Investment Company Reporting Modernization
Investment Management Update
Date: November 03, 2016
On October 13, 2016, the Securities and Exchange Commission (SEC) announced the adoption of new or amended rules and forms intended to modernize the reporting and disclosure of information by registered investment companies. The reforms are meant to address the manner in which information is filed with the SEC and disclosed to the public to keep up with changes in the industry and technology. These changes were originally proposed in May 2015 and generally adopted as proposed, despite the fact that the SEC received over 1,000 comment letters. The new and amended rules that have been finalized are made up of three principal components applicable to registered investment companies and certain other funds:
- Reporting of monthly fund portfolio holding information on new Form N-PORT (replacing Form N-Q);
- Annual, census-type reporting on new Form N-CEN (replacing Form N-SAR); and
- Amendments to Regulation S-X, which will require standardized, enhanced disclosure about derivatives in fund financial statements, along with amendments to Forms N-1A, N-3 and N-CSR to require certain disclosures regarding securities lending activities.
In its initial proposal, the SEC had also proposed a new Rule 30e-3 that would permit, but not require, registered investment companies to transmit shareholder reports and quarterly portfolio holdings to their shareholders by making the reports accessible on a website unless shareholders specifically opt for paper copies. The SEC deferred the vote on Rule 30e-3 until further study could be completed.
Under the new rules, most registered investment companies (other than money market funds, small business investment companies and business development companies) and unit investment trusts that operate as exchange-traded funds will be required to file a Form N-PORT to report information about their monthly portfolio holdings to the SEC in a structured data format (XML). Form N-PORT requires reporting of a fund’s complete portfolio holdings, including detailed information on a fund’s investments, securities pricing, securities lending positions, repurchase agreements, and options and other derivatives (including disclosure regarding counterparties, underlying positions and notional amounts). It will require a fund to disclose certain risk metric calculations so that the SEC and investors can better understand a fund’s exposure to changes in market conditions and to what extent a fund is leveraged through either derivatives or borrowings. The adopting release lists the following items to be included on Form N-PORT:
- General information about the fund;
- Assets and liabilities;
- Certain portfolio-level metrics, including risk metrics;
- Information regarding securities lending counterparties;
- Flow information;
- Certain information regarding each investment in the portfolio;
- Miscellaneous securities (if any);
- Explanatory notes (if any); and
Form N-PORT will be filed monthly with the SEC. Only information reported for the third month of a fund’s fiscal quarter will be available to the public, and the information will not be public until 60 days after the end of the quarter, with certain items kept nonpublic. The current Form N-Q, which requires funds to report certain portfolio holdings for their first and third fiscal quarters, will be eliminated to avoid duplication of disclosure. However, this will not prevent all duplication, and the SEC acknowledges that some information collected on Form N-PORT will also continue to be disclosed elsewhere (such as on Form N-CSR). The SEC believes that it is appropriate to provide certain duplicative information in the structured format of Form N-PORT to allow for detailed analysis as well as other forms that may be more investor-friendly. Also, the SEC endeavored to require conforming derivatives disclosure required by both Form N-PORT and amended Regulation S-X.
The SEC also adopted new Form N-CEN, which will require registered investment companies, other than face-amount certificate companies, to annually report certain census-type information to the SEC in XML format. Form N-CEN will replace the current Form N-SAR and will be required to be filed annually within 75 days of the fund’s fiscal year end (rather than semi-annually like Form N-SAR). Funds will also be required to report information regarding their use of swing pricing, including the upper limit of the swing factor on Form N-CEN.
Derivatives & Securities Lending
Finally, the SEC adopted changes to Regulation S-X that will require standardized, enhanced disclosure about derivatives in a fund’s financial statements. The amendments require disclosures regarding investments in derivatives in a fund’s schedule of investments, standardized disclosures regarding fund holdings in open futures contracts, open foreign currency contracts, open swap contracts and option contracts. Such disclosure is to be made in a standardized schedule containing detailed information about derivatives investments, similar to the information about derivatives required to be reported in Form N‑PORT. The intention is to provide investors with clear and consistently presented disclosures across funds concerning investments in derivatives.
Regulation S-X as amended also requires additional information be disclosed in the notes to the financial statements relating to a fund’s securities lending activities. The Regulation S-X disclosures for other investments and investments in or advances to affiliates have also been updated, along with the rules regarding the general form and content of fund financial statements. Regulation S-X governs the form and content of financial statements required in registration statement and shareholder reports for registered investment companies other than face-amount certificate companies.
Amendments to Forms N-1A, N-3 and N-CSR also require additional disclosures regarding securities lending activities by management investment companies and closed-end funds. Information similar to that required in a fund’s financial statements will need to be disclosed in the registration statement (or Form N-CSR in the case of a closed-end fund), including actual fees paid to a securities lending agent during the fund’s prior fiscal year (rather than terms governing compensation).
Most funds will be required to begin filing reports on new Forms N-PORT and N-CEN after June 1, 2018, while fund complexes with less than $1 billion in net assets will not be required to begin filing reports on Form N-PORT until after June 1, 2019. The Regulation S-X changes will have a compliance date of August 1, 2017.
FOR MORE INFORMATION
For more information, please contact:
Cassandra W. Borchers
Andrew J. Davalla
Donald S. Mendelsohn
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