SAR is also outdated, which reduces the ability of Commission staff to obtain and aggregate the information. The technology in which Form N-CEN would be filed allows for both the sender and recipient to validate the information against identical definitions, thereby increasing the accuracy of the information and therefore the ability of Commission staff to compare the information across funds.

The economic effects from the introduction of new Form N-CEN and the rescission of Form N-SAR would largely result from an update to the format of the information reported, as well as the update to the census information that investment companies would report. The economic effects would therefore depend on the extent to which investment companies become more transparent, and the ability of Commission staff and investors to utilize the updated disclosures. Form N-CEN would require census information about the fund industry reported in a structured format. However, while Form N-SAR is also reported in a structured format, Form N-CEN would modernize the information funds report and the required format of the filings. Therefore, although the introduction of Form N-CEN would increase the transparency of the fund industry, we do not know the extent to which the transparency would increase or the significance of its economic implications.

b. Benefits

As discussed above, the Commission is proposing to rescind Form N-SAR and replace it with new Form N-CEN in order to improve the quality and utility of the information reported to the Commission. The improvement in the quality and utility of the information would allow Commission staff to better understand industry trends, inform policy, and assist with the Commission's examination program.

Similar to Form N-PORT, the ability of the Commission to most effectively use the information is dependent on the ability of staff to compile and aggregate the information into a single database. The structuring of the information in an XML format would improve the ability and efficiency of Commission staff to obtain and analyze the information. An improved structured format could also promote additional efficiency to the extent that the new reporting requirements encourage modernization of internal systems and standardization for the disclosure and transmission of information. An XML format would also improve its accuracy by providing sophisticated constraints as to how information could be provided and by allowing for built-in validation.

Form N-CEN would also modernize the census information that funds provide and increase its utility to Commission staff, investors, and other interested parties by reflecting the changes to the fund industry. The Commission would use the information in Form N-CEN to improve its understanding of fund industry trends and practices, and assist with the Commission's examination program. Commission staff has identified specific information that could improve its ability to effectively oversee funds including identifying information, when applicable, about the fund's service providers, information describing financial support by an affiliated entity, classification of fund type, and information describing investments in CFCs.

Along with the additional information, Form N-CEN would add new requirements for information specifically relating to the ETF primary markets, including more detailed information on authorized participants and creation unit requirements.[721] We believe that our proposed additional information on ETFs allows the Commission to better understand and assess the ETF market and also inform the public about certain characteristics of the ETF primary markets. Additionally, Form N-CEN, like Form N-SAR, has particular sections for closed-end funds, SIBCs, and UITs in order to obtain information about the particular characteristics of these entities to assist us in monitoring the activities of these funds and our examiners in their preparation for exams of these funds.

Form N-CEN would also add new requirements for information relating to a management company's securities lending activities, including information concerning the management company's securities lending agents and cash collateral managers.[722] Together with the requirements on securities lending activities in proposed Form N-PORT, this information would benefit the Commission's oversight abilities and, potentially, future policymaking concerning securities lending. Moreover, we believe that this information could inform investors and other interested parties about the use of and potential risks associated with a management company's securities lending activities.

We expect funds to also benefit from replacing Form N-SAR with Form N-CEN through reduced expenses. First, we estimate that N-CEN has a lower cost per filing than Form N-SAR, as a result of filing in an XML format, as opposed to the outdated format of Form N-SAR, and the elimination of certain information items on Form N-SAR that funds would not be required to report on Form N-CEN. Second, funds that are management investment companies would experience reduced paperwork related costs from decreasing the reporting frequency of census information from semi-annual to annual. We estimate that filers would have an aggregate annual paperwork related expenses of $12,395,064 for reports on Form N-CEN.[723] By contrast, we estimate that the ongoing paperwork related expenses of filing Form N-SAR is $25,299,092 annually.[724] Start Printed Page 33669Accordingly, we estimate the annual paperwork related cost savings to funds associated with the adoption of Form N-CEN, compared to Form N-SAR, would be $12,904,028. We recognize that these ongoing annual cost savings would be offset by a one-time cost in the first year to file reports on N-CEN, estimated at $20,040,020.[725]

The rescission of Form N-SAR and the introduction of Form N-CEN, to the extent relevant, could provide similar benefits to investors, to third-party information providers, and to other potential users from an update to the census information that investment companies report and from an update to its structured format. Similar to Form N-PORT, we expect that institutional investors and other market participants could use the information from Form N-CEN more so than individual investors, and that the format of the data may make the information difficult for individual investors to understand. However, individual investors may indirectly benefit from the increase in information to the extent that it becomes available through third-party information providers. For the investors and other potential users that would obtain and use the information reported in Form N-CEN, the update to the structure of the information would improve their ability to efficiently aggregate the information collected on Form N-CEN across all investment companies.

The changes to the reporting of census information, including the reporting of the information in a modern structured format, could improve the ability of investors to differentiate investment companies and could therefore lead to an increase in competition among funds for investor capital. These changes would not significantly relate to the ability of investors to understand the investment risks of investment companies, and therefore would not significantly improve the ability of investors to efficiently allocate capital. Consequently, the reporting changes would not significantly promote capital formation.

c. Costs

As discussed above, we expect the adoption of N-CEN and rescission of Form N-SAR would result in reduced costs to funds in the form of lower expenses related to filing Form N-CEN relative to Form N-SAR. ETFs and closed-end funds, however, may have higher expenses in filing reports on Form N-CEN relative to other investment companies, as they will generally be required to provide more information. There could, however, be costs as a result of the change in the disclosure of census information. For example, the Commission would receive census information on an annual instead of semi-annual basis, and therefore the information would be more dated than if the information was reported to the Commission on a semi-annual basis.[726] As discussed above, we believe that the costs related to reducing the frequency of the information received on Form N-SAR is not significant as this information is unlikely to change frequently. Also, some of the information from Form N-SAR would not be included in Form N-CEN.[727] However, we have attempted to mitigate the potential cost relating to the loss of information by eliminating only that information which is either available elsewhere, not frequently used by Commission staff, or provides little benefit.

Form N-CEN could impose costs on investors and other potential users of the information to obtain the information from a new or additional source, including the information that would not be included on Form N-CEN but would be available through other filings. The information that would not be included on Form N-CEN and that would not be available elsewhere would impose costs on investors and other potential users from a loss of information to the extent that the information is found to be useful.[728] >

F. Alternatives to the Reporting Requirements

The Commission has explored ways to modernize and improve the utility and the quality of the information that funds provide to the Commission and to investors. Commission staff examined how information reported to the Commission could be improved to assist the Commission in its rulemaking, inspection, examination, policymaking, and risk-monitoring functions, and how technology could be used to facilitate those ends. Commission staff also examined enhancements that would benefit investors and other potential users of this information, including updating the reporting obligations of funds to keep pace with the changes in the fund industry.

In formulating our proposal, we have considered many alternatives to the individual elements contained in our proposal, and those alternatives are outlined above in the sections discussing each of the five parts of our proposal, and we have requested comment on these alternatives.[729] The following discussion addresses significant alternatives to our proposal, which involve broader issues than the more granular alternatives to the individual elements contained in each part of our proposal, as discussed above.

We considered the frequency at which Commission staff believed it to be important to receive information from investment companies. A possible alternative to the monthly reporting of portfolio investment information in Form N-PORT is a quarterly reporting of the information, with the quarterly reports containing information for each month in the quarter. The quarterly reporting of portfolio investment information could decrease the ongoing burden of the proposal on investment companies. We do not believe, however, that the quarterly reporting of portfolio investment information would be as useful for Commission staff to oversee investment companies on an ongoing basis given the increase in alternative strategies and the use of derivatives, as this information, even if broken out into monthly data, would result in the Commission receiving the information with a longer time lag. For example, a longer time lag for the Commission to receive portfolio investment information could reduce its effectiveness to analyze the effect of a market or other event on the fund industry.

Likewise, a possible alternative to the annual reporting of census information in Form N-CEN is a semiannual Start Printed Page 33670reporting of the information similar to Form N-SAR. However, as we discussed above, the census-type nature of the information that we would collect from funds in Form N-CEN should not change frequently. Requiring management companies to report census information semi-annually would therefore place a burden on funds without a commensurate increase in the value of the information received by the Commission.

We also considered alternatives to extend or shorten the filing period of Form N-PORT from thirty days and Form N-CEN from sixty days. While a shorter filing period would provide more timely information to the Commission, it would also place a burden on funds that need time to collect, verify, and report the required information to the Commission. Conversely, a longer filing period would give funds more time to report the information and would decrease the potential costs to front-running or copycatting by other investors, but would decrease the utility of the information for the Commission. We therefore believe that the thirty-day filing period for Form N-PORT and the sixty-day filing period for Form N-CEN would appropriately balance the staff's need for timely information against the appropriate amount of time for funds to collect, verify, and report information to the Commission.

Other significant alternatives relate to the public dissemination of information reported on Form N-PORT. Alternatives to the proposal include making more of the portfolio and other information reported on the form either non-public or public, including making all or none of the information reported on Form N-PORT each month publicly available, and increasing or decreasing the lag from the date funds would file this information to when the information would be publicly released. Making more of the portfolio and other information reported on the form non-public or increasing the time-lag to release the information would reduce the amount of information investors have access to when making investment decisions. However, as discussed above, making more of the portfolio and other information reported on the form public or decreasing the time-lag could increase the risk of front-running, predatory trading, and copycatting/reverse engineering of trading strategies by other investors.[730] We believe the current proposal strikes an appropriate balance of providing more usable information to investors and other third-parties while mitigating the risk of potential investor harm that could occur from more frequent disclosure of portfolio information.

Other alternatives relate to the information that the Commission could require when determining the specific items to include and exclude on From N-PORT and Form N-CEN. The Commission considered what information it believes to be important for the Commission's oversight activities and to the public, and the costs to investment companies to provide the information. In particular, the Commission considered the benefits and costs of the information already disclosed in Form N-CSR, Form N-Q, and Form N-SAR, and that could be required on Form N-PORT and Form N-CEN. Commission staff believes that the benefits of the information currently disclosed by investment companies that would be reported on Form N-PORT and Form N-CEN, especially in a structured format, justify the costs to investment companies to report the information in these forms.

The Commission also considered the information that would be required on Form N-PORT as compared to the information on Form N-CEN. Commission staff considered the benefits to having the information more frequently updated as well as the cost to funds to report the information. Although the costs to report information on a more frequent basis imposes additional costs on funds, Commission staff believes the information that would be reported more frequently on Form N-PORT, relative to the annual reporting on Form N-CEN, is necessary for the Commission's oversight activities and could be important to other interested third-parties.

The Commission also considered the benefits and costs of the new information that would be required on Form N-PORT and Form N-CEN. The new information that would be required includes contractual terms for debt securities and derivatives, a description of reference instruments, if any, and information describing securities lending and repurchase and reverse repurchase agreements. A reasonable alternative would be to not require some of the new information, and another reasonable alternative would be to require information in addition to what is currently proposed.

As discussed, the Commission would require information which provides staff an ability to identify investment risks and engage in further outreach as necessary, and not requiring the information would substantially reduce the ability of the Commission to oversee the fund industry. In addition, the information would be important to investors to differentiate investment companies. Although the new information that would be reported on Form N-PORT and Form N-CEN could increase the initial and ongoing reporting costs for investment companies, and increase the likelihood of front-running or copycatting by other investors, Commission staff believes that the information is important to fully describe a fund's investments.

The Commission is also proposing to require risk-sensitivity measures at the portfolio and position level on Form N-PORT. These measures would aid Commission staff to efficiently understand the risk exposures of investment companies, especially those funds that invest in debt securities and derivatives. The portfolio risk-sensitivity measures, DV01 and SDV01, and the position level risk-sensitivity measure, delta, would improve the ability of Commission staff to efficiently approximate the risk exposures of reporting funds.

A reasonable alternative is to require additional portfolio and position level risk-sensitivity measures that would provide Commission staff a more precise approximation of the risk exposures of reporting funds for larger changes in the value of the reference instrument. For example, Form N-PORT could require at the portfolio level measures that describe the sensitivity of a reporting fund to a 50 or 100 basis point change in interest rates and credit spreads, and a measure of convexity; and Form N-PORT at the position level could require gamma.[731] These measures could improve the ability of Commission staff to monitor the fund industry when large changes in prices and rates occur. The Commission could also require other risk measures including vega. While potentially valuable, requiring these additional risk-sensitivity measures could increase the burden on funds, and the additional precision might not significantly improve the ability of Commission staff to monitor the fund industry in most market environments. Another reasonable alternative is to not require any risk-sensitivity measures, or limit the requirement to certain derivatives such as those traded over-the-counter. Although the burden to investment companies to provide the information would be less if fewer or no risk-Start Printed Page 33671sensitivity measures were required by the Commission, staff believes that the benefits from requiring the measures, including the ability to efficiently identify and size specific investment risks, justify the costs to investment companies to provide the measures.

The Commission is proposing a tiered compliance for filing reports on Form N-PORT—funds that together with other investment companies in the same group of related investment companies with assets over $1 billion would have eighteen months to file reports, and smaller groups of related investment companies with assets less than $1 billion would have thirty months to file reports. An alternative would be to not allow for tiered compliance and require all investment companies to begin filing reports on Form N-PORT within eighteen months. We believe it is appropriate to tier the compliance period to improve the ability of smaller fund complexes to make the system and internal process changes necessary to prepare reports on Form N-PORT. Although the Commission, investors, and other interested parties would potentially not have access to structured portfolio investment information for the smaller fund complexes until thirty months after the effective date, information similar to the proposed requirements concerning disclosures of derivatives that would be required on reports on proposed Form N-PORT would be available elsewhere, such in the fund's financial statements as a result of amendments to Regulation S-X. Although another alternative would be to tier the compliance period for our proposed amendments to Regulation S-X, we believe that it is less likely that smaller fund complexes would benefit from additional time to modify systems to adhere to the amendments to Regulation S-X because the proposed amendments are largely consistent with current disclosure practices and would therefore be unnecessary. Likewise, we could propose a tiered compliance period for reports on proposed Form N-CEN. However, as discussed above, we believe that it is less likely that smaller fund complexes would need additional time to comply with the requirements to file Form N-CEN because the requirements are similar to the current requirements to file Form N-SAR, and we expect that filers will prefer the updated, more efficient filing format of Form N-CEN. Commission staff also considered requiring funds to continue to report Form N-Q, and to amend Form N-SAR instead of replacing it with Form N-CEN. Commission staff believes, however, that the new reporting requirements for portfolio investment information, including the amendments to the certification requirements of Form N-CSR, would cause Form N-Q to become redundant if not outdated, and therefore impose costs on funds to file reports that would result in little benefit. Although requiring that certifying officers state that they have disclosed in the report any change in the registrant's internal control over financial reporting that occurred during the most recent fiscal half-year would increase the burden of filing Form N-CSR, these certifications are necessary to ensure that the information reported continues to be accurate. The Commission also believes that the technology associated with Form N-SAR required the introduction of a new form in order to increase the benefits from the changes made to the reporting of census information. One effect of the amendments to Regulation S-X would be to provide investors with more transparency in a fund's investments. For example, as discussed above, we are proposing to require funds, under certain circumstances, to disclose the components of a custom index underlying swaps or option contracts. As an alternative, we could require funds to only disclose a brief description of the index or require a different threshold for identifying the components of the swap or options contract, such as a custom basket that represents a larger portion of the fund's assets under management. Although these alternatives would attenuate the information disclosed and reduce the potential costs to funds and index providers, these alternatives would result in less transparency for investors into the assets underlying a swap or options contract and any related risks associated with these investments.

The accessibility of information about a fund's investments would also increase as a result of the new option for transmission of shareholder reports and other portfolio investment information. In general, the requirements of proposed rule 30e-3 are designed to allow funds to take advantage of the cost efficiencies from the advancements in technology and to more closely align the transmission format to investor preferences, while at the same time ensuring that shareholders would have an opportunity to view reports in their desired form and have an opportunity to view portfolio investment information in a central and more familiar location. One alternative would be to require different notice and consent procedures, and another alternative would be for funds to report different portfolio investment information on their Web sites. We believe that the requirements of rule 30e-3, as proposed, provide investors an ability to receive shareholder reports in their desired format and become aware of the availability of portfolio investment information, while at the same time providing funds an opportunity to take advantage of advancements in technology and reduce burdens.

Lastly, the Commission is proposing that investment companies file Form N-PORT and Form N-CEN in an XML structured format. One alternative is to not structure the information. As discussed, the ability of Commission staff investors, third-party information providers, and other potential users to utilize the information is dependent on the efficiency in which the information investment companies provide can be compiled and aggregated. Commission staff believes that the affected parties to this proposal would experience substantially less benefit from the reporting of investment company information if the information is not structured. In addition, based on the Commission's understanding of current practices, it is likely that investment companies and third party service providers have systems in place to accommodate the use of XML. Therefore, requiring information in a format such as XML should impose minimal costs. The proposal would require funds to file certain attachments to their reports on Form N-PORT and Form N-CEN, and these attachments would not be required in a structured format. Commission staff believes that only marginal benefits would result from requiring funds to file these attachments in a structured, XML format due to the narrative format of the information provided.

The technology used to structure the data could affect the benefits and costs associated with the proposed rules, and we have therefore considered alternative formats for structuring the data, such as XBRL. Sending a data file from a sender to a recipient requires many conditions to be satisfied, and one of crucial importance to regulatory data collection is the need for validation. XML provides for a built-in validation framework, and is supported in all modern programming languages. Other data formats can achieve validation but through custom software. The nature of the information we are collecting also lends itself to an XML format due to the non-complex requirements to structure the information, and does not necessitate Start Printed Page 33672the need for a more robust framework such as XBRL.

G. Request for Comments

Throughout this release, we have discussed the anticipated benefits and costs of the proposed rules and their potential impact on efficiency, competition, and capital formation. While the Commission does not have comprehensive information on all aspects of asset management industry reporting, the Commission is using the data currently available in considering the effects of the proposals. The Commission requests comment on all aspects of this initial economic analysis, including on whether the analysis has: (1) Identified all benefits and costs, including all effects on efficiency, competition, and capital formation; (2) given due consideration to each benefit and cost, including each effect on efficiency, competition, and capital formation; and (3) identified and considered reasonable alternatives to the proposed new rules and rule amendments. We request and encourage any interested person to submit comments regarding the proposed rules, our analysis of the potential effects of the rules and other matters that may have an effect on the proposed rules. The Commission requests that commenters identify sources of data and information as well as provide data and information to assist the Commission in analyzing the economic consequences of the proposed rules. We are also interested in comments on the qualitative benefits and costs we have identified and any benefits and costs we may have overlooked. We urge commenters to be as specific as possible.

Comments on the following questions are of particular interest.

  • To what extent would the monthly public reporting or the quarterly public reporting of monthly portfolio investment information aid in the ability of other investors to front-run, predatory trade, or copycat/reverse engineer the investment strategy of reporting funds? To what extent would the monthly public reporting or the quarterly public reporting of monthly portfolio investment information reduce the incentives of fund companies to develop new or alternative strategies, and what would be the effect on fund competition? How would investors benefit from the public reporting of portfolio investment information in the first and second month of each fiscal quarter as compared to the public reporting of the third month only? Would investors benefit from the quarterly public reporting of monthly portfolio investment information? Why?
  • To what extent would the additional information required on Form N-PORT, especially with respect to the contractual terms for debt securities and derivatives, including information describing reference instruments, if any, and to securities lending and repurchase and reverse repurchase result in additional front-running, predatory trading, or copycatting/reverse engineering by other investors? Does this raise any confidentiality or other concerns?
  • What are the benefits, costs, and other economic effects from funds providing portfolio investment information in a structured XML format? In particular, what are the effects of structured portfolio investment information on the ability of other investors to front-run, predatory trade, or copycat/reverse engineer the investment strategy of reporting funds? How would the effect of structured portfolio investment information differ between funds that engage in alternative strategies or utilize derivatives as part of its investment strategy and those funds that do not? To what extent would portfolio investment information that is structured reduce the incentives of fund companies to develop new or alternative strategies, and what would be the effect on fund competition? Also, would the public reporting of portfolio investment information in an XML format result in a decrease in the costs to investors from obtaining the information?
  • What are the operational benefits and costs to investment companies to file Form N-PORT and Form N-CEN in a structured format? What are the costs to funds from adapting systems to the new filing requirements? To what extent would the fund industry benefit from a standard format to report information?
  • Is there additional information that Form N-PORT and Form N-CEN, as proposed, could require that would aid in the ability of the Commission to oversee the fund industry or that could be beneficial to other potential users? Are any of the proposed information requirements duplicative or unnecessary? What are the benefits and costs of reporting this additional information? Is there information that Form N-PORT and Form N-CEN, as proposed, would require that does not aid in the ability of the Commission to oversee the fund industry and would not benefit other potential users? What are the benefits and costs of not reporting this information?
  • What are the costs, benefits, and other economic effects from investment companies reporting risk-sensitivity measures on Form N-PORT? What is the current availability of the measures to investment companies, in particular for more complex or exotic derivatives? Are there competitive or other economic effects from the reporting of risk-sensitivity measures? Would the public reporting of the risk-sensitivity measures disclose information relating to proprietary risk management practices of investment companies?
  • To what extent would the proposal affect the ability of investors to understand the investment risks of investment companies as a result of the proposal and to efficiently allocate capital? Would investors be more likely to allocate additional capital to investment companies? What would be the effect on fund competition for investor capital?
  • Under what circumstances and to what extent would funds choose to rely on proposed rule 30e-3 by making shareholder reports publicly accessible on a Web site and satisfying the other conditions of the rule? Would allowing funds that choose to rely on the proposed rule to transmit shareholder reports to their investors “by default” result in more investors viewing shareholder reports in a format that the investors prefer, or would the need for each investor who wishes to receive a printed report to affirmatively “opt-out” of electronic delivery reduce the number of shareholders that receive reports in the format that they prefer? Why or why not? What is the likelihood that investors would mistakenly opt-out and consent to Web site posting? Lastly, to what extent do investors compare portfolio investment information between fiscal quarters, and would investors benefit from the requirement that a fund's shareholder reports as well as its complete portfolio holdings from its most recent first and third fiscal quarters be publicly accessible on a Web site?
  • What are the costs, benefits, and other economic effects to other market participants including third-party information providers, index providers, and swap dealers? For instance, what would be the economic effects of structured data on the cost to service providers to offer aggregated information to investors? Are there other market participants that would be affected by the proposal that are not discussed above? What are the benefits and costs to these other market participants?
  • What are the benefits and costs of providing an additional twelve months for smaller entities to comply with the requirements to file Form N-PORT? Are there potential costs from smaller fund Start Printed Page 33673complexes potentially not providing structured portfolio investment information during the additional twelve months? Are the potential costs, if any, from a loss of disclosed portfolio investment information from small fund complexes mitigated by the amendments to Regulation S-X? Are there other alternatives to the current compliance dates that would be more beneficial or that would be less costly, including with respect to other parts of the proposal? Which alternatives and why?
  • What are the costs associated with rescinding N-Q and replacing Form N-SAR? How reliant are investors, third-party information providers, and other interested parties on the data reported on these forms? What are the costs to investors, third-party information providers, and other interested parties to obtain the information from alternative sources? What are the benefits from the amendments to certification requirements of Form N-CSR? What are the costs?
  • Are there alternatives to the proposal that the Commission did not consider that would result in a more robust disclosure regime for investment companies? What are the costs associated with those alternatives? Similarly, are there alternatives to the proposal that would result in the same benefits but that would be less costly? Which alternatives and why?

V. Paperwork Reduction Act

Proposed new forms, Form N-CEN and Form N-PORT, and proposed new rule 30e-3 contain “collections of information” within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).[732] In addition, the proposed amendments to Articles 6 and 12 of Regulation S-X would impact the collections of information under rules 30e-1 and 30e-2 of the Investment Company Act,[733] and the proposed amendments to Forms N-1A, N-2, N-3, N-4 and N-6 under the Investment Company Act and Securities Act would impact the collections of information under those forms. Furthermore, the proposals would rescind Forms N-Q and N-SAR, thus eliminating the collections of information associated with those forms.

The titles for the existing collections of information are: “Form N-Q-Quarterly Schedule of Portfolio Holdings of Registered Management Investment Company” (OMB Control No. 3235-0578); [734] “Form N-SAR under the Investment Company Act of 1940, Semi-Annual Report for Registered Investment Companies” (OMB Control No. 3235-0330); Rule 30e-1 under the Investment Company Act of 1940, Reports to Stockholders of Management Companies” (OMB Control No. 3235-0025); “Rule 30e-2 pursuant to Section 30(e) of the Investment Company Act of 1940. Reports to Shareholders of Unit Investment Trusts” (OMB Control No. 3235-0494); “Form N-CSR under the Securities Exchange Act of 1934 and under the Investment Company Act of 1940, Certified Shareholder Report of Registered Management Investment Companies” (OMB Control No. 3235-0570); “Form N-1A under the Securities Act of 1933 and under the Investment Company Act of 1940, Registration Statement of Open-End Management Investment Companies” (OMB Control No. 3235-0307); “Form N-2 under the Investment Company Act of 1940 and Securities Act of 1933, Registration Statement of Closed-End Management Investment Companies” (OMB Control No. 3235-0026); “Form N-3 Under the Securities Act of 1933 and Under the Investment Company Act of 1940, Registration Statement of Separate Accounts Organized as Management Investment Companies” (OMB Control No. 3235-0316); “Form N-4 (17 CFR 239.17b) Under the Securities Act of 1933 and (17 CFR 274.11c) Under the Investment Company Act of 1940, Registration Statement of Separate Accounts Organized as Unit Investment Trusts” (OMB Control No. 3235-0318); and “Form N-6 (17 CFR 239.17c) Under the Securities Act of 1933 and (17 CFR 274.11d) Under the Investment Company Act of 1940, Registration Statement of Separate Accounts Organized as Unit Investment Trusts that Offer Variable Life Insurance Policies” (OMB Control No. 3235-0503). We are also submitting new collections of information for proposed new forms, Form N-CEN and Form N-PORT and proposed new rule 30e-3 under the Investment Company Act. The titles for these new collections of information would be: “Form N-CEN Under the Investment Company Act, Annual Report for Registered Investment Companies;” “Form N-PORT Under the Investment Company Act, Monthly Portfolio Investments Report;” “Rule 30e-3 Under the Investment Company Act, Web site Transmission of Shareholder Reports.” The Commission is submitting these collections of information to the OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number.

The Commission is proposing new forms, Form N-CEN and Form N-PORT, new rule 30e-3, and amendments to Regulation S-X and the relevant registration forms, as well as the rescission of Forms N-Q and Form N-SAR as part of a set of reporting and disclosure reforms. These reforms are designed to harness the benefits of advanced technology and to modernize the fund reporting regime in order to help investors and other market participants better assess different fund products and to assist the Commission in carrying out our regulatory functions. We discuss below the collection of information burdens associated with these reforms.

A. Portfolio Reporting

1. Form N-PORT

Under our proposal, certain funds would be required to file an electronic monthly report on proposed Form N-PORT within thirty days after the end of each month. Proposed Form N-PORT is intended to improve transparency of information about funds' portfolio holdings and facilitate oversight of funds. The information required by proposed Form N-PORT would be data-tagged in XML format. The respondents to proposed Form N-PORT would be management investment companies (other than money market funds and small business investment companies) and UITs that operate as ETFs. Compliance with proposed Form N-PORT would be mandatory for all such funds. Responses to the reporting requirements would be kept confidential for reports filed with respect to the first two months of each quarter; the third month of the quarter would not be kept confidential, but made public sixty days after the quarter end.Start Printed Page 33674

We estimate that 10,710 funds [735] would be required to file, on a monthly basis, a complete report on proposed Form N-PORT reporting certain information regarding the fund and its portfolio holdings. Based on our experience with other interactive data filings, we estimate that funds would prepare and file their reports on proposed Form N-PORT by either (1) licensing a software solution and preparing and filing the reports in house, or (2) retaining a service provider to provide data aggregation, validation and/or filing services as part of the preparation and filing of reports on proposed Form N-PORT on behalf of the fund. We estimate that 35% of funds (3,749 funds) would license a software solution and file reports on proposed Form N-PORT in house.[736] We further estimate that each fund that files reports on proposed Form N-PORT in house would require an average of approximately 44 burden hours to compile (including review of the information), tag, and electronically file a report on proposed Form N-PORT for the first time [737] and an average of approximately 14 burden hours for subsequent filings.[738] Therefore, we estimate the per fund average annual hour burden associated with proposed Form N-PORT for 3,749 fund filers is 198 hours for the first year [739] and 168 hours for each subsequent year.[740] Amortized over three years, the average aggregate annual hour burden would be 178 hours per fund.[741]

We estimate that 65% of funds (6,962 funds) would retain the services of a third party to provide data aggregation, validation and/or filing services as part of the preparation and filing of reports on proposed Form N-PORT on the fund's behalf.[742] Because reports on Form N-PORT would be filed in a structured format and more frequently than current portfolio holdings reports (i.e., Form N-CSR and Form N-Q), we anticipate that funds and their third-party service providers will move to automate the aggregation and validation process to the extent they do not already use an automated process for portfolio holdings reports. For these funds, we estimate that each fund would require an average of approximately 60 burden hours to compile and review the information with the service provider prior to electronically filing the report for the first time [743] and an average of approximately 9 burden hours for subsequent filings.[744] Therefore, we estimate the per fund average annual hour burden associated with proposed Form N-PORT for 6,962 funds would be 159 hours for the first year [745] and 108 hours for each subsequent year.[746] Amortized over three years, the average aggregate annual hour burden would be 125 hours per fund.[747] In sum, we estimate that filing reports on proposed Form N-PORT would impose an average total annual hour burden of 1,537,572 on applicable funds.[748]

In addition to the costs associated with the hour burdens discussed above, funds would also incur other external costs in connection with reports on proposed Form N-PORT. Based on our experience with other interactive data filings, we estimate that funds that would file reports on proposed Form N-PORT in house would license a third-party software solution to assist in filing their reports at an average cost of $4,805 per fund per year.[749] In addition, we Start Printed Page 33675estimate that funds that would use a service provider to prepare and file reports on proposed Form N-PORT would pay an average fee of $11,440 per fund per year for the services of that third-party provider.[750] In sum, we estimate that all applicable funds would incur on average, in the aggregate, external annual costs of $97,674,221.[751]

2. Rescission of Form N-Q

Our proposed reforms would rescind Form N-Q in order to eliminate unnecessarily duplicative reporting requirements. The proposed rescission of Form N-Q would affect all management investment companies required to file reports on the form.

We currently estimate that each fund requires an average of approximately 21 hours per year to prepare and file two reports on Form N-Q annually, for a total estimated annual burden of 219,513 hours.[752] Accordingly, we estimate that, in the aggregate, our proposed rescission would eliminate the 219,513 annual burden hours associated with filing Form N-Q. Additionally, we currently estimate that there are no external costs associated with the certification requirement or with preparation of reports on Form N-Q in general.

B. Census Reporting

1. Form N-CEN

As proposed, amended rule 30a-1 would require all funds to file reports on proposed Form N-CEN with the Commission on an annual basis.[753] Similar to current Form N-SAR, proposed Form N-CEN would require reporting with the Commission of certain census-type information. However, unlike Form N-SAR, which requires semi-annual reporting for all management investment companies, proposed Form N-CEN would require annual reporting.[754] Proposed Form N-CEN would be a collection of information under the PRA, and is designed to facilitate the Commission's oversight of funds and its ability to monitor trends and risks. This new collection of information would be mandatory for all funds, and responses would not be kept confidential.

The staff estimates that the Commission would receive an average of 3,146 reports per year, based on the number of existing Form N-SAR filers.[755] We estimate that management investment companies would each spend as much as 13.35 hours annually, preparing and filing reports on proposed Form N-CEN.[756] The Commission further estimates that UITs, including separate account UITs, would each spend as much as 9.11 hours annually, preparing and filing reports on proposed Form N-CEN, since a UIT would be required to respond to fewer items.[757]

As discussed below, we currently estimate that management investment companies spend as much as 15.35 hours preparing and filing each report on Form N-SAR. We have generally sought with proposed Form N-CEN, where appropriate, to simplify and decrease the census-type reporting burdens placed on registrants by current Form N-SAR. For example, proposed Form N-CEN would reduce the number of attachments that may need to be filed with the reports and largely eliminate financial statement-type information from the reports. Additionally, we believe that reports in XML on proposed Form N-CEN will be less burdensome to produce than the reports on Form N-SAR currently required to be filed using outdated technology. Accordingly, for management investment companies we believe the estimated hour burden for filing reports on proposed Form N-CEN should be a reduced burden from the hour burden associated with Form N-SAR.[758] As such, we estimate that the annual hour burden for management companies will be 13.35 per report on proposed Form N-CEN, down from 15.35 hours per report for Form N-SAR.

UITs may, however, experience an increase in the hour burden associated with census-type reporting if proposed Form N-CEN is adopted because UITs would be required to respond to more items in the form than they are currently required to respond to under Form N-SAR. For example, UITs would be required to provide certain background information and attachments in their reports on proposed Form N-CEN, which they are not currently required to provide in their reports on Form N-SAR. As a result, we have increased the annual hour burden for UITs from 7.11 hours in the currently approved collection for Form N-SAR to 9.11 hours for proposed Form N-CEN.

The Commission also believes that, in the first year reports on the form are filed, funds may require additional time to prepare and file reports. We estimate that, for the first year, funds would require 20 additional hours.[759] Accordingly, we estimate that management investment companies would require 33.35 annual burden hours in the first year [760] and 13.35 annual burden hours in each subsequent year for preparing and filing reports on proposed Form N-CEN. Additionally, we estimate that UITs would require 29.11 annual burden hours in the first year [761] and 9.11 annual burden hours in each subsequent year for preparing and filing reports on proposed Form N-CEN.

We estimate that the average annual hour burden per response for proposed Form N-CEN for the first year would be 32.37 hours [762] and 12.37 hours in subsequent years.[763] Amortizing the Start Printed Page 33676burden over three years, we estimate that the average annual hour burden per fund per year would be 19.04 [764] and the total average annual hour burden would be 59,900.[765]

With respect to the initial filing of a report on Form N-CEN, we estimate an external cost of $220 per fund and, with respect to subsequent filings, we estimate an annual external cost of $120 per fund.[766] We estimate the amortized annual external cost per fund would be $153.[767] We currently estimate that no external cost burden is associated with Form N-SAR. External costs include the cost of goods and services, which with respect to reports on Form N-CEN, would include the costs of registering and maintaining an LEI for the registrant/funds.[768] In sum, we estimate that all applicable funds would incur, in the aggregate, external annual costs of $1,748,637.[769]

2. Rescission of Form N-SAR

Our proposed reforms would rescind Form N-SAR in order to eliminate unnecessarily duplicative reporting requirements. The proposed rescission would affect all management investment companies and UITs.

We currently estimate that the weighted average annual hour burden per response for Form N-SAR is 14.25 hours,[770] with a total annual hour burden for all respondents of approximately 82,223 hours. Accordingly, we estimate that, in the aggregate, our proposed rescission would eliminate the 82,223 annual burden hours associated with filing Form N-SAR. Additionally, we currently estimate that there are no external costs associated with preparation of reports on Form N-SAR.

C. Amendments to Regulation S-X

1. Rule 30e-1

Section 30(e) of the Investment Company Act requires every registered investment company to transmit to its stockholders, at least semiannually, reports containing such information and financial statements or their equivalent, as of a reasonably current date, as the Commission may prescribe by rules and regulations.[771] Rule 30e-1 generally requires management investment companies to transmit to their shareholders, at least semi-annually, reports containing the information that is required to be included in such reports by the fund's registration statement form under the Investment Company Act.[772] Pursuant to this rule and Forms N-1A and N-2, management investment companies are required to include the financial statements required by Regulation S-X in their shareholder reports.[773]

Rule 30e-1 also permits, under certain conditions, delivery of a single shareholder report to investors who share an address (“householding”).[774] Specifically, rule 30e-1 permits householding of annual and semi-annual reports by management companies to satisfy the transmission requirements of rule 30e-1 if, in addition to the other conditions set forth in the rule, the management company has obtained from each applicable investor written or implied consent to the householding of shareholder reports at such address. The rule requires management companies that wish to household shareholder reports with implied consent to send a notice to each applicable investor stating, among other things, that the investors in the household will receive one report in the future unless the investors provide contrary instructions. In addition, at least once a year, management companies relying on the householding provision must explain to investors who have provided written or implied consent how they can revoke their consent.

Compliance with the disclosure requirements of rule 30e-1 is mandatory. Responses to the disclosure requirements are not be kept confidential.

Based on staff conversations with fund representatives, we currently estimate that it takes approximately 84 hours per fund to comply with the collection of information associated with rule 30e-1, including the householding requirements. This time is spent, for example, preparing, reviewing, and certifying the reports. The current total estimated annual hour burden of responding to rule 30e-1 is approximately 903,000 hours.[775]

As discussed above, we are proposing certain amendments to Articles 6 and 12 of Regulation S-X. As outlined in Part II.C. above, the amendments would: (1) Require new, standardized disclosures regarding fund holdings in open futures contracts, open forward foreign currency contracts, and open swap contracts, and additional disclosures regarding fund holdings of written and purchased options; (2) update the disclosures for other investments, as well as reorganize the order in which some investments are presented; (3) amend the rules regarding the general form and content of fund financial statements; and (iv) require a new disclosure in the notes to the financial statements relating to a fund's securities lending activities.[776]

We estimate that that there are 11,230 management companies that would have to comply with these amendments.[777] In addition, we estimate that these amendments would likely increase the time spent preparing, reviewing and certifying reports, if adopted. The extent to which a fund's burden would increase as a result of the proposed amendments would depend on the extent to which the fund invests in the instruments covered by many of the amendments. We estimate that, on an annual basis, funds generally will incur an additional 9 burden hours in the first year [778] and an additional 3 Start Printed Page 33677burden hours for filings in subsequent years in order to comply with the proposed amendments.[779] Amortized over three years, the average annual hour burden associated with the amendments for Regulation S-X would be 5 hours per fund.[780] Accordingly, the estimated total annual average hour burden associated with the amendments would be 56,150.[781]

We estimate that the annual external cost burden of compliance with the information collection requirements of rule 30e-1, which is currently $31,061 per fund, will not change as a result of the proposed amendments to Regulation S-X.[782] We further estimate that the total annual external cost burden for rule 30e-1 would be $348,815,030.[783] External costs include, for example, the costs for funds to prepare, print, and mail the reports.

2. Rule 30e-2

Rule 30e-2 requires registered UITs that invest substantially all of their assets in shares of a management investment company to send their unitholders annual and semiannual reports containing financial information on the underlying company.[784] Specifically, rule 30e-2 requires that the report contain all the applicable information and financial statements or their equivalent, required by rule 30e-1 under the Investment Company Act to be included in reports of the underlying fund for the same fiscal period.[785] Rule 30e-2 also permits UITs to rely on the householding provision in rule 30e-1 to transmit a single shareholder report to investors who share an address.[786]

Compliance with the disclosure requirements of rule 30e-2 is mandatory. Responses to the disclosure requirements are not kept confidential.

The Commission currently estimates that the annual burden associated with rule 30e-2, including the householding requirements, is 121 hours per respondent. The Commission currently estimates that the total hour burden is approximately 91,960 hours.[787]

As discussed above, we are proposing certain amendments to Articles 6 and 12 of Regulation S-X that, if adopted, would likely increase the time spent preparing, reviewing and certifying reports.[788] The extent to which a UIT's burden increases as a result of the proposed amendments would depend on the extent to which an underlying fund invests in the instruments covered by many of the amendments. We estimate that there are 727 UITs that may be subject to the proposed amendments.[789] We also estimate that, on an annual basis, UITs generally will incur an additional 9 burden hours in the first year [790] and an additional 3 burden hours for filings in subsequent years in order to comply with the proposed amendments.[791] Amortized over three years, we estimate that the average annual hour burden associated with the proposed amendments would be 5 hours per fund.[792] Accordingly, we estimate that the total average annual hour burden associated with the proposed amendments to Regulation S-X would be 3,635 hours.[793]

In addition, we estimate that the annual external cost burden of compliance with the information collection requirements of rule 30e-2, which are currently $20,000 per respondent, will not change as a result of the proposed amendments to Regulation S-X.[794] We further estimate that the total annual external cost burden for rule 30e-2 would be $14,540,000.[795] External costs include, for example, the costs for the funds to prepare, print, and mail the reports.

D. Option for Web Site Transmission of Shareholder Reports

We are also proposing new rule 30e-3, which would permit, but not require, a fund to transmit its reports to shareholders by posting them on its Web site, as long as the fund meets certain other conditions of the rule regarding (a) availability of the report and other materials, (b) shareholder consent, (c) notice to shareholders, and (d) delivery of materials upon request of the shareholder.[796] Reliance on the rule would be voluntary; however, compliance with the rule's conditions is mandatory for funds relying on the rule. Responses to the information collections would not be kept confidential.

1. Availability of Report and Other Materials and Delivery Upon Request

Proposed rule 30e-3 would provide that a fund's annual or semiannual report to shareholders would be considered transmitted to a shareholder of record if certain conditions set forth in the rule are satisfied. Among these conditions are the requirements that (i) the fund's shareholder report, any previous shareholder report transmitted to shareholders of record within the last 244 days, and in the case of a fund that is not an SBIC, the fund's complete portfolio holdings as of the close of its most recent first and third fiscal quarters, be publicly accessible, free of charge, at a specified Web site Start Printed Page 33678address,[797] and (ii) the fund (or a financial intermediary through which shares of the fund may be purchased or sold) must send a paper copy of any of the materials discussed in (i) above to a shareholder upon request.[798]

We estimate that 11,957 funds could rely on proposed new rule 30e-3.[799] Of these funds, we estimate that 90% of all funds (or 10,761 funds) would rely on proposed rule 30e-3.[800] Of this 10,761, we estimate 9,634 are funds relying on the summary prospectus rule (rule 498 under the Securities Act) and, thus, currently posting annual and semiannual shareholder reports on their Web sites. Accordingly, with respect to these funds, we estimate that annual compliance with the posting requirements of proposed rule 30e-3 will require a half hour burden per fund.[801]

Of the remaining funds estimated to rely on proposed rule 30e-3, we further estimate that approximately 90% of those funds [802] (or 1,014 funds) already have a Web site.[803] With respect to these funds, we estimate that the posting requirements of proposed rule 30e-3 will require a one and half hour burden per fund to post the required documents online, both in the first year and annually thereafter. For the remaining 10% of funds (or 113 funds) that we estimate will rely on the proposed rule but that do not have a Web site,[804] we estimate initial compliance with the posting requirements will require approximately 24 hours per fund of internal fund staff time to develop a Web page and post the required documents on the Web page.[805] In addition, we estimate that each of these funds would spend approximately four hours of professional time to maintain and update a Web page with the required information on a quarterly basis.[806]

Accordingly, we estimate that the posting requirements will result in an average annual hour burden of 0.84 hours per fund in the first year of compliance [807] and 0.76 hours per fund for each of the next two years.[808] Amortized over three years, the average annual hour burden would be 0.79 hours per fund.[809] In sum, we estimate that the posting requirements of proposed rule 30e-3 would impose an average total annual hour burden of 8,447 hours on applicable funds.[810]

In addition, with respect to those funds that would rely on proposed rule 30e-3 but that do not currently have a Web site, we estimate that the posting requirements of the proposed rule will result in an external cost burden of $2000 per fund in the first year to develop a Web site,[811] but no cost burden in subsequent years.[812] We further estimate that the amortized annual external cost burden associated with developing a Web site would be $667.[813] In the aggregate, we estimate that the annual total external cost burden with respect to these funds would be $75,371.[814] With respect to those funds that currently have Web sites, we estimate that the posting requirements of the proposed rule will not result in any external costs.[815] The external cost burden is the cost of goods and services purchased in connection with complying with the rule, which, with respect to the posting requirements, would include costs associated with development of a Web site.

Furthermore, we also estimate that funds may incur external costs in connection with the requirement to provide a complete shareholder report upon request of a shareholder. We estimate that the annual costs associated with printing and mailing these reports would be $500 per fund.[816] Start Printed Page 33679Accordingly, we estimate that the aggregate annual external costs associated with printing and mailing shareholder reports upon request would be $5,380,500.[817] Together with the external costs for those funds that would rely on proposed rule 30e-3 but that do not currently have a Web site, we estimate that the posting and shareholder request requirements of the proposed rule will result in an annual external cost burden of $5,455,871.[818]

2. Shareholder Consent and Notice

Proposed rule 30e-3 would permit electronic transmission of a shareholder report to a particular shareholder only if the shareholder has either previously consented to this method of transmission or has been determined to have provided implied consent under certain conditions specified in the rule.[819] One of the conditions for implied consent requires that the fund transmit to the shareholder an Initial Statement, at least 60 days before it begins to rely on the rule, notifying the shareholder of the fund's intent to make future shareholder reports available on the fund's Web site until the shareholder revokes consent. Additionally, proposed rule 30e-3 would require funds relying on the rule with respect to a shareholder who has consented to electronic transmission to send a Notice containing certain information to the shareholder within 60 days of the close of the fiscal period to which the report relates.[820] The proposed rule would also require funds to file a form of the Notice with the Commission not later than 10 days after the Notice is sent to shareholders.[821]

As discussed in Part V.D.1. above, we estimate that 90% of all eligible funds (or 10,761 funds) will choose to rely on proposed rule 30e-3.[822] For those funds relying on the rule, we estimate that it will take each fund one and a half hours to prepare the Initial Statement in the first year of compliance with the rule.[823] We further estimate that each fund will incur a half hour burden in subsequent years to the extent the fund has shareholders that have not previously consented to Web site transmission of the fund's shareholder reports.[824] We also estimate that each fund will incur two hours to prepare and file the first Notice in the first year [825] and an hour for each subsequent notice.[826] Additionally, with respect to both the Initial Statement and the Notice, we estimate that 75% of the annual hour burden would be incurred by the fund and that 25% of the burden would be incurred by outside counsel retained by the fund.[827]

Accordingly, we estimate that the Initial Statement will result in an average hourly burden per fund of 1.3 hours in the first year [828] and 0.38 hours in each subsequent year.[829] Amortized over three years, the average annual hour burden associated with the Initial Statement would be 0.69 hours per fund.[830] In addition, we estimate that the Notice will result in an average annual hour burden of 2.3 hours per fund in the first year [831] and 1.5 hours per fund in each subsequent year.[832] Amortized over three years, the average annual hour burden associated with the Notice would be 1.8 hours per fund.[833] In sum, we estimate that the shareholder consent and Notice requirements of proposed rule 30e-3 would impose an average total annual hour burden of 8,932 hours on applicable funds.[834]

In addition, we estimate that funds will incur external costs if they rely on proposed rule 30e-3. The external cost burden is the cost of goods and services purchased in connection with complying with the rule, which, with respect to the Initial Statement and Notice, we estimate would include the costs associated with outside counsel and printing and mailing costs.

We estimate outside counsel retained by the fund will incur 25% of the hourly burden associated with each of the Initial Statement and Notice at a rate of $380 per hour.[835] Accordingly, we estimate that outside counsel costs associated with the Initial Statement will result in an average cost burden per fund of $144 in the first year,[836] $49 in subsequent years,[837] and amortized over three years, $81.[838] Additionally, we estimate that outside counsel costs associated with the Notice will result in Start Printed Page 33680an average cost burden per fund of $285 in the first year,[839] $190 in subsequent years,[840] and amortized over three years, $222.[841] In sum, we estimate that the outside counsel costs related to the shareholder consent and Notice requirements of proposed rule 30e-3 would impose an annual average total cost burden of $3,260,583 on applicable funds.[842]

We also estimate that, in the first year, each fund will incur approximately $1000 in printing and mailing costs related to each of the first Initial Statement and Notice.[843] In subsequent years, we estimate each fund will incur $333 in printing and mailing costs related to the Initial Statement[844] and $1000 with respect to each Notice.[845] Amortized over three years, we estimate that the Initial Statement will result in $555 annual cost burden per fund[846] and the Notice will result in a $2000 annual cost burden per fund.[847] In sum, we estimate that the printing and mailing costs related to the shareholder consent and Notice requirements of proposed rule 30e-3 would impose an average annual total cost burden of $27,494,355 on applicable funds.[848] Accordingly, together with the costs associated with outside counsel, we estimate that the shareholder consent and Notice requirements of the proposed rule would impose an average annual total cost burden of $30,754,938.[849]

In total, proposed rule 30e-3 would impose an average total annual hour burden of 17,379 hours on applicable funds[850] and a total annual external cost burden of $36,210,809 on applicable funds.[851]

3. Impact on Information Collections for Rules 30e-1 and 30e-2

As discussed in Sections V.C.1. and 2. above, rule 30e-1 under the Investment Company Act requires management companies to transmit semi-annual reports to their shareholders and rule 30e-2 under the Investment Company Act requires certain UITs to similarly transmit semi-annual reports to their unitholders.[852] Also as discussed above, we currently estimate, with respect to rule 30e-1, that each fund incurs an annual hourly burden of 84 hours [853] and an annual external cost burden of $31,061 per fund.[854] Additionally, with respect to rule 30e-2, we currently estimate that each UIT respondent incurs an annual hourly burden of 121 hours per fund [855] and an annual external cost burden of $20,000 per fund.[856]

As discussed above, we estimate that 90% of all funds will rely on proposed rule 30e-3. In addition, we estimate that a fund's hourly burden associated with rule 30e-1 or rule 30e-2 will not change as result of proposed rule 30e-3. However, we estimate that, for those funds that rely on proposed rule 30e-3, the fund's external cost burden would decrease. In this regard, we estimate that for 90% of funds relying on rule 30e-3, their annual cost burden related to rule 30e-1 would decrease from $31,061 to $20,707.[857] Additionally, we estimate that for the 90% of funds relying on rule 30e-3, their annual cost burden related to rule 30e-2 would decrease from $20,000 to $13,333.[858] Accordingly, if proposed rule 30e-3 is adopted, we estimate that for 90% of management companies the total annual external cost burden for rule 30e-1 would be $209,285,649 [859] and the total annual external cost burden for all management companies under rule 30e-1 would be $244,167,152.[860] Additionally, if proposed rule 30e-3 is adopted, we estimate that for 90% of UITs the total annual external cost burden for rule 30e-2 would be $8,719,782 [861] and the total annual external cost burden for all UITs under rule 30e-2 would be $10,179,782.[862]

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E. Amendments to Certification Requirements of Form N-CSR

In connection with the rescission of Form N-Q, we are proposing to amend Form N-CSR, the reporting form used by management companies to file certified shareholder reports under the Investment Company Act and the Exchange Act. Form N-Q currently requires principal executive and financial officers of the fund to make certifications for the first and third fiscal quarters relating to (1) the accuracy of information reported to the Commission, and (2) disclosure controls and procedures and internal control over financial reporting.[863] Rescission of Form N-Q would eliminate these certifications.

Form N-CSR requires similar certification with respect to the fund's second and fourth fiscal quarters. As a result of the proposed rescission of Form N-Q, we are proposing to amend the form of certification in Form N-CSR to require each certifying officer to state that he or she has disclosed in the report any change in the registrant's internal control over financial reporting that occurred during the most recent fiscal half-year, rather than the registrant's most recent fiscal quarter as currently required by the form.[864] Lengthening the look-back of this certification to six months, so that the certifications on Form N-CSR for the semi-annual and annual reports would cover the first and second fiscal quarters and third and fourth fiscal quarters, respectively, would fill the gap in certification coverage that would otherwise occur once Form N-Q is rescinded.

Compliance with the amended certification requirements would be mandatory and responses would not be kept confidential.

We currently estimate that the annual burden associated with Form N-CSR is 14.42 hours per fund [865] and that the current total annual time burden for Form N-CSR is 177,799 hours.[866] We note that the amount and content of the information contained in the reports filed on Form N-CSR would not change as the result of the proposed amendments and the funds likely already have policies and procedures in place to assist officers in their certifications of this information. Accordingly, we estimate that the proposed amendments to Form N-CSR would not change the annual hour burden associated with Form N-CSR and, thus, we continue to estimate the annual hour burden associated with Form N-CSR to be 14.42 hours per fund. With respect to the total annual hour burden, however, we estimate 161,937 hours.[867] This decrease in the current total annual hour burden is a result of the decrease in the number of funds estimated to file Form N-CSR.

In addition, we currently estimate that the annual cost of outside services associated with Form N-CSR is approximately $129 per fund.[868] External costs include the cost of goods and services purchased to prepare and update filings on Form N-CSR. We do not believe that these costs will change as a result of the proposed amendments to Form N-CSR and, thus, continue to estimate an external cost burden of $129 per fund to file Form N-CSR. We further estimate that the total annual external cost burden for Form N-CSR would be $2,897,340.[869]

F. Amendments to Registration Statement Forms

We are also proposing to amend Forms N-1A, N-2, N-3, N-4, and N-6 to exempt funds from those forms' respective books and records disclosures if the information is provided in a fund's most recent report on Form N-CEN.[870] The books and records disclosures required by these registration statement forms are not provided in a structured format. We believe that having this information in a structured format would increase our efficiency in preparing for exams as well as our ability to identify current industry trends and practices and, therefore, are proposing it be reported on proposed Form N-CEN.

Currently, we estimate the following total hour burden for each of the relevant forms: (i) Form N-1A—1,579,974 hours; (ii) Form N-2—86,533 hours; (iii) Form N-3—2,173 hours; (iv) Form N-4—256,835 hours; and (v) Form N-6—34,349 hours. We estimate the total hour burden, as discussed above, for each respective form will not change as result of the proposed amendments. Additionally, we do not believe the total cost burden for any of the relevant forms would change as a result of the proposed amendments and, therefore, we continue to estimate the following total cost burden for each of the respective forms: (i) Form N-1A—$124,820,197; (ii) Form N-2—$5,488,048; (iii) Form N-3—$139,300; (iv) Form N-4—$26,609,241; and (v) Form N-6—$3,820,447.

G. Request for Comments

We request comment on whether our estimates for burden hours and any external costs as described above are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (i) Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (ii) evaluate the accuracy of the Commission's estimate of the burden of the proposed collections of information; (iii) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (iv) determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.

The agency has submitted the proposed collection of information to OMB for approval. Persons wishing to submit comments on the collection of information requirements of the proposed amendments should direct them to the Office of Management and Budget, Attention Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should send a copy to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549 1090, with reference to File No. S7-08-15. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this Start Printed Page 33682release; therefore, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days after publication of this release. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-08-15, and be submitted to the Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 20549-2736.

VI. Initial Regulatory Flexibility Analysis

This Initial Regulatory Flexibility Analysis (“IRFA”) has been prepared in accordance with section 3 of the Regulatory Flexibility Act (“RFA”).[871] It relates to proposed new Form N-PORT and amendments to the Form N-CSR certification requirement, amendments to Regulation S-X, the proposed rule governing electronic transmission of shareholder reports, the rescission of Forms N-Q and N-SAR, and proposed amendments to Forms N-1A, N-2, N-3, N-4, and N-6.

A. Reasons for and Objectives of the Proposed Actions

The Commission collects certain information about the funds that it regulates. The Commission is proposing new rules, rule amendments, and new forms and form amendments that would improve the quality of information that funds report to the Commission, benefitting the Commission's risk monitoring and oversight, examination, and enforcement programs.

We believe that our proposals would improve the information that funds report to their shareholders and the Commission. In addition, the proposed new forms would require reports be filed in a structured data format (XML) to allow for easier collection and analysis of data by Commission staff and the public. This is the format used by Form N-MFP, Form 13F, and Form D, which greatly improves the ability of Commission staff and other potential users to aggregate and analyze the data reported.

The Commission's objective is to gain more timely and useful information about funds' operations and portfolio holdings. The Commission also believes that its risk monitoring and oversight, examination, and enforcement programs would be improved by requiring enhanced information from funds.

B. Legal Basis

The Commission is proposing the rules and forms contained in this document under the authority set forth in the Securities Act, particularly, section 19 thereof [15 U.S.C. 77a et seq.], the Trust Indenture Act, particularly, section 319 thereof [15 U.S.C. 77aaa et seq.], the Exchange Act, particularly, sections 10, 13, 15, 23, and 35A thereof [15 U.S.C. 78a et seq.], the Investment Company Act, particularly, sections 8, 30, and 38 thereof [15 U.S.C. 80a et seq.], and 44 U.S.C. 3506, 3507.

C. Small Entities Subject to the Rule

An investment company is a small entity if, together with other investment companies in the same group of related investment companies, it has net assets of $50 million or less as of the end of its most recent fiscal year.[872] Commission staff estimates that, as of December 2014, approximately 146 registered investment companies, including 133 open and closed-end funds (including one SBIC) and 13 UITs. The Commission staff further estimates that, as of December 2014, approximately 28 BDCs are small entities.

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

The proposed amendments would create, amend, or eliminate current reporting requirements for small entities.

1. Form N-PORT

Funds currently report portfolio holdings information quarterly on Form N-Q (first and third fiscal quarters) and Form N-CSR (second and fourth fiscal quarters). The Commission is proposing to adopt new Form N-PORT on which funds, other than MMFs, UITs, and SBICs, would be required to report portfolio holdings information and information related to liquidity, derivatives, securities lending, purchases and redemptions, and counterparty exposure each month. Funds would be required to file Form N-PORT within 30 days after the end of the monthly period using a structured format. Only information reported for the third month of each quarter would be available to the public and such information would not be made public until 60 days after the end of the third month of the fund's fiscal quarter. For smaller funds and fund groups (i.e., funds that together with other investment companies in the same “group of related investment companies” have net assets of less than $1 billion as of the end of the most recent fiscal year), which would include small entities, we expect to provide for an extra 12 months (or 30 months after the effective date) to comply with the new Form N-PORT reporting requirements.

Based on our experience with other interactive data filings, we estimate that funds would prepare and file their reports on proposed Form N-PORT by either (1) licensing a software solution and preparing and filing the reports in house, or (2) retaining a service provider to provide data aggregation and validation services as part of the preparation and filing of reports on proposed Form N-PORT on behalf of the fund. We estimate that approximately 132 open and closed-end funds (other than money market funds and SBICs), are small entities that would be required to file, on a monthly basis, a complete report on proposed Form N-PORT reporting certain information regarding the fund and its portfolio holdings. As discussed above, we estimate, for funds that choose to license a software solution to file reports on Form N-PORT, that completing, reviewing, and filing Form N-PORT would cost $55,970 for each fund, including small entities, in its first year of reporting and $46,745 per year for each subsequent year.[873] We further estimate, for funds that choose to retain a third-party service provider to provide data aggregation and validation services as part of the preparation and filing of reports on Form N-PORT, that completing, reviewing, and filing Form N-PORT would cost $54,821 for each fund, including small entities, in its first year of reporting, and $38,746 per year for each subsequent year.[874]

2. Rescission of Form N-Q

Our proposal would rescind Form N-Q in order to eliminate unnecessarily duplicative reporting requirements. The proposed rescission of Form N-Q would affect all management investment companies required to file reports on the form. We expect that approximately 132 open and closed-end funds are small entities that would be affected by the recession of Form N-Q.

As discussed above, we estimate that the rescission of Form N-Q would save $6,762 per year for each fund, including small entities.[875]

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3. Form N-CEN

Funds currently report census type information relating to the fund's organization, service providers, fees and expenses, portfolio strategies and investments, portfolio transactions, and share transactions on Form N-SAR. Funds file this form semi-annually with the Commission, except for UITs, which must file such reports annually.[876] The utility of the information reported on Form N-SAR has been limited for two reasons. First, the data items funds are required to report on Form N-SAR have not been updated to reflect current Commission staff needs. Second, the technology by which funds file reports on Form N-SAR has not been updated and limits the Commission staff's ability to extract and analyze reported data.

Because of these limitations, the Commission is proposing to replace Form N-SAR with new Form N-CEN. This new form would streamline and updated the required data items to reflect current Commission staff needs. The Commission is also proposing that funds file reports on Form N-CEN in a structured (XML) format, which would allow for easier data analysis and use in the Commission's rulemaking, inspection, and risk monitoring functions and reduce burdens on filers. Finally, the Commission is proposing that funds file reports on Form N-CEN annually, opposed to semi-annually, which is currently required for Form N-SAR (except UITs, which currently must file reports annually).

We estimate that approximately 146 registered investment companies, including 133 open and closed-end funds (including one SBIC) and 13 UITs, are small entities that would be required to file a complete report on Form N-CEN. Although UITs are required to complete fewer items on Form N-CEN than other registered investment companies, the burden on UITs would increase because UITs would be required to respond to more items in Form N-CEN than they are currently required to respond to under Form N-SAR.

As discussed above, the SEC estimates that completing, reviewing, and filing Form N-CEN would cost $10,622 for each fund,[877] including small entities, in its first year of reporting, and $4,252 per year for each subsequent year.[878] We further estimate that completing, reviewing, and filing Form N-CEN would cost $9,272 for each UIT,[879] including small entities, in its first year of reporting, and $2,902 per year for each subsequent year.[880]

4. Rescission of Form N-SAR

Our proposal would rescind Form N-SAR in order to eliminate unnecessarily duplicative reporting requirements. We estimate that that approximately 146 registered investment companies that are small entities, including 133 open and closed-end funds (including one SBIC) and 13 UITs would be affected by the rescission of Form N-SAR.

We estimate that rescinding Form N-SAR would save $9,778 per year for each fund, including small entities.[881] We further estimate that rescinding Form N-SAR would save $2,265 per year for each UIT, including small entities.[882]

5. Regulation S-X Amendments

The Commission is also proposing to amend Regulation S-X to require new, standardized disclosures regarding fund holdings in open futures contracts, open forward foreign currency contracts, and open swap contracts, and additional disclosures regarding fund holdings of written and purchased options, update the disclosures for other investments with conforming amendments, and amend the rules regarding the form and content of fund financial statements. We believe that the amendments we are proposing today are generally consistent with how many funds are currently reporting investments (including derivatives), and other information according to current industry practices. The Commission believes investors would benefit from our proposed amendments because increased disclosure and standardization of fund holdings would improve comparability among funds including transparency for investors regarding a fund's use of derivatives and the liquidity of certain investments. The Commission also believes that greater clarity would benefit the industry, while any additional burdens would be reduced since similar disclosures would be proposed to be required on Form N-PORT.

We expect that approximately 146 registered investment companies, including 133 open and closed-end funds (including one SBIC) and 13 UITs and, approximately 28 BDCs, are small entities that would be affected by the amendments to Regulation S-X. As discussed above, we estimate that amending Regulation S-X would cost $2,417 for each fund, including small entities, in its first year of reporting, and $806 per year for each subsequent year.[883] As discussed above, we further estimate that amending Regulation S-X would cost $2,417 for each UIT, including small entities, in its first year of reporting, and $806 per year for each subsequent year.[884]

6. Web Site Transmission of Shareholder Reports

The Commission is proposing new rule 30e-3 under the Investment Company Act, which would, if adopted, permit, but not require, a fund to satisfy requirements under the Act and rules thereunder to transmit reports to shareholders if the fund makes the reports and certain other materials accessible on its Web site and periodically notifies investors of the materials' availability.[885] Proposed rule 30e-3 would provide that a fund's annual or semiannual report to shareholders would be considered “transmitted” to a shareholder of record if certain conditions set forth in the rule are satisfied.[886] Funds that do not maintain Web sites or that otherwise wish to transmit shareholder reports in paper or pursuant the Commission's Start Printed Page 33684existing electronic delivery guidance would continue to be able to satisfy their transmission requirements by those transmission methods.

We expect that approximately 146 registered investment companies, including 133 open and closed-end funds (including one SBIC) and 13 UITs, are small entities that would rely on the Web site reporting rules. As discussed above, the SEC estimates that our proposed Web site reporting would save $4,792 for each fund, including small entities, in its first year of reporting, and $6,122 per year for each subsequent year.[887]

7. Amendments to Form N-CSR

Form N-Q and Form N-CSR currently require a quarterly SOX certification relating to the accuracy of information reported to the Commission and disclosure controls and procedures and internal control over financial reporting. To facilitate the elimination of Form N-Q, we are proposing to expand the SOX certification for Form N-CSR to six months to maintain coverage for the entire fiscal year. We expect that approximately 146 registered investment companies, including 133 open and closed-end funds (including one SBIC) and 13 UITs, are small entities that would be affected by the amendments to Form N-CSR. As discussed above, the Commission does not believe that the costs associated with reporting on Form N-CSR for will change for funds, including small entities, as a result of the proposed amendments to Form N-CSR.[888]

8. Amendments to Registration Statement Forms

We are also proposing to amend Forms N-1A, N-2, N-3, N-4, and N-6 to exempt funds from those forms' respective books and records disclosures if the information is provided in a fund's most recent report on Form N-CEN.[889] The books and records disclosures required by these registration statement forms are not provided in a structured format. We believe that having this information in a structured format would increase our efficiency in preparing for exams as well as our ability to identify current industry trends and practices and, therefore, are proposing it be reported on proposed Form N-CEN. We are also proposing amendments that would restrict funds that would rely on proposed rule 30e-3 from providing a Summary Schedule in their shareholder reports in lieu of a complete schedule, and certain technical and conforming amendments to Forms N-1A, N-2 and N-3 to refer to the availability of portfolio holdings schedules attached to reports on Form N-PORT and posted on fund Web sites rather than on reports on Form N-Q.

We expect that approximately 146 registered investment companies, including 133 open and closed-end funds (including one SBIC) and 13 UITs, and approximately 28 BDCs, are small entities that would be required to file registration statements. As discussed above, the SEC estimates that our proposed amendments would not change for funds, including small entities, as a result of our proposed amendments to Forms N-1A, N-2, N-3, N-4, and N-6.[890]

E. Duplicative, Overlapping, or Conflicting Federal Rules

Funds currently report portfolio holdings information for the first and third fiscal quarters on Form N-Q and for the second and fourth fiscal quarters on Form N-CSR. As a result of our proposal to create new Form N-PORT, on which funds will report portfolio holdings information monthly, the Commission is proposing to eliminate Form N-Q, which will reduce duplication of portfolio holdings information for the first and third fiscal quarters. We acknowledge that Form N-CSR, Form N-PORT, Regulation S-X, and Web reporting would require reporting of some duplicative information, including information currently reported on the fund's registration statements and annual reports. However, we believe that both the nature and structure of the reporting are sufficiently different to justify overlapping information requirements on the fund's Web site or on respective Commission forms.[891]

Funds currently report census information on Form N-SAR. As part of our proposed amendments, the Commission is proposing to replace Form N-SAR with new Form N-CEN. In addition, we are proposing that reports on Form N-CEN be filed annually, as opposed to semi-annually, which is generally required for Form N-SAR. Again, we acknowledge that Form N-CEN would require reporting of some duplicative information, including information currently reported on the fund's registration statements and annual reports. Like Form N-PORT and Form N-CSR, we believe that both the nature and structure of the reporting are sufficiently different to justify overlapping information requirements.

Finally, in order to reduce duplicative information in Form N-CEN and fund registration statements, we are proposing to amend Forms N-1A, N-2, N-3, N-4, and N-6 to exempt funds from those forms' respective books and records disclosures if the information is provided in a fund's most recent report on Form N-CEN.

F. Significant Alternatives

The RFA directs the Commission to consider significant alternatives that would accomplish our stated objective, while minimizing any significant economic impact on small entities. The Commission considered the following alternatives for small entities in relation our proposed amendments: (i) Establishing different reporting requirements or frequency to account for resources available to small entities; (ii) using performance rather than design standards; and (iii) exempting small entities from all or part of the proposal.

Small entities currently follow the same requirements that large entities do when filing reports on Form N-SAR, Form N-CSR, and Form N-Q. The Commission believes that establishing different reporting requirements or frequency for small entities would not be consistent with the Commission's goal of industry oversight and investor protection. However, as discussed above, we are proposing a delayed compliance period for small entities that would file reports on Form N-PORT.

G. General Request for Comment

The Commission requests comments regarding this IRFA. We request comments on the number of small entities that may be affected by our proposed rules and guidelines, and whether the proposed rules and guidelines would have any effects not considered in this analysis. We request that commenters describe the nature of any effects on small entities subject to the rules, and provide empirical data to support the nature and extent of such effects. We also request comment on the proposed compliance burdens and the effect these burdens would have on smaller entities.Start Printed Page 33685

VII. Consideration of Impact on The Economy

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 (“SBREFA”),[892] the Commission must advise OMB whether a proposed regulation constitutes a “major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results in or is likely to result in:

  • An annual effect on the economy of $100 million or more;
  • A major increase in costs or prices for consumers or individual industries; or
  • Significant adverse effects on competition, investment, or innovation.

We request comment on whether our proposal would be a “major rule” for purposes of SBREFA. We solicit comment and empirical data on:

  • The potential effect on the U.S. economy on an annual basis;
  • Any potential increase in costs or prices for consumers or individual industries; and
  • Any potential effect on competition, investment, or innovation.

Commenters are requested to provide empirical data and other factual support for their views to the extent possible.

VIII. Statutory Authority and Text of Proposed Amendments

We are proposing the rules and forms contained in this document under the authority set forth in the Securities Act, particularly, section 19 thereof [15 U.S.C. 77a et seq.], the Trust Indenture Act, particularly, section 319 thereof [15 U.S.C. 77aaa et seq.], the Exchange Act, particularly, sections 10, 13, 15, 23, and 35A thereof [15 U.S.C. 78a et seq.], the Investment Company Act, particularly, sections 8, 30, and 38 thereof [15 U.S.C. 80a et seq.], and 44 U.S.C. 3506, 3507.

Start List of Subjects

List of Subjects

17 CFR Part 200

  • Administrative practice and procedure
  • Organization and functions (Government agencies)

17 CFR Part 210

  • Accounting
  • Investment companies
  • Reporting and recordkeeping requirements
  • Securities

17 CFR Parts 230 and 239

  • Investment companies
  • Reporting and recordkeeping requirements
  • Securities

17 CFR Part 232

  • Administrative practice and procedure
  • Reporting and recordkeeping requirements
  • Securities

17 CFR Parts 240 and 249

  • Reporting and recordkeeping requirements
  • Securities

17 CFR Parts 270 and 274

  • Investment companies
  • Reporting and recordkeeping requirements
  • Securities
End List of Subjects

For reasons set forth in the preamble, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows:

Start Part

PART 200—ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND REQUESTS

Subpart N—Commission Information Collection Requirements Under the Paperwork Reduction Act: OMB Control Numbers

End Part Start Amendment Part

1. The authority citation for Part 200 Subpart N continues to read as follows:

End Amendment Part Start Authority

Authority: 44 U.S.C. 3506; 44 U.S.C. 3507.

End Authority Start Amendment Part

2. Section 200.800 is amended in paragraph (b) by removing the entry for “Form N-SAR” and adding in its place an entry “Form N-CEN” and adding an entry in numerical order by part and section number for “Form N-PORT”, to read as follows:

End Amendment Part
OMB control numbers assigned pursuant to the Paperwork Reduction Act.
* * * * *

(b) * * *

Information collection requirement17 CFR part or section where identified and describedCurrent OMB control No.
*         *         *         *         *         *         *
Form N-CEN274.101[OMB control number TBD].
*         *         *         *         *         *         *
Form N-PORT274.150[OMB control number TBD].
*         *         *         *         *         *         *
Start Part

PART 210—FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

End Part Start Amendment Part

3. The authority citation for part 210 continues to read as follows:

End Amendment Part Start Authority

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78 l, 78m, 78n, 78o(d), 78q, 78u-5, 78w, 78 ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, unless otherwise noted.

End Authority Start Amendment Part

4. Revise § 210.6-01 and the undesignated heading preceding it to read as follows:

End Amendment Part

Registered Investment Companies and Business Development Companies

Application of §§ 210.6-01 to 210.6-10.

Sections 210.6-01 to 210.6-10 shall be applicable to financial statements filed for registered investment companies and business development companies.

Start Amendment Part

5. Revise § 210.6-03 to read as follows:

End Amendment Part
Special rules of general application to registered investment companies and business development companies.

The financial statements filed for persons to which §§ 210.6-01 to 210.6-10 are applicable shall be prepared in accordance with the following special Start Printed Page 33686rules in addition to the general rules in §§ 210.1-01 to 210.4-10 (Articles 1, 2, 3, and 4). Where the requirements of a special rule differ from those prescribed in a general rule, the requirements of the special rule shall be met.

(a) Content of financial statements. The financial statements shall be prepared in accordance with the requirements of this part (Regulation S-X) notwithstanding any provision of the articles of incorporation, trust indenture or other governing legal instruments specifying certain accounting procedures inconsistent with those required in §§ 210.6-01 to 210.6-10.

(b) Audited financial statements. Where, under Article 3 of this part, financial statements are required to be audited, the independent accountant shall have been selected and ratified in accordance with section 32 of the Investment Company Act of 1940 (15 U.S.C. 80a-31).

(c) Consolidated and combined statements. (1) Consolidated and combined statements filed for registered investment companies and business development companies shall be prepared in accordance with §§ 210.3A-01 to 210.3A-04 (Article 3A) except that:

(i) Statements of the registrant may be consolidated only with the statements of subsidiaries which are investment companies;

(ii) A consolidated statement of the registrant and any of its investment company subsidiaries shall not be filed unless accompanied by a consolidating statement which sets forth the individual statements of each significant subsidiary included in the consolidated statement: Provided, however, That a consolidating statement need not be filed if all included subsidiaries are totally held; and

(iii) Consolidated or combined statements filed for subsidiaries not consolidated with the registrant shall not include any investment companies unless accompanied by consolidating or combining statements which set forth the individual statements of each included investment company which is a significant subsidiary.

(2) If consolidating or combining statements are filed, the amounts included under each caption in which financial data pertaining to affiliates is required to be furnished shall be subdivided to show separately the amounts:

(i) Eliminated in consolidation; and

(ii) Not eliminated in consolidation.

(d) Valuation of investments. The balance sheets of registered investment companies and business development companies, other than issuers of face-amount certificates, shall reflect all investments at value, with the aggregate cost of each category of investment reported under §§ 210.6-04.1, 6-04.2, 6-04.3 and 6-04.9 or the aggregate cost of each category of investment reported under § 210.6-05.1 shown parenthetically. State in a note the methods used in determining value of investments. As required by section 28(b) of the Investment Company Act of 1940 (15 U.S.C. 80a-28(b)), qualified assets of face-amount certificate companies shall be valued in accordance with certain provisions of the Code of the District of Columbia. For guidance as to valuation of securities, see §§ 404.03 to 404.05 of the Codification of Financial Reporting Policies.

(e) Qualified assets. State in a note the nature of any investments and other assets maintained or required to be maintained, by applicable legal instruments, in respect of outstanding face-amount certificates. If the nature of the qualifying assets and amount thereof are not subject to the provisions of section 28 of the Investment Company Act of 1940 (15 U.S.C. 80a-28), a statement to that effect shall be made.

(f) Restricted securities. State in a note unless disclosed elsewhere the following information as to investment securities which cannot be offered for public sale without first being registered under the Securities Act of 1933 (restricted securities):

(1) The policy of the person with regard to acquisition of restricted securities.

(2) The policy of the person with regard to valuation of restricted securities. Specific comments shall be given as to the valuation of an investment in one or more issues of securities of a company or group of affiliated companies if any part of such investment is restricted and the aggregate value of the investment in all issues of such company or affiliated group exceeds five percent of the value of total assets. (As used in this paragraph, the term affiliated shall have the meaning given in § 210.6-02(a).)

(3) A description of the person's rights with regard to demanding registration of any restricted securities held at the date of the latest balance sheet.

(g) Income recognition. Dividends shall be included in income on the ex-dividend date; interest shall be accrued on a daily basis. Dividends declared on short positions existing on the record date shall be recorded on the ex-dividend date and included as an expense of the period.

(h) Federal income taxes. The company's status as a regulated investment company as defined in subtitle A, chapter 1, subchapter M of the Internal Revenue Code, as amended, shall be stated in a note referred to in the appropriate statements. Such note shall also indicate briefly the principal assumptions on which the company relied in making or not making provisions for income taxes. However, a company which retains realized capital gains and designates such gains as a distribution to shareholders in accordance with section 852(b)(3)(D) of the Internal Revenue Code shall, on the last day of its taxable year (and not earlier), make provision for taxes on such undistributed capital gains realized during such year.

(i) Issuance and repurchase by a registered investment company or business development company of its own securities. Disclose for each class of the company's securities:

(1) The number of shares, units, or principal amount of bonds sold during the period of report, the amount received therefor, and, in the case of shares sold by closed-end management investment companies, the difference, if any, between the amount received and the net asset value or preference in involuntary liquidation (whichever is appropriate) of securities of the same class prior to such sale; and

(2) The number of shares, units, or principal amount of bonds repurchased during the period of report and the cost thereof. Closed-end management investment companies shall furnish the following additional information as to securities repurchased during the period of report:

(i) As to bonds and preferred shares, the aggregate difference between cost and the face amount or preference in involuntary liquidation and, if applicable net assets taken at value as of the date of repurchase were less than such face amount or preference, the aggregate difference between cost and such net asset value;

(ii) As to common shares, the weighted average discount per share, expressed as a percentage, between cost of repurchase and the net asset value applicable to such shares at the date of repurchases.

Note to paragraphs (h)(2)(i) and (ii): The information required by paragraphs (h)(2)(i) and (ii) of this section may be based on reasonable estimates if it is impracticable to determine the exact amounts involved.

(j) Series companies. (1) The information required by this part shall, in the case of a person which in essence Start Printed Page 33687is comprised of more than one separate investment company, be given as if each class or series of such investment company were a separate investment company; this shall not prevent the inclusion, at the option of such person, of information applicable to other classes or series of such person on a comparative basis, except as to footnotes which need not be comparative.

(2) If the particular class or series for which information is provided may be affected by other classes or series of such investment company, such as by the offset of realized gains in one series with realized losses in another, or through contingent liabilities, such situation shall be disclosed.

(k) Certificate reserves. (1) For companies issuing face-amount certificates subsequent to December 31, 1940 under the provisions of section 28 of the Investment Company Act of 1940 (15 U.S.C. 80a-28), balance sheets shall reflect reserves for outstanding certificates computed in accordance with the provisions of section 28(a) of the Act.

(2) For other companies, balance sheets shall reflect reserves for outstanding certificates determined as follows:

(i) For certificates of the installment type, such amount which, together with the lesser of future payments by certificate holders as and when accumulated at a rate not to exceed 31/2 per centum per annum (or such other rate as may be appropriate under the circumstances of a particular case) compounded annually, shall provide the minimum maturity or face amount of the certificate when due.

(ii) For certificates of the fully-paid type, such amount which, as and when accumulated at a rate not to exceed 31/2 per centum per annum (or such other rate as may be appropriate under the circumstances of a particular case) compounded annually, shall provide the amount or amounts payable when due.

(iii) Such amount or accrual therefor, as shall have been credited to the account of any certificate holder in the form of any credit, or any dividend, or any interest in addition to the minimum maturity or face amount specified in the certificate, plus any accumulations on any amount so credited or accrued at rates required under the terms of the certificate.

(iv) An amount equal to all advance payments made by certificate holders, plus any accumulations thereon at rates required under the terms of the certificate.

(v) Amounts for other appropriate contingency reserves, for death and disability benefits or for reinstatement rights on any certificate providing for such benefits or rights.

(l) Inapplicable captions. Attention is directed to the provisions of §§ 210.4-02 and 210.4-03 which permit the omission of separate captions in financial statements as to which the items and conditions are not present, or the amounts involved not significant. However, amounts involving directors, officers, and affiliates shall nevertheless be separately set forth except as otherwise specifically permitted under a particular caption.

(m) Securities Lending. State in a note unless disclosed elsewhere the following information regarding securities lending activities and cash collateral management:

(1) The gross income from securities lending activities, including income from cash collateral reinvestment;

(2) The dollar amount of all fees and/or compensation paid by the registrant for securities lending activities and related services, including borrower rebates and cash collateral management services;

(3) The net income from securities lending activities;

(4) The terms governing the compensation of the securities lending agent, including any revenue sharing split, with the related percentage split between the registrant and the securities lending agent, and/or any fee-for-service, and a description of services included;

(5) The details of any other fees paid directly or indirectly, including any fees paid directly by the registrant for cash collateral management and any management fee deducted from a pooled investment vehicle in which cash collateral is invested; and

(6) The monthly average of the value of portfolio securities on loan.

Start Amendment Part

6. Revise § 210.6-04 to read as follows:

End Amendment Part
Balance sheets.

This section is applicable to balance sheets filed by registered investment companies and business development companies except for persons who substitute a statement of net assets in accordance with the requirements specified in § 210.6-05, and issuers of face-amount certificates which are subject to the special provisions of § 210.6-06. Balance sheets filed under this rule shall comply with the following provisions:

Assets

1. Investments in securities of unaffiliated issuers.

2. Investments in and advances to affiliates. State separately investments in and advances to: (a) Controlled companies and (b) other affiliates.

3. Other investments. State separately amounts of assets related to (a) variation margin receivable on futures contracts, (b) forward foreign currency contracts; (c) swap contracts; and (d) investments—other than those presented in §§ 210.12-12, 12-12A, 12-12B, 12-13, 12-13A, 12-13B, and 12-13C.

4. Cash. Include under this caption cash on hand and demand deposits. Provide in a note to the financial statements the information required under § 210.5-02.1 regarding restrictions and compensating balances.

5. Receivables. (a) State separately amounts receivable from (1) sales of investments; (2) subscriptions to capital shares; (3) dividends and interest; (4) directors and officers; and (5) others.

(b) If the aggregate amount of notes receivable exceeds 10 percent of the aggregate amount of receivables, the above information shall be set forth separately, in the balance sheet or in a note thereto, for accounts receivable and notes receivable.

6. Deposits for securities sold short and other investments. State separately amounts held by others in connection with: (a) Short sales; (b) open option contracts (c) futures contracts, (d) forward foreign currency contracts; (e) swap contracts; and (f) investments—other than those presented in §§ 210.12-12, 12-12A, 12-12B, 12-13, 12-13A, 12-13B, and 12-13C.

7. Other assets. State separately (a) prepaid and deferred expenses; (b) pension and other special funds; (c) organization expenses; and (d) any other significant item not properly classified in another asset caption.

8. Total assets.

Liabilities

9. Other investments. State separately amounts of liabilities related to: (a) Securities sold short; (b) open option contracts written; (c) variation margin payable on futures contracts, (d) forward foreign currency contracts; (e) swap contracts; and (f) investments—other than those presented in §§ 210.12-12, 12-12A, 12-12B, 12-13, 12-13A, 12-13B, and 12-13C.

10. Accounts payable and accrued liabilities. State separately amounts payable for: (a) Other purchases of securities; (b) capital shares redeemed; (c) dividends or other distributions on capital shares; and (d) others. State separately the amount of any other liabilities which are material.Start Printed Page 33688

11. Deposits for securities loaned. State the value of securities loaned and indicate the nature of the collateral received as security for the loan, including the amount of any cash received.

12. Other liabilities. State separately (a) amounts payable for investment advisory, management and service fees; and (b) the total amount payable to: (1) Officers and directors; (2) controlled companies; and (3) other affiliates, excluding any amounts owing to noncontrolled affiliates which arose in the ordinary course of business and which are subject to usual trade terms.

13. Notes payable, bonds and similar debt. (a) State separately amounts payable to: (1) Banks or other financial institutions for borrowings; (2) controlled companies; (3) other affiliates; and (4) others, showing for each category amounts payable within one year and amounts payable after one year.

(b) Provide in a note the information required under § 210.5-02.19(b) regarding unused lines of credit for short-term financing and § 210.5-02.22(b) regarding unused commitments for long-term financing arrangements.

14. Total liabilities.

15. Commitments and contingent liabilities.

Net Assets

16. Units of capital. (a) Disclose the title of each class of capital shares or other capital units, the number authorized, the number outstanding, and the dollar amount thereof.

(b) Unit investment trusts, including those which are issuers of periodic payment plan certificates, also shall state in a note to the financial statements: (1) The total cost to the investors of each class of units or shares; (2) the adjustment for market depreciation or appreciation; (3) other deductions from the total cost to the investors for fees, loads and other charges, including an explanation of such deductions; and (4) the net amount applicable to the investors.

17. Accumulated undistributed income (loss). Disclose:

(a) The accumulated undistributed investment income-net,

(b) accumulated undistributed net realized gains (losses) on investment transactions, and

(c) net unrealized appreciation (depreciation) in value of investments at the balance sheet date.

18. Other elements of capital. Disclose any other elements of capital or residual interests appropriate to the capital structure of the reporting entity.

19. Net assets applicable to outstanding units of capital. State the net asset value per share.

Start Amendment Part

7. Revise § 210.6-05 to read as follows:

End Amendment Part
Statements of net assets.

In lieu of the balance sheet otherwise required by § 210.6-04, persons may substitute a statement of net assets if at least 95 percent of the amount of the person's total assets are represented by investments in securities of unaffiliated issuers. If presented in such instances, a statement of net assets shall consist of the following:

Statements of Net Assets

1. A schedule of investments in securities of unaffiliated issuers as prescribed in § 210.12-12.

2. The excess (or deficiency) of other assets over (under) total liabilities stated in one amount, except that any amounts due from or to officers, directors, controlled persons, or other affiliates, excluding any amounts owing to noncontrolled affiliates which arose in the ordinary course of business and which are subject to usual trade terms, shall be stated separately.

3. Disclosure shall be provided in the notes to the financial statements for any item required under § 210.6-04.3 and §§ 210.6-04.9 to 210.6-04.13.

4. The balance of the amounts captioned as net assets. The number of outstanding shares and net asset value per share shall be shown parenthetically.

5. The information required by (i) § 210.6-04.16, (ii) § 210.6-04.17 and (iii) § 210.6-04.18 shall be furnished in a note to the financial statements.

Start Amendment Part

8. Revise § 210.6-07 to read as follows:

End Amendment Part
Statements of operations.

Statements of operations filed by registered investment companies and business development companies, other than issuers of face-amount certificates subject to the special provisions of § 210.6-08, shall comply with the following provisions:

Statements of Operations

1. Investment income. State separately income from: (a) Cash dividends; (b) non-cash dividends; (c) interest on securities excluding payment in kind interest; (d) payment in kind interest on securities; and (e) other income. If income from investments in or indebtedness of affiliates is included hereunder, such income shall be segregated under an appropriate caption subdivided to show separately income from: (1) Controlled companies; and (2) other affiliates. If non-cash dividends or payment in kind interest are included in income, the bases of recognition and measurement used in respect to such amounts shall be disclosed. Any other category of income which exceeds five percent of the total shown under this caption shall be stated separately.

2. Expenses. (a) State separately the total amount of investment advisory, management and service fees, and expenses in connection with research, selection, supervision, and custody of investments. Amounts of expenses incurred from transactions with affiliated persons shall be disclosed together with the identity of and related amount applicable to each such person accounting for five percent or more of the total expenses shown under this caption together with a description of the nature of the affiliation. Expenses incurred within the person's own organization in connection with research, selection and supervision of investments shall be stated separately. Reductions or reimbursements of management or service fees shall be shown as a negative amount or as a reduction of total expenses shown under this caption.

(b) State separately any other expense item the amount of which exceeds five percent of the total expenses shown under this caption.

(c) A note to the financial statements shall include information concerning management and service fees, the rate of fee, and the base and method of computation. State separately the amount and a description of any fee reductions or reimbursements representing: (1) Expense limitation agreements or commitments; and (2) offsets received from broker-dealers showing separately for each amount received or due from (i) unaffiliated persons; and (ii) affiliated persons. If no management or service fees were incurred for a period, state the reason therefor.

(d) If any expenses were paid otherwise than in cash, state the details in a note.

(e) State in a note to the financial statements the amount of brokerage commissions (including dealer markups) paid to affiliated broker-dealers in connection with purchase and sale of investment securities. Open-end management companies shall state in a note the net amounts of sales charges deducted from the proceeds of sale of capital shares which were retained by any affiliated principal underwriter or other affiliated broker-dealer.

(f) State separately all amounts paid in accordance with a plan adopted Start Printed Page 33689under 17 CFR 270.12b-1 of this chapter. Reimbursement to the fund of expenses incurred under such plan (12b-1 expense reimbursement) shall be shown as a negative amount and deducted from current 12b-1 expenses. If 12b-1 expense reimbursements exceed current 12b-1 costs, such excess shall be shown as a negative amount used in the calculation of total expenses under this caption.

(g)(1) Brokerage/Service Arrangements. If a broker-dealer or an affiliate of the broker-dealer has, in connection with directing the person's brokerage transactions to the broker-dealer, provided, agreed to provide, paid for, or agreed to pay for, in whole or in part, services provided to the person (other than brokerage and research services as those terms are used in section 28(e) of the Securities Exchange Act of 1934 [15 U.S.C. 78bb(e)]), include in the expense items set forth under this caption the amount that would have been incurred by the person for the services had it paid for the services directly in an arms-length transaction.

(2) Expense Offset Arrangements. If the person has entered into an agreement with any other person pursuant to which such other person reduces, or pays a third party which reduces, by a specified or reasonably ascertainable amount, its fees for services provided to the person in exchange for use of the person's assets, include in the expense items set forth under this caption the amount of fees that would have been incurred by the person if the person had not entered into the agreement.

(3) Financial Statement Presentation. Show the total amount by which expenses are increased pursuant to paragraphs (1) and (2) of this paragraph (2)(g) as a corresponding reduction in total expenses under this caption. In a note to the financial statements, state separately the total amounts by which expenses are increased pursuant to paragraphs (1) and (2) of this paragraph (2)(g), and list each category of expense that is increased by an amount equal to at least 5 percent of total expenses. If applicable, the note should state that the person could have employed the assets used by another person to produce income if it had not entered into an arrangement described in paragraph (2)(g)(2) of this section.

3. Interest and amortization of debt discount and expense. Provide in the body of the statements or in the footnotes, the average dollar amount of borrowings and the average interest rate.

4. Investment income before income tax expense.

5. Income tax expense. Include under this caption only taxes based on income.

6. Investment income—net.

7. Realized and unrealized gain (loss) on investments—net. (a) State separately the net realized gain or loss from: (1) Transactions in investment securities of unaffiliated issuers, (2) transactions in investment securities of affiliated issuers, (3) expiration or closing of option contracts written, (4) closed short positions in securities, (5) expiration or closing of futures contracts, (6) settlement of forward foreign currency contracts, (7) expiration or closing of swap contracts, and (8) transactions in other investments held during the period.

(b) Distributions of realized gains by other investment companies shall be shown separately under this caption.

(c) State separately the amount of the net increase or decrease during the period in the unrealized appreciation or depreciation in the value of: (1) Investment securities of unaffiliated issuers, (2) investment securities of affiliated issuers, (3) option contracts written, (4) short positions in securities, (5) futures contracts, (6) forward foreign currency contracts, (7) swap contracts, and (8) other investments held at the end of the period.

(d) State separately any: (1) Federal income taxes and (2) other income taxes applicable to realized and unrealized gain (loss) on investments, distinguishing taxes payable currently from deferred income taxes.

8. Net gain (loss) on investments.

9. Net increase (decrease) in net assets resulting from operations.

Start Amendment Part

9. Revise § 210.6-10 to read as follows:

End Amendment Part
What schedules are to be filed.

(a) The schedules shall be examined by an independent accountant if the related financial statements are so examined.

(b) Management investment companies. (1) Except as otherwise provided in the applicable form, the schedules specified in this paragraph shall be filed for management investment companies as of the dates of the most recent audited balance sheet and any subsequent unaudited statement being filed for each person or group.

Schedule I—Investments in securities of unaffiliated issuers. The schedule prescribed by § 210.12-12 shall be filed in support of caption 1 of each balance sheet.

Schedule II—Investments in and advances to affiliates. The schedule prescribed by § 210.12-14 shall be filed in support of caption 2 of each balance sheet.

Schedule III—Investments—securities sold short. The schedule prescribed by § 210.12-12A shall be filed in support of caption 9(a) of each balance sheet.

Schedule IV—Open option contracts written. The schedule prescribed by § 210.12-13 shall be filed in support of caption 9(b) of each balance sheet.

Schedule V—Open futures contracts. The schedule prescribed by § 210.12-13A shall be filed in support of captions 3(a) and 9(c) of each balance sheet.

Schedule VI—Open forward foreign currency contracts. The schedule prescribed by § 210.12-13B shall be filed in support of captions 3(b) and 9(d) of each balance sheet.

Schedule VII—Open swap contracts. The schedule prescribed by § 210.12-13C shall be filed in support of captions 3(c) and 9(e) of each balance sheet.

Schedule VIII—Investments—other than those presented in §§ 210.12-12, 12-12A, 12-12B, 12-13, 12-13A, 12-13B and 12-13C. The schedule prescribed by § 210.12-13D shall be filed in support of captions 3(d) and 9(f) of each balance sheet.

(2) When permitted by the applicable form, the schedule specified in this paragraph may be filed for management investment companies as of the dates of the most recent audited balance sheet and any subsequent unaudited statement being filed for each person or group.

Schedule IX—Summary schedule of investments in securities of unaffiliated issuers. The schedule prescribed by § 210.12-12B may be filed in support of caption 1 of each balance sheet.

(c) Unit investment trusts. Except as otherwise provided in the applicable form:

(1) Schedules I and II, specified below in this section, shall be filed for unit investment trusts as of the dates of the most recent audited balance sheet and any subsequent unaudited statement being filed for each person or group.

(2) Schedule III, specified below in this section, shall be filed for unit investment trusts for each period for which a statement of operations is required to be filed for each person or group.

Schedule I—Investment in securities. The schedule prescribed by § 210.12-12 shall be filed in support of caption 1 of each balance sheet (§ 210.6-04).

Schedule II—Allocation of trust assets to series of trust shares. If the trust assets are specifically allocated to different series of trust shares, and if such allocation is not shown in the balance sheet in columnar form or by the filing of separate statements for each Start Printed Page 33690series of trust shares, a schedule shall be filed showing the amount of trust assets, indicated by each balance sheet filed, which is applicable to each series of trust shares.

Schedule III—Allocation of trust income and distributable funds to series of trust shares. If the trust income and distributable funds are specifically allocated to different series of trust shares and if such allocation is not shown in the statement of operations in columnar form or by the filing of separate statements for each series of trust shares, a schedule shall be submitted showing the amount of income and distributable funds, indicated by each statement of operations filed, which is applicable to each series of trust shares.

(d) Face-amount certificate investment companies. Except as otherwise provided in the applicable form:

(1) Schedules I, V and X, specified below, shall be filed for face-amount certificate investment companies as of the dates of the most recent audited balance sheet and any subsequent unaudited statement being filed for each person or group.

(2) All other schedules specified below in this section shall be filed for face-amount certificate investment companies for each period for which a statement of operations is filed, except as indicated for Schedules III and IV.

Schedule I—Investment in securities of unaffiliated issuers. The schedule prescribed by § 210.12-21 shall be filed in support of caption 1 and, if applicable, caption 5(a) of each balance sheet. Separate schedules shall be furnished in support of each caption, if applicable.

Schedule II—Investments in and advances to affiliates and income thereon. The schedule prescribed by § 210.12-22 shall be filed in support of captions 1 and 5(b) of each balance sheet and caption 1 of each statement of operations. Separate schedules shall be furnished in support of each caption, if applicable.

Schedule III—Mortgage loans on real estate and interest earned on mortgages. The schedule prescribed by § 210.12-23 shall be filed in support of captions 1 and 5(c) of each balance sheet and caption 1 of each statement of operations, except that only the information required by column G and note 8 of the schedule need be furnished in support of statements of operations for years for which related balance sheets are not required.

Schedule IV—Real estate owned and rental income. The schedule prescribed by § 210.12-24 shall be filed in support of captions 1 and 5(a) of each balance sheet and caption 1 of each statement of operations for rental income included therein, except that only the information required by columns H, I and J, and item “Rent from properties sold during the period” and note 4 of the schedule need be furnished in support of statements of operations for years for which related balance sheets are not required.

Schedule V—Qualified assets on deposit. The schedule prescribed by § 210.12-27 shall be filed in support of the information required by caption 4 of § 210.6-06 as to total amount of qualified assets on deposit.

Schedule VI—Certificate reserves. The schedule prescribed by § 210.12-26 shall be filed in support of caption 7 of each balance sheet.

Schedule VII—Valuation and qualifying accounts. The schedule prescribed by § 210.12-09 shall be filed in support of all other reserves included in the balance sheet.

Start Amendment Part

10. Revise § 210.12-12 to read as follows:

End Amendment Part

For Management Investment Companies

Investments in securities of unaffiliated issuers.

[For Management Investment Companies Only]

Col. ACol. BCol. C
Name of issuer and title of issue.1 2 3 4Balance held at close of period. Number of shares—principal amount of bonds and notes.7Value of each item at close of period.5 6 8 9 10 11 12
1 Each issue shall be listed separately: Provided, however, that an amount not exceeding five percent of the total of Column C may be listed in one amount as “Miscellaneous securities,” provided the 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 of the person for which the schedule is filed or to any exchange, or set forth in any registration stat