SEC INVESTMENT COMPANY
REPORTING MODERNIZATION,
LIQUIDITY RISK MANAGEMENT
PROGRAMS AND SWING PRICING
FINAL RULE HELP SHEET
On October 13, 2016, the SEC voted to adopt changes to modernize and enhance
the reporting and disclosure of information by registered investment companies and to
enhance liquidity risk management by open-end mutual funds and Exchange Traded
Funds (ETFs). The new rules are part of the Commission’s initiative to enhance its
monitoring and regulation of the asset management industry and are intended to enhance
the quality of information available to investors and allow the Commission to more
effectively collect and use data reported by funds.
Modernization Rule Highlights
The reporting modernization rules will enhance data reporting for mutual funds,
ETFs and other registered investment companies and will require registered funds
to file new form types, Form N-PORT and Form N-CEN, with the SEC.
Form N-PORT, requires funds, other than money market funds to provide
portfolio-wide and position-level holdings data to the Commission on a monthly basis.
Form N-CEN, requires funds to report certain census-type information to
the Commission on an annual basis. The form would streamline and update
information to reflect current information, such as requiring more information on
ETFs and securities lending.
The information for both form types will be reported and filed in EXtensible Markup
Language (“xml”), a structured data format, which will improve the ability of the
Commission and the public to aggregate and analyze information across all funds
and to link the reported information with information from other sources.
The rules also will require enhanced and standardized disclosures in financial
statements and add new disclosures in fund registration statements relating to a
fund’s securities lending activities. The Commission currently receives xml
reporting for Form N-MFP and Form PF.
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Form N-PORT
The form would require monthly reporting of the fund’s investments, including:
• Data related to the pricing of portfolio securities
• Information regarding repurchase agreements, securities lending activities
and counterparty exposures
• Terms of derivatives contracts
• Discrete portfolio level and position level risk measures to better understand
fund exposure to changes in market conditions
Information contained on reports for the last month of each fund’s fiscal quarter
would be available to the public after 60 days.
A fund is required to report the aggregated percentage of its portfolio representing each
of the four classification categories specified in the Liquidity Risk Management
Programs Final Rule. Funds will also be required to report position-level liquidity
classification information to the Commission and information regarding a fund’s highly
liquid investment minimum on a confidential basis.
The Commission will rescind Form N-Q, on which funds currently report certain
portfolio holdings for the first and third fiscal quarters and will implement
amendments to the certification requirements of Form N-CSR.
To allow funds time to satisfy the 60-day filing requirements for the final filing on
Form N-Q, for the reporting period preceding their first filing on Form N-PORT, the
Commission is delaying the rescission of Form N-Q by two additional months.
Form N-CEN
Reports will be filed annually within 75 days of the end of the fund’s fiscal year,
rather than semi-annually as is currently required by Form N-SAR.
A fund is required to disclose information regarding the use of lines of credit and
interfund borrowing and lending, and would require an ETF to report if it is an
in-kind ETF.
The swing pricing amendments would add a new item to Form N-CEN that would
require a fund to report information regarding the use of swing pricing, including a
fund’s swing factor upper limit.
Form N-CEN will replace Form N-SAR, the form currently used to report fund
census information.
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What’s Next
Reporting on Fund Financial Statements
The Commission will consider adopting amendments that would require enhanced
and standardized disclosures in financial statements that are required in fund
registration statements and shareholder reports. The amendments would
include specific information related to derivatives, similar to the information about
derivatives that would be required in the monthly portfolio holdings reports.
Current requirements do not require specific information for many types of
derivatives, including swaps, futures, and forwards.
Additionally, in order to make fund derivatives holdings easier to review, the
amended rules would require derivative disclosures to be displayed prominently in
the financial statements, rather than in the notes.
Increased Disclosure Concerning Securities Lending Activities
The Commission will consider adopting amendments to fund registration
statements requiring disclosures relating to fund securities lending activities,
including income and fees from securities lending, and the fees paid to securities
lending agents in the prior fiscal year. These specific requirements with respect to
fees would increase the comparability of securities lending fees between funds.
Liquidity Risk Management Highlights
A fundamental feature of open-end funds is that they allow investors to redeem
their shares daily. Funds must maintain sufficiently liquid assets in order to meet
shareholder redemptions while also minimizing the impact of those redemptions on
the fund’s remaining shareholders.
The rules are designed to promote effective liquidity risk management for mutual
funds and ETFs, reducing the risk that funds will not be able to meet shareholder
redemptions and mitigating potential dilution of the interests of fund shareholders.
The new rules will require liquidity risk management programs be established that
address multiple elements, including classification of the liquidity of fund portfolio
investments and a highly liquid investment minimum. The rules also strengthen
the 15 percent limit on illiquid investments and will require enhanced disclosure
regarding fund liquidity and redemption practices.
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Liquidity Risk Management Programs
Rule 22e-4 requires mutual funds and other open-end management investment
companies, including ETFs, to establish liquidity risk management programs.
Money market funds are excluded from all requirements of the rule and ETFs that
qualify as “in-kind ETFs” from certain requirements.
The liquidity risk management program will be required to include:
•
Assessment, Management, and Periodic Review of a Fund’s Liquidity Risk:
Liquidity risk is defined as the risk that a fund could not meet requests
to redeem shares issued by the fund without significant dilution of remaining
investors’ interests in the fund. Funds will be required to assess, manage,
and periodically review their liquidity risk, based on specified factors.
•
Classification of the Liquidity of Fund Portfolio Investments: Each fund will
be required to classify each of the investments in its portfolio. The classification
will be based on the number of days in which the fund reasonably expects
the investment would be convertible to cash in current market conditions without
significantly changing the market value of the investment and the determination
would need to take into account the market depth of the investment.
Funds will be required to classify each investment into one of four liquidity
categories: highly liquid, moderately liquid, less liquid and illiquid investments.
Funds will be permitted to classify investments by asset class, unless
market, trading, or investment-specific considerations with respect to a particular
investment are expected to significantly affect the liquidity characteristics of that
investment as compared to the fund’s other portfolio holdings within that asset class.
•
Determination of a Highly Liquid Investment Minimum: A fund will be required
to determine a minimum percentage of its net assets that must be invested
in highly liquid investments, defined as cash or investments that are reasonably
expected to be converted to cash within three business days without significantly
changing the market value of the investment. The fund also will be required
to implement policies and procedures for responding to a highly liquid investment
minimum shortfall, which must include board reporting in the event of a shortfall.
• Limitation on Illiquid Investments: An illiquid investment is an investment that
the fund reasonably expects cannot be sold in current market conditions
in seven calendar days without significantly changing the market value of the
investment. The determination will follow the same process as the other liquidity
classifications, and funds will need to review their illiquid investments at
least monthly.
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A fund would not be permitted to purchase additional illiquid investments if more
than 15 percent of its net assets are illiquid assets. If a fund breaches the 15
percent limit, the occurrence must be reported to the board, along with an
explanation of how the fund plans to bring its illiquid investments back within the
limit within a reasonable period of time, and if it is not resolved within 30 days, the
board must assess whether the plan presented to it is in the best interest of the
fund and its shareholders.
• Board Oversight: A fund’s board, including a majority of the fund’s independent
directors, will be required to approve the fund’s liquidity risk management
program and the designation of the fund’s adviser or officer to administer the
program. The fund’s board also will be required to review, at least annually,
a written report on the adequacy of the program and the effectiveness of its
implementation.
Form N-LIQUID
The Commission is adopting new rule 30b1-10 and Form N-LIQUID that will
require a fund to confidentially notify the Commission when the fund’s level of
illiquid investments that are assets, exceeds 15% of its net assets or when its
highly liquid investments that are assets fall below its minimum.
The Commission does not intend to make public information reported on Form
N-LIQUID that is identifiable to any particular registrant, although the Commission
may use Form N-LIQUID information in an enforcement action.
Additional Disclosure and Reporting Requirements
The Commission also adopted amendments to Form N-1A. The amendments
require funds to describe their procedures for redeeming fund shares, the number
of days in which the fund typically expects to pay redemption proceeds, and the
methods for meeting redemption requests.
Amendments to Form N-1A and Regulation S-X would also address financial
statement and performance reporting related to swing pricing, and will require
funds that use swing pricing to provide an explanation of a fund’s use of swing
pricing in its registration statement.
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Compliance Dates
The Commission is providing a tiered set of compliance dates for the Investment
Company Reporting Modernization based on asset size. Fund companies with
$1 billion in net assets (“larger entities”) will be required to begin filing their reports
on Forms N-PORT and N-CEN after June 1, 2018, while fund complexes with
less than a $1 billion in net assets (“smaller entities”) will not be required to begin
filing on Form N-PORT until after June 1, 2019. Funds will file reports on Form
N-PORT no later than 30 days after the close of each month.
All reports filed on Form N-PORT for the first six months following June 1, 2018
will not be publicly disclosed to allow for adjustments to the technical specifications
and data validation processes. However, portfolio information attached as exhibits
to Part F of Form N-PORT, for the first and third quarters of a fund’s fiscal year will
be made public during this period.
Part F will contain the fund’s complete portfolio holdings as of the close of the
reporting period and will be presented in accordance with the schedules set forth
in Regulation S-X, but are not required to be reported in a structured data format.
The compliance date for the Liquidity Risk Management program requirement
is December 1, 2018 for larger entities and June 1, 2019 for smaller entities. All
registered open-end management investment companies, including open-end
ETFs, that are not smaller entities, will be required to adopt and implement a
written liquidity risk management program, approved by a fund’s board of directors
by the designated compliance dates.
Swing Pricing Highlights
Swing pricing is the process of adjusting a fund’s net asset value per share, to
pass on to purchasing or redeeming shareholders, certain of the costs associated
with their trading activity. It is designed to protect existing shareholders from
dilution associated with shareholder purchases and redemptions and would be
another tool to help funds manage liquidity risks. Pooled investment vehicles in
certain foreign jurisdictions currently use forms of swing pricing. The reforms will
permit open-end funds (except money market funds or ETFs) to use swing pricing.
A fund that chooses to use swing pricing would adjust its net asset value by a
specified amount, the swing factor, once the level of net purchases into or net
redemptions from the fund has exceeded a specified percentage or percentages
of the fund’s net asset value, known as the swing threshold. A fund’s swing pricing
policies and procedures would have to specify the process for how the fund’s
swing factor and swing threshold is determined and establish and disclose an
upper limit on the swing factor used, which may not exceed two percent of net
asset value per share.
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The amendments also would require the fund’s board to approve the fund’s swing
pricing policies and procedures and periodically review a written report that would
have to, among other things, review the adequacy of the fund’s swing pricing
policies and procedures and the effectiveness of their implementation. The board
also would be required to approve the funds’ swing factor upper limit, swing pricing
threshold, and any changes thereto.
The Commission is delaying the effective date of the amendments that would
permit funds to use swing pricing. The final amendments, if adopted, would
become effective 24 months after publication in the Federal Register. The
compliance date for the form amendments would differ by form.
The Commission may use the information provided on Form N-PORT, Form
N-CEN and N-LIQUID in its regulatory, enforcement, examination, disclosure
review, inspection and policy making roles.
The final rules state that, 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.
This Help Sheet is published by Merrill Corporation in order to highlight
SEC rules, regulations and updates concerning compliance issues. The
Help Sheet is designed to provide accurate and informative information and
should not be considered legal advice.
©2016 Merrill Communications LLC. All rights reserved.
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