Investment Company Reporting Modernization, 81870-82081 [2016-25349]

Download as PDF 81870 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 200, 210, 232, 239, 240, 249, 270, 274 [Release Nos. 33–10231; 34–79095; IC– 32314; File No. S7–08–15] RIN 3235–AL42 Investment Company Reporting Modernization Securities and Exchange Commission. ACTION: Final rule. AGENCY: The Securities and Exchange Commission is adopting new rules and forms as well as amendments to its rules and forms to modernize the reporting and disclosure of information by registered investment companies. The Commission is adopting new Form N– PORT, which will require certain registered investment companies to report information about their monthly portfolio holdings to the Commission in a structured data format. In addition, the Commission is adopting amendments to Regulation S–X, which will require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The Commission is adopting new Form N–CEN, which will require registered investment companies, other than face-amount certificate companies, to annually report certain census-type information to the Commission in a structured data format. The Commission is adopting amendments to Forms N–1A, N–3, and N–CSR to require certain disclosures regarding securities lending activities. Finally, the Commission is rescinding current Forms N–Q and N–SAR and amending certain other rules and forms. Collectively, these amendments will, among other things, improve the information that the Commission receives from investment companies and assist the Commission, in its role as primary regulator of investment companies, to better fulfill its mission of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. Investors and other potential users can also utilize this information to help investors make more informed investment decisions. DATES: Effective Dates: This rule is effective January 17, 2017, except for the following: • The amendments to 17 CFR 200.800, 232.105, 232.301, 240.10A–1, 240.12b–25, 240.13a–10, 240.13a–11, 240.13a–13, 240.13a–16, 240.15d–10, 240.15d–11, 240.15d–13, 240.15d–16, mstockstill on DSK3G9T082PROD with RULES2 SUMMARY: VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 249.322, 249.330, 270.8b–16, 270.10f–3, 270.30a–1, 270.30a–4, 270.30b1–1, 270.30b1–2, 270.30b1–3, 274.101, and 274.218, and in Instruction 55 amending § 270.30d–1 are effective June 1, 2018; and • The amendments to 17 CFR 232.401, 249.332, 270.8b–33, 270.30a–2, 270.30a–3, 270.30b1–5, and 274.130, and in Instruction 54 amending § 270.30d–1, Instruction 57 amending Form N–1A (referenced in §§ 239.15A and 274.11A), Instruction 59 amending Form N–2 (referenced in §§ 239.14 and 274.11a–1), and Instruction 61 amending Form N–3 (referenced in §§ 239.17a and 274.11b) are effective August 1, 2019. Compliance Dates: The applicable compliance dates are discussed in section II.H. of this final rule. FOR FURTHER INFORMATION CONTACT: Daniel K. Chang, Senior Counsel, J. Matthew DeLesDernier, Senior Counsel, Jacob D. Krawitz, Senior Counsel, Andrea Ottomanelli Magovern, Senior Counsel, Naseem Nixon, Senior Counsel, Michael C. Pawluk, Senior Special Counsel, or Sara Cortes, Assistant Director, at (202) 551–6792, Investment Company Rulemaking Office, Matt Giordano, Chief Accountant, or Kristy Von Ohlen, Assistant Chief Accountant, Chief Accountant’s Office, at (202) 551–6918, Division of Investment Management, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–8549. SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the ‘‘Commission’’) is adopting new Form N–PORT [referenced in 17 CFR 274.150] and new Form N–CEN [referenced in 17 CFR 274.101] under the Investment Company Act of 1940 [15 U.S.C. 80a–1 et seq.] (‘‘Investment Company Act’’); new rules 30a–4 [17 CFR 270.30a–4] and 30b1–9 [17 CFR 270.30b1–9] under the Investment Company Act; rescinding rules 30b1–1 [17 CFR 270.30b1–1], 30b1–2 [17 CFR 270.30b1–2], 30b1–3 [17 CFR 270.30b1– 3], and 30b1–5 [17 CFR 270.30b1–5] under the Investment Company Act; adopting amendments to rules 8b–16 [17 CFR 270.8b–16], 8b–33 [17 CFR 270.8b–33], 10f–3 [17 CFR 270.10f–3], 30a–1 [17 CFR 270.30a–1], 30a–2 [17 CFR 270.30a–2], 30a–3 [17 CFR 270.30a–3], and 30d–1 [17 CFR 270.30d–1], and Form N–8F [referenced in 17 CFR 274.218] under the Investment Company Act; adopting amendments to Forms N–1A [referenced in 17 CFR 274.11A], N–2 [referenced in 274.11a–1], N–3 [referenced in 274.11b], N–4 [referenced in 17 CFR 274.11c], and PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 N–6 [referenced in 17 CFR 274.11d] under the Investment Company Act and the Securities Act of 1933 [15 U.S.C. 77a et seq.] (‘‘Securities Act’’); adopting amendments to Form N–14 [referenced in 17 CFR 239.23] under the Securities Act; rescinding Form N–SAR [referenced in 17 CFR 274.101 and Form N–Q [referenced in 17 CFR 274.130] and adopting amendments to Form N–CSR [referenced in 17 CFR 274.128] under the Investment Company Act and Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (‘‘Exchange Act’’); adopting amendments to rules 10A–1 [17 CFR 240.10A–1], 12b–25 [17 CFR 240.12b–25], 13a–10 [17 CFR 240.13a– 10], 13a–11 [17 CFR 240.13a–11], 13a– 13 [17 CFR 240.13a–13], 13a–16 [17 CFR 240.13a–16], 15d–10 [17 CFR 240.15d– 10], 15d–11 [17 CFR 240.15d–11], 15d– 13 [17 CFR 240.15d–13], and 15d–16 [17 CFR 240.15d–16] under the Exchange Act; rescinding section 332 [17 CFR 249.332] and adopting amendments to sections 322 [17 CFR 249.322] and 330 [17 CFR 249.330] of 17 CFR part 249; adopting amendments to Article 6 [17 CFR 210.6–01 et seq.] and Article 12 [17 CFR 210.12–01 et seq.] of Regulation S– X [17 CFR 210]; adopting amendments to section 800 of 17 CFR part 200 [17 CFR 200.800]; and adopting amendments to rules 105 [17 CFR 232.105], 301 [17 CFR 232.301], and 401 [17 CFR 232.401] of Regulation S–T [17 CFR 232]. Table of Contents I. Background A. Changes in the Industry and Technology B. Summary of Changes to Current Reporting Regime 1. Form N–PORT and Amendments to Regulation S–X 2. Form N–CEN II. Discussion A. Form N–PORT 1. Who Must File Reports on Form N– PORT 2. Information Required on Form N–PORT 3. Reporting of Information on Form N– PORT 4. Disclosure of Information Reported on Form N–PORT B. Rescission of Form N–Q and Amendments to Certification Requirements of Form N–CSR 1. Rescission of Form N–Q 2. Amendments to Certification Requirements of Form N–CSR C. Amendments to Regulation S–X 1. Overview 2. Enhanced Derivatives Disclosures 3. Amendments to Current Rules 12–12 through 12–12C 4. Instructions Common to Rules 12–12 through 12–12B and 12–13 through 12– 13D 5. Investments In and Advances to Affiliates—Rule 12–14 E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 6. Form and Content of Financial Statements D. Form N–CEN and Rescission of Form N– SAR 1. Overview 2. Who Must File Reports on Form N–CEN 3. Frequency of Reporting and Filing Deadline 4. Information Required on Form N–CEN 5. Items Required by Form N–SAR That Will be Eliminated by Form N–CEN E. Option for Web site Transmission of Shareholder Reports F. Amendments to Forms Regarding Securities Lending Activities 1. Determination to Adopt Requirements as Amendments to Registration Statement and Annual Report Forms 2. Requirement to Disclose Securities Lending Income, Expenses, and Services 3. Required Disclosures of Monthly Average Value on Loan G. Technical and Conforming Amendments H. Compliance Dates 1. Form N–PORT, Rescission of Form N– Q, and Amendments to the Certification Requirements of Form N–CSR 2. Form N–CEN, Rescission of Form N– SAR, and Amendments to the Exhibit Requirements of Form N–CSR 3. Regulation S–X, Statement of Additional Information, and Related Amendments III. Economic Analysis A. Introduction B. Form N–PORT, Rescission of Form N– Q, and Amendments to Form N–CSR 1. Introduction and Economic Baseline 2. Benefits 3. Costs 4. Alternatives C. Amendments to Regulation S–X 1. Introduction and Economic Baseline 2. Benefits 3. Costs 4. Alternatives D. Form N–CEN and Rescission of Form N– SAR 1. Introduction and Economic Baseline 2. Benefits 3. Costs 4. Alternatives E. Amendments to Forms Regarding Securities Lending Activities 1. Introduction and Economic Baseline 2. Benefits 3. Costs 4. Alternatives F. Other Alternatives to the Reporting Requirements IV. Paperwork Reduction Act A. Portfolio Reporting 1. Form N–PORT 2. Rescission of Form N–Q B. Census Reporting 1. Form N–CEN 2. Rescission of Form N–SAR C. Amendments to Regulation S–X 1. Rule 30e–1 2. Rule 30e–2 D. Amendments to Registration Statement Forms E. Amendments to Form N–CSR V. Final Regulatory Flexibility Analysis A. Need for and Objectives of the Forms and Form Amendments and Rules and Rule Amendments VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 B. Significant Issues Raised by Public Comments C. Small Entities Subject to the Rule D. Projected Reporting, Recordkeeping, and Other Compliance Requirements 1. Form N–PORT 2. Rescission of Form N–Q 3. Form N–CEN 4. Rescission of Form N–SAR 5. Regulation S–X Amendments 6. Amendments to Registration Statement Forms 7. Amendments to Form N–CSR E. Agency Action To Minimize Effect on Small Entities VI. Statutory Authority I. Background A. Changes in the Industry and Technology As the primary regulator of the asset management industry, the Commission relies on information included in reports filed by registered investment companies (‘‘funds’’) 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 17,052 funds registered with the Commission, as of December 2015.2 Commission staff further estimates that there were nearly 12,000 investment advisers registered with the Commission, along with another 3,138 advisers that file reports with the Commission as exempt reporting advisers, as of January 2016.3 1 For purposes of the preamble of this release, we use ‘‘funds’’ to mean registered investment companies other than face-amount certificate companies and any separate series thereof—i.e., management companies and unit investment trusts. In addition, we use the term ‘‘management companies’’ or ‘‘management investment companies’’ to refer to registered management investment companies and any separate series thereof. We note that ‘‘fund’’ may be separately and differently defined in each of the new or amended forms or rules. 2 Based on data obtained from the Investment Company Institute (‘‘ICI’’) and reports filed by registrants on Form N–SAR. The 17,052 funds include mutual funds (including funds of funds and money market funds), closed-end funds, exchangetraded funds (‘‘ETFs’’), and unit investment trusts (‘‘UITs’’). See ICI, 2016 Investment Company Fact Book (56th ed., 2016) (‘‘2016 ICI Fact Book’’) at 22, available at https://www.ici.org/pdf/2016_ factbook.pdf; see also infra footnote 1259 and accompanying and following text. 3 Based on Investment Adviser Registration Depository (‘‘IARD’’) system data. In 2010 Congress charged the Commission with implementing new reporting and registration requirements for certain PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 81871 At year-end 2015, assets of registered investment companies exceeded $18 trillion, having grown from about $5.8 trillion at the end of 1998.4 At the same time, the industry has developed new product structures, such as ETFs,5 new fund types, such as target date funds with asset allocation strategies,6 and increased its use of derivatives and other alternative strategies.7 These products and strategies can offer greater opportunities for investors to achieve their investment goals, but they can also add complexity to funds’ investment strategies, amplify investment risk, or have other risks, such as counterparty credit risk. While these changes have been taking place in the fund industry, there have also been significant advances in the technology that can be used to report and analyze information. We have started to use structured data formats to collect, aggregate, and analyze data reported by registrants and other filers.8 investment advisers to private funds (known as ‘‘exempt reporting advisers’’). See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111–203, 124 Stat. 1376, 1570–80 (2010). Form ADV is used by registered investment advisers to register with the Commission and with the states and by exempt reporting advisers to report information to the Commission. Information on Form ADV is available to the public through the Investment Adviser Public Disclosure System, which allows the public to access the most recent Form ADV filing made by an investment adviser and is available at https://www.adviserinfo.sec.gov. The Commission recently adopted amendments to Form ADV. See Form ADV and Investment Adviser Act Rules, Investment Advisers Act Release No. 4509 (August 25, 2016) [81 FR 60417 (September 1, 2016)] (‘‘Form ADV Release’’). 4 See 2016 ICI Fact Book, supra footnote 2, at 9. 5 See generally Exchange-Traded Funds, Securities Act Release No. 8901 (Mar. 11, 2008) [73 FR 14618 (Mar. 18, 2008)] (‘‘ETF Proposing Release’’) at 14619; Request for Comment on Exchange-Traded Products, Securities Exchange Act Rel. No. 34–75165 (June 12, 2015); see also ICI, Exchange-Traded Funds April 2016 (May 27, 2016), available at https://www.ici.org/research/stats/etf/ etfs_04_16 (discussing April 2016 statistics on ETFs). As of April 2016, there were 1,630 ETFs with over $2 trillion in assets. Over the twelve-month period ending April 2016, assets of ETFs increased $89.63 billion. See id. 6 See generally Investment Company Advertising: Target Date Retirement Fund Names and Marketing, Securities Act Release No. 9126 (June 16, 2010) [75 FR 35920 (June 23, 2010)] (‘‘Investment Company Advertising Release’’). 7 See Use of Derivatives by Registered Investment Companies and Business Development Companies, Investment Company Act Release No. 31933 (Dec. 11, 2015) [80 FR 80884 (Dec. 28, 2015)] (‘‘Derivatives Proposing Release’’) (noting ‘‘dramatic growth in the volume and complexity of the derivatives markets over the past two decades, and the increased use of derivatives by certain funds’’); see also Investment Company Reporting Modernization, Investment Company Act Release No. 31610 (May 20, 2015) [80 FR 33590 (June 12, 2015)] (‘‘Proposing Release’’) at n. 7. 8 See Proposing Release, supra footnote 7, at nn. 12–16 and accompanying text (discussing the use E:\FR\FM\18NOR2.SGM Continued 18NOR2 81872 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 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. As we noted in the Proposing Release, we have historically acted to modernize our forms and the manner in which information is filed with the Commission and disclosed to the public in order to keep up with changes in the industry and technology.9 In May 2015, we again acted to modernize our forms and the manner in which information is filed and disclosed by proposing a number of reforms for investment company reporting.10 Our proposal included four sets of reforms: (1) The creation of a new portfolio holdings reporting form, Form N–PORT, and the rescission of Form N–Q; (2) the creation of a new census reporting form, Form N–CEN, and the rescission of Form N– SAR; (3) amendments to Regulation S– X, largely designed to improve derivatives disclosure; and (4) a proposed new rule, rule 30e–3, which would provide funds with an optional method to satisfy shareholder report transmission requirements by posting of eXtensible Business Reporting Language (‘‘XBRL’’) with open-end fund risk/return summaries and the use of Extensible Markup Language (‘‘XML’’) with Forms N–MFP, PF and 13F, as well as in other contexts). 9 See supra footnote 8 and accompanying text; see also Proposing Release, supra footnote 7, at nn. 8– 9 and accompanying text (discussing the adoption of Form N–SAR and the adoption of rules requiring the use of the IARD for investment adviser filings); see also Derivatives Proposing Release, supra footnote 7 (proposing, among other things, reporting requirements in Forms N–PORT and N–CEN related to derivatives); Investment Company Liquidity Risk Management Programs; Investment Company Act Release No [x] (October 13, 2016) (‘‘Liquidity Adopting Release’’); Investment Company Swing Pricing; Investment Company Release No. [x] (October 13, 2016) (‘‘Swing Pricing Adopting Release’’). We also note that in December 2014, the Financial Stability Oversight Council (‘‘FSOC’’) issued a notice requesting comment on aspects of the asset management industry, including on additional data or information that would be helpful to regulators and market participants. See FSOC, Notice Seeking Comment on Asset Management Products and Activities, Docket No. FSOC–2014–0001 (Dec. 24, 2014) (‘‘FSOC Notice’’), available at https://www.treasury.gov/initiatives/ fsoc/rulemaking/Documents/Notice%20 Seeking%20Comment%20on%20Asset%20 Management%20Products%20and%20 Activities.pdf. Although our proposal was independent of FSOC, several commenters responding to the notice discussed issues concerning data that were relevant to our proposal and those comments were discussed in the Proposing Release, as relevant. See Proposing Release, supra footnote 7, at nn. 17–18 and accompanying text. 10 See Proposing Release, supra footnote 7. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 their reports online if they met certain conditions. The proposed reforms were designed to help the Commission, investors, and other market participants better assess different fund products and to assist us in carrying out our mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. These reforms also sought to (1) increase the transparency of fund portfolios and investment practices both to the Commission and to investors, (2) take advantage of technological advances both in terms of the manner in which information is reported to the Commission and how it is provided to investors and other potential users, and (3) where appropriate, reduce duplicative or otherwise unnecessary reporting burdens on the industry. B. Summary of Changes to Current Reporting Regime We received 1,003 comments 11 on our proposed reforms from a variety of interested parties, including investment companies, industry groups, investors, academics and others. As discussed in greater detail below in the relevant sections of this release, commenters generally supported our efforts to modernize the investment company reporting regime, but had varying comments on a number of specific items in each of the respective sets of reforms. Commenters were generally supportive of proposed new Form N–PORT; 12 however, we received many comments relating to the data to be collected by the form, the frequency of filing reports on the form, and whether reports on the form or certain information in the reports should be made public. Commenters were also generally supportive of proposed new Form N– CEN,13 agreeing that Form N–CEN will provide both the Commission and the public with enhanced and updated census-type information. Similar to 11 Of these, about 574 were individualized letters, and the rest were one of a number of types of form letters. See Comments on Investment Company Reporting Modernization, File No. S7–08–15, available at https://www.sec.gov/comments/s7-0815/s70815.shtml. The comment period for the proposal closed on August 11, 2015, but was reopened until January 13, 2016 when the Commission proposed liquidity risk management programs for open-end funds. See Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment Company Reporting Modernization Release, Investment Company Act Release No. 31835 (Sept. 22, 2015) [80 FR 62274 (Oct. 15, 2015)] (‘‘Liquidity Proposing Release’’). 12 See infra footnotes 46, 64, 100, 115, 123, 145, 193, 197, 198, 245, 275, 283, 293, 330, 350, 379, 423, 432, 443, 455 and 475. 13 See infra footnotes 745, 759, 769, 779, 819, 832, 857, 870, 883, 907, 940, 989, 1008, 1045, 1061, 1070, 1080, 1101 and 1107. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 Form N–PORT, however, commenters also provided many comments on the data to be collected by the form and whether certain information in reports on the form should be made public. In addition, commenters were largely supportive of our efforts to improve the information that funds report to shareholders and the Commission through the proposed amendments to Regulation S–X,14 but had specific comments on certain disclosures. Comments on proposed rule 30e–3, which would allow funds to transmit reports to shareholders via the internet subject to a number of conditions, were mixed, with some commenters supporting the rule and others opposing it.15 Today, after consideration of the comments we received, we are adopting new Forms N–PORT and N–CEN, as well as amendments to Regulation S–X. We continue to believe that with the industry changes and technological advances that have occurred over the years, we need to improve the type and format of the information that funds provide to us and to investors, and the information that the Commission receives from funds in order to improve the Commission’s monitoring of the fund industry in its role as the primary regulator of funds and investment advisers. We are not adopting proposed rule 30e–3 at this time as we believe, in light of the comments received, that additional consideration regarding the rule is appropriate. We are adopting amendments to Forms N–1A, N–3, and N–CSR to require certain disclosures regarding securities lending activities.16 1. Form N–PORT and Amendments to Regulation S–X We are adopting Form N–PORT, largely as proposed, with certain modifications in response to commenters. We are also rescinding, as proposed, Form N–Q. Form N–PORT is a new portfolio holdings reporting form that will be filed by all registered management investment companies, other than money market funds and small business investment companies (‘‘SBICs’’),17 and by UITs that operate as 14 See infra footnotes 527, 537, 556, 558, 566, 648, 665, 701 and 711. 15 See infra footnotes 1178–1179. 16 If any provision of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. 17 See infra footnote 49 (discussing why money market funds and SBICs will not be required to file reports on Form N–PORT). E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations ETFs.18 Currently, management investment companies (other than SBICs) are required to report their complete portfolio holdings to the Commission on a quarterly basis on Forms N–Q 19 and N–CSR.20 Form N–PORT requires reporting of a fund’s complete portfolio holdings. The form also requires additional information concerning fund portfolio holdings that is not currently required by Forms N–Q and N–CSR, and that will facilitate risk analyses and other Commission oversight. For example, Form N–PORT requires reporting of additional information relating to derivative investments. The form also includes certain risk metric calculations that measure a fund’s exposure and sensitivity to changing market conditions, such as changes in asset prices, interest rates, or credit spreads. As was proposed, reports on Form N– PORT will be filed in a structured data format with the Commission on a monthly basis, with every third month available to the public 60 days after the end of the fund’s fiscal quarter. We continue to believe that more timely and frequent reporting of portfolio holdings information to the Commission, as well as the additional information Form N–PORT requires, will enable us to further our mission to protect investors by assisting the Commission and its staff in carrying out its regulatory responsibilities related to the asset management industry. These responsibilities include its examination, enforcement, and monitoring of funds, its formulation of policy, and the staff’s review of fund registration statements and disclosures. While Form N–PORT is primarily designed to assist the Commission and its staff, we also continue to believe that information in Form N–PORT will be beneficial to investors and other potential users. In particular, we believe that both sophisticated institutional investors and third-party users that provide services to investors may find the information required on Form N– PORT useful. For example, Form N– PORT’s structured format will allow the mstockstill on DSK3G9T082PROD with RULES2 18 ETFs will be required to file reports on Form N–PORT, regardless of whether they are organized as management companies or UITs. UITs are a type of investment company which (a) are organized under a trust indenture contract of custodianship or agency or similar instrument, (b) do not have a board of directors, and (c) issue only redeemable securities. See section 4(2) of the Investment Company Act. 19 Rule 30b1–5 under the Investment Company Act [17 CFR 270.30b1–5]. While SBICs file reports on Form N–CSR, SBICs are not required to file reports on Form N–Q. 20 See rule 30b2–1 under the Investment Company Act [17 CFR 270.30b2–1]. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 Commission, investors, and other potential users to better collect and analyze portfolio holdings information.21 While we do not anticipate that many individual investors will analyze data using Form N–PORT, although some may, we believe that individual investors will benefit indirectly from the information collected on reports on Form N–PORT, through enhanced Commission monitoring and oversight of the fund industry and through analyses prepared by third-party service providers and other parties, such as industry observers and academics. In addition, we are adopting, largely as proposed, amendments to Regulation S–X with certain modifications in response to comments. These amendments in large part require standardized enhanced derivatives disclosures in fund financial statements. Currently, Regulation S–X does not prescribe specific information for most types of derivatives, including swaps, futures, and forwards. While many fund groups provide disclosures regarding the terms of their derivatives contracts, the lack of standard disclosure requirements has resulted in inconsistent disclosures in fund financial statements. We continue to believe that the amendments to Regulation S–X to enhance and standardize derivatives disclosures in financial statements will allow comparability among funds and help all investors better assess funds’ use of derivatives. Reports on Form N– PORT will contain similar derivatives disclosures to facilitate analysis of derivatives investments across funds. Because Form N–PORT is not primarily designed for individual investors, the amendments to Regulation S–X require disclosures concerning the fund’s investments in derivatives in the financial statements that are provided to investors. We also have endeavored to mitigate burdens on the industry by conforming the derivatives disclosures that are required by both Regulation S– X and Form N–PORT. 2. Form N–CEN We are adopting, substantially as proposed and with certain modifications in response to comments, Form N–CEN, a new form on which funds will report census-type information to the Commission. We are 21 As we noted in the Proposing Release, portfolio holdings information currently filed on Form N–Q is filed in a plain text or hypertext format, which often requires labor-intensive manual reformatting by Commission staff and other potential users in order to prepare the reported data for analysis. See Proposing Release, supra footnote 7. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 81873 also rescinding, as proposed, Form N– SAR, the current form on which the Commission collects census-type information on management investment companies and UITs.22 As we discussed in the Proposing Release, Form N–SAR was adopted in 1985 and, while Commission staff has indicated that the census-type information reported on Form N–SAR is useful in its support of the Commission’s regulatory functions, staff has also indicated that in the thirty plus years since Form N–SAR’s adoption, changes in the industry have reduced the utility of some of the currently required data elements.23 Commission staff believes that obtaining certain additional census-type information not currently collected by Form N–SAR will improve the staff’s ability to carry out regulatory functions, including risk monitoring and analysis of the industry. Form N–CEN includes many of the same data elements as Form N–SAR, but, in order to improve the quality and utility of information reported, replaces those items that are outdated or of limited usefulness with items that we believe to be of greater relevance today. Where possible, we are also eliminating items that are reported on other Commission forms, or are available elsewhere. In addition, reports on Form N–CEN will be filed in a structured XML format, which, we believe, will reduce reporting burdens for current Form N–SAR filers and yield data that can be used more effectively by the Commission and other potential users.24 Finally, reports on new Form N–CEN will be filed annually, rather than semiannually as is required for reports on Form N–SAR by management companies, which will further reduce current burdens on funds. II. Discussion A. Form N–PORT As discussed above, we are adopting a new monthly portfolio reporting form, Form N–PORT. Form N–PORT requires registered management investment companies and ETFs organized as UITs, other than money market funds and SBICs, to electronically file with the 22 See rules 30a–1 and 30b1–1 under the Investment Company Act [17 CFR 270.30a–1 and 17 CFR 270.30b1–1]. 23 See Proposing Release, supra footnote 7 (noting that when adopted, Form N–SAR was intended to reduce reporting burdens and better align the information that was required to be reported with the characteristics of the fund industry). Also as noted in the Proposing Release, the filing format that is required for reports on Form N–SAR limits our ability to use the reported information for analysis. 24 See infra footnotes 750–752 and accompanying text. E:\FR\FM\18NOR2.SGM 18NOR2 81874 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Commission monthly portfolio investments information on reports in an XML format no later than 30 days after the close of each month.25 Except as discussed below in section II.A.4, only information reported for the third month of each fund’s fiscal quarter on Form N–PORT will be publicly available, and that information will not be made public until 60 days after the end of the fiscal quarter.26 As the primary regulator of the asset management industry, the Commission relies on information that funds file with us, including their registration statements, shareholder reports, and various reporting forms such as Form N–CSR. The Commission and its staff use this information to understand trends in the fund industry and carry out regulatory responsibilities, including formulating policy and guidance, reviewing fund registration statements, and assessing and examining a fund’s regulatory compliance with the federal securities laws and Commission rules thereunder. Information on fund portfolios is currently filed with the Commission quarterly with up to a 70-day delay.27 Moreover, the reports are currently filed 25 See new rule 30b1–9. used throughout this section, the term ‘‘fund’’ generally refers to investment companies that will file reports on Form N–PORT. As discussed further in section II.A.4, the Commission does not intend to make public the information reported on Form N–PORT for the first and second months of each fund’s fiscal quarter that is identifiable to any particular fund or adviser or any information reported with regard to country of risk and economic exposure, delta, or miscellaneous securities, or explanatory notes related to any of those topics that is identifiable to any particular fund or adviser. However, the Commission may use such information in its regulatory programs, including examinations, investigations, and enforcement actions. See infra footnote 500; see also General Instruction F of Form N–PORT. 27 Funds currently file with the Commission portfolio schedules for the fund’s first and third fiscal quarters on Form N–Q, and shareholder reports, including portfolio schedules for the fund’s second and fourth fiscal quarters, on Form N–CSR. These reports are available to the public and the Commission with either a 60- or 70-day delay. See rule 30b1–5 (requiring management companies, other than SBICs, to file reports on Form N–Q no more than 60 days after the close of the first and third quarters of each fiscal year); rule 30b2–1 (requiring management companies to file reports on Form N–CSR no later than 10 days after the transmission to stockholders of any report required to be transmitted to stockholders under rule 30e– 1). See also rules 30e–1 and 30e–2 under the Investment Company Act [17 CFR 270.30e–1 and 17 CFR 270.30e–2] (requiring management companies and certain UITs to transmit to stockholders semiannual reports containing, among other things, the fund’s portfolio schedules, no more than 60 days after the close of the second and fourth quarters of each fiscal year). These reports include portfolio holdings information as required by Regulation S– X. See rule 12–12 of Regulation S–X [17 CFR 210.12–12], et seq. mstockstill on DSK3G9T082PROD with RULES2 26 As VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 in a format that does not allow for efficient searches or analyses across portfolios, and even limits the ability to search or analyze a single portfolio. Based on staff experience with data analysis of funds, including staff experience using Form N–MFP, we believe, and commenters generally agreed, that more frequent and timely information concerning fund portfolios than we currently receive, will assist the Commission in its role as the primary regulator of funds, as discussed further below.28 The information we will collect on Form N–PORT will be important to the Commission and its staff in analyzing and understanding the various risks in a particular fund, as well as risks across specific types of funds and the fund industry as a whole. These risks can include the investment risk that the fund is undertaking as part of its investment strategy, such as interest rate risk, credit risk, volatility risk, other market risks, or risks associated with specific types of investments, such as emerging market debt or commodities. Additionally, as we discuss in the Liquidity Adopting Release that we are adopting concurrently Form N–PORT will help the Commission better understand liquidity risks through additional Form N–PORT disclosure requirements discussed in that release.29 The information collected on Form N–PORT will also assist with understanding whether and to what extent a fund’s exposure to price movements is leveraged, either through borrowings or the use of derivatives. Many commenters generally agreed with us that the information required on Form N–PORT will assist the Commission in better understanding each of these risks in the fund industry.30 These commenters also 28 See, e.g., Comment Letter of Morningstar, Inc. (Aug. 21, 2015) (‘‘Morningstar Comment Letter’’) (expressing belief that timelier information to investors through monthly public disclosures of portfolios would assist the Commission in monitoring the financial system, while also providing suggested revisions to enhance the proposal.); Comment Letter of Vanguard (Aug. 11, 2015) (‘‘Vanguard Comment Letter’’) (stating that the proposal strikes the appropriate balance between disclosures to the Commission and protecting funds and their investors from frontrunning, and providing suggested modifications to the proposal). 29 See generally Liquidity Adopting Release, supra footnote 9. 30 See, e.g., Comment Letter of BlackRock (Aug. 11, 2015) (‘‘BlackRock Comment Letter’’) (‘‘Importantly, the greater depth and frequency of information requested by the Commission will help the Commission better identify and monitor emerging risks associated with specific RICs or categories of RICs as well as asset management activities.’’); Comment Letter of Wells Fargo Funds Management, LLC (Aug. 11, 2015) (‘‘Wells Fargo PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 generally agreed with us that the ability to understand the risks that funds face will help Commission staff better understand and monitor risks and trends in the fund industry as a whole, facilitating the Commission’s informed regulation of the fund industry.31 We also believe, and some commenters agreed, that information obtained from Form N–PORT filings will facilitate the Commission’s oversight of funds and assist Commission staff in examination, enforcement, and monitoring, as well as in formulating policy and in its review of fund registration statements and disclosures.32 In this regard, we expect that Commission staff will use the data reported on Form N–PORT for many of the same purposes as Commission staff has used data reported on Form N–MFP by money market funds. The data received on Form N–MFP has been used extensively by Commission staff, including for purposes of assessing regulatory compliance, identifying funds for examination, and risk monitoring. Form N–MFP data has also informed Commission policy; for example, staff used Form N–MFP data in analyses that informed the Commission’s considerations when it proposed and adopted money market fund reform rules in 2013 and 2014.33 In addition to assisting the Commission in its regulatory functions, we believe, and some commenters agreed, that investors and other potential users will benefit from the Comment Letter’’) (‘‘we believe that the enhanced disclosure requirements of the Proposals represent appropriate valuable information for the Commission to have in order to assess trends in risks, for example, across the mutual fund industry.’’); but see, e.g., Comment Letter of Federated Investors, Inc. (January 13, 2016) (‘‘Federated Comment Letter) (‘‘A majority of the Commission’s proposed amendments to Form N– 1A, N–PORT, and N–CEN would require a large effort from funds while offering data that is, at best, of little utility, and, at worst, misleading. Many of these deficiencies relate to flaws inherent in a security-level disclosure scheme.’’). We disagree with the commenter that a security-level disclosure scheme is of little utility. See infra footnote 1283 and accompanying and following text (discussing the utility of the security-level information that will be reported on Form N–PORT). 31 Id. 32 Id. 33 See, e.g., Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 30551 (June 5, 2013) [78 FR 36834 (June 19, 2013)]; Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 31166 (July, 23 2014) [79 FR 44076 (July 29, 2014)] (‘‘Money Market Fund Reform 2014 Release’’) at n. 502 and accompanying text (citing use of Form N–MFP data in discussing the Commission’s decision to require basis point rounding) and at n. 651 and accompanying text (citing use of Form N–MFP data in discussing the Commission’s decision regarding the size of the non-government securities basket for government money market funds). E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 periodic public disclosure of the information reported on Form N– PORT.34 Form N–PORT is primarily designed for use by the Commission and its staff, and not for disclosing information directly to individual investors. The information we are requiring on Form N–PORT is more voluminous than on a schedule of investments. We believe, and some commenters agreed, however, that some investors, particularly institutional investors, could directly use the data from the information on Form N–PORT for their own quantitative analysis of funds, including to better understand the funds’ investment strategies and risks, and to better compare funds with similar strategies.35 Additionally, we believe, and some commenters agreed, that entities providing services to investors, such as investment advisers, broker-dealers, and entities that provide information and analysis for fund investors, will also utilize and analyze the information that will be required by Form N–PORT to help all investors make more informed investment decisions.36 Accordingly, whether directly or through third parties, we believe, and some commenters agree, that the periodic public disclosure of the information on Form N–PORT will benefit all fund investors.37 As discussed further below, in order to mitigate the risk that the information on Form N–PORT will be used in ways that might ultimately result in investor harm, we are limiting the public availability of Form N–PORT to reports filed as of quarter-end, as well as delaying public availability of those reports by 60 days and keep certain discrete information items nonpublic. We intend to increase transparency of fund investments through Form N– PORT in several ways. First, Form N– PORT will improve reporting of fund derivative usage. As the Commission has previously noted, we have observed a dramatic growth in the volume and complexity of the derivatives markets over the past two decades.38 Additionally, funds that are considered ‘‘alternative’’ funds, which often use 34 See, e.g., Comment Letter of Joseph A. Franco (Aug. 11, 2015) (‘‘Franco Comment Letter’’); Morningstar Comment Letter; but see, e.g., Comment Letter of the Investment Company Institute (Aug. 11, 2015) (‘‘ICI Comment Letter’’). 35 Id. 36 See id. 37 See id. 38 See Derivatives Proposing Release, supra footnote 7, at n. 6 and accompanying text; see also Use of Derivatives by Investment Companies under the Investment Company Act of 1940, Investment Company Act Release No. 29776 (Aug. 31, 2011) [76 FR 55237 (Sept. 7, 2011)] (‘‘Derivatives Concept Release’’) at n. 7 and accompanying text. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 derivatives for implementing their investment strategy, are becoming increasingly popular among investors.39 Although Regulation S–X establishes general disclosure requirements for financial statements in fund registration statements and shareholder reports, based on staff review of fund filings, the lack of standardized requirements as to the terms of derivatives that must be reported has sometimes led to inconsistent approaches to reporting derivatives information and, in some cases, insufficient information concerning the terms and underlying reference assets of derivatives to allow the Commission or investors to better understand the investment.40 This hinders both an analysis of a particular fund’s investments, as well as comparability among funds.41 The information and reporting format required by Form N–PORT will create a more detailed, uniform, and structured reporting regime. We believe and several commenters agreed that this will allow the Commission and investors to better analyze and compare funds’ derivatives investments and the exposures they create, which can be important to understanding funds’ investment strategies, use of leverage, and potential for risk of loss.42 39 While there is no clear definition of ‘‘alternative’’ in the fund industry, an alternative fund is generally understood to be a fund whose primary investment strategy falls into one or more of the three following categories: (1) Non-traditional asset classes (for example, currencies); (2) nontraditional strategies (such as long/short equity positions); and/or (3) less liquid assets (such as private debt). At the end of December 2015, alternative mutual funds and exchange-traded funds had more than $200 billion in assets. Although alternative mutual funds only accounted for 1.23% of the mutual fund market as of December 2015, the almost $17.3 billion of inflows into these funds in 2015 represented 7% of the inflows for the entire mutual fund industry in that year. These statistics were obtained from staff analysis of Morningstar Direct data, and are based on fund categories as defined by Morningstar. 40 For example, we understand that some funds provide a description of all of the holdings in an index or custom basket underlying a swap contract, while others only provide a short description. See also Proposing Release, supra footnote 7, at n. 31 and accompanying text. 41 See, e.g., current rule 12–13 of Regulation S– X [17 CFR 210.12–13] (requiring funds to disclose ‘‘other’’ investments, which includes derivatives); rule 6–03 of Regulation S–X [17 CFR 210.6–03] (applying articles 1–4 of Regulation S–X to investment companies, but not specifying where derivative disclosures should be made for funds); FASB ASC 815, Disclosures about Derivative Instruments and Hedging Activities (‘‘ASC 815’’) (discussing general derivative disclosure); FASB ASC 820, Fair Value Measurements (‘‘ASC 820’’) (requiring disclosure of valuation information for major categories of investments). See also infra section II.C. 42 See, e.g., Comment Letter of Fidelity Investments (Aug. 10, 2015) (‘‘Fidelity Comment Letter’’) (generally supporting Commission’s focus PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 81875 Furthermore, as discussed further below, Form N–PORT requires funds to report certain risk metrics that would provide measurements of a fund’s exposure to changes in interest rates, credit spreads and asset prices, whether through investments in debt securities or in derivatives. Financial statement information provides historical information over a particular time period (e.g., a statement of operations), or information about values of assets at a particular point in time (e.g., a balance sheet including, for funds, a schedule of investments). Risk metrics, on the other hand, measure the change in value of an investment in response to small changes in the underlying reference asset of an investment, whether the underlying reference asset is a security (or index of securities), commodity, interest rate, or credit spread over an interest rate. Based on staff experience, as well as staff outreach to asset managers and entities that provide risk management services to asset managers (prior to the Commission issuing the Proposing Release), discussed further below, we believe that fund portfolio managers and risk managers commonly calculate risk metrics to analyze the exposures in their portfolios.43 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 will also require information about certain fund transactions and activities such as securities lending, repurchase agreements, and reverse repurchase agreements, including information regarding the counterparties to which the fund is exposed in those transactions, as well as in over-thecounter derivatives transactions. We believe and several commenters agreed that such information will increase transparency concerning these transactions and activities and will on modernizing the way data is collected from funds and reported to shareholders and providing suggestions for modifications to the final rule); Comment Letter of Capital Research and Management Company (Aug. 11, 2015) (‘‘CRMC Comment Letter’’) (supporting Commission’s efforts to take advantage of technology in order to assist the staff, investors, and other market participants to better assess different fund products and assist the Commission in carrying out its mission; and providing suggestions for modifications to the final rule). 43 See generally John C. Hull, Options, Futures, and Other Derivatives (9th ed., 2015) (discussing, for example, the function of duration, convexity, delta, and other calculations used for measuring changes in the value of bonds or derivatives as a result of changes in underlying asset prices or interest rates); Sheldon Natenberg, Option Volatility and Pricing (1994) (same). E:\FR\FM\18NOR2.SGM 18NOR2 81876 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 provide better information regarding counterparties, which will be useful in assessing both individual and multiple fund exposures to a single counterparty.44 This will allow the Commission to better assess and monitor counterparty risk for individual funds, as well as across the industry. As discussed further below, Form N– PORT will be filed electronically in a structured, XML format. This format will enhance the ability of the Commission, as well as investors and other potential users, to analyze portfolio data both on a fund-by-fund basis and also across funds.45 As a result, although we will collect certain information on Form N–PORT that may be similarly disclosed or reported elsewhere (e.g., portfolio investments would continue to be included as part of the schedules of investments contained in shareholder reports, and filed on a semi-annual basis with the Commission on Form N–CSR), we believe that it is appropriate to also collect this information in a structured format for analysis by our staff as well as investors and other potential users. Many commenters were generally supportive of our proposal.46 However, 44 See, e.g., Morningstar Comment Letter (‘‘By collecting and making available additional information about counterparty risk and other important factors, the SEC will make it easier for investors and financial advisors to monitor portfolio risks.’’). 45 See, e.g., Fidelity Comment Letter (‘‘Collecting data in a structured format should allow the Commission to use information from market participants in rigorous empirical examinations of the industry in furtherance of the SEC’s goals.’’); ICI Comment Letter (‘‘Obtaining that information in a structured data format will help the SEC to better analyze information and improve its ability to carry out its regulatory mission.’’). 46 See, e.g., Comment Letter of Charles Schwab Investment Management, Inc. (Aug. 11, 2015) (‘‘Schwab Comment Letter’’) (‘‘Form N-Port [sic] will provide substantial additional information to the Commission and strengthen its ability to oversee and carry out its regulatory responsibilities for the asset management industry.’’); Vanguard Comment Letter (‘‘Vanguard generally supports the proposed reporting initiatives because we believe these reporting obligations will provide the Commission with the tools necessary to monitor portfolio composition and risk exposure among funds, without exposing fund investors to potentially harmful front-running activities.’’); Comment Letter of Pioneer Investments (Aug. 11, 2015) (‘‘Pioneer Comment Letter’’) (‘‘Pioneer supports the Commission’s effort to modernize the regime whereby funds report information about their portfolio holdings to the Commission.’’); Comment Letter of the Securities Industry and Financial Markets Association Asset Management Group (Aug. 11, 2015) (‘‘SIFMA Comment Letter I’’) (‘‘We support the Commission’s initiative in proposing monthly reports on Form N–PORT in order to strengthen its regulatory oversight of the asset management industry and protect investors by obtaining more frequent and substantially expanded information about funds, in a structured format.’’); ICI Comment Letter (‘‘ICI broadly supports the Commission’s efforts to update fund reporting.’’). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 we received many comments relating to the structure of the proposed form, data to be collected, frequency of filings, and whether reports on the form should be made public. We address these comments below and discuss modifications we made from the proposal in response to comments. 1. Who Must File Reports on Form N–PORT We are adopting, as proposed, the requirement that each registered management investment company and each ETF organized as a UIT file a report on Form N–PORT.47 Registrants offering multiple series will be required to file a report for each series separately, even if some information is the same for two or more series.48 Money market funds and SBICs will not be required to file reports on Form N–PORT.49 We are adopting, as proposed, the requirement that all ETFs file reports on Form N–PORT, regardless of their form of organization. Although most ETFs today are structured as open-end management investment companies, there are several ETFs that are organized as UITs.50 ETFs organized as UITs have significant numbers of investors who we believe can benefit from the disclosures required in Form N–PORT.51 We received no comments on this aspect of the proposal. One commenter suggested that reports on Form N–PORT should be filed by all registered investment companies, including UITs, in order to have 47 See new rule 30b1–9. further discussed below, in part to harmonize definitions between Forms N–PORT and N–CEN, and in part to parallel identical changes to the definition of ‘‘exchange-traded fund’’ in Form N–CEN, we have revised Form N–PORT’s proposed definition of ‘‘exchange-traded product’’ to refer instead to ‘‘exchange-traded fund,’’ which as revised includes each series of a UIT that meets that definition. See General Instruction E of Form N– PORT; infra footnote 896 (discussing changes to definitions in Form N–CEN). 49 Money market funds already file their monthly portfolio investments with the Commission. See Form N–MFP. SBICs are unique investment companies that operate differently and are subject to a different regulatory regime than other management investment companies. They are ‘‘privately owned and managed investment funds, licensed and regulated by [the Small Business Administration (‘‘SBA’’)], that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses.’’ See SBA, SBIC Program Overview, available at https://www.sba.gov/content /sbic-program-overview. As a result of these differences, SBICs are not required to file reports on Form N–Q. As of December 31, 2015, only one SBIC had publicly offered securities outstanding. 50 There are currently eight ETFs organized as UITs that have registered with the Commission. 51 Commission staff estimates that as of December 2015, ETFs organized as UITs represented 12% of all assets invested in registered ETFs. This analysis is based on data from Morningstar Direct. 48 As PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 comparable filing information across registered investment products, although the commenter did suggest that less frequent filing requirements might be appropriate based on the structure of the investment company.52 We note that UITs have fixed portfolios that do not change over time, and thus, unlike most other investment companies which are required to file quarterly reports with their current portfolio holdings, UITs are not currently required to file periodic reports other than on an annual basis.53 Based on these differences, as reflected in the current reporting regime, we have determined not to extend Form N–PORT filing requirements to UITs that are not ETFs at this time. The same commenter also recommended that reports on Form N– PORT be filed by business development companies (‘‘BDCs’’).54 BDCs are a category of closed-end funds that are operated for the purpose of investing in, and providing managerial assistance to, small and developing businesses, and financially troubled businesses. BDCs are not required to register as investment companies under the Investment Company Act although they do elect to be subject to certain specialized provisions, and they are subject to a different reporting regime than registered investment companies.55 Based on these differences, and as reflected in the current reporting and registration regime, we have determined not to extend Form N–PORT filing requirements to BDCs at this time.56 Another commenter suggested that the Commission and the CFTC should agree on and implement a substituted 52 See Morningstar Comment Letter. currently file annual reports on Form N– SAR. In contrast, management investment companies currently file reports for their first and third fiscal quarters on Forms N–Q and reports for their second and fourth fiscal quarters on Form N– CSR, as well as semi-annual reports on Form N– SAR. See supra footnotes 19–20 and accompanying text. 54 See Morningstar Comment Letter (recommending that ‘‘business development companies . . . and other [registered investment companies]’’ should be required to file reports on Form N–PORT). 55 See Adoption of Permanent Notification Forms for Business Development Companies; Statement of Staff Position, Investment Company Act Release No. 12274 (Mar. 5, 1982) [47 FR 10518–02 (Mar. 11, 1982)]; and Interim Notification Forms for Business Development Companies, Investment Company Act Release No. 11703 (Mar. 26, 1981) [46 FR 19459 (Mar. 31, 1981)] for a discussion of the regulatory system applicable to BDCs. 56 Although BDCs will not be subject to Form N– PORT filing requirements, the amendments being adopted to Regulation S–X will apply to both registered investment companies and BDCs. See infra footnote 700. 53 UITs E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations compliance regime.57 Although we recognize that there are various alternative reporting requirements imposed in other contexts and by other regulators, the reporting requirements imposed by Form N–PORT have been designed specifically to meet the Commission’s regulatory needs with regards to monitoring and oversight of registered funds. Finally, one commenter stated that we should not require funds to directly report information on their own behalf, but instead require other entities such as transfer agents and custodians to report information on behalf of funds.58 Given our expertise and experience in regulating, examining, and overseeing funds, including fund reporting, recordkeeping, and compliance, we continue to believe that obtaining such information directly from funds is appropriate. 2. Information Required on Form N–PORT We are adopting, substantially as proposed, the requirements in Form N– PORT to report certain information about the fund and the fund’s portfolio investments as of the close of the preceding month, including: (a) General information about the fund; (b) assets and liabilities; (c) certain portfolio-level metrics, including certain risk metrics; (d) information regarding securities lending counterparties; (e) information regarding monthly returns; (f) flow information; (g) certain information regarding each investment in the portfolio; (h) miscellaneous securities (if any); (i) explanatory notes (if any), and (j) exhibits. We are adopting these information requirements substantially as proposed, although we are making some modifications from the proposal in response to comments. Each of these is discussed in more detail below. a. General Information and Instructions mstockstill on DSK3G9T082PROD with RULES2 Part A of Form N–PORT requires, as proposed, general identifying information about the fund. This information includes the name of the registrant, name of the series, and relevant file numbers.59 Funds will also 57 See SIFMA Comment Letter I (‘‘Under our suggested approach, funds required to report on new Form N–PORT would be excused from reporting on Form CPO–PQR.’’). 58 See Federated Comment Letter (‘‘It would also reduce the reporting burden on funds for the Commission to acquire information directly from custodians and transfer agents, which are proficient in maintaining and reporting portfolio holdings and other information.’’). 59 See Item A.1 and Item A.2 of Form N–PORT. Funds will provide the name of the registrant, the Investment Company Act and CIK file numbers for the registrant, and the address and telephone VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 report the date of their fiscal year end, the date as of which information is reported on the form, and indicate if they anticipate that this will be their final filing on Form N–PORT.60 This information will be used to identify the registrant and series filing the report, track the reporting period, and identify final filings. No comments were received on this aspect of our proposal. We are adopting these elements as proposed. As proposed, funds will also provide the Legal Entity Identifier (‘‘LEI’’) number of the registrant and series.61 The LEI is a unique identifier generally associated with a single corporate entity and is intended to provide a uniform international standard for identifying counterparties to a transaction.62 Fees are not imposed for the usage of or access to LEIs, and all of the associated reference data needed to understand, process, and utilize the LEIs is widely and freely available and not subject to any usage restrictions. Funds or registrants that have not yet obtained an LEI will be required to obtain one, which currently entails a one-time fee of $219 plus $119 per year in annual maintenance costs and fees.63 Commenters were generally supportive of this aspect of our proposal, with most endorsing the use of LEI for identification of funds, as well as for fund counterparties.64 However, number of the registrant. Funds will also provide the name of and EDGAR identifier (if any) for the series. 60 See Item A.3 and Item A.4 of Form N–PORT. 61 See Item A.1.d and Item A.2.c of Form N– PORT. The Commission has begun to require disclosure of the LEI in other contexts. See, e.g., Form PF, Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors, available at https://www.sec.gov/rules/final/2011/ia3308-formpf.pdf; Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Securities Exchange Act Release No. 74244 (Feb. 11, 2015) [80 FR 14564 (Mar. 19, 2015)] (‘‘Regulation SBSR Adopting Release’’). 62 The global LEI system operates under an LEI Regulatory Oversight Committee (‘‘ROC’’) that currently includes members that are official bodies from over 40 jurisdictions. The Commission is a member of the ROC and currently serves on its Executive Committee. The Commission notes that it would expect to revisit the requirement to report LEIs if the operation of the LEI system were to change significantly. 63 As of June 30, 2016, the cost of obtaining an LEI from the Global Markets Entity Identifier (‘‘GMEI’’) Utility in the United States was $200, plus a $19 surcharge for the LEI Central Operating Unit. The annual cost of maintaining an LEI from the GMEI Utility was $100, plus a $19 surcharge for the LEI Central Operating Unit. See GMEI Utility, Frequently Asked Questions, available at https:// www.gmeiutility.org/frequentlyAskedQuestions.jsp. 64 See, e.g., Comment Letter of State Street Corporation (Aug. 11, 2015) (‘‘State Street Comment Letter’’); Comment Letter of Depository Trust & Clearing Corporation (Aug. 11, 2015); Comment Letter of Interactive Data Pricing and Reference Data PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 81877 one commenter suggested that certain funds should be permanently exempted from such requirements as such funds would not need an LEI for any other purpose.65 Lastly, another commenter suggested that, to better assist academic researchers with identification of entities, every filing by a mutual fund should require an exhaustive list of the tickers and CUSIPs associated with that mutual fund.66 We are adopting the requirement that funds report LEI information for the registrant and for each series, as proposed. We acknowledge that funds will incur some costs to obtain and maintain an LEI, although we believe the cost to obtain and maintain an LEI identifier is modest.67 Uniform reporting of LEIs by funds, however, will help provide a consistent means of identification that will facilitate the linkage of data reported on Form N– PORT with data from other filings and sources that is or will be reported elsewhere as LEIs become more widely used by regulators and the financial industry.68 Using alternate means of identification or providing exemptions to this requirement could hinder the ability of Commission staff as well as investors and other potential users of this information to use the data on Form N–PORT as discussed above. For these LLC (Aug. 10, 2015) (‘‘Interactive Data Comment Letter’’); Comment Letter of Global Legal Entity Identifier Foundation (Aug. 5, 2015). 65 See Comment Letter of Carol Singer (June 24, 2015) (‘‘Carol Singer Comment Letter’’) (suggesting that a small closed-end fund that is not listed on an exchange should not be required to obtain an LEI identifier). 66 See Comment Letter of Russ Wermers (Aug. 4, 2015) (‘‘Russ Wermers Comment Letter’’) (arguing that this information could help with the identification of entities. The commenter did not discuss the utility of the LEI specifically). 67 See supra footnote 63. 68 See, e.g., Commodities Futures Trading Commission (‘‘CFTC’’), CFTC Announces Mutual Acceptance of Approved Legal Entity Identifiers, Press Release: PR6758–13 (Oct. 30, 2013), available at https://www.cftc.gov/PressRoom/PressReleases/ pr6758-13; Letter from Kenneth Bentsen, President & CEO of SIFMA to Jacob Lew, Chairman of FSOC, re: Adoption of the Legal Entity Identifier (Apr. 11, 2014), available at https://www.sifma.org/commentletters/2014/sifma-submits-comments-to-fsocencouraging-us-regulators-to-adopt-and-use-thelegal-entity-identifiers; Regulation SBSR Adopting Release, supra footnote 61. Commenters to the FSOC Notice expressed support for regulatory acceptance of LEI identifiers. See, e.g., Joint Comment Letter of SIFMA/ Investment Adviser Association to FSOC Notice (Mar. 25, 2015) (‘‘SIFMA/IAA FSOC Notice Comment Letter’’) (expressing support for the LEI initiative, and noting that the use of LEIs has already enhanced the industry’s ability to identify and monitor global market participants); Comment Letter of Fidelity to FSOC Notice (Mar. 25, 2015) (expressing the need to develop analytics to make data intelligible, such as the ability to map exposures across the financial system, such as through the use of LEIs). E:\FR\FM\18NOR2.SGM 18NOR2 81878 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations reasons, we anticipate that the benefits of requiring funds to report the LEI number of the registrant and series on Form N–PORT will justify the costs of obtaining and reporting this information, and thus we are adopting this requirement as proposed. Furthermore, in response to the request that an exhaustive list of the tickers and CUSIPs associated with the fund be reported to help with the identification of entities, we note that Form N–PORT requires funds to report various identifying information, including name of the registrant, Investment Company Act file number of the registrant, CIK number of the registrant, LEI of the registrant, name of each series, EDGAR identifier (if any) for each series, and LEI for each series.69 We believe this information is sufficient for Commission staff, as the primary user of the form, to identify funds filing reports on Form N–PORT, and could also be useful for investors and other potential users. As discussed further below, funds will also be reporting additional identifying information on Form N–CEN in a structured format that can be used to identify those funds and link information reported by them on Forms N–PORT and N–CEN with information available in other Commission filings and sources that is similarly structured.70 Form N–PORT also includes general filing and reporting instructions, as well as definitions of specific terms referenced in the form.71 These instructions and definitions are intended to provide clarity to funds and to assist them in filing reports on Form N–PORT.72 Proposed Form N–PORT would have required funds to report information about their portfolios as of the last business day, or calendar day, of the month, but did not provide specific instructions on the appropriate basis for reporting such information, such as 69 See Item A.1 and Item A.2 of Form N–PORT. N–CEN requires funds to report additional information for each share class outstanding, including name of the class, class identification number, and ticker symbol. See Item C.2.d of Form N–CEN. 71 See General Instruction A (Rule as to Use of Form N–PORT), B (Application of General Rules and Regulations), C (Filing of Reports), D (Paperwork Reduction Act Information), E (Definitions), F (Public Availability) and G (Responses to Questions) of Form N–PORT. 72 See id. For example, General Instructions A, B, C and G provide specific filing and reporting instructions (including how to report entity names, percentages, and dates), General Instructions D and F provide information about the Paperwork Reduction Act and the public availability of information reported on Form N–PORT, and General Instruction E provides definitions for specific terms referenced in Form N–PORT. mstockstill on DSK3G9T082PROD with RULES2 70 Form VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 whether the information should be reported as of the trade date (‘‘T+0’’), which is required for financial reporting purposes, or the trade date plus one day (‘‘T+1’’), which is currently permitted under rule 2a–4 for the calculation of funds’ net asset values (‘‘NAV’’). Several commenters requested clarification on this issue and specifically requested that Form N–PORT allow reporting on a T+1 basis.73 Many commenters noted that most funds use T+1 accounting to record their day-to-day transactions, and only convert their records to T+0 for quarterly portfolio holdings reporting purposes on Forms N–CSR and N–Q.74 These commenters further noted that our proposal would require funds to file monthly reports 30 days after each reporting period, whereas funds currently have at least 60 days after the end of each fiscal quarter to report similar information on a T+0 basis on Forms N–CSR and N–Q. Accordingly, commenters suggested that allowing funds to file on a T+1 basis would reduce filing burdens relative to requiring reporting on a T+0 basis, while not meaningfully changing the substance of the information reported. One commenter explicitly recommended that funds be allowed to choose whether to file on a T+0 or T+1 basis, so that funds that prefer to align their Form N–PORT reporting with their reporting on Forms N–Q and/or N–CSR could do so, while other commenters that suggested this modification did not specify whether all funds should be required to report on a T+1 basis uniformly.75 As discussed above, the Commission did not specify the appropriate basis for reporting, and we agree with commenters that an explicit instruction on the basis on which to report is appropriate. We are persuaded by commenters that explicitly instructing funds file on the same basis for which they calculate their NAV (generally a T+1 basis) would not be as burdensome as instructing all funds to file on a T+0 basis, and would still maintain the utility of the information reported. As noted by commenters, we acknowledge that reporting monthly information on Form N–PORT on a T+1 basis may 73 See, e.g., ICI Comment Letter; Fidelity Comment Letter; Schwab Comment Letter; Comment Letter of OppenheimerFunds (Aug. 10, 2015) (‘‘Oppenheimer Comment Letter’’). 74 See, e.g., Pioneer Comment Letter; Comment Letter of Invesco Advisers (Aug. 11, 2015) (‘‘Invesco Comment Letter’’); Schwab Comment Letter; ICI Comment Letter; Comment Letter of the Securities Industry and Financial Markets Association Asset Management Group (Jan. 13, 2016) (‘‘SIFMA Comment Letter II’’). 75 See SIFMA Comment Letter I. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 result in differences between quarterly portfolio holdings information currently reported on a T+0 basis on Forms N– CSR and N–Q. However, any such differences are unlikely to affect the utility of the information for the Commission and other potential users, because our primary purpose for using the information is to analyze and assess the various risks in a particular fund and monitoring risks and trends in the fund industry as a whole, rather than to align the information reported with the fund’s financial statements. Nonetheless, we do not agree that funds should be permitted to file either on the basis of calculating its NAV (generally T+1) or on the basis of how they prepare financial reports (T+0) at the fund’s option, as having funds report their portfolio holdings on different bases would reduce the comparability of the data reported on Form N–PORT among funds and across the industry. Accordingly, we have modified the proposal to add an instruction to Form N–PORT instructing funds that they must report portfolio information on Form N–PORT on the same basis they use to calculate their NAV, which we understand is generally T+1.76 Commenters also requested confirmation that different internal methodologies could be applied in responding to certain items on Form N– PORT, such as those that may require subjective judgments on the part of funds.77 Furthermore, two commenters urged the Commission to explicitly state that funds may make and rely on reasonable assumptions in providing responses to information items on Form N–PORT.78 In response to these comments, we have modified the proposal by adding an instruction clarifying that in reporting information on Form N–PORT, the fund may 76 See General Instruction A of Form N–PORT (‘‘Reports on Form N–PORT must disclose portfolio information as calculated by the fund for the reporting period’s ending net asset value (commonly, and as permitted by rule 2a–4, the first business day following the trade date).’’). We understand that funds generally calculate their NAV on a T+1 basis pursuant to rule 2a-4, although under certain circumstances funds might record particular transactions on a T+0 basis, such as when correcting a pricing error. The instructions in Form N–PORT are intended to be flexible enough to allow funds to report information on Form N–PORT on the same basis used in calculating NAV. 77 See, e.g., SIFMA Comment Letter I (requesting confirmation that funds may use classifications generated by existing methodologies or available service providers in reporting country of risk for portfolio holdings); ICI Comment Letter (asserting that funds should have the flexibility to make country of risk determinations using their own good faith judgment). 78 See ICI Comment Letter; Oppenheimer Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 respond using its own methodology and the conventions of its service provider, so long as the methodology and conventions are consistent with the way the fund reports internally and to current and prospective investors.79 This approach, which we have modeled after a similar instruction in Form PF, is intended to strike an appropriate balance between easing the reporting burden on funds by allowing them to rely on their existing practices, while still providing useful information to the Commission, investors, and other potential users.80 The new instruction also explains that funds may explain any of their methodologies, including related assumptions, in Part E of Form N–PORT.81 One commenter recommended that we include a definition of ‘‘forward contract,’’ that references the settlement time of a contract, noting that from their experience, there are several interpretations of what constitutes a forward contract and without a standard definition, funds might categorize products inconsistently.82 We disagree that we should define forward contracts with regard to the settlement time, and believe that adopting a specific definition like the one that the commenter suggested could be overbroad or under-inclusive based on the settlement time selected. Also, based on staff experience reviewing fund disclosures, we note that funds have generally been able to classify forwards in their current disclosures even though there is not a specific definition that references the settlement date of the contract. Finally, the approach we are adopting allows flexibility as forward products evolve. 79 See General Instruction G of Form N–PORT (‘‘Funds may respond to this Form using their own internal methodologies and the conventions of their service providers, provided the information is consistent with information that they report internally and to current and prospective investors. However, the methodologies and conventions must be consistently applied and the Fund’s responses must be consistent with any instructions or other guidance relating to this Form.’’). 80 See General Instruction 15 of Form PF. Periodic reports on Form PF must be filed by registered investment advisers with at least $150 million in private fund assets under management. Form PF is designed, among other things, to assist the Financial Stability Oversight Council in its assessment of systemic risk in the U.S. financial system. See generally Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Investment Advisers Act Release No. 3308 (Oct. 31, 2011) [76 FR 71228 (Nov. 16, 2011)] (‘‘Form PF Adopting Release’’). 81 See General Instruction G of Form N–PORT (‘‘A Fund may explain any of its methodologies, including related assumptions, in Part E.’’). 82 See Comment Letter of T. Rowe Price (Aug. 21, 2015) (‘‘T. Rowe Price Comment Letter’’). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 Similarly, one commenter noted that it is unclear if a credit default swap should be reported as an option or a swap on Form N–PORT since it has the characteristics of both types of investments.83 As discussed further below, we are revising Form N–PORT to include a clarification that specifically identifies that total return swaps, credit default swaps, and interest rate swaps should all be categorized under the ‘‘swap’’ instrument type.84 A few commenters also asked for guidance as to what investments would fall within the category of ‘‘other derivatives’’ in Item C.11.g.85 The commenters noted that funds already rely upon the definition of ‘‘derivatives’’ provided in U.S. Generally Accepted Accounting Principles (‘‘GAAP’’) for financial statement reporting purposes and recommended that funds be allowed to rely upon the same definition for determining what to report as ‘‘other derivatives’’ on Form N–PORT (i.e., investments reported as derivatives for financial statement reporting purposes, but that do not fall within the categories of derivatives enumerated in Form N–PORT such as futures, forwards, etc.).86 We agree that this approach will generally promote consistency in how such information is reported and will provide more certainty to funds reporting ‘‘other derivatives’’ on Form N–PORT, and we understand that funds may choose to utilize this approach. However, we are not requiring that funds do so since we anticipate most derivative investments held by funds will fall within one of the categories of derivatives previously 83 See Morningstar Comment Letter. infra footnote 340 and accompanying text. 85 See ICI Comment Letter; T. Rowe Price Comment Letter. 86 See generally ASC 815 (Derivatives and Hedging). We note that definitions related to derivatives have been proposed in other contexts, for example ‘‘derivatives transaction’’ in our recent proposal regarding the use of derivatives by registered investment companies and BDCs. See Derivatives Proposing Release, supra footnote 7 (defining the term ‘‘derivatives transaction’’ to mean ‘‘any swap, security-based swap, futures contract, forward contract, option, any combination of the foregoing, or any similar instrument (‘derivatives instrument’) under which a fund is or may be required to make any payment or delivery of cash or other assets during the life of the instrument or at maturity or early termination.’’ However, that proposed definition is limited to derivatives transactions where the fund may be required to make a payment or delivery of cash or other assets. In contrast, for purposes of Form N–PORT, we seek to obtain information about all of a fund’s derivative investments, regardless of whether the fund has a payment or delivery obligation. As a result of these differences, we continue to believe that it is preferable for Form N–PORT to not incorporate a specific definition, but rather to retain the flexibility to encompass the changing types of products that may evolve and emerge. 84 See PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 81879 enumerated in Form N–PORT, and thus we expect few investments to be reported within the ‘‘other derivatives’’ category. Moreover, this ‘‘other derivatives’’ category is intentionally designed to be flexible enough to allow funds to capture and categorize investments in the future that are not currently traded by funds, and for these reasons we are not requiring funds to adhere to any specific process in determining what should fall within this category, provided that none of the previously enumerated categories apply. Several commenters also asked that the definition of ‘‘investment grade’’ be revised to follow standards generally used by the industry by replacing references to liquidity with references to credit quality.87 In response to these comments, we are removing the definition of ‘‘investment grade’’ that we proposed to be included in Form N– PORT. Consistent with our other changes discussed herein that permit funds to rely on their existing practices and methodologies, Form N–PORT provides funds with the flexibility, in determining what constitutes ‘‘investment grade,’’ to generally use their own methodology and the conventions of their service providers, as provided in General Instruction G. Given this clarification in the adopted form, we do not believe any definition of investment grade is necessary.88 We have also made several changes to certain definitions and instructions related to the way in which funds will provide information on Form N–PORT, largely relating to the formatting of the information reported. Among other things, we have revised the instruction in the proposal that directed funds to respond to every item of the form.89 As proposed, the instruction would have required funds to respond to each subitem and item on Form N–PORT even if the item was inapplicable. The revised instruction indicates that funds are not required to respond to items that are wholly inapplicable.90 For example, no 87 See ICI Comment Letter; Oppenheimer Comment Letter; Pioneer Comment Letter; Comment Letter of MFS Investment Management (Aug. 11, 2015) (‘‘MFS Comment Letter’’); Comment Letter of the Dreyfus Corporation (Aug. 11, 2015) (‘‘Dreyfus Comment Letter’’). 88 See supra footnote 79 and accompanying text. 89 See General Instruction G of proposed Form N– PORT (‘‘A Fund is required to respond to every item of this form. If an item requests information that is not applicable (for example, an LEI for a counterparty that does not have an LEI), respond N/ A’’). 90 See General Instruction G of Form N–PORT (‘‘A Fund is not required to respond to an item that is wholly inapplicable (for example, no response would be required for Item C.11 when reporting information about an investment that is not a E:\FR\FM\18NOR2.SGM Continued 18NOR2 81880 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 response is required for Item C.11, which concerns derivatives, when reporting information about an investment that is not a derivative. We believe this revision will decrease burdens upon filers and reduce the file size of Form N–PORT submissions, while still maintaining the clarity of the data reported on Form N–PORT. We have also eliminated certain instructions from proposed Form N– PORT relating to the formatting of information reported on the form that, upon further consideration, we believe are unnecessary in Form N–PORT. In particular, we have eliminated instructions requiring the rounding of percentages, monetary values, and other numeric values.91 Elimination of the instructions regarding the rounding of such figures should allow funds to report such information in the same way such information is currently recorded in their books and records. We also have eliminated instructions regarding the signature and filing of reports, because we believe that the general rules and regulations applicable under the Act provide sufficient guidance with regard to those issues.92 We have also made clarifying revisions to certain definitions. As discussed above, we have revised the proposed definition of ‘‘exchange-traded product’’ to refer instead to ‘‘exchangetraded fund’’ to harmonize the definitions used in Forms N–PORT and N–CEN.93 The revision also clarifies that a separate report on Form N–PORT must derivative). If a sub-item requests information that is not applicable, for example, an LEI for a counterparty that does not have an LEI, respond N/ A’’). 91 See General Instruction G of proposed Form N– PORT (instructions regarding rounding of percentages, monetary values, and other numerical values). 92 See General Instruction B of Form N–PORT (‘‘The General Rules and Regulations under the Act contain certain general requirements that are applicable to reporting on any form under the Act. These general requirements shall be carefully read and observed in the preparation and filing of reports on this Form, except that any provision in the Form or in these instructions shall be controlling.’’) See also General Instruction H of proposed Form N–PORT (instructions regarding signature and filing of reports). 93 See supra footnote 48 and accompanying text. Although the definition of ‘‘exchange-traded fund’’ being adopted on Form N–PORT is narrower than the definition of ‘‘exchange-traded product’’ as proposed on Form N–PORT, the universe of filers on Form N–PORT is not changing because exchange-traded managed funds that would have been encompassed in the proposed definition of ‘‘exchange-traded product’’ will be encompassed in the adoption through references to managed investment companies. See rule 30b1–9 (requiring certain funds to file reports on Form N–PORT); Form N–PORT (‘‘Form N–PORT is to be used by a registered management investment company, or an exchange-traded fund organized as a unit investment trust, or series thereof (‘Fund’). . . .’’). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 be filed by each series of a UIT organized as an ETF, and parallels similar revisions to the definition of ETF in Form N–CEN.94 We have also revised the definition of ‘‘LEI’’ to reflect new terminology regarding LEIs.95 Finally, regarding General Instruction F, which provides information regarding the public availability of the information in Form N–PORT, the final Instruction clarifies, similar to language that is contained in current Form PF, that we do not intend to make public certain information reported on Form N–PORT ‘‘that is identifiable to any particular fund or adviser.’’ 96 This modification makes clear, for example, that the Commission or Commission staff could issue analyses and reports that are based on aggregated, nonidentifying Form N–PORT data, which would otherwise be nonpublic, such as information reported on Form N–PORT for the first and second months of each fund’s fiscal quarter. b. Information Regarding Assets and Liabilities Part B of Form N–PORT seeks certain portfolio level information about the fund. As we proposed, Part B includes questions requiring funds to report their total assets, total liabilities, and net assets.97 Funds will also separately report certain assets and liabilities, as follows. First, as we proposed, funds will report the aggregate value of any ‘‘miscellaneous securities’’ held in their portfolios.98 As currently permitted by Regulation S–X, and as further discussed below, Form N–PORT permits funds to report an aggregate amount not exceeding 5 percent of the total value of their portfolio investments in one amount as ‘‘Miscellaneous securities,’’ provided that securities so listed are not restricted, have been held for not more than one year prior to the date of the related balance sheet, and have not previously been reported by name to the shareholders, or set forth in any registration statement, application, or report to shareholders or otherwise 94 See infra footnote 896. N–PORT’s revised definition of ‘‘LEI’’ refers to the legal entity identifier ‘‘endorsed’’ by the Regulatory Oversight Committee Of The Global Legal Entity Identifier System (‘‘LEI ROC’’) or ‘‘accredited’’ by the Global Legal Entity Identifier Foundation (‘‘GLEIF’’), as opposed to ‘‘assigned or recognized’’ by those two entities. 96 See supra footnote 26. 97 See Item B.1 of Form N–PORT. 98 See Item B.1.a and Item B.2.a of Form N–PORT. As discussed further below, Form N–PORT will require funds to also report information about miscellaneous securities on an investment-byinvestment basis, although such information will be nonpublic and will be used for Commission use only. See infra footnote 420 and accompanying text. 95 Form PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 made available to the public.99 We received only one comment on this aspect of our proposal, which supported the reporting of aggregate information for miscellaneous securities.100 Second, as we proposed, funds will also report any assets invested in a controlled foreign corporation for the purpose of investing in certain types of investments (‘‘controlled foreign corporation’’ or ‘‘CFC’’).101 We received no comments on this aspect of the proposal. Some funds use CFCs for making certain types of investments, particularly commodities and commodity-linked derivatives, often for tax purposes. Form N–PORT requires funds to disclose each underlying investment in a CFC, rather than just the investment in the CFC itself, which will increase transparency on fund investments through CFCs.102 These disclosures will allow investors to look through CFCs and understand the specific underlying holdings that they are investing in, which will in turn allow investors to better analyze their fund holdings and risk, and hence enable investors to make more informed investment decisions. In addition, as discussed further below in section II.D.4, we believe it will be beneficial for the Commission to have certain information about funds’ use of CFCs. The information we will be obtaining in Form N–PORT, combined with additional information we are requiring on Form N–CEN regarding CFCs, discussed below, will help the Commission better monitor funds’ compliance with the Investment Company Act and assess funds’ use of CFCs, including the extent of their use by reporting of total assets in CFCs. Third, as we proposed, we are requiring that funds report the amounts of certain liabilities, in particular: (1) Borrowings attributable to amounts payable for notes payable, bonds, and similar debt, as reported pursuant to rule 6–04(13)(a) of Regulation S–X [17 CFR 210.6–04(13)(a)]; (2) payables for investments purchased either (i) on a delayed delivery, when-delivered, or other firm commitment basis, or (ii) on a standby commitment basis; and (3) liquidation preference of outstanding 99 See rule 12–12 of Regulation S–X; see also Parts C and D of Form N–PORT. 100 See SIFMA Comment Letter I. 101 See General Instruction E (providing that ‘‘Controlled Foreign Corporation’’ has the meaning provided in section 957 of the Internal Revenue Code [26 U.S.C. 957]) and Item B.2.b (requiring funds to report assets invested in controlled foreign corporations) of Form N–PORT. 102 See Instruction to Part B of Form N–PORT (‘‘Report the following information for the Fund and its consolidated subsidiaries.’’). E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations preferred stock issued by the fund.103 We received no comments on this aspect of the proposal. This information will allow Commission staff, as well as investors and other potential users, to better understand a fund’s borrowing activities and payment obligations associated with these transactions. This in turn will facilitate analysis of the fund’s use of financial leverage, as well as the fund’s liquidity profile and ability to meet redemptions or share repurchases, which are important to understanding the risks such borrowings might create. One commenter suggested that certain fee and expense information currently reported on Form N–SAR, and Item 75 of Form N–SAR in particular—which relates to average net assets during the current reporting period—be reported on Form N–PORT.104 The commenter acknowledged that much of this information is already publicly reported in or can be derived from information reported in other fund documents filed with the Commission, but argued that this information should also be reported on Form N–PORT because the structured format of Form N–PORT would make information reported on Form N–PORT easier to aggregate and analyze.105 We are not making this suggested change because similar and complementary information will be reported on Form N–PORT in a structured format going forward (i.e., monthly net assets for funds more generally) and is currently available in a structured format for mutual funds in their risk/return summaries (certain fee and expense data).106 Also, as discussed further below, we are revising Form N– CEN to require funds to report average net assets on an annual basis.107 For these reasons, we are adopting this aspect of Form N–PORT as proposed. c. Portfolio Level Risk Metrics One of the purposes of Form N–PORT is to provide the Commission with information regarding fund portfolios to help us better monitor trends in the fund industry, including investment strategies funds are pursuing, the investment risks that funds undertake, and how different funds might be affected by changes in market mstockstill on DSK3G9T082PROD with RULES2 103 See 104 See Item B.2.c–Item B.2.e of Form N–PORT. Morningstar Comment Letter. 105 Id. 106 See SEC, Interactive Data and Mutual Fund Risk/Return Summaries, available at https:// www.sec.gov/spotlight/xbrl/mutual-funds.shtml; Item B.6 of Form N–PORT (requiring funds to report monthly flow information). 107 See infra footnotes 1016–1017 and accompanying text. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 conditions. As discussed above, the Commission uses information from fund filings, including a fund’s registration statement and reports on Form N–CSR (which includes the fund’s shareholder report) and Form N–Q, to inform its understanding and regulation of the fund industry. Additionally our staff reviews fund disclosures—including registration statements, shareholder reports, and other documents—both on an ongoing basis as well as retroactively every three years.108 The disclosures in a fund’s registration statement about its investment objective, investment strategies, and risks of investing in the fund, as well as the fund’s financial statements, are fundamental to understanding a fund’s implementation of its investment strategies and the risks in the fund. However, the financial statements and narrative disclosures in fund disclosure documents do not always provide a complete picture of a fund’s exposure to changes in asset prices, particularly as fund strategies and fund investments become more complex.109 The financial statements, including a fund’s schedule of portfolio investments, provide data regarding investments’ values as of the end of the reporting period—a ‘‘snapshot’’ of data at a particular point in time—or, in the case of the statement of operations, for example, historical data over a specified time period. By contrast, based on staff experience and the staff’s outreach to funds prior to our proposal, we understand that funds commonly internally use multiple risk metrics that provide calculations that measure the change in the value of fund investments assuming a specified change in the value of underlying assets or, in the case of debt instruments and derivatives that provide exposure to interest rates and debt instruments, changes in interest rates or in credit spreads above the riskfree rate.110 Accordingly, we believe, and some commenters agreed, that it is appropriate to require funds to report quantitative measurements of certain risk metrics that will provide information beyond the narrative, often qualitative disclosures about investment strategies and risks in the fund’s registration statement.111 Monthly 108 See, e.g., section 408 of the Sarbanes-Oxley Act of 2002, Public Law 107–204, 116 Stat. 745, 790–791 (2002) (requiring the Commission to engage in enhanced review of periodic disclosures by certain issuers every three years). 109 See Morningstar Comment Letter. 110 See Proposing Release, supra footnote 7, at 33598. 111 See Morningstar Comment Letter (noting a range of fund disclosures relating to fund synthetic PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 81881 reporting on these risk measures, in particular, will help provide the Commission with more current information on how funds are implementing their investment strategies through particular exposures. Receiving this information on a monthly basis could help the Commission, for example, more efficiently analyze the potential effects of a market event on funds.112 Specifically, we proposed to require certain funds to report portfolio-level measures on Form N–PORT that will help Commission staff better understand and monitor funds’ exposures to changes in interest rates and credit spreads across the yield curve.113 As discussed in section II.A.2.g below, we proposed to require risk measures at the investment level for options and convertible bonds. We continue to believe that the staff can use these measures, for example, to determine whether additional guidance or policy measures are appropriate to improve disclosures in order to help investors better understand how changes in interest rate or credit spreads might affect their investment in a fund. As a result, we are adopting these risk measures substantially as proposed, subject to the modifications discussed below.114 While we received some comments generally supporting our proposal to require portfolio-level risk metrics,115 some suggested alternative methods for collecting risk metrics,116 or opposed disclosures, with some more helpful to investors than others); Franco Comment Letter (supporting the Commission’s proposal relating to disclosures of risk metrics). 112 See Morningstar Comment Letter. 113 See Item B.3 of proposed Form N–PORT. 114 See Item B.3 of Form N–PORT. 115 See, e.g., SIFMA Comment Letter I (‘‘We support the Commission’s proposal to require funds to provide the Commission with portfolio level risk metrics, and generally would defer to the Commission as to the information the Commission would consider useful for its regulatory purposes.’’); State Street Comment Letter; Wells Fargo Comment Letter (‘‘We are in agreement with the Commission’s request for risk metrics as it relates to duration and spread duration; however, we suggest that the calculation for providing such risk metrics are defined differently than proposed.’’). 116 See, e.g., BlackRock Comment Letter (Commission should use the same interest rate and credit risk questions as is required in Form PF; Commission should consider implementing a reporting requirement to obtain a comprehensive measure of fund’s use of leverage); Morningstar Comment Letter (but also urging the Commission to collect more position level information which will enable the Commission, investors, and service providers to independently calculate risk); see also Interactive Data Comment Letter (‘‘[P]osition level reporting aligns with what is standard practice in the industry and so would not be burdensome. Position level reporting would provide the E:\FR\FM\18NOR2.SGM Continued 18NOR2 81882 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 our proposal to make certain of the risk metrics public.117 These comments are discussed in more detail below. We believe, and some commenters agreed, that institutional investors, as well as entities that provide services to both institutional and individual investors, could use these risk metrics to conduct their own analyses in order to help them better understand fund composition, investment strategy, and interest rate and credit spread risk the fund is undertaking. As discussed further below, however, other commenters, were mixed as to whether this information would be useful for investors and if this information should be made public.118 These measures can complement the risk disclosures that are contained in the registration statement, thereby potentially helping investors to make more informed investment choices. Accordingly, we disagree with commenters that argued this information has no utility for investors. We also continue to believe that requiring funds to publicly disclose these measures quarterly, like other information in the schedule of investments will also help provide investors with more specific, quantitative information regarding the nature of a fund’s exposure to debt than they currently have.119 As discussed further in Section II.A.4 below, we are adopting, largely as proposed, the requirement that funds provide public Commission with greater insight into sources of risk within a portfolio.’’); Comment Letter of Simpson Thacher & Bartlett LLP (Aug. 11, 2015) (‘‘Simpson Thacher Comment Letter’’) (derivatives reporting should focus on portfolio-level risk metrics, such as ‘‘value at risk’’ models) 117 See, e.g., Comment Letter of the Independent Directors Council (Aug. 11, 2015) (‘‘IDC Comment Letter’’); SIFMA Comment Letter I; Simpson Thacher Comment Letter; Invesco Comment Letter; Schwab Comment Letter; ICI Comment Letter; Comment Letter of Dechert LLP (Aug. 11, 2015) (‘‘Dechert Comment Letter’’) (or, in the alternative, include a disclaimer that risk metrics are an estimate); T. Rowe Price Comment Letter; BlackRock Comment Letter; Oppenheimer Comment Letter. Our decision to make [certain] Items in Parts C, D, and E of the Form non-public is discussed in more detail below. See infra section II.A.4. 118 See Franco Comment Letter (Noting that the information on Form N–PORT is relevant to information intermediaries and market professionals and would assist them in assessing individual fund performance or comparing among funds); see also Morningstar Comment Letter (same); but see Invesco Comment Letter (stating that Form N–PORT’s disclosures would not complement fund registration statements, nor be useful in helping investors make more informed investing decisions); SIFMA Comment Letter I (same); Federated Comment Letter. 119 See Franco Comment Letter (‘‘The rule proposal’s various disclosure and reporting requirements, especially those requirements relating to portfolio disclosure, risk metrics and fund use of derivatives, serve the public interest and/or the protection of investors.’’). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 disclosure of portfolio-level risk metrics on a quarterly basis.120 For these reasons, and as discussed further below in section II.A.4, we were not persuaded by commenters that such information should be nonpublic. 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 can help them analyze how portfolio values might change in response to changes in interest rates or credit spreads.121 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 proposed that a fund that invests in debt instruments, or derivatives that provide notional exposure to debt instruments or interest rates, representing at least 20% of the fund’s net asset value as of the reporting date, provide a portfolio level calculation of duration and spread duration across the applicable maturities in the fund’s portfolio.122 Commenters were generally supportive of our proposal to include a threshold.123 However, several 120 See Item B.3 of Form N–PORT; see also generally Proposing Release, supra footnote 7, at n. 56 and accompanying text. 121 As discussed further below, the Commission also believes that there would be a benefit to collecting risk measures for derivatives that provide exposure to certain assets, such as equities and commodities. Due to the nature of these instruments, however, we believe that such information should be provided on an instrumentby-instrument basis, instead of as a portfolio level calculation. 122 Specifically, as proposed, funds would have calculated notional value as the sum of the absolute values of: (i) The value of each debt security, (ii) the notional amount of each swap, including, but not limited to, total return swaps, interest rate swaps, and credit default swaps, for which the underlying reference asset or assets are debt securities or an interest rate; and (iii) the deltaadjusted notional amount of any option for which the underlying reference asset is an asset described in clause (i) or (ii). See proposed Instruction to Item B.3 of Form N–PORT. The delta-adjusted notional value of options is needed to have an accurate measurement of the exposure that the option creates to the underlying reference asset. See, e.g., Comment Letter of Morningstar to Derivatives Concept Release (Nov. 7, 2011) (‘‘Morningstar Derivatives Concept Release Comment Letter’’) (submitted in response to the Derivatives Concept Release, supra footnote 38, which sought comment regarding the use of derivatives by management investment companies). 123 See, e.g., Interactive Data Comment Letter (supporting 20% level as reasonable and stating belief that threshold should be measured by considering notional value for derivatives and market values for bonds); State Street Comment Letter (supporting 20% threshold and recommending that the Commission provide clarity on the threshold calculation); Fidelity Comment Letter; Franco Comment Letter; Simpson Thacher PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 commenters requested that we increase the threshold for risk reporting from 20% and that the calculation of debt investments be made based on the fund’s three-month average notional value of debt investments as a percentage of NAV.124 Some commenters requested an increase in the threshold in order to make the risk metric threshold more consistent with the Commission’s threshold for requiring funds to disclose industry concentration in their prospectus.125 Additionally, some commenters argued that the three-month average would better reflect a fund’s true investment strategy and mitigate short-term market fluctuations that could cause a fund to temporarily exceed the threshold.126 We agree with both recommendations. We believe that a 25% threshold, as several commenters suggested, will still allow the Commission to receive measurements of duration and spread duration from funds that make investments in debt instruments as a significant part of their investment strategy because we do not believe many, if any, funds that make investments in debt instruments as a significant part of their investment strategy have less than 25% of their NAV invested in such instruments. Commenters persuaded us that some funds that primarily invest in assets other than debt instruments, such as equities, could, at times, have more than 20% of the net asset value of the fund Comment Letter (20% threshold and holds more than 100 debt securities); Wells Fargo Comment Letter (supporting 20% threshold). 124 See, e.g., Oppenheimer Comment Letter (25% threshold consistent with prospectus disclosure of industry concentration); ICI Comment Letter (same); MFS Comment Letter (25% threshold); Pioneer Comment Letter (same); Dreyfus Comment Letter (‘‘we believe the Commission should consider a 25% threshold because, at least, it would define a subset of ‘balanced’ and ‘asset allocation’ funds that would, by prospectus or name test mandate, for example, have to maintain a minimum fixed income exposure.’’); SIFMA Comment Letter I (recommending a 30% threshold); Invesco Comment Letter (same); but see Morningstar Comment Letter (supporting 20% threshold). 125 See, e.g., ICI Comment Letter; Oppenheimer Comment Letter; MFS Comment Letter; Pioneer Comment Letter; Dreyfus Comment Letter; see also Instruction 4 to Item 9(b)(1) of Form N–1A (‘‘Disclose any policy to concentrate in securities of issuers in a particular industry or group of industries (i.e. investing more than 25% of a Fund’s net assets in a particular industry or group of industries).’’); Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998)] at nn. 100–101 and accompanying text (‘‘. . . the Commission continues to believe that 25% is an appropriate benchmark to gauge the level of investment concentration that could expose investors to additional risk.’’). 126 See, e.g., ICI Comment Letter; MFS Comment Letter; Dreyfus Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations invested in debt instruments for cash management or other purposes.127 Thus raising the threshold from 20% to 25% will relieve more funds of having to monitor each month whether they trigger the requirement for making such calculations, while still achieving the goal the Commission stated in the Proposing Release of requiring funds that make investments in debt instruments as a significant part of their investment strategy to report such metrics.128 We agree with commenters that using the same thresholds we use for discussing industry concentration in current prospectuses is appropriate as it will achieve an objective that is similar to the one in Form N–1A of requiring funds to disclose only where such investments are a central part of the fund’s investment objectives. We are therefore adopting a 25% threshold for reporting portfolio-level risk metrics.129 We are also modifying the rule from the proposal to require funds to calculate this threshold on the threemonth average of a fund’s value as percentage of NAV (rather than, as proposed, value as percentage of NAV at the reporting date (i.e. month-end)) because we agree with commenters who pointed out that this should mitigate the chance that short-term market fluctuations could cause a fund that does not typically use such instruments as part of its investment strategy to temporarily exceed the threshold and be required to report the metrics.130 Finally, another commenter opposed requiring risk metrics data for index funds because it believed that this requirement would be unnecessarily burdensome for those funds.131 However, index funds incorporate a wide variety of funds—some of which are primarily invested in debt securities, including derivatives based on debt securities. It is our view that if a fund is exposed to debt instruments or interest rates in amounts that trigger the reporting of risk metrics, they have an 127 See, e.g. Pioneer Comment Letter. e.g., State Street Comment Letter. 129 See supra footnote 125. 130 See Item B.3 of Form N–PORT; see, e.g. Pioneer Comment Letter; Oppenheimer Comment Letter. One commenter requested that the threshold be based on the fund’s net asset value and not notional value. See MFS Comment Letter. We continue to believe that basing the threshold on notional amount, especially for derivatives, is a better measure of a fund’s exposure than the just the investment’s value because some derivatives may have a negligible net asset value, but represent significant exposures to the fund. We have, however, made a clarifying change to the terminology from the proposal, and instruction B.3 now refer to ‘‘value’’ rather than ‘‘notional value.’’ See infra footnote 165. 131 See ICI Comment Letter. mstockstill on DSK3G9T082PROD with RULES2 128 See, VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 exposure large enough to warrant reporting. Moreover, some index funds have indexes that change weekly or daily. Accordingly, because we believe it is important to monitor the risk metrics for all funds with exposures to debt instruments exceeding the threshold, we do not believe it would be appropriate to exempt index funds from Form N–PORT’s requirements for risk metric reporting. For duration, we proposed to require that a fund calculate, the change in value in the fund’s portfolio from a 1 basis point change in interest rates (commonly known as DV01) for each applicable key rate along the risk-free interest rate curve, i.e., 1-month, 3month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30year interest rate, for each applicable currency in the fund.132 We realized that funds might not have exposures for every applicable key rate. For example, a short-term bond fund is unlikely to have debt exposures with longer maturities. Accordingly, we proposed that a fund only report the key rates that are applicable to the fund. We proposed that funds report zero for maturities to which they have no exposure.133 For exposures outside of the range of listed maturities listed on Form N–PORT, we proposed that funds include those exposures in the nearest maturity. One commenter stated that calculating DV01 along key rates of the Treasury curve is ‘‘common and intuitive’’ to analyzing shifts of the yield curve.134 However, some commenters suggested that calculating the DV01 and SDV01 for 11 proposed key rates could be burdensome, and requested that we limit the number of applicable key rates along the risk-free curve.135 For example, commenters recommended that the Commission limit the calculations to the key rates to those most representative of bond fund overall exposures by limiting the calculation to the 1-, 2-, 5-, 10-, 20-, and 30-year rates.136 Another commenter recommended collapsing the 1-, 3-, and 6-month exposures into the 1-year exposure, as a detailed breakout inside 1-year is not informative for most instruments.137 Commenters argued that 132 See Item B.3.aof proposed Form N–PORT. funds with exposures that fall between any of the listed maturities in the form, we proposed in the Instructions to Item B.3 that funds use linear interpolation to approximate exposure to each maturity listed above. 134 See Wells Fargo Comment Letter. 135 See, e.g., Fidelity Comment Letter; Dreyfus Comment Letter; Simpson Thacher Comment Letter. 136 See Dreyfus Comment Letter; Simpson Thacher Comment Letter. 137 See Fidelity Comment Letter. 133 For PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 81883 reducing the number of key rates will reduce burdens for fund companies while providing the Commission with sufficient information on yield curve exposures for staff analysis.138 Finally, one commenter suggested that we only require a single measure of duration (i.e., total portfolio duration) that is the weighted average of the top 5 currencies (including the base currency) rather than providing duration calculations for key rates along the Treasury curve, arguing that a single measure would capture the majority of a fund’s portfolio risk.139 We continue to believe that requiring funds to provide further detail about their exposures to interest rate changes along the risk-free rate curve will provide the Commission with a better understanding of the risk profiles of funds with different strategies for achieving debt exposures. For example, funds targeting an effective duration of 5 years could achieve that objective in different ways—one fund could invest predominantly in intermediate-term debt; another fund could create a long position in longer-term bonds, matched with a short position in shorter-term bonds. While both funds would have intermediate-term duration, the risk profiles of these two funds, that is, their exposures to changes in long-term and short-term interest rates, are different. Having DV01 calculations along the risk-free interest rate curve, as opposed to a single measure of duration suggested by one commenter, will clarify this difference. Moreover, as one commenter noted, ‘‘DV01 and SD01 [spread duration] are likely the measures that will be least subject to differences based on assumptions within risk models employed by fund companies’’ and therefore minimizes variation based on the disparate risk metrics models used by funds.140 The Commission staff will use this information to better understand how funds are achieving their exposures to interest rates, and to perform analysis across funds with similar strategies to identify outliers for potential further inquiry, as appropriate. We were, however, persuaded by commenters that reducing the number of key rates that funds must report could reduce the reporting burden, while still 138 See id.; Dreyfus Comment Letter. e.g., ICI Comment Letter (suggesting as an alternative, a single duration measurement that is the weighted average of the top 5 currencies (including the base currency)); SIFMA Comment Letter I (duration disclosure should be limited to top 5 exposures); ICI Comment Letter (report only total portfolio duration and credit spread duration—i.e., single measures—rather than multiple points along the yield curve). 140 See Morningstar Comment Letter. 139 See, E:\FR\FM\18NOR2.SGM 18NOR2 81884 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations providing the staff with sufficient information and flexibility to analyze how debt portfolios will react to different interest rates and credit spreads along the Treasury curve. We are therefore modifying this requirement from the proposal to require fewer key rates—specifically 3-month, 1-year, 5year, 10-year, and 30-year—which will provide, as commenters suggested, the rates most representative to bond funds’ overall exposures. The key rates Form N–PORT will require, as adopted, are substantially similar to the key rates suggested by commenters; 141 however, we believe that some granularity for short term debt is important, especially in the context of short and ultra-short duration funds, and therefore, unlike the commenters’ suggestions for collapsing all short-term exposures to one-year, Form N–PORT will require reporting for the 3-month maturity.142 Form N–PORT will also require, as proposed, funds to provide the key rate duration for each applicable currency in a fund. One commenter recommended that we limit the duration to the top 5 currencies.143 Some commenters requested that we not include currency in the reporting of duration for funds because currency risk is not relevant to duration.144 Others supported a de minimis reporting threshold for exposure to different currencies that would be based on the notional value of the instruments, relative to NAV.145 These commenters noted that including all currency exposures, regardless of size, would result in a long list of exposures that would have little impact on a fund.146 As a result, the commenters believed that the Commission would receive data that would add little to the staff’s ability to understand a fund’s portfolio risk, but would add significant reporting and compliance burdens to funds.147 mstockstill on DSK3G9T082PROD with RULES2 141 See Dreyfus Comment Letter; Simpson Thacher Comment Letter; Fidelity Comment Letter. 142 See Item B.3.a and Item B.3.bof Form N– PORT; see also Item B.3.c of Form N–PORT; see also Fidelity Comment Letter (collapse the 1-, 3-, and 6-month exposures into the 1-year exposure, as a detailed breakout inside 1-year is not informative for most instruments); Dreyfus Comment Letter (focus should be on portfolio level statistics; alternative six key rates 1-, 2-, 5-, 10-, 20, and 30years). 143 See, e.g., SIFMA Comment Letter I. 144 See, e.g., Dreyfus Comment Letter. 145 See CRMC Comment Letter (supporting a 5% de minimis threshold for currencies); MFS Comment Letter (same); SIFMA Comment Letter I (same); ICI Comment Letter (5% or top 5 currencies or those currencies representing at least 50% of the portfolio’s exposure); Morningstar Comment Letter (same); Oppenheimer Comment Letter (one percent). 146 Id. 147 Id. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 We continue to believe that funds should generally be required to provide the key rate duration for each applicable currency in the fund in order to understand interest rate risk to funds with significant currency risk. Nonetheless, we were persuaded by commenters that a de minimis threshold is appropriate. Based on staff experience analyzing similar data, however, we believe that a 5% de minimis, as suggested by some commenters, could hinder the staff’s ability to measure smaller fund exposures that could have large effects across the fund industry as a whole. We agree with one comment that Form N–PORT should provide for a 1% de minimis threshold, calculated as the notional value of relevant investments in each currency relative to the fund’s NAV.148 We believe that setting the de minimis at this level will balance the need for the staff to identify and monitor not only a fund’s currency risk, but also the risks of small fund positions that could aggregate into large positions across the industry, as the Commission will still be receiving information about the majority of a fund’s currency exposures with this threshold. For both duration and spread duration, we proposed to require that funds provide the change in value in the fund’s portfolio from a 1 basis point change in interest rates or credit spreads, rather than a larger change, such as 5 basis points or 25 basis points. As we noted in the Proposing Release, based on staff outreach, we believed that a 1 basis point change is the methodology that many funds currently use to calculate these risk measures at the position level for internal risk monitoring and would provide sufficient information to assist the Commission in analyzing fund exposures to changes in interest rate or credit spreads.149 We requested comment on whether we should require or permit funds to report a larger change in interest rates or credit spreads, such as 5 or 25 basis points. Additionally, while we did not propose requiring convexity, the Commission also considered and requested comment on whether funds should be required to report convexity, which facilitates more precise measurement of the change in a bond price with larger changes in interest rates because this measure captures 148 SIFMA Comment Letter I. Proposing Release, supra footnote 7, at 33600. See also Morningstar Comment Letter (‘‘The use of a bottom-up approach and the limited movement of 1 basis point are likely to provide standardization.’’). 149 See PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 changes in the shape of the yield curve.150 Commenters suggested that we adopt risk metrics that would provide a better measure of risk over time than just DV01.151 For example, one commenter, noting that, while DV01 and SDV01 are typically used as daily risk measures, larger shifts in the curve, such as DV25 or DV50, may be appropriate for measures with a significant lag, such as reporting on Form N–PORT.152 We also received several comment letters recommending that we include a measure of convexity as it is a valuable method of measuring the change of the shifting yield curve, as well as a comment to require stress tests of the portfolio of small and large changes in spreads, interest rates, and volatility.153 We agree with commenters that a measurement that captures larger changes in the yield curve will be useful. We additionally agree with commenters that argued that a measure for changes in the shape of the yield curve such as convexity would be useful, but are sensitive to the burdens that requiring a measurement of convexity may impose on filers that do not currently calculate convexity internally. Accordingly we believe that requiring a risk measure that shows the effect of a larger change in interest rates, coupled with DV01 as we proposed, both provides information that commenters said would be useful (i.e., how the exposure changes with different changes in interest rate), while not requiring filers that do not calculate convexity internally to begin to do so. We are therefore adopting a requirement that funds provide both DV01 154 (a one basis point change in interest rate) and DV100 (a 100 basis point change in interest rates).155 Based on staff experience, we believe that DV100 is among the most 150 See Proposing Release, supra footnote 7, at 33600. More specifically, convexity measures the non-linearities in a bond’s price with respect to changes in interest rates. See Frank J. Fabozzi, The Handbook of Fixed Income Securities (8th ed., 2012) at 149–152. 151 See Morningstar Comment Letter; see also Interactive Data Comment Letter (noting that fund managers often consider moves greater than 1 basis point when managing interest rate risks in their portfolios, particularly for funds with exposure to bonds with call or prepayment risk.). 152 See Morningstar Comment Letter (also noting that DV01 and SDV01 are less likely to be subject to model risk). 153 Interactive Data Comment Letter (‘‘portfolio managers consider convexity to be critical when measuring the interest rate risk of their funds’’); Dreyfus Comment Letter (‘‘Convexity is valuable as a risk measure because it captures the change in the curvature (the ‘flattening’ or ‘steepening’) of the shifting yield curve.’’). 154 See B.3.a of Form N–PORT. 155 See B.3.b of Form N–PORT. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations common measures of interest rate sensitivity and it will, in conjunction with DV01, provide more useful information about non-parallel shifts in the yield curve than smaller measures, such as DV25 and DV50. Moreover, DV100 will allow the staff to capture larger changes to interest rates (and corresponding ‘‘shocks’’ to the markets) than DV25 and DV50. Finally, based on staff experience, it is our belief that DV100 is a standard measure of interest rate sensitivity and is a common measure of duration and is therefore unlikely to require filers to change current internal measurement practices, thereby mitigating the increase in reporting costs relative to the proposal. We also proposed to require that funds provide a measure of spread duration (commonly known as SDV01) at the portfolio level for each of the same maturities listed above, aggregated by non-investment grade and investment grade exposures.156 This would measure the fund’s sensitivity to changes in credit spreads (i.e., a measure of spread above the risk-free interest rate). Again, similar to the example above regarding the potential use of the DV01 metric, SDV01 can provide more precise information regarding funds’ exposures to credit spreads when they engage in a strategy investing in investment-grade or noninvestment grade debt. One commenter stated that spread duration is a more representative measure of bond fund portfolio risk than duration alone because it ‘‘captures both interest rate risk and credit risk’’ and that staff should therefore use spread duration when analyzing funds.157 However, that commenter and others recommended that we require funds to report a single spread duration for the portfolio, as spread rates are generally calculated as a parallel shift, making calculations at key rates less useful than they are for analyzing shifts in interest rates.158 Because credit spreads can vary mstockstill on DSK3G9T082PROD with RULES2 156 As proposed, Form N–PORT would have included instructions stating that ‘‘Investment Grade’’ refers to an investment that is sufficiently liquid that it can be sold at or near its carrying value within a reasonably short period of time and is subject to no greater than moderate credit risk, and ‘‘Non-Investment Grade’’ refers to an investment that is not Investment Grade. See proposed General Instruction E of Form N–PORT. As discussed above in section H.A.2.a, we received comments relating to our proposed definition of ‘‘Investment Grade’’. For the reasons discussed above, we have determined to remove these definitions from the Form. 157 See Dreyfus Comment Letter. 158 See supra footnotes 134–137; see, e.g., Wells Fargo Comment Letter (noting that, unlike interest rate spreads, credit spreads are not typically calculated at all key rates); Fidelity Comment Letter (‘‘A single CR01 without reference to maturity is a VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 based on the maturity of the bonds, we continue to believe that providing credit spread measures for the key rates along the yield curve, as with DV01, will help the Commission and its staff better analyze credit spreads of investments in funds than a single measure for the entire portfolio. For example, this data could be helpful for analyzing shifts in credit spreads for non-investment grade and investment grade debt, respectively, over the yield curve, as credit spreads for investment grade and noninvestment grade debt do not always shift in parallel or in lock step, particularly during times of market stress.159 For the same reasons discussed above for interest rate risk, however, we are limiting the required key rates for credit spread risk to 3-month, 1-year, 5-year, 10-year, and 30-year.160 Commenters also suggested either only requiring spread duration (as opposed to both credit and spread duration) or further refining the measure of credit spreads, for example, by breaking out government related spreads from other investment-grade spreads.161 However, we continue to believe that our current measure of spread risk provides adequate information to the staff, investors, and other potential users to better understand industry and fund credit spreads, and the risk associated with credit spreads, while appropriately balancing the costs of calculating such measures. We are therefore adopting the credit spread risk as proposed, subject to the previously discussed key rate refinements discussed above.162 We also proposed to include an instruction to Item B.3 to assist funds with calculating the threshold and to allow better comparability among funds. One commenter recommended that our proposed calculation for the threshold, which the proposal defined as ‘‘notional value,’’ include the ‘‘contract value of each futures contract for which the standard risk metric and should be familiar to market participants.’’); Dreyfus Comment Letter (recommending a single measure for spread duration); ICI Comment Letter (same). 159 The delineation between non-investment grade and investment grade debt is similar to information regarding private fund exposures gathered on Form PF, which could be helpful for comparing and analyzing credit spreads between public and private funds. See, e.g., Item 26 of Form PF. 160 See B.3.c of Form N–PORT. 161 See, e.g., Fidelity Comment Letter (Suggesting breaking out government-related credit spreads from other investment-grade credit spreads because it would be more useful for monitoring fund credit risk); Dreyfus Comment Letter (‘‘Spread duration is a more important measure of overall bond fund portfolio risk than duration alone because it captures both interest rate risk and credit risk.’’). 162 See Item B.3.c of Form N–PORT. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 81885 underlying reference asset or assets are debt securities or an interest rate.’’ 163 The commenter noted that funds may use fixed income futures for similar purposes as fixed income swaps, for example, to adjust duration, and including futures in the calculation would give the Commission more accurate reporting and is consistent with how the industry typically does these types of calculations.164 We agree and are modifying our instructions to require that funds include futures in the calculation of notional value.165 Another commenter noted that noninvestment grade portfolios often hold ‘‘equity-like securities,’’ such as convertible bonds and preferred stocks.166 The commenter argued that DV01 is not appropriate for these types of portfolios and requested that Form N–PORT clarify how funds should calculate interest-rates in such situations.167 Other commenters suggested that we further refine our proposed methodology by providing more details relating to the relevant interest rate and credit spread calculations such as whether the credit spread to be shifted is the nominal or option adjusted spread (OAS).168 In determining the proposed methodology for the measures of duration and spread duration, staff engaged in outreach to asset managers and risk service providers that provide risk management and other services to asset managers and 163 See CRMC Comment Letter. 164 Id. 165 We have also decided to make a clarifying change by using the term ‘‘value’’ as opposed to the proposal’s ‘‘notional value.’’ We believe that this could reduce confusion in the reporting of these measures. Since our proposed calculation of ‘‘notional value’’ requires the sum of ‘‘absolute’’ values, which may be different than how funds currently define ‘‘notional value,’’ we are changing the instructions from requiring notional value to requiring ‘‘value,’’ which is defined to include the notional value of certain derivatives instruments. See Instruction to Item B.3 of Form N–PORT. Moreover, this is consistent with Form PF which describes ‘‘value’’ in General Instruction 15. See General Instruction 15 of Form PF. 166 See Fidelity Comment Letter. 167 Id. 168 See, e.g., Interactive Data Comment Letter (Clarify whether interest rate shifts should be applied to a par yield curve or a spot yield curve and specify that the measurement procedure should include shifting rates both upward and downward. Clarify whether the curve segments should be defined based on maturity or average life, particularly for amortizing assets such as MBS and consider excluding certain issues, such as US treasuries; clarify whether the credit spread to be shifted is the nominal or option adjusted spread (OAS) and recommending OAS.); State Street Comment Letter (requesting clarity whether the Commission wants notional value versus delta adjusted or duration equivalent value, but also suggesting that the SEC should not be too prescriptive and give managers discretion within guidelines, so long as they can validate and justify their approach.). E:\FR\FM\18NOR2.SGM 18NOR2 81886 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations institutional investors. The proposed methodology was based on staff experience in using duration and spread duration, as well as this outreach to better understand common fund practices for calculating such measures. While the Commission continues to believe that the methodologies for reporting duration and spread duration will allow for better comparability across funds, as discussed above, we are adopting a new instruction to Form N– PORT, subject to the specific instruction in Item B.3 to calculate value, that funds may use their own internal methodologies and the conventions of their service providers, which should help minimize reporting burdens.169 As in Form PF, we believe that this approach strikes an appropriate balance between easing the burdens on funds by allowing them to rely on their existing practices while still providing the Commission’s staff with comparable data across the industry.170 However, we agree with the commenter that requested that we clarify whether the shift is the nominal or option-adjusted spread. We believe that measuring credit risk by shifting option adjusted spread provides a more robust measure of credit risk for investments with embedded optionality because it captures how embedded options alter the payment obligations of counterparties.171 Thus measuring credit risk by shifting the option adjusted spread will allow the Commission and other interested parties to more accurately monitor this effect. We are therefore adding one clarification to Item B.3.c., Credit Spread Risk, to clarify that funds should provide the change in value of the portfolio from a 1 basis point change in credit spreads where the shift is applied to the option adjusted spread.172 While we proposed that funds provide a calculation of each of these measures at a portfolio level, we also considered whether to require, and requested comment on the alternative that, instead, funds report these risk metrics for each debt instrument or derivative that has an interest rate or 169 See General Instruction G of Form N–PORT. Form PF Adopting Release, supra footnote 80, at n. 187 and accompanying text Based on staff experience, we believe that we will still find the data useful even when funds use different methodologies, despite the fact that varying methodologies could reduce the comparability of data across funds because this data will still provide information that can be compared to a fund’s previous filings, as well as a baseline measurement for the industry that can be monitored for changes from one month to the next. 171 See also Interactive Data Comment Letter. 172 See Item B.3.c of Form N–PORT. mstockstill on DSK3G9T082PROD with RULES2 170 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 credit exposure.173 We had asked what the benefits would be to having more precise data for analysis of various movements in interest rates and credit spreads. Several commenters supported reporting at the portfolio-level rather than at the position-level.174 One commenter suggested that, rather than report risk measures at the portfoliolevel, funds should report risk exposures at the position-level, as this is current industry practice and would therefore not be burdensome.175 Other commenters generally noted that providing position specific details would better enable investors and service providers to calculate risk, without relying on the reporting fund’s models or assumptions.176 Finally, another commenter recommended that the Commission, with respect to derivatives, focus on metrics based on a portfolio-level analysis, as such an analysis would more accurately reflect a fund’s use of, and net exposure to, derivatives.177 As discussed in the Proposing Release, we believe that most funds likely calculate these risk metrics at a position-level. However, we recognize that even if such calculations are available at a position-level, reporting these metrics could cause funds to make additional systems changes to collect such position-level data for reporting, as well as potential burdens related to increased review time and quality control in submitting the reports. Therefore, on balance, we continue to believe that requiring funds to provide this information for each maturity at the portfolio level would provide a sufficient level of granularity for purposes of Commission staff analysis. We also believe that there are certain efficiencies for the Commission, its staff, investors, and other potential users to having funds report the portfolio-level calculations relative to reporting 173 See Proposing Release, supra footnote 7, at 33601. 174 See, e.g., SIFMA Comment Letter I (supporting the Commission’s proposal to require funds to provide the Commission with portfolio level risk metrics and requesting that the information not be made public); Wells Fargo Comment letter (supporting the Commission’s request for duration and spread duration, but suggesting that the calculation for providing risk metrics be defined differently). 175 See Interactive Data Comment Letter (recommending that the Commission consider several alternatives, including requiring funds to report aggregate risk metrics at the asset class level and composite portfolio-level, and to require risk metric calculations to account for the ‘‘interactions among the investments being aggregated.’’). 176 See Morningstar Comment Letter; Vanguard Comment Letter. 177 See Simpson Thacher Comment Letter. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 position-level calculations, as this could allow for more timely and efficient analysis of the data by not requiring users of the information to calculate the portfolio-level measures from the position-level measures.178 In order to allow better comparability among funds, some commenters recommended that the Commission omit risk metrics in favor of more data on the specific investments, stating that raw data would allow the staff, investors, and other potential users to perform their own risk calculations. 179 According to the commenters, providing position specific details would better enable investors and service providers to calculate risk, without relying on the reporting fund’s models or assumptions.180 While we agree that reporting raw data on specific investments would provide users of the data with more flexibility in calculating risk, we do not believe that the benefits of reporting this information sufficiently justify the burdens of requiring funds to report substantially more detailed information on Form N–PORT at this time. Moreover, as discussed above, we believe that requiring funds to report the portfolio-level risk measures required on Form N–PORT, as well as delta for options, warrants, and convertible securities, which is discussed further below in section II.A.2.g.iv, provides the Commission, investors, and other potential users with a sufficient level of granularity for purposes of analysis at this time. Finally, commenters requested that we collect alternative risk metrics, such as the same interest rate and credit risk questions as are required by Form PF in order to improve the interoperability of the data collected for private funds and registered investment companies.181 178 Commenters also requested that we clarify that the fixed income exposure as calculated by a top tier in a fund-of-fund investment structure would not include the top tier fund’s exposure to the underlying fund’s exposure to debt. See ICI Comment Letter; MFS Comment Letter. Since Item B.3 requires aggregated portfolio-level risk metrics, we generally would not expect funds to look through to the underlying funds’ holdings. Rather, funds only will need to look to the top level fund investments in calculating their exposure to risk measures. 179 See, e.g., Vanguard Comment Letter; Morningstar Comment Letter (‘‘Rather than collecting model assumptions or additional standardization of the calculations, we believe providing additional detail with position information, specifically for bespoke derivatives and syndicated loans, will enable investors and service providers to independently calculate risk measures based on a model of the investor’s choice.’’). 180 Id. 181 See, e.g., BlackRock Comment Letter (Commission should use the same interest rate and credit risk questions as is required in Item 42 of E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations However, while some of our Form N– PORT risk metric disclosures are based on Form PF, for the reasons stated above, the position-level information that we will receive in reports on Form N–PORT make more detailed reporting unnecessary for registered funds.182 Another commenter suggested that we focus on alternative portfolio-level risk metrics, such as Value at Risk (‘‘VaR’’).183 Based on staff experience, for purposes of monitoring a fund’s sensitivity to changes in interest rates and credits spreads, we believe that requiring funds to calculate duration and spread duration along key rates will provide the Commission with more sensitive information than would be provided by an overall portfolio-level risk metric such as VaR. Accordingly, we are not adopting these suggested alternative risk metrics. mstockstill on DSK3G9T082PROD with RULES2 d. Securities Lending To increase the rate of return on their portfolios, some funds engage in securities lending activities whereby a fund lends certain of its portfolio securities to other financial institutions such as broker-dealers. To protect the fund from the risk of borrower default (i.e., the borrower failing to return the borrowed security or returning it late), the borrower posts collateral with the fund in an amount at least equal to the value of the borrowed securities, and this amount of collateral is adjusted daily as the value of the borrowed securities is marked to market.184 Funds generally demand cash as collateral. A fund will typically invest cash collateral Form PF; Commission should consider implementing a reporting requirement to obtain a comprehensive measure of fund’s use of leverage); Simpson Thacher Comment Letter. Item 42 of Form PF requires an adviser to report the impact on the fund’s portfolio from specified changes to certain identified market factors, if regularly considered in formal testing in the fund’s risk management, broken down by the long and short components of the qualifying fund’s portfolio. See Item 42 of Form PF; see also Form PF Adopting Release, supra footnote 80, at nn. 270–272 and accompanying text. 182 Unlike with Form PF, which does not require position-level reporting, with Form N–PORT the staff will be able to calculate alternative risk measures using the detailed position-level information provided in reports on Form N–PORT. 183 See Simpson Thacher Comment Letter (derivatives reporting should focus on portfoliolevel risk metrics, such as ‘‘value-at-risk’’ models). 184 See SIFMA, Master Securities Loan Agreement, §§ 4 (Collateral), 9 (Mark to Market) (2000) (‘‘Master Securities Loan Agreement’’), available at https://www.sifma.org/Services/ Standard-Forms-and-Documentation/MRA,-GMRA,MSLA-and-MSFTAs/MSLA_Master-Securities-LoanAgreement-(2000-Version). See also Division of Investment Management, SEC, Securities Lending by U.S. Open-End and Closed-End Investment Companies (2014) (‘‘Securities Lending Summary’’), available at https://www.sec.gov/divisions/ investment/securities-lending-open-closed-endinvestment-companies.htm. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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. A fund’s income from these activities may come from fees paid by the borrowers to the fund and/or from the reinvestment of collateral.185 Many funds engage an external service provider—commonly called a ‘‘securities lending agent’’—to administer the securities lending program. The securities lending agent is typically compensated by being paid a share of the fund’s securities lending revenue after the borrower has been paid any rebate owed to it.186 Securities lending may implicate certain provisions of the Investment Company Act, and funds that engage in securities lending do so in reliance on Commission staff no-action letters, and in some circumstances, exemptive orders.187 Funds that rely on these letters and orders are subject to conditions on a number of aspects of their securities lending activities, including loan collateralization and termination, fees and compensation, board approval and oversight, and voting of proxies. Currently, the information that funds are required to report about securities lending activity, whether in a structured format or otherwise, is limited. For example, funds disclose on Form N– SAR whether they are permitted under their investment policies to, and whether they did engage during the reporting period in, securities lending activities.188 Funds generally also disclose additional information regarding their securities lending programs in their registration statements.189 In addition, consistent 185 If a security is not in high demand, a lender typically pays the borrower a cash collateral fee, commonly called a ‘‘rebate.’’ The rebate is negotiated and can be negative (i.e., a fee paid from the borrower to the lender) when demand for the loan of a particular security is especially great or its supply especially constrained. See Master Securities Loan Agreement, supra footnote 184, at § 5 (Fees for Loan). 186 See Securities Lending Summary, supra footnote 184. 187 For example, the transfer of a fund’s portfolio securities to a borrower implicates section 17(f) of the Investment Company Act, which generally requires that a fund’s portfolio securities be held by an eligible custodian. A fund’s obligation to return collateral at the termination of a loan implicates section 18 of the Investment Company Act, which governs the extent to which a fund may incur indebtedness. See id. 188 Item 70.N of Form N–SAR. 189 See, e.g., Item 9(c) (disclosures regarding risks), Item 16(b) (disclosures of investment strategies and risks), Item 17(f) (disclosures of proxy voting policy), and Item 28(h) (exhibits of other material contracts) of Form N–1A. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 81887 with current industry practices, many funds identify particular securities that are on loan in their schedules of portfolio investments prepared pursuant to Regulation S–X. These disclosures do not address other pertinent considerations, such as the extent to which a fund lends its portfolio securities, the borrower to which the fund is exposed, the fees and revenues associated with those activities, and the significance of securities lending revenue to the investment performance of the fund. As proposed, to address these data gaps and provide additional information to the Commission, investors, and other potential users regarding a fund’s securities lending activities, we are requiring funds to report certain borrower information and position-level information monthly on Form N– PORT.190 Also, as to other securities lending information for which annual reporting would be sufficient because it is unlikely to change on a frequent basis (e.g., name and other identifying information for a fund’s securities lending agent), funds will report such information annually on Form N–CEN, as proposed and as discussed below in section II.D. In addition, as discussed below in section II.C.6, we have made a modification from the proposal to require certain information about the income from and fees paid in connection with securities lending activities, and the monthly average of the value of portfolio securities on loan, be disclosed as part of the fund’s Statement of Additional Information (or, for closed-end funds, reports on Form N–CSR) or in Form N–CEN, instead of a fund’s financial statements as we had originally proposed.191 190 See infra text following footnote 195 (discussing the reporting of counterparty information); section II.A.2.g (discussing the proposed requirements regarding position-level information). Commenters to the FSOC Notice also suggested that enhanced securities lending disclosures could be beneficial to investors and counterparties. See, e.g., SIFMA/IAA FSOC Notice Comment Letter (‘‘Disclosures related to securities lending practices, if appropriately tailored, could potentially assist investors and counterparties in making informed choices about where they deploy their assets and how they engage in lending practices.’’); Comment Letter of the Vanguard Group, Inc. to FSOC Notice (Mar. 25, 2015) (‘‘Vanguard FSOC Notice Comment Letter’’) (asserting that securities lending as a whole suffers from a lack of readily available data, and supporting further efforts to gather data and study the practice of securities lending). 191 See infra footnotes 724–725 and accompanying text (discussing new required disclosures in funds’ Statement of Additional Information (or, for closed-end funds, funds’ reports on Form N–CSR) that will allow investors to better understand the income generated from, as well as the expenses associated with, securities lending E:\FR\FM\18NOR2.SGM Continued 18NOR2 81888 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 The new reporting requirements we are adopting are intended, in part, to increase the transparency of information available related to the lending of securities by funds as a subset of the universe of market participants engaged in securities lending activities.192 Commenters were generally supportive of increased reporting about securities lending activities, although they suggested modifications to certain aspects of the proposal and expressed concerns with some of the specific proposed reporting.193 These comments, and the modifications we are making in response to comments, are discussed in more detail below. Borrower Information.194 One risk that funds engaging in securities lending are exposed to is counterparty risk because borrowers could fail to return the loaned securities. In this event, the lender would keep the collateral. In the U.S., cash collateral is more typical than non-cash collateral and loans are often over-collateralized. The collateral requirements thereby mitigate the extent of a fund’s counterparty risk. This risk is further mitigated for the fund if the fund’s securities lending agent indemnifies the fund against default by the borrower. As we explained in the Proposing Release, while we believe there is value to having information on borrowers of fund securities to monitor risk, as well as information with which to evaluate compliance with conditions set forth in staff no-action letters and exemptive orders,195 we proposed to require that funds report the full name and LEI (if activities) and 1224–1225 and accompanying text (discussing new required disclosures of monthly average value of portfolio securities on loan in Form N–CEN). 192 See, e.g., section 984(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376, 1933 (2010) (directing the Commission to promulgate rules designed to increase the transparency of information available to brokers, dealers, and investors, with respect to the loan or borrowing of securities). 193 See, e.g., infra footnotes 199–201 and accompanying and following text (recommending that the collection of securities lending information should be limited to the top 5 or 10 securities lending borrowers with the greatest exposure) and footnotes 205–208 and accompanying and following text (suggestions regarding how to report non-cash collateral posted by securities lending borrowers). 194 In the Proposing Release, we referred to ‘‘securities lending counterparties,’’ but have made a clarifying change to ‘‘securities lending borrowers’’ in the form. As discussed above, when funds are engaged in securities lending transactions, they are securities lenders because they lend their portfolio securities to other financial institutions, such as broker-dealers, who are securities borrowers. The change in terminology is not intended to alter the substance of reporting from what we proposed. 195 See generally Securities Lending Summary, supra footnote 184. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 any) of each borrower, as well as the aggregate value of all securities on loan to the particular borrower, rather than at the loan level.196 We believe that reporting of borrower information at an aggregate portfolio level will provide the Commission, investors, and other potential users with information to better understand the level of potential counterparty risk assumed as part of the fund’s securities lending program, with a lower relative burden on funds than requesting such information on a per loan level. Commenters generally supported our proposal to increase reporting relating to securities lending borrowers, although one commenter questioned the usefulness of borrower information given that securities lending agreements are generally indemnified by securities lending agents.197 Most commenters also specifically supported our approach of assessing the counterparty risk of securities lending transactions on an aggregate basis for each borrower, as opposed to a loan-by-loan or securityby-security basis.198 However, many commenters recommended limiting the collection of securities lending information to the top 5 or 10 securities lending borrowers presenting the greatest exposure.199 These commenters argued that the top 5 securities lending borrowers generally represent the majority of a fund’s securities lending exposure and that further disclosure would impose unnecessary costs on funds and shareholders to the extent it would be capturing borrowers to which the fund does not have material exposure.200 196 Item B.4 of proposed Form N–PORT. e.g., Comment Letter of Independent Directors of the BlackRock Equity-Liquidity Funds (Oct. 2, 2015) (‘‘Blackrock Directors Comment Letter’’) (supporting this aspect of our proposal); BlackRock Comment Letter (same); Fidelity Comment Letter (same); Comment Letter of the Risk Management Association (Aug. 11, 2015) (‘‘RMA Comment Letter’’) (same); SIFMA Comment Letter I (same); Comment Letter of CFA Institute (Aug. 10, 2015) (‘‘CFA Comment Letter’’) (same). But see MFS Comment Letter (arguing that disclosure of borrower information may not be relevant in understanding a fund’s counterparty exposure, because if the fund has been indemnified then the counterparty exposure rests with the lending agent). 198 See, e.g., BlackRock Comment Letter; Morningstar Comment Letter. 199 See, e.g., ICI Comment Letter (limit to the top 5 securities lending borrowers); RMA Comment Letter (top 5 or 10 borrowers); Fidelity Comment Letter (top 5 borrowers; broader securities lending disclosures would not provide a meaningful indicator of risk in securities lending because security loans are fully collateralized and also funds may be indemnified by lending agents); State Street Comment Letter (top 5 or ten borrowers). But see Morningstar Comment Letter (applauding the Commission’s proposal to require counterparty information for all securities lending borrowers). 200 See, e.g., Invesco Comment Letter (the top 5 securities lending borrowers generally represent 197 See, PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 Likewise, several commenters suggested that borrower information for securities lending transactions should only be reported by funds whose securities lending exposure exceeded a certain minimum threshold.201 We continue to believe that funds that engage in securities lending should be required to report information for all of its securities lending borrowers. In response to commenters’ observations that many funds are indemnified for their securities lending transactions, we note that not all funds are so indemnified. Separately, we believe that information on borrowers is useful even if there is an indemnification by the agent. For example, such information is helpful in generally monitoring the degree to which funds are involved in securities lending transactions and the identities of borrowers engaged in such transactions. Allowing funds to exclude certain borrower information would limit the applicability and completeness of the information reported on Form N– PORT regarding counterparty risk, both to an individual fund and to the fund industry. We are not persuaded by commenters’ arguments that reporting of all borrowers would be unduly burdensome or costly, as we believe funds would need to collect this information both to understand its own counterparty risk and for its own oversight of securities lending. For these reasons, we are requiring funds to report aggregate borrower exposure for all securities lending borrowers, as proposed. Several commenters also suggested that borrower information for securities lending information should be nonpublic. In particular, these commenters expressed concerns that securities lending counterparties (i.e., borrowers) may wish to avoid having details of their exposures being made public, including to competitors.202 We are not persuaded by these arguments. First, we note that the new reporting requirements we are adopting today are intended, in part, to increase the transparency of information available related to the lending and borrowing of 68% of a fund’s securities lending exposure); ICI Comment Letter (additional disclosures beyond the top 5 borrowers would impose unnecessary costs on funds and shareholders). 201 See Wells Fargo Comment Letter (portfolio level reporting of aggregate securities lending activity should only be required for funds with a minimum threshold of 10% of assets on loan); Oppenheimer Comment Letter (funds should report only the top 5 borrowers and not disclose anything if outstanding securities loans do not exceed 1% of net assets). 202 See BlackRock Comment Letter; SIFMA Comment Letter I; RMA Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations securities.203 Making borrower information for the securities lending information reported on Form N–PORT nonpublic would defeat this objective. Second, based on our experience with securities lending, we are not persuaded by commenters claiming that a fund’s activities in securities lending would be harmed because certain securities borrowers do not want to be identified. We note that we are not requiring identification of securities borrowers by loan, but rather on an aggregated basis. We also note that certain funds currently publicly identify securities lending borrowers twice per year in the notes to their annual and semi-annual financial statements, as permitted by GAAP.204 We are unaware of any evidence that these disclosures have had any effects on borrowers’ decisions to borrow from registered investment companies in the manner those commenters suggest, and thus we continue to believe that requiring funds to make such information publicly available is appropriate because these disclosures will improve transparency to investors and other users. As discussed in greater detail below, we also received various suggestions regarding how to report non-cash collateral posted by securities lending borrowers.205 One commenter pointed out that funds typically do not account for non-cash collateral as a fund asset because funds generally do not ‘‘control’’ the non-cash collateral and thus do not bear any investment risk for it.206 For this reason, the commenter asserted that it would be inconsistent with accounting and reporting standards for funds to report non-cash collateral received for loaned securities as portfolio investments on Form N–PORT, as we proposed.207 We agree with the commenter and are modifying Form N– PORT from the proposal to add a new Item requiring funds to report the aggregate principal amount and aggregate value of each type of non-cash collateral received for loaned securities that is not treated as a fund asset.208 203 See supra footnote 192 and accompanying text. 204 See, e.g., SIFMA Comment Letter I. infra footnote 413 and accompanying and following text. 206 See ICI Comment Letter. 207 See Item C.12.b of proposed Form N–PORT. 208 See Item B.4.b of Form N–PORT. Funds will report the category of instrument that most closely represents the collateral, selected from among the following (asset-backed securities; agency collateralized mortgage obligations; agency debentures and agency strips; agency mortgagebacked securities; U.S. Treasuries (including strips); other instrument). If ‘‘other instrument,’’ funds will also include a brief description, including, if applicable, whether it is an irrevocable letter of credit. mstockstill on DSK3G9T082PROD with RULES2 205 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 Several commenters also requested that Form N–PORT collect additional information regarding securities lending activities. One commenter recommended that funds report average monthly aggregate dollar amounts on loan and fee split information, as well as a brief summary of the fund’s securities lending program, including risk and strategy.209 Another commenter suggested that the aggregate value of securities lent should be accompanied by the aggregate value of collateral pledged.210 One commenter requested that funds report the average daily value of securities lending collateral over the reporting period, rather than a snapshot as of the last day of the reporting period, and asserted that securities lending collateral can be used as a proxy for the percentage of the portfolio that is on loan, which is the true quantity of interest.211 We are not adopting such additional reporting requirements on Form N– PORT. As discussed further below, the amendments to the Statement of Additional Information (and, for closedend funds, Form N–CSR) that we are adopting today will require funds to make certain disclosures in connection with their securities lending activities and cash collateral management, and Form N–CEN also requires information about a fund’s securities lending program, including the average monthly value of securities on loan. Although the additional information requested by commenters may be useful to certain investors or other users, we are sensitive to the burdens on funds of additional reporting requirements. Some of the information requested by commenters, such as a brief summary of the fund’s securities lending program, including risk and strategy, is already disclosed in fund registration statements.212 Certain other information requested by commenters, such as the aggregate value of securities lent and the aggregate value of collateral pledged, can be calculated by adding up the structured information reported for each individual securities lending transaction.213 Furthermore, other information requested by commenters, such as the percentage of the portfolio securities on loan over the reporting period, can be derived from 209 See Comment Letter of John C. Adams (July 8, 2015) (‘‘John Adams Comment Letter’’). 210 See Morningstar Comment Letter. 211 See Comment Letter of Richard B. Evans (Oct. 20, 2015). 212 See supra footnote 189 and accompanying text. 213 See Item C.12.a (value of the investment representing cash collateral), Item C.12.b (value of the securities representing non-cash collateral), and Item C.12.c (value of the securities on loan) of Form N–PORT. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 81889 information that will be reported in a structured format as part of this rulemaking.214 Although we understand that requiring funds to report additional information may be useful to certain users of such information, Form N– PORT is primarily designed to meet the data needs of the Commission and its staff. As such, the securities lending information we are requiring to be reported on Form N–PORT is designed to balance what we anticipate would be useful for our regulatory oversight purposes, namely obtaining more information specifically regarding counterparties, amounts on loan, and how collateral is reinvested, against the expected burdens of reporting such information. Accordingly, we decline to modify Form N–PORT to require the additional securities lending disclosures requested by commenters. We also received several comments requesting that we revise Form N–PORT to phase in reporting of securities lending borrowers’ LEIs. Commenters urged that this requirement be delayed until LEIs have been fully integrated into the global financial system and lending agents and funds have implemented the necessary systems enhancements to facilitate LEI reporting.215 Commenters also expressed concerns that reporting LEI information for securities lending counterparties (i.e., borrowers) may cause borrowers to become less likely to borrow from registered funds and more likely to borrow from lenders who are not required to make similar disclosures, in order to avoid having details of the borrowers’ exposures being made public.216 For the same reasons discussed above regarding commenters’ suggestions not to require disclosure of securities borrowers, we are not persuaded by such arguments. While the Commission is the primary user of the form, the new reporting requirements we are adopting today are intended, in part, to increase the transparency of information available related to the lending and borrowing of securities.217 In particular, the uniform public reporting of borrowers’ LEIs will facilitate the identification of such borrowers, which is part of the purpose of such reporting. As discussed above, providing exemptions or deferring implementation 214 See Item B.1 of Form N–PORT (net assets); Item C.6.f of Form N–CEN (monthly average value of securities on loan). 215 See State Street Comment Letter; BlackRock Comment Letter; RMA Comment Letter. 216 See State Street Comment Letter; RMA Comment Letter. 217 See supra footnote 192 and accompanying text. E:\FR\FM\18NOR2.SGM 18NOR2 81890 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations of this requirement would hinder the ability of Commission staff as well as investors and other potential users of this information to use the data on Form N–PORT as discussed above.218 Furthermore, as indicated above, Form N–PORT instructs funds to report LEIs ‘‘if any’’ for borrowers, and thus already acknowledges and makes accommodations for the fact that LEI identifiers may not be available in some contexts as LEIs are continuing to be integrated into the global financial system. mstockstill on DSK3G9T082PROD with RULES2 e. Return Information As proposed, we are requiring funds to provide monthly total returns for each of the preceding three months.219 If the fund is a multiple class fund, it will report returns for each class.220 Funds with multiple classes will also report their class identification numbers.221 Funds will 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.222 We are requiring this information on Form N–PORT because we believe it will 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, and this type of analysis can be done much more efficiently and timely when the information is reported in a structured format. Additionally, performance that appears to be inconsistent with a fund’s investment strategy or other benchmarks can form a basis for further inquiry and monitoring.223 Although mutual funds currently report certain return 218 See supra footnote 68 and accompanying and following text. 219 See Item B.5.a of Form N–PORT. 220 See id. 221 See Item B.5.b of Form N–PORT. 222 See Item 26(b)(1) of Form N–1A; Instruction 13 to Item 4 of Form N–2; Item 26(b)(i) of Form N– 3. Return information reported on Form N–PORT will reflect swing pricing for funds that elect to swing price pursuant to the contemporaneous release we are adopting today regarding swing pricing for open-end funds. See Swing Pricing Adopting Release, supra footnote 9., at section II.A.3.g. 223 Similar risk analytics were used in the Commission’s Aberrational Performance Inquiry, an initiative by the Division of Enforcement’s Asset Management Unit to identify hedge funds with suspicious returns. See, e.g., SEC, SEC Charges Hedge Fund Adviser and Two Executives with Fraud in Continuing Probe of Suspicious Fund Performance, Press Release: 2012–209 (Oct. 17, 2012), available at https://www.sec.gov/News/Press Release/Detail/PressRelease/1365171485332. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 information in a structured format periodically as part of their risk/return summaries, we believe that having return information reported on a monthly basis by all registered funds will allow the Commission staff to more easily and effectively monitor the fund industry as a whole, as described above.224 Because only quarter-end reports on Form N–PORT will be made public, we are requiring, as proposed, that funds provide return information for each of the preceding three months.225 This rolling three month requirement will provide investors and other potential users with monthly return information, so that they will 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. Commenters had mixed reactions regarding the reporting of monthly total returns. Several commenters expressed concern that reporting three months of returns could cause investors to unduly focus on short-term results and recommended that returns for longer periods of time be reported instead.226 One commenter recommended that funds should report only a single month of returns in order to lower compliance costs and because investors are likely to use other sources (such as fund or thirdparty Web sites) to find return information rather than Form N– 224 See generally Interactive Data for Mutual Fund Risk/Return Summary, Investment Company Act Release No. 28617 (Feb. 11, 2009) [74 FR 7748 (Feb. 19, 2009)] (requiring funds to submit to the Commission a structured data file for any registration statement or post-effective amendment on Form N–1A that includes or amends information in Form N–1A’s risk/return summary); SEC, Interactive Data and Mutual Fund Risk/Return Summaries, available at https://www.sec.gov/ spotlight/xbrl/mutual-funds.shtml. 225 See Item B.5.a of Form N–PORT. Although generally only information reported on Form N– PORT for the third month of each fund’s fiscal quarter will be publicly available, the concerns associated with more frequent public disclosure are related to the disclosure of portfolio holdings information and will not apply to the disclosure of fund return information. See generally footnote 1305 and accompanying and following text (discussing the risks of predatory trading practices such as front-running and the ability of noninvestors to reverse engineer and copycat fund’s investment strategies). 226 See CRMC Comment Letter (monthly return information could cause investors to focus on shortterm results and therefore should not be publicly reported or, in the alternative, should be reported together with fund level long-term results); Wells Fargo Comment Letter (funds should provide returns for a rolling 12-month period as of the end of each month); Dreyfus Comment Letter (shortterm performance can mislead investors); SIFMA Comment Letter I (monthly return information should not be made public or, in the alternative, should be disclosed annually on Form N–CEN). PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 PORT.227 Another commenter agreed with our proposed approach of requiring funds to report total returns as opposed to gross returns, noted that monthly fund performance data is already generally publicly available, and concluded that the quarterly public release of monthly performance data reported on Form N–PORT would result in the release of information that had already been made available to the public.228 We are adopting this requirement as proposed. As acknowledged by commenters, many funds and market data providers already generally disclose monthly performance data to investors, and daily performance data is often available as well.229 The greater granularity provided by monthly data will enhance the ability of Commission staff to use return information to reveal outliers and detect performance that appears to be inconsistent with a fund’s investment strategy or other benchmarks, as discussed above. More generally, frequent disclosure of performance data over shorter time periods can better capture variations in performance that would not be apparent with returns reported over longer time periods. Accordingly, we are not persuaded by commenters’ recommendations to require funds to report return information on Form N–PORT over longer time horizons, as opposed to on a monthly basis. We are similarly not persuaded by arguments that reporting fund performance data for three months will ‘‘[provide no] direct or indirect value to [fund] investors’’ as opposed to reporting one month of fund performance information.230 As discussed above, although Form N– PORT is primarily designed to assist the Commission and its staff, we believe that investors and other potential users may benefit from the information reported on Form N–PORT as well, either by analyzing Form N–PORT directly or through analyses prepared by third-party service providers. Because Form N–PORT will be available on a quarterly basis but will provide monthend return information, we remain 227 See Comment Letter of Confluence Technologies, Inc. (Aug. 11, 2015) (‘‘Confluence Comment Letter’’). 228 See Morningstar Comment Letter. 229 See, e.g., Morningstar Comment Letter (Morningstar’s monthly performance data, as well as most of the industry’s data, is generally made available on investor-facing Web sites by the third business day after month end. Daily performance data is also provided for 99.6% of open-end investment companies by 9 p.m. EST.); SIFMA Comment Letter I (certain funds make monthly returns available on their Web sites). 230 See Confluence Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations concerned that investors might potentially confuse one month’s returns as representing the fund’s returns for the full quarter. For each of these reasons, we are requiring funds to report monthly return information for each of the preceding three months, as proposed. We are also requiring, substantially as proposed, 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 certain categories. We proposed that this information would be reported by asset category (i.e., commodity contracts, credit contracts, equity contracts, etc.). We are modifying the proposal to require funds to report this information by both asset category and also by type of derivative instrument (i.e., forward, future, option, swap, etc.).231 This information will 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, and as proposed, we are also requiring 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.232 Comments on this aspect of the proposal were mixed. Some commenters opposed the reporting requirement, stating that it would not provide a valuable reference point from which to assess whether the derivatives included in a fund’s portfolio have contributed to returns, especially when derivatives are used for hedging purposes.233 One commenter expressed general support for the derivatives reporting requirements in N–PORT, including this proposed requirement, stating that this information would, among other things, allow the Commission to better assess trends, given the potential risks associated with certain uses of derivatives.234 Several commenters, in response to a request for comment, recommended that the Commission require funds to report the monthly net realized gain (or loss) and net change in unrealized appreciation (or depreciation) attributable to derivatives by type of 231 See Item B.5.c of Form N–PORT. Item B.5.d of Form N–PORT. 233 See Wells Fargo Comment Letter; Dreyfus Comment Letter. 234 See CFA Comment Letter (additionally supporting disclosure of derivatives reporting on N–PORT to investors). 232 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 derivative instrument (i.e., forward, future, option, swap, etc.), rather than by asset category (i.e., commodity contracts, credit contracts, equity contracts, etc.). This is because funds typically report derivatives in their financial statements by type of derivative instrument rather than asset category. As a result, according to commenters, systems are currently aligned to capture and report this information by instrument type, whereas reporting information by asset category would require large changes to the existing accounting systems, which these commenters believed would involve costs that would not be justified by the resulting benefits.235 Finally, some commenters believed that gains (or losses) and appreciation (or depreciation) attributable to derivatives should not be made public because such information would not be meaningful to investors and could potentially convey proprietary information about the fund’s trading strategies that could be used for predatory trading or to reverse engineer the fund’s investment strategy.236 We disagree with commenters questioning the utility of reporting gains (or losses) and appreciation (or depreciation) attributable to derivatives. We continue to believe that this information will help 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. We recognize that providing this information by asset category is not how funds currently maintain this data in their systems and therefore will involve more systems changes and costs relative to providing this information by type of derivative instrument alone; however, we disagree that such information does not have a benefit that justifies this burden. Providing this information by asset category will be helpful in understanding the relationship between derivatives—and, as discussed further below, the types of derivative instruments—that provide exposure to a particular asset category and direct investments in the same asset category. For example, information attributable to equity derivatives contracts could be compared to returns attributable to direct investments in equities. Further, reporting returns by derivative instrument alone would not provide any information about the market risk factors that had caused the gain or loss. 235 See SIFMA Comment Letter I; ICI Comment Letter; MFA Comment Letter. 236 See SIFMA Comment Letter I; MFA Comment Letter. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 81891 Although we recognize that there will be some initial burden in modifying systems to provide information by asset category, we note that funds are currently already required to compile this information by asset category twice a year, pursuant to FASB Topic ASC 815.237 While we understand from the comments that many funds currently compile this manually, we believe, based on staff experience, that such processes could be automated over time to facilitate the more frequent reporting. In particular, we note that Form N– PORT, as proposed and adopted, will separately require funds to categorize each derivative investment by asset category, which should reduce the incremental burden of providing return information by asset category.238 Additionally, after consideration of the comments, we are modifying this item from the proposal to require funds to report this information by type of derivative instrument within each asset category. We believe that providing both elements—asset category and derivative instrument type—will make this information more informative than by reporting by either asset category or instrument type in isolation. For example, consider a fund that uses derivatives in two asset categories (e.g., equities and commodities) and two types of derivative instruments (e.g., futures and options). If the asset category or instrument type were reported alone, users of the information would be unable to discern if the fund is deriving its returns by using equity options and commodity futures or equity futures and commodity options— or in what proportion. Reporting both pieces of information together allows the Commission, investors, and other users to determine from which categorytype combination the fund is drawing (or hedging) its exposure. Further, knowing the instrument type in combination with asset category can be important for understanding the risks associated with obtaining exposure to a particular asset category because different derivative instruments can have different risks associated with them, such as different counterparty risk, or a linear risk profile (e.g. futures) versus a non-linear risk profile (e.g., options). Additionally, having such information by instrument and asset category will be useful in understanding situations ranging from a market 237 See ASC 815 (Derivatives and Hedging). Item C.4.a of Form N–PORT (requiring reporting of asset category of each investment among enumerated categories, including derivativecommodity, derivative-credit, derivative-equity, derivative-foreign exchange, derivative-interest rate, derivatives-other). 238 See E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 81892 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations disruption for a particular type of derivative instrument (e.g., a market disruption affecting a futures market) to a price shock impacting a particular asset category (e.g., commodities). Consequently, we believe that requiring such information by both derivative instrument type and asset category will provide more complete information relative to providing either type in isolation to Commission staff, investors, and other potential users seeking to better understand how a fund is using derivatives in accomplishing its investment strategy and the impact of derivatives on the fund’s returns. Moreover, based on staff review of fund financial statements, we have observed that in compliance with the requirements of FASB Topic ASC 815, upon which this reporting requirement was based, funds generally show gains (losses) and appreciation (depreciation) in tabular format by both asset category and type of derivative instrument. Because, as noted by commenters, many funds already have systems in place to classify derivatives by instrument type, we believe that requiring such information to be reported on Form N– PORT along with asset category will not add a significant incremental burden relative to providing, as proposed, such information by asset category alone.239 Regarding comments concerning public disclosure of the information, we disagree with the commenter that argued such disclosures could reveal information that could be used for reverse engineering or predatory trading.240 We are not aware of this information being used for such purposes, nor did the commenter explain how the disclosure of such information could reveal information about the fund’s trading strategies that would allow traders to ‘‘front-run’’ or ‘‘copycat’’ the fund. Separately, we note that the information will be delayed in terms of public disclosure and that the return information will be aggregated, which should mitigate the possibility that such information could be used by predatory traders to the detriment of the fund. Likewise, we disagree with the commenter that asserted such information would not be meaningful to investors.241 The Commission believes, and one commenter agreed, that this information will be useful for identifying funds in which a significant amount of gains and losses came from exposures to derivative contracts, and 239 See SIFMA Comment Letter I; ICI Comment Letter. 240 See SIFMA Comment Letter I. 241 Id. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 will allow Commission staff, investors, and other potential users to better understand the relationship between the type of derivative instrument and asset category in terms of the impact on the fund’s returns. Furthermore, we are not persuaded by commenters’ arguments that such information would be misleading to investors if made publicly available. As discussed above, funds will also be reporting similar information attributable to investments other than derivatives, which we believe could help investors compare returns attributable to derivatives with returns attributable to a fund’s other investments. Furthermore, although gains (or losses) and appreciation (or depreciation) from derivatives may have different implications depending on whether derivatives are being used for investment purposes or as a hedge for other positions in the portfolio, disclosure of such information should help improve the ability of investors to understand and assess the use of derivatives in funds’ investment strategies. f. Flow Information As proposed, Form N–PORT will 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).242 This information is similar to what is currently reported on Form N–SAR, and is generally to be reported subject to the same instructions that currently govern reporting of flow information on that form.243 We are requiring this 242 See Item B.6 of Form N–PORT. to Form N–SAR, Form N–PORT will instruct funds to report amounts after any front-end sales loads had been deducted and before any deferred or contingent deferred sales loads or charges had been deducted. Shares sold will include shares sold by the fund to a registered UIT. Funds will also include as shares sold any transaction in which the fund acquired the assets of another investment company or of a personal holding company in exchange for its own shares. Funds will include as shares redeemed any transaction in which the fund liquidated all or part of its assets. Exchanges will be defined as the redemption or repurchase of shares of one fund or series and the investment of all or part of the proceeds in shares of another fund or series in the same family of investment companies. Form N– PORT will also include a new clarifying instruction, providing that if shares of the fund are held in omnibus accounts, funds will use net sales or redemptions/repurchases from such omnibus accounts for purposes of calculating the fund’s sales, redemptions, and repurchases. Cf. Item B.6 of Form N–PORT and Item 28 of Form N–SAR (requiring reporting of monthly sales and 243 Similar PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 information on Form N–PORT because we believe that this information will 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 that will be reported on Form N–PORT regarding liquidity of fund positions pursuant to changes to Form N–PORT set forth in the Liquidity Adopting Release, which we are adopting today, flow information could also help us identify funds that might be at risk of experiencing liquidity stress due to increased redemptions.244 Commenters generally supported our proposed reporting requirements for monthly flow information.245 However, many commenters noted that funds are generally unable to look through omnibus accounts to the underlying investors, and thus requested confirmation that flow information be reported on a net basis for shares of the fund held in omnibus accounts.246 We agree with these commenters, and in response to these comments, Form N– PORT now includes a clarifying instruction to this effect.247 One commenter asked the Commission to mandate that transfer agents, distributors, or some other entity (e.g., a central data repository) track omnibus flow information by type of underlying investor (i.e., 401(k) plans/ individual retirement accounts, pension funds, insurance companies, other institutional investors, and retail investors).248 The commenter suggested that this information be provided to fund managers, who would then report repurchases of the Registrant’s/Series’ shares for the past six months). 244 See Liquidity Adopting Release, supra footnote 9. 245 See ICI Comment Letter; SIFMA Comment Letter I; Wells Fargo Comment Letter; BlackRock Comment Letter. 246 See State Street Comment Letter; MFS Comment Letter; Wells Fargo Comment Letter; SIFMA Comment Letter I; ICI Comment Letter; Morningstar Comment Letter. But see BlackRock Comment Letter (recommending that the Commission mandate that transfer agents, distributors, or some other entity aggregate information by investor types redeeming from and subscribing to funds so that funds could look through omnibus accounts and report more detailed flow information). 247 See supra footnote 243. 248 See BlackRock Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations this information on Form N–PORT. The commenter concluded that this information would help funds and others to create predictive models to better understand potential future redemptions, which in turn would help funds with liquidity risk management. We acknowledge the merits of helping funds better manage potential redemption risks, and further note that better transparency into intermediary omnibus accounts by each type of underlying investor would help the Commission better understand subscription and redemption activity and how it varies across distribution platforms and market environments. However, the commenter’s suggestion is beyond the scope of this rulemaking, although we note that the Commission is currently seeking a range of input with respect to omnibus intermediary account relationships, including through the recently issued advance notice of proposed rulemaking and concept release with respect to transfer agent regulations, which seeks comment in various areas including the processing of book entry securities, broker-dealer recordkeeping for beneficial owners, and the role of transfer agents to mutual funds.249 Another commenter recommended that monthly flow information be reported for only the last month of the reporting period, rather than for the three prior months, on the grounds that reporting this information for the three prior months would have ‘‘no direct value to investors.’’ 250 We are not persuaded by this suggestion. As discussed above, although Form N– PORT is primarily designed to assist the Commission and its staff, we believe that investors and other potential users may benefit from the information reported on Form N–PORT as well, either by analyzing Form N–PORT directly or through analyses prepared by third-party service providers. Unlike other information reported on Form N– PORT, which generally represents a snapshot ‘‘as of’’ a certain date, flows are calculated over a period of time. Because information reported on Form N–PORT will be publicly available on a quarterly basis but will provide monthly flow information, we are concerned that investors might potentially believe that one month’s flows represent the fund’s flows for the full quarter. For that reason, we are requiring funds to report monthly flow information for each of 249 See Transfer Agent Regulations Concept Release, Securities Exchange Act Release No. 76743 (Dec. 22, 2015) [80 FR 81948 (Dec. 31, 2015)]. 250 See Confluence Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 the preceding three months, as proposed. g. Schedule of Portfolio Investments Part C of Form N–PORT will require, as proposed, funds to report certain information on an investment-byinvestment basis about each investment held by the fund and its consolidated subsidiaries as of the close of the preceding month. As proposed, funds will respond to certain questions that will apply to all investments (i.e., the investment’s identification, amount, payoff profile, asset and issuer type, country of investment or issuer, fair value level, and whether the investment was a restricted security). As proposed, funds will also respond, as applicable, to additional questions related to specific types of investments (i.e., debt securities, repurchase and reverse repurchase agreements, derivatives, and securities lending). Also, as proposed, funds will have the option of identifying any investments that are ‘‘miscellaneous securities.’’ 251 Unless otherwise indicated, funds will not report information related to those investments in Part C, but will instead report such information in Part D.252 i. Information for All Investments Form N–PORT will require, as proposed, funds to report certain basic information about each investment held by the fund and its consolidated subsidiaries. In particular, funds will 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.253 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. To address this issue, and as proposed, we are requiring that funds report additional information about the 251 See Part D of Form N–PORT. See also supra footnote 99 and accompanying text. 252 See infra footnote 419 and accompanying and following text. 253 See Item C.1 of Form N–PORT. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 81893 issuer and the security. Funds will report certain securities identifiers, if available.254 For example, for securitybased swaps, funds may report the product ID if a product ID for that contract is used by one or more securitybased swap data repositories.255 Identifiers for other types of derivatives may also be used, if available.256 If a unique identifier is reported, funds will also indicate the type of identifier used.257 Such an identifier might be assigned by a security-based swap data repository or 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 received comments regarding the use of unique identifiers generally, and LEI in particular. As discussed above, many commenters expressed support for the use of LEI for identification of funds, registrants, and counterparties.258 However, one commenter asserted that a portfolio-based approach, including data on counterparties to whom funds have greatest exposures, would enable adequate monitoring of potential threats better than obtaining counterparty LEI and specific information for each bilateral transaction.259 Other commenters expressed concerns regarding the ability of funds to verify the accuracy of LEIs provided by thirdparties.260 Another commenter suggested that each security held by a fund should be identified by ticker and CUSIP, or ISIN and SEDOL for foreign securities, together with the primary exchange where the security is traded at the date of the filing.261 Another commenter urged the Commission not to mandate the use of certain unique identifiers for public and nonpublic funds, such as the Financial 254 See Item C.1.b, Item C.1.d, and Item C.1.e of Form N–PORT (requiring reporting of identifiers such as LEI of the issuer, CUSIP, ISIN, ticker or other unique identifier). 255 See 17 CFR 242.900(aa) and (bb) (defining ‘‘product’’ and ‘‘product ID,’’ respectively). See also Regulation SBSR Adopting Release, supra footnote 61 (discussing use of product IDs under Regulation SBSR). 256 See, e.g., CFTC, Q&A—Swap Data Recordkeeping and Reporting Requirements, available at https://www.cftc.gov/ucm/groups/ public/@newsroom/documents/file/sdrr_qa.pdf (discussing product identifiers for swaps). 257 See Item C.1.e.iii of Form N–PORT. 258 See footnote 64 and accompanying text. 259 See CFA Comment Letter. 260 See Oppenheimer Comment Letter; MFS Comment Letter; ICI Comment Letter. 261 See Russ Wermers Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 81894 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Instrumental Global Identifier (‘‘FIGI’’).262 As discussed above, we are adopting a portfolio-based approach in the securities lending context, including data on counterparties to whom funds have greatest exposures. However, we believe that the uniform reporting of LEIs by fund series and registrants, as well as securities issuers and fund counterparties, will further enhance our monitoring and analytical capabilities by providing a consistent means of identification that will facilitate the linkage of data reported on Form N– PORT with data from other filings and sources that is or will be reported elsewhere. We acknowledge that LEIs have not yet been fully integrated into the global financial system, and accordingly the form contains a qualifier that an LEI be reported, ‘‘if any.’’ We believe, however, that LEIs will become more widely used by regulators and the financial industry and note that our rulemaking will not require funds to report LEIs, if any, until 18 months following the effective date. However, we understand that funds will in some instances be relying upon service providers and other third-parties who will be providing funds with LEI information to be reported to the Commission and publicly disclosed to investors and other possible users, and we understand that funds may find it difficult to verify such information other than to confirm that it has been generated and reported consistently with the methodologies of the fund’s service providers. As discussed above, the fund may generally use its own methodology or the methodology of its service provider, so long as the methodology is consistently applied and is consistent with the way the fund reports internally and to current and prospective investors.263 We do not believe, as some commenters suggested, mstockstill on DSK3G9T082PROD with RULES2 262 See State Street Comment Letter (asserting that there are few third-party providers who currently use such unique identifiers and concluding that requiring the usage of such unique identifiers would give those providers an unfair competitive advantage relative to the rest of the industry). Information about the FIGI is available on the Object Management Group’s Web site, a not-forprofit technology standards consortium. See generally Object Management Group, Documents Associated with Financial Industry Global Identifier (FIGI) Version 1.0—Beta 1 (Sept. 2014), available at https://www.omg.org/spec/FIGI/1.0/Beta1/. 263 See General Instruction G of Form N–PORT (‘‘Funds may respond to this Form using their own internal methodologies and the conventions of their service providers, provided the information is consistent with information that they report internally and to current and prospective investors. However, the methodologies and conventions must be consistently applied and the Fund’s responses must be consistent with any instructions or other guidance relating to this Form.’’). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 that it is necessary to require specific alternative unique identifiers for securities or entities at this time, other than those identified in Form N–PORT, because we believe that allowing funds to select another identifier in the absence of an ISIN, CUSIP, or ticker gives funds appropriate flexibility in identifying such investments. We are also requiring, as proposed, funds to report the amount of each investment as of the end of the reporting period, as is currently required under Regulation S–X.264 Funds will 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.265 Funds will 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.266 We received no comments on this aspect of our proposal. Also as proposed, we are requiring funds to report the payoff profile of the investment, indicating whether the investment is held long, short, or N/A, which will serve the same purpose as the current requirement in Regulation S–X to disclose investments sold short.267 Funds will respond N/A for derivatives and will respond to relevant questions that indicate the payoff profile of each derivative in the derivatives portion of the form. These disclosures will identify short positions in investments held by funds. We received no comments on these disclosure requirements. As proposed, funds will also report the asset type for the investment: shortterm investment vehicle (e.g., money market fund, liquidity pool, or other cash management vehicle), repurchase agreement, equity-common, equitypreferred, debt, derivative-commodity, derivative-credit, derivative-equity, derivative-foreign exchange, derivativeinterest rate, structured note, loan, ABSmortgage backed security, ABS-asset backed commercial paper, ABScollateralized 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 264 See Item C.2 of Form N–PORT. See rule 12– 12 of Regulation S–X. 265 See Item C.2.a–Item C.2.d of Form N–PORT. For derivatives, as appropriate, funds will provide the number of contracts. 266 See Item C.2.b and Item C.2.c of Form N– PORT. 267 See Item C.3 of Form N–PORT. See rule 12– 12A of Regulation S–X [17 CFR 210.12–12A]. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 fund, registered fund, other).268 We are also adopting a modification from the proposal to add a ‘‘derivatives-other’’ category to encompass derivatives that do not fall into the other categories of derivatives enumerated in this Item, so as to allow Commission staff, investors, and other users of the information reported on Form N–PORT to more easily aggregate the fund’s derivative investments. 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 to be reported by private funds on Form PF.269 These disclosures will allow the Commission, investors, and other potential users to assess the composition of fund portfolios in terms of asset and issuer types and also facilitate comparisons among similar types of investments. One commenter recommended the use of a well-defined taxonomy for asset and issuer type, such as ISO 10962, or some truncation of the six-character ISO Classification of Financial Instruments code.270 Although we acknowledge there could be benefits for data aggregation and analysis to using an existing standardized taxonomy for users of the form, Form N–PORT is primarily designed to meet the data needs of the Commission and its staff. We have drafted the asset categories in Form N–PORT specifically to address the Commission staff’s data needs, whereas many of the existing taxonomies include extraneous information in some areas or insufficient information in other areas. For these reasons, we are adopting the asset categories on Form N–PORT largely as proposed. Funds will also report, as proposed, for each investment, whether the investment is a restricted security.271 268 See Item C.4.a and Item C.4.b of Form N– PORT. 269 See, e.g., Item 26 of Form PF (requiring filers to report exposures by asset type); Item 1 of Form N–Q (requiring filers to report the schedules of investments required by sections 210.12–12 to 12– 14 of Regulation S–X); Item 1 of Form N–CSR (requiring filers to attach a copy of the report transmitted to stockholders pursuant to rule 30e–1 under the Act). 270 See Morningstar Comment Letter. See generally International Standards Organization, Securities and related financial instruments— Classification of financial instruments, ISO 10962:2015 (July 17, 2015), available at https:// www.iso.org/iso/catalogue_detail.htm?csnumber= 44799. 271 See Item C.6 of Form N–PORT. ‘‘Restricted security’’ will have the definition provided in rule 144(a)(3) under the Securities Act [17 CFR 230.144(a)(3)]. See General Instruction E of Form N–PORT. See also amended rule 12–13, nn. 6 and 8 of Regulation S–X, which will require similar disclosures in funds’ schedules of investments to E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 This disclosure will provide investors and the Commission staff with more information about liquidity risks associated with the fund’s investments. Also as proposed, each fund will 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 GAAP.272 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.273 In addition, Commission staff will be better able to identify anomalies in reported data by aggregating all fund investments industry-wide into the various level categories. These disclosures will also provide investors and the Commission staff with more information about which of the fund’s investments are more actively traded, and which investments are less actively traded and thus potentially less liquid. Currently, funds are required to categorize the fair value measurement of each investment in the fair value hierarchy in their financial statements.274 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. Several commenters supported this aspect of our proposal, noting it would enhance portfolio transparency and allow investors, plans, and fund fiduciaries to more accurately evaluate identify securities that are restricted. Cf. footnote 290 and accompanying and following text. 272 See ASC 820. An investment is categorized in the same level of the fair value hierarchy as the lowest level input that is significant to its fair value measurement. Level 1 inputs include quoted prices (unadjusted) for identical investments in an active market (e.g., active exchange-traded equity securities). Level 2 inputs include other observable inputs, such as: (i) Quoted prices for similar securities in active markets; (ii) quoted prices for identical or similar securities in non-active markets; and (iii) pricing models whose inputs are observable or derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the security. Level 3 inputs are unobservable inputs. We are amending Regulation S–X to require that funds identify those investments whose value was determined using significant unobservable inputs. See infra section II.C.3. 273 For a discussion of some of the challenges regulators may face with respect to Level 3 accounting, see, e.g., Konstantin Milbradt, Level 3 Assets: Booking Profits and Concealing Losses, 25 Rev. Fin. Stud. 55–95 (2011). 274 ASC 820–10–50–2 (Fair Value MeasurementDisclosure-General) requires for each class of assets and liabilities measured at fair value, the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 liquidity and valuation risks in funds.275 Another commenter asserted that our proposal to report the fair value level measurement for each individual investment held by the fund would represent no incremental burden relative to the current burden of reporting the total value of each fair value level category, because reporting systems should already contain the necessary information at the individual security level.276 However, one commenter cautioned that different fund families currently employ different accounting practices when classifying similar investments into fair value level hierarchies, and warned that the Commission staff should reconsider expectations that disclosure of these fair value levels would create comparability among different funds with regards to fair value level hierarchy classifications.277 Another commenter echoed the sentiment that fair value level determinations reported by funds would likely differ from one fund group to another, and concluded that these determinations should be disclosed in aggregate by fair value level hierarchy classification as opposed to on an individual security basis.278 Several commenters also recommended that additional related information be reported, such as the uncertainty of valuation for thinlytraded securities and identification of the primary pricing sources used in determining the fair value level hierarchy of the investments.279 Lastly, one commenter noted that certain funds of funds’ investments may not have fair value level hierarchies assigned to them pursuant to FASB Accounting Standards Update 2015–07, and requested that Form N–PORT be revised to allow funds to report ‘‘null’’ to account for such investments.280 In response to the last comment, we are revising Form N–PORT to allow funds to report ‘‘N/A’’ to this item if an investment does not have a fair value level hierarchy assigned to it pursuant to FASB Accounting Standards Update 275 See Morningstar Comment Letter; Comment Letter of Harvest Investments, Ltd. (Aug. 11, 2015) (‘‘Harvest Comment Letter’’). 276 See State Street Comment Letter. 277 See Interactive Data Comment Letter. 278 See Wells Fargo Comment Letter. 279 See Comment Letter of Markit (Aug. 11, 2015) (‘‘Markit Comment Letter’’) (for thinly-traded securities or investments in assets with thinlytraded underlying assets, consider a disclosure indicating the uncertainty of valuation); Harvest Comment Letter (information about primary pricing sources should be made available, and third-party pricing services used should be disclosed on an individual security basis). 280 See State Street Comment Letter. PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 81895 2015–07. This revision will allow funds to report fair value hierarchy information consistently across Form N–PORT and their shareholder reports.281 More generally, we acknowledge that there may be differences among fair value level hierarchy classifications between funds, even for the same investments, but believe that reporting of this information could still help Commission staff, investors, and other potential users to identify and monitor investments that may be more susceptible to increased valuation risk and identify potential outliers that warrant additional monitoring or inquiry. We decline to add the additional information suggested by commenters related to valuation, such as more information regarding thinly-traded securities or position-level information on price sources. We believe that, unlike fair value hierarchy information, which funds already need to track for reporting purposes, this information is not currently reported by funds in any form and could be burdensome to begin reporting relative to the additional value it may provide. Accordingly, we decline to revise Form N–PORT to require funds to report this additional information. As proposed, Form N–PORT would have required funds to report the country that corresponds to the country of investment or issuer based on the concentrations of the investment’s risk and economic exposure, and, if different, the country in which the issuer is organized. As adopted, Form N–PORT will switch the sequence of those disclosures, thus requiring funds to report the country in which the issuer is organized and, if different, the country that corresponds to the country of investment or issuer based on the concentrations of the investment’s risk and economic exposure.282 These disclosures will provide the Commission staff with more information about country-specific exposures associated with the fund’s investments. Specifically, the Commission believes that providing both the country based 281 See Item C.8 of Form N–PORT. Item C.5 of Form N–PORT. Also, as discussed further below, we are making the country of risk and economic exposure a nonpublic field in all Form N–PORT filings. Under the proposal, this would have meant that funds would be publicly reporting nothing if the country of risk and economic exposure were the same as the country in which the issuer is organized, because in that situation funds would only be reporting the country of risk and economic exposure, which will be nonpublic in Form N–PORT. Accordingly, we are requiring funds to report the country in which the issuer is organized as the default, and, only if different, to also report the country of risk and economic exposure. 282 See E:\FR\FM\18NOR2.SGM 18NOR2 81896 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations on concentrations of risk and economic exposure and also the country in which the issuer is organized will assist the Commission in understanding the country-specific risks associated with such investments. For example, knowing the country of risk and economic exposure, including the country in which an issuer is organized, is important for understanding the effect of such investments in a portfolio when that country might be going through times of economic stress (e.g., monetary controls or sanctions) or political unrest or other emergency circumstances. We received mixed comments on this aspect of our proposal. Commenters generally supported the requirement to report the country in which the issuer is organized.283 Commenters generally viewed the determination of country of risk as inherently subjective, but differed in terms of whether the Commission should provide a particular standard for determining the country of risk or whether the Commission should permit funds to report differing information for the same securities as a result of the existing diversity of approaches currently used by funds and service providers.284 Commenters also disagreed regarding whether this information should be publicly reported or even reported at all.285 Partly in response to these concerns, and as discussed above, we are revising Form N–PORT to include instructions clarifying that in reporting information on Form N–PORT, funds may generally use their own internal methodologies and the conventions of their service providers, provided that the information they report is consistent with mstockstill on DSK3G9T082PROD with RULES2 283 See, e.g., SIFMA Comment Letter I; Dreyfus Comment Letter; Morningstar Comment Letter. 284 See, e.g., Wells Fargo Comment Letter (the Commission should include guidance and instructions for determining the country with the greatest concentration of risks and economic exposure in order to achieve consistent reporting across funds); Interactive Data Comment Letter (the Commission should support the prevailing diversity of approaches towards identifying country of risk as a necessary consequence of such reporting); SIFMA Comment Letter I (the Commission should either limit the disclosure requirement to country of issuer organization or else clarify that funds may use classifications generated by existing methodologies or available service providers); ICI Comment Letter (it is important for funds to have the flexibility to make these determinations using their own good faith judgment). 285 See, e.g., Interactive Data Comment Letter (supporting the disclosure of country of risk); Schwab Comment Letter (public disclosure may lead to investor confusion); Fidelity Comment Letter (the Commission should require non-public disclosure of this information until it is standardized); Morningstar Comment Letter (opposing the reporting of country of risk to the extent this information is proprietary and subjective, but supporting country of issuance on the grounds that it is more objective). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 information that they report elsewhere (e.g., the fund’s schedule of portfolio holdings as prepared pursuant to Regulation S–X).286 For example, we understand that for issuers with operations in multiple countries, some funds commonly use the issuer’s country of domicile for purposes of internal recordkeeping and analysis and may choose to do the same for reporting country of risk on Form N–PORT, whereas funds that utilize other methodologies may prefer to rely upon their own chosen methodologies instead. Additionally, as discussed further below in section II.A.4, we are making the country of risk and economic exposure a nonpublic field in all Form N–PORT filings.287 More generally, several commenters sought confirmation that funds would not be required to look through any entities in its portfolio holdings except as specifically instructed in Form N– PORT.288 As discussed above, Form N– PORT requires funds to disclose information about ‘‘each investment held by the Fund and its consolidated subsidiaries.’’ 289 Thus, Form N–PORT requires funds to report information about each underlying investment in a CFC, because CFCs are consolidated subsidiaries in funds’ financial statements for reporting purposes. The proposed form also would have required funds to identify each investment that is ‘‘illiquid.’’ 290 We note that the Liquidity Adopting Release, which we are adopting today, addresses liquidity risk management programs for open-end funds, which, among other things, requires 286 See General Instruction G of Form N–PORT (‘‘Funds may respond to this Form using their own internal methodologies and the conventions of their service providers, provided the information is consistent with information that they report internally and to current and prospective investors. However, the methodologies and conventions must be consistently applied and the Fund’s responses must be consistent with any instructions or other guidance relating to this Form.’’). See also supra footnote 77 and accompanying and following text. 287 See infra footnote 515 and accompanying and following text. 288 See Invesco Comment Letter; Schwab Comment Letter; CRMC Comment Letter; SIFMA Comment Letter I. 289 See Part C of Form N–PORT (‘‘For each investment held by the Fund and its consolidated subsidiaries, disclose the information requested in Part C.’’). 290 As proposed, Form N–PORT would have defined ‘‘illiquid asset’’ as ‘‘an asset that cannot be sold or disposed of by the Fund in the ordinary course of business within seven calendar days, at approximately the value ascribed to it by the Fund.’’ This definition is the same definition used in the liquidity guidance issued by the Commission for open-end funds. See Revisions of Guidelines to Form N–1A, Investment Company Act Release No. 18612 (Mar. 12, 1992) [57 FR 9829 (Mar. 20, 1992)] (‘‘1992 Release’’). PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 information about the liquidity of fund investments to be reported on Form N– PORT.291 ii. Debt Securities In addition to the information required above, as proposed, 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 potential 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 the annualized interest rate and indicating whether fixed, floating, variable, or none).292 While commenters were generally supportive of this requirement, they requested that we provide clear standards for reporting or more granular classifications.293 For example, commenters noted that a more granular classification scheme for debt instruments is useful for investors in understanding the nature of the obligation supporting the instrument, such as issuers, security type, guarantors, and the investment’s structure.294 However, while more granular classifications could be useful to investors, we do not believe that the additional information would be justified in light of the burdens imposed because we believe that the classification being adopted provides sufficient detail to allow the staff, investors, and other potential users, to understand the nature of the fund investments. As a result, we are adopting this requirement as proposed.295 Another commenter recommended that we consider a minimum reporting threshold of 10% of 291 See Liquidity Adopting Release, supra footnote 9. 292 See Item C.9.a and Item C.9.b of proposed Form N–PORT. 293 See SIFMA Comment Letter I (supporting all required information with the exception of the disclosures relating to securities in defaults and arrears); Wells Fargo Comment Letter; Interactive Data Comment Letter (‘‘In general, we believe that a more granular classification scheme for debt instruments is useful for investors in understanding the nature of the obligation supporting the instrument’’); State Street Comment Letter; Morningstar Comment Letter. 294 See Interactive Data Comment Letter (additional disclosures should include classification of debt securities (e.g., corporate bonds, municipal securities), bond insurance, conduit municipal filings, letters of credit, and identification of debt ranking); State Street Comment Letter (additional disclosures should include issuer, security type, security structure, guarantor, country, sector, and rating). 295 See Item C.9.a and Item C.9.b of Form N– PORT. E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations exposure to each security type for additional security-specific reporting for debt securities, convertible securities, repurchase and reverse repurchase agreements, and derivatives.296 However, as we discuss below in section II.A.2.g.iv, we believe that it is important that the Commission and investors have transparency in a fund’s investments and do not believe that a reporting threshold for such instruments is appropriate, as it would not allow the Commission and investors to fully understand a fund’s risks. Moreover, security-level reporting of a fund’s underlying investments in such securities are currently reported in a fund’s financial statements.297 As proposed, 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.298 Several commenters raised concerns regarding these disclosures. For example, one commenter argued that the public disclosure on default, arrears, or deferred coupon payments raises competitive concerns when a debt security is issued by a borrower that is a private company, as private borrowers may avoid registered funds in order to limit public disclosure if the company becomes distressed.299 The commenter noted that public disclosure that a borrower is or may be financially distressed could increase prepayment risk and be disruptive to the fund’s or adviser’s relationship with the borrower.300 Moreover, this disclosure could also harm private issuers by disclosing their financial distress to vendors and key employees and customers.301 While we recognize that the disclosure of a private issuer in distress could have a negative impact on the issuer, we believe that it is important that Commission staff have access to information relating to fund investments that are in default or arrears in order to monitor individual fund and industry risk. It is similarly important that fund’s investors have access to this information so that they can make fully informed decisions regarding their investment. Moreover, default or arrears relating to a fund’s investments in private issuer debt are already publicly 296 See Wells Fargo Comment Letter. generally Article 12 of Regulation S–X. 298 See Item C.9.c through Item C.9.e of proposed Form N–PORT. 299 See Simpson Thacher Comment Letter. 300 See id. 301 See id. 297 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 available on a fund’s quarterly financial statements.302 Another commenter recommended eliminating the requirements relating to whether a debt security is currently in default or any of the interest payments are in arrears or have been deferred.303 The commenter noted that these items require a subjective legal analysis on an instrument-by-instrument basis, on which conclusions among funds may vary and thus would not provide meaningful comparable information.304 For similar reasons, another commenter supported the proposal, but recommended that the Commission should establish a clear standard for designating when a security is deemed to be in arrears.305 As we previously discussed, this type of analysis and public reporting is not new to funds, as they are required to report results in their financial statements and on their schedules of investments.306 Rather than provide funds with a definition that may not be applicable in all situations, or inconsistent with their financial statement reporting, we believe that it is more appropriate to allow funds to continue to use their own methodology in responding to these items on Form N–PORT, subject to the limitations of General Instruction G.307 As we discuss in more detail in section II.C.3 below, commenters noted that in-kind payments where the fund elects to receive payments-in-kind (as opposed to cash) do not raise the same risks as an issuer that only makes inkind payments, because such a scenario does not represent an issuer who may be in financial difficulties and cannot pay cash dividends, as opposed to an investor who merely chooses to receive in-kind dividends rather than cash.308 We agree and are adding an additional clarifying clause to Item C.9.e that a fund should not designate interest as paid-in-kind if the fund has the option to elect an in-kind payment and has elected to be paid-in-kind 309 Finally, we proposed to require additional information for convertible securities, to indicate whether the conversion is mandatory or contingent.310 We also proposed to 302 See rule 12–12, n. 5 of Regulation S–X. Comment Letter I. 303 SIFMA 304 Id. Wells Fargo Comment Letter. rule 12–12, n. 5 of Regulation S–X. 307 See General Instruction G of Form N–PORT; see also supra footnote 79 and accompanying test. 308 See Comment Letter of American Institute of CPAs (Aug. 17, 2015) (‘‘AICPA Comment Letter’’); Comment Letter of PricewaterhouseCoopers LLP (Aug. 7, 2016) (‘‘PwC Comment Letter’’); see also infra footnote 651 and accompanying text. 309 See Item C.9.e of Form N–PORT. 310 See Item C.9.f of proposed Form N–PORT. 81897 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. For example, based upon staff experience, we believe that the risk and reward profiles for mandatory and contingent conversions vary considerably and, thus we proposed to require disclosure of the type of conversion in order to better understand these risks. Similarly, we proposed to require disclosure of the conversion ratio and information about the asset into which the debt is convertible. Furthermore, the proposed requirement to provide the delta was also proposed to be required for options, as discussed further below, because convertible securities have optionality.311 For similar reasons discussed below regarding options, we expressed our belief 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 received several comments relating to the disclosures of convertible securities. One commenter requested that the securities be consistently reported across funds and include additional instructions for calculating delta.312 Another commenter noted that calculating delta for convertible bonds using the Black-Scholes model, which is commonly used for calculating the delta for options would be impractical and therefore requested further clarification for calculating delta for convertible bonds.313 As discussed above, while we believe that it is important to receive consistent reporting between funds, we have endeavored to limit burdens on funds, when possible. Thus, rather than provide prescriptive instructions for funds to calculate delta, General Instruction G to Form N–PORT now clarifies that funds may use their own 305 See 306 See PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 311 See text accompanying and following footnote 384 (discussing information required for options, including delta). 312 See State Street Comment Letter (reporting delta should be consistent, but should include the following attributes to define the approach, such as: Volatility used, actual volatility used in the calculation, and attributes such as mandatory convertible.). 313 See Morningstar Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 81898 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations current methodology.314 For example, based on staff experience, we understand that delta for some instruments could be calculated using certain formulas, such as Black-Scholes, while funds might calculate the delta for convertible bonds using a different calculation.315 Such variations in calculation among funds, or even by the same funds with different types of investments, are permissible so long as the calculations are consistent with how the fund reports information internally and to its current and prospective investors.316 However, we agree with the commenter that calculating delta for certain convertible securities, such as contingent convertible bonds, may not be possible. We are therefore adding the clarifying instruction to Item C.9.f.v to only provide delta if it is applicable to that security.317 Another commenter suggested that we eliminate the additional information proposed in Form N–PORT for convertible securities as they do not represent significant data points from which to assess risk.318 We, however, believe that the proposed information will not only assist staff with understanding the risks to a fund or the fund industry, it will also be used to better understand fund investments, industry trends, and new and emerging risks. We continue to believe that the items required for convertible securities will be valuable information for the staff, investors, and other potential users. As a result, we are adopting Item C.9 as proposed, subject to the clarifications in Item C.9.e and C.9.f.v. discussed above.319 mstockstill on DSK3G9T082PROD with RULES2 iii. Repurchase and Reverse Repurchase Agreements As we proposed, and in addition to the information required above for all investments, Form N–PORT requires each fund to report additional information for each repurchase and reverse repurchase agreement held by the fund. The fund will 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 314 See General Instruction G of Form N–PORT; see also supra section II.A.2.a. 315 See Morningstar Comment Letter. 316 See General Instruction G of Form N–PORT. 317 See Item C.9.f.v of Form N–PORT. 318 Wells Fargo Comment Letter (eliminate requirements such as whether the conversion is mandatory or contingent, the conversion ratio, information about the asset into which the debt is convertible, and the delta). 319 See Item C.9 of Form N–PORT. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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.320 Funds will also report the principal amount and value of collateral, as well as the category of investments that most closely represents the collateral.321 These disclosures will enhance the information currently reported regarding funds’ use of repurchase agreements and reverse repurchase agreements. Information regarding repurchase agreements will be comparable to similar disclosures currently required to be made by money market funds on Form N–MFP. The categories used for reporting collateral will 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 will be used in Form N–PORT to categories used in other reporting contexts will ease reporting burdens and enhance comparability.322 One commenter agreed with our proposed reporting, but recommended, without further elaboration, that reporting of collateral be done on the basis of aggregate security type rather than at the individual security level.323 Another commenter noted that our proposed reporting would align not only with information reported on Form N– MFP and collected by the Federal Reserve, but also with information reported by fund companies operating globally and offering managed products within Europe.324 320 See Item C.10.a–Item C.10.e of Form N–PORT. For example, if the fund is engaged in a repurchase transaction in which it is the cash borrower and is transferring securities to the counterparty, the fund will report the transaction as a ‘‘reverse repurchase agreement.’’ 321 See Item C.10.f of Form N–PORT. Funds will report the category of investments that most closely represents the collateral, selected from among the following (asset-backed securities; agency collateralized mortgage obligations; agency debentures and agency strips; agency mortgagebacked securities; private label collateralized mortgage obligations; corporate debt securities; equities; money market; U.S. Treasuries (including strips); other instrument). If ‘‘other instrument,’’ funds will also include a brief description, including, if applicable, whether it is a collateralized debt obligation, municipal debt, whole loan, or international debt. 322 See Money Market Fund Reform 2014 Release, supra footnote 33, at nn. 1515–1518 and accompanying text (discussing comment letter stating that the categories used to report collateral for tri-party repurchase agreements to the Federal Reserve Bank of New York would allow for regular and efficient comparison of current and historical risk factors regarding repurchase agreements on a standardized basis). 323 See Wells Fargo Comment Letter. 324 See Morningstar Comment Letter. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 In contrast, another commenter asserted that funds should apply the same taxonomy when reporting collateral that would be used when reporting the fund’s portfolio investments on Form N–PORT, which would result in a more granular disclosure of collateral.325 Other commenters expressed concerns about public disclosure of this information on a transaction-by-transaction basis and suggested that this information be collected on a firm-by-firm basis instead or be nonpublic, due in part to counterparties’ concerns about the disclosure of such information to the public, including their competitors.326 After considering these comments, we are adopting this requirement as proposed. As mentioned above, the information that funds will report is aligned with similar information publicly reported on Form N–MFP by money market funds, reported to the Federal Reserve by banks, and publicly reported by fund companies operating globally and offering managed products in Europe. Uniform reporting of this information under the common taxonomy that has already been developed and is being used by other financial institutions will help facilitate the linkage of data reported on Form N– PORT with data from other filings and sources. For these reasons, we are not persuaded by the suggestions of one commenter to require collateral to be reported on an aggregate level,327 nor are we persuaded by the commenter who suggested that funds should apply the same taxonomy when reporting collateral that would be required when reporting the fund’s portfolio investments on Form N–PORT,328 which would result in data that would be incompatible with collateral data reported more broadly elsewhere. We are also not persuaded by assertions by commenters that this type of information could reveal any strategies competitors could use to their advantage. As indicated above, such information is currently routinely publicly disclosed in other contexts, and commenters did not specify how additional disclosure on Form N–PORT could result in harm. More generally, using a different taxonomy for funds with regards to repurchase and reverse repurchase agreements or keeping such information nonpublic or making it available on only an aggregated basis would hinder the ability of Commission 325 See 326 See Interactive Data Comment Letter. SIFMA Comment Letter I; CFA Comment Letter. 327 See Wells Fargo Comment Letter. 328 See Interactive Data Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations staff as well as investors and other potential users of this information to use the data on Form N–PORT as discussed above. mstockstill on DSK3G9T082PROD with RULES2 iv. Derivatives As discussed above and in the Proposing Release, 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, warrants, and certain convertible bonds, the Commission believes that it is 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, warrants, and certain convertible bonds 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 potential risk of loss. With this rulemaking, we will 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 will 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.329 While we received comments supporting our proposal to include specific information about positionlevel derivatives,330 some commenters believed that portfolio-level reporting (as opposed to position-level reporting) would be more appropriate for understanding how funds use derivatives and funds’ derivative-based 329 See infra section II.C.2. e.g., CFA Comment Letter (‘‘Given the potential risks associated with certain uses of derivatives, we support the new reporting requirements.’’); Wells Fargo Comment Letter. 330 See, VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 risks.331 Other commenters requested that certain position-level disclosures relating to derivatives not be publicly reported noting that this information could be confusing to investors, proprietary, or potentially used by competitors to harm fund investors through front-running or reverse engineering of fund investing strategies.332 Another requested that derivatives disclosure be subject to certain de minimis thresholds.333 As we discuss more fully below in section II.A.4, we continue to believe that it is important that, in addition to the Commission, investors receive enough information in order to evaluate an investment and make appropriate investing decisions. Moreover, much of the information required in Form N– PORT is already reported in fund financial statements, or will be with our amendments to Regulation S–X, albeit in an unstructured format. As we describe more fully in section II.A.4 below, we generally believe that the reporting requirements of Form N– PORT are appropriate given the filer’s status as a registered investment company with the Commission. Moreover, we generally believe that investors, directly and indirectly, should have access to portfolio information in a structured data format, to assist them with making more informed investing decisions. We thus believe that certain position-level information should be reported publicly on a quarterly basis.334 Consequently, in addition to the information required above for all investments, we proposed to require additional information about each derivative contract in the fund’s portfolio. As proposed, funds would report the type of derivative instrument that most closely represents the investment (e.g., forward, future, option, 331 See, e.g., Dreyfus Comment Letter (explaining that an investment-by-investment approach to reporting does not adequately explain how derivatives are being used); Simpson Thacher Comment Letter (derivatives reporting should focus on metrics based on a portfolio-level analysis). 332 See, e.g., State Street Comment Letter (details relating to nonpublic indexes or custom baskets underlying options and swaps contracts); MFS Comment Letter (financing rates for OTC derivatives); Pioneer Comment Letter; Wells Fargo Comment Letter; SIFMA Comment Letter I (all derivatives information should be nonpublic); Invesco Comment Letter (reference assets, specific terms, financing rates and contracts terms and conditions); ICI Comment Letter (delta for convertible securities, options, and warrants and derivative financing rates); Oppenheimer Comment Letter (derivatives payment terms, including financing rates); Simpson Thacher Comment Letter (position-level reporting for derivatives); SIFMA Comment Letter II. 333 See Pioneer Comment Letter. 334 See infra section II.A.4. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 81899 etc.).335 As discussed above in section II.A.2.a, commenters requested that we provide definitions of certain items in the form, such as ‘‘derivatives’’ and ‘‘forwards.’’ 336 For the reasons discussed above, we are not adopting definitions for these items. Finally, a commenter suggested that we organize the disclosure of derivatives as reflected in the recently adopted amendments to Form ADV or Item 30 of Form PF arguing that these items would standardize the organization and reporting of derivatives across different Commission forms.337 As discussed below in section II.C.2, the derivative instrument type categories identified in Form N–PORT are similar to the categories disclosed by funds in amended Regulation S–X. We designed these categories to enable funds to report position-level information on their investments in derivatives, while leaving enough flexibility to allow funds to categorize investments in the future that are not currently traded by funds.338 In contrast, the categories used in the Form ADV Release and Item 30 of Form PF are designed to collect aggregated information at the portfolio level for investment advisers advising separately managed accounts and private funds, respectively. As a result, the categories for Forms PF and ADV must be more specific, as the Commission does not receive more detailed position-level information for these types of filers. However, in the case of registered funds, the current disclosure regime requires funds to disclose position-level information to the Commission and investors; thus it is not necessary for more standardization across funds regarding definitions, as the Commission and investors could always review the fund’s specific holdings.339 In the case of Form N–PORT, in addition to the categories, the Commission will receive additional position-specific data, which will allow the user of the information to better understand each position, without solely relying on the instrument type. However, we acknowledge the potential for confusion regarding the categorization of different types of 335 See Item C.11.a of proposed Form N–PORT. Funds would report the category of derivative that most closely represents the investment, selected from among the following (forward, future, option, swaption, swap, warrant, other). If ‘‘other,’’ funds would provide a brief description. 336 See, e.g., T. Rowe Price Comment Letter (‘‘derivatives’’ and ‘‘forwards’’); ICI Comment Letter (‘‘derivatives’’). 337 See BlackRock Comment Letter. See also Form ADV Release, supra footnote 3. 338 See infra section II.C.2. 339 See generally, Form N–CSR and Form N–Q. E:\FR\FM\18NOR2.SGM 18NOR2 81900 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations swaps and are therefore adopting the derivatives instrument type categorizes that we proposed, but subject to a modification in Item C.11.a to include a clarification that specifically identifies that total return swaps, credit default swaps, and interest rate swaps should all be categorized under the ‘‘swap’’ instrument type.340 We are adopting the derivatives instrument categories subject to this modification.341 As proposed, funds would also report the name and LEI (if any) of the counterparty (including a central counterparty).342 We believe, and some commenters agreed, that this identifying information should assist the Commission, investors, and other potential users in better identifying and monitoring derivatives held by funds and the associated counterparty risks.343 Other than requests to keep counterparty information nonpublic 344 and requests to phase in the disclosure of counterparty LEI’s,345 which are discussed above, we generally received positive comments on our proposed counterparty and LEI disclosures and are adopting them, as proposed.346 340 See Item C.11.a of Form N–PORT. id. 342 See Item C.11.b of proposed Form N–PORT. 343 See generally Morningstar Comment Letter (‘‘More-frequent portfolio disclosures will improve the counterparty information available to market participants. As a result, market participants could assist the SEC in identifying emerging risks—and they would likely direct assets away from counterparties perceived as excessively risky.’’); CFA Comment Letter (supporting aspects of the proposal that would require derivative counterparty information); Wells Fargo Comment Letter (same). Commenters to the FSOC Notice indicated that counterparty data for derivative disclosures is not often available and discussed the need to have more transparency in this regard. See, e.g., Comment Letter of Americans for Financial Reform to FSOC Notice (Mar. 27, 2015) (‘‘Americans For Financial Reform FSOC Notice Comment Letter’’) (asserting that counterparty data in derivative disclosures is not often available); Comment Letter of the Systemic Risk Council to FSOC Notice (Mar. 25, 2015) (discussing the need to have information about investment vehicles that hold bank liabilities). 344 See, e.g., SIFMA Comment Letter I. 345 See, e.g., State Street Comment Letter; BlackRock Comment Letter; see generally supra section II.A.2.a. 346 See Item C.11.b of Form N–PORT; see also Morningstar Comment Letter; CFA Comment Letter; Wells Fargo Comment Letter. As discussed below in section II.C.2.a, in response to commenters’ suggestions, for Regulation S–X purposes, we are not requiring funds to disclose the counterparty for centrally cleared or exchange traded derivatives. See, e.g., rule 12–13, n. 4 of Regulation S–X. This is because we believe it may be necessary to have information about the central counterparty for a derivative (for example, to compare data with other data available to regulators) but such information may not be necessary for financial statements, where the primary purpose for providing this information to fund investors is to make investors aware of the fund’s counterparties and any associated credit risk. mstockstill on DSK3G9T082PROD with RULES2 341 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 As proposed, 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.347 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.348 Proposed Form N– PORT would require funds to provide a description of the reference instrument, including name of issuer, title of issue, and relevant securities identifier.349 We received comments supporting these items 350 and are adopting them as proposed.351 We recognize that some derivatives have underlying assets that are indexes of securities or other assets or a ‘‘custom basket’’ of assets, the components of which are not always publicly available. We proposed requirements to ensure that the Commission, investors, and other potential users are aware of the components of such indexes or custom baskets. As proposed, 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.352 We proposed 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 adopted in this release, would continue to be required, to disclose their portfolio 347 We are requiring similar information on a fund’s schedule of investments. See infra section II.C.2. 348 See Item C.11.c of proposed Form N–PORT. As discussed above, funds would report the number of option contracts in Item C.2.a of Form N–PORT. See also supra footnote 265 and accompanying text. 349 See Item C.11.c.iii.2 and Item C.11.c.iii.3 of proposed Form N–PORT. For the securities identifier, funds would report, if available, CUSIP of the reference asset, ISIN (if CUSIP is not available), ticker (if CUSIP and ISIN are not available), or other unique identifier (if CUSIP, ISIN, and ticker are not available). See also supra footnote 254 and accompanying and following text. 350 See Wells Fargo Comment Letter; see also MFS Comment Letter. 351 See Item C.11.c.i, Item C.11.c.ii, and Item C.11.c.iii of Form N–PORT. 352 See Item C.11.c.iii.2 of proposed Form N– PORT. If the reference instrument is a derivative, funds would also indicate the category of derivative (e.g., swap) and will provide all information required to be reported on Form N–PORT for that type of derivative. We received no comments on this requirement and are adopting it as proposed. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 investments.353 We proposed that 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.354 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, we proposed that 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.355 We received a number of comments on our proposal to publicly disclose the components of the underlying index or custom basket. While some commenters agreed with our proposal,356 others requested that we include a higher threshold before requiring reporting.357 Some commenters, for example, suggested that the threshold for requiring any reporting of components be 5% of net asset value of the fund.358 Others agreed with our proposed 1% threshold but stated that reporting should be based on whether the net asset value of the derivative instrument that is relying on the index or custom basket exceeds 1% of the fund’s net asset value, rather than the derivative instrument’s notional value (as was proposed), as net asset value is a better indicator of materiality.359 We continue to believe that it is important for the Commission, 353 See infra section II.A.4 (discussing proposed rules concerning the public disclosure of reports on Form N–PORT). 354 See supra footnote 352. 355 See id. Short positions in the index, if any, would be reported as negative numbers. The identifier for each index component would include CUSIP, ISIN (if CUSIP is not available), ticker (if CUSIP and ISIN are not available), or other identifier (if CUSIP, ISIN, and ticker are not available). If other identifier is provided, the fund would indicate the type of identifier used. 356 See, e.g., Morningstar Comment Letter (‘‘Index providers are earning revenues from the licensing fees embedded in the derivative cost that is born by the fund and therefore its shareholders.’’); CFA Comment Letter (expressing general support for the proposed derivatives reporting requirements). 357 See, e.g., Wells Fargo Comment Letter (additional index reporting should only be triggered when a derivative represents 5% of NAV); ICI Comment Letter. 358 See id. 359 See, e.g., SIFMA Comment Letter I (‘‘The proposal of 1% notional value is entirely different from the predicate requirement on which the Commission says the proposal is based. We believe the original 1% value requirement is a far better indicator of materiality and should be adopted in this connection as well.’’); Oppenheimer Comment Letter (1% of net (not notional) value of derivatives). E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 investors, and other potential users to have transparency into a fund’s exposures to assets, regardless of whether the fund directly holds investments in those assets or chooses to create those exposures through a derivatives contract.360 Our proposed one percent threshold was 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.361 Similar to the threshold in the summary schedule of investments, we believe that 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 nonpublic index for instruments that represent a small amount of the fund’s overall value. Moreover, for purposes of this calculation, we believe that it is appropriate to measure whether such derivative instrument exceeds the 1% threshold based on the derivative’s notional value, as opposed to the current market value of the derivative, because derivatives with a small market value could have a much larger potential impact on a fund’s performance than the current market value would suggest, and thus believe that a derivative’s notional value better measures its potential contribution to the gains or losses of the fund.362 We also solicited comment on whether we should limit the required disclosure of index components to the top 50 components and/or components that represent more than 1% of the index. In response to this request for comment commenters suggested that once a nonpublic index crosses the reporting threshold, we limit disclosure to the top 50 components and components that represent more than one percent of the index based on the notional value of the derivatives, as this standard is analogous to the current reporting requirement to identify holdings in the summary schedule of investments. Commenters stated that this would reduce reporting burdens for funds that invest in indexes with a large number of components.363 Some commenters also objected to the public disclosure of the components underlying an index as that disclosure could harm the intellectual property rights that index providers might assert and, as a result, harm investors who may lose the benefit of index products that would no longer be available to them, should an index provider choose to no longer do business with a fund, rather than have its index’s components made publicly available.364 Other commenters urged the Commission to delete this requirement as information on non-public indexes or custom baskets may be difficult for funds to obtain.365 As discussed below in section III.B.3., commenters also noted that disclosure of the components of custom baskets underlying swaps are considered by some as proprietary information regarding a fund’s investment strategies and could lead to the indexing strategy being imitated, resulting in harm to the fund and its investors through reverse engineering and free-riding.366 We believe that it is fundamental to the reporting by funds that fund shareholders have access to the information necessary to understand the exposures of their fund’s investments.367 Moreover, we note that a fund whose investment objective tracks an index or custom basket is currently required to publicly disclose its direct holdings quarterly in its 360 We are also modifying Regulation S–X to require similar disclosures. See infra section II.C.2.a (discussing proposed rule 12–13, n. 3 of Regulation S–X). 361 See rule 12–12C, n. 3 of Regulation S–X [17 CFR 210.12–12C]. 362 See Item C.11.c.iii.2 of Form N–PORT. As discussed more fully below, we received several comments relating to the appropriate calculation of notional amount for derivative instruments. See infra footnotes 546–550 and accompanying text. We acknowledge that there are multiple ways of calculating notional amount for certain investments. See id. While the staff has previously provided examples of acceptable notional amount calculations, see id., funds may use other methods of calculating notional amount so long as the methodology is applied consistently and is consistent with the way the fund reports notional amount internally and to current and prospective investors. See General Instruction G of Form N– PORT. 363 See current rule 12–12C of Regulation S–X; see, e.g., ICI Comment Letter; Oppenheimer Comment Letter; see also SIFMA Comment Letter I (top 5 components or the components reflecting 50% of the index). Commenters also noted their belief that reporting should be based on a percentage of NAV, rather than notional value, as percentage of NAV is a better indicator of materiality. See SIFMA Comment Letter I; Oppenheimer Comment Letter; contra Morningstar Comment Letter (‘‘Arbitrary limits on positions that should be disclosed for portfolios or reference indexes can mask the risk of an instrument.’’). 364 See, e.g., SIFMA Comment Letter I; Comment Letter of MSCI (Aug. 10, 2015) (‘‘MSCI Comment Letter’’) (even provision of delayed data is a concern). 365 See Simpson Thacher Comment Letter; Dreyfus Comment Letter. 366 See, e.g., SIFMA Comment Letter II; MSCI Comment Letter; see also infra section III.B.3. 367 See Morningstar Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 81901 financial statements.368 Likewise, funds should not be able to use proprietary indexes to mask exposures to investments underlying a custom basket for a swap or options contract.369 Moreover, while some commenters noted that obtaining information on the components of an underlying index may be difficult,370 again, we believe that fund shareholders need sufficient information to understand their fund’s exposures, even if such transparency requires the fund to renegotiate licensing agreements or, in some cases results in the fund having to forego investments in a custom basket or nonpublic index.371 As discussed further in section II.A.4, below, we believe that we have mitigated the potential for harm to fund investors that some commenters believed could result from the public reporting of non-public indexes and custom baskets by delaying the public reporting of reports on Form N–PORT by 60-days. For the reasons discussed above, we believe that it is important that the Commission and investors have full transparency into any index or custom basket that significantly contributes to a fund’s NAV. However, we were also persuaded by commenters that, in cases of indexes with a large number of components, and where the index only constitutes a small portion of the fund’s investments, disclosure of every component could yield information on underlying investments that constitute only a ‘‘miniscule’’ percentage of the fund’s NAV.372 In these cases, requiring complete reporting of all the components could be burdensome without providing information that is minimally helpful for understanding the role of the investment in the fund. In such situations, limiting component reporting to the largest holdings of an index or custom basket could appropriately reduce reporting burdens while still providing transparency into the investment. Accordingly, we are adopting a tiered reporting structure for the reporting of the components of an index or custom basket underlying a derivative. For investments in a non-public index or custom basket that represent more than 1%, but less than 5%, of a fund’s net assets, funds will be required to report the top 50 components of the basket and, in addition, those components that exceed 1% of the notional value of the 368 See generally Forms N–CSR and N–Q. Morningstar Comment Letter. 370 See Simpson Thacher Comment Letter; Dreyfus Comment Letter. 371 See Morningstar Comment Letter. 372 See ICI Comment Letter. 369 See E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 81902 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations index. For investments in a non-public index or custom basket that exceed 5% of a fund’s net assets, funds will be required to report all components. We developed this tiered threshold in response to commenters, discussed above, that suggested a higher de minimis threshold of 5% of net assets for requiring any reporting of the underlying components. We recognize that this approach will be more burdensome for funds holding investments that fall within these thresholds than raising the de minimis for any reporting of components to 5% of net assets, which was suggested by some commenters. We believe, however, that investments representing between 1% and 5% of a fund’s net assets are sufficiently significant to a fund that some reporting of individual components is appropriate and will help the Commission staff and investors to understand a fund’s indirect exposures to investments that are the most significant components of the index. Further, limiting reporting for such derivative investments to the top 50 components and those components that exceed 1% of the notional value of the index, which is the same threshold used for the summary schedule of investments, will reduce the reporting burdens relative to the proposal for funds with such investments.373 Conversely, we acknowledge that limiting the required reporting for those investments representing between 1% and 5% will not provide full transparency into such investments; we believe, however, that this approach appropriately balances providing information that is sufficient for the Commission and investors to understand the composition and risk of such investments, with reducing reporting burdens for funds. For investments in non-public indexes or custom baskets that exceed 5% of a fund net assets, funds will be required to report all components of the index or custom basket, as we believe that full transparency is appropriate for such investments because, as discussed above, funds should not be able to mask significant portions of their investment strategy by using a proprietary index or custom basket. A commenter also objected to disclosure of unrealized appreciation or depreciation for each component of the index or custom basket arguing that such information would be costly to maintain as the fund would be required to create a record of the value of each underlying security in the index at the 373 See Morningstar Comment Letter; SIFMA Comment Letter I. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 time the derivatives contract is entered into.374 We agree. Moreover, we agree with the commenter that Form N–PORT will already require the fund to provide the unrealized appreciation and depreciation for the option or swap contract on a monthly basis, making the disclosure of unrealized appreciation and depreciation for components of the underlying index unnecessary.375 Thus, if the index’s or custom basket’s components are not publicly available and the notional amount of the derivative represents more than 1%, but less than 5%, of the net asset value of the fund, the fund will 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), and value, for (i) the 50 largest components in the index or custom basket and (ii) any other components where the notional value for that component is over 1% of the notional value of the index or custom basket.376 Likewise, if the index’s or custom basket’s components are not publicly available and the notional amount of the derivative represents more than 5% of the net asset value of the fund, the fund will 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), and value, for all of the index’s or custom basket’s components.377 We also proposed to require funds to report the delta of options and warrants, which is the ratio of the change in the value of the option or warrant to the change in the value of the reference instrument.378 This measure reflects the sensitivity of the value of the option or warrant to changes in the price of the reference instrument. We requested comment on our proposal to require funds to report the delta for options and warrants. Some commenters supported our proposal to require funds to report delta for options and warrants.379 Others objected to the 374 See, e.g., ICI Comment Letter. id.; see also Item C.11.c.viii and Item C.11.f.v of Form N–PORT. 376 See Item C.11.c.viii.2 of Form N–PORT. Short positions in the index, if any, will be reported as negative numbers. The identifier for each index component would include CUSIP, ISIN (if CUSIP is not available), ticker (if CUSIP and ISIN are not available), or other identifier (if CUSIP, ISIN, and ticker are not available). If other identifier is provided, the fund would indicate the type of identifier used. 377 Id. 378 See Item C.11.c.vii of proposed Form N– PORT. 379 See, e.g., Morningstar Comment Letter (requesting clarity on specific method to calculate delta); Wells Fargo Comment Letter. 375 See PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 Commission’s proposal to collect delta because they believed it would provide little value because of the time delay between the end of the period date and the reporting date, and could be difficult to calculate.380 Others did not specifically object to the Commission requiring delta, but requested that delta not be released to the public citing concerns of investor confusion regarding the subjectivity of delta (i.e. the calculation of delta is necessarily based upon inputs and assumptions that could vary between funds).381 We continue to believe that the reporting of delta for options and warrants will provide the Commission a more accurate measure of a fund’s full exposure to the fund’s investments in options and warrants. Accordingly, we believe that having the measurement of delta for options is important for the Commission 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 written options as a form of obtaining a leveraged position in an underlying reference asset.382 Having a measurement of exposures created through this type of leverage can help the Commission 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. Thus, while we acknowledge that the Commission will receive delta 30 days after the reporting date, it will still be a useful tool for the Commission and its staff to understand the fund’s relative exposures to changes in the price of the underlying reference asset. Moreover, as discussed more fully below in section II.A.4, for the reasons discussed in that section, we have determined to make the reporting of delta non-public for all three months, which should mitigate commenters concerns regarding investor confusion relating to the subjectivity of calculating delta. Finally, based upon staff experience, we believe that it is general industry practice to calculate delta for options, warrants, and swaps. As a result, we are adopting the requirement that funds report delta for options and warrants as proposed. While one commenter noted that there are a variety of models to calculate delta and requested a specific approach to calculating delta, based on staff 380 See, e.g., Dreyfus Comment Letter (delta statistic may be of limited value because of the time lag associated with reporting); Simpson Thacher Comment Letter (obtaining information on delta may be difficult for funds). 381 See, e.g., ICI Comment Letter. 382 See Derivatives Proposing Release, supra footnote 7, at 80886. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 experience analyzing these metrics, we believe that such differences are not so large that the results would not be useful to the staff. Therefore we are not requiring specific delta formulas be used.383 As a result, in order to reduce burdens and provide clarity to funds, as discussed above, we are adopting an instruction that will allow funds to use their own (or their service provider’s) methodologies to calculate data for reports on Form N–PORT, including delta, subject to the instruction and other guidance relating to the Form.384 For futures and forwards (other than foreign exchange forwards, which share similarities with foreign exchange swaps and should be reported accordingly as discussed below), as proposed, 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.385 The description of the reference instrument would conform to the same requirements as the description of reference instruments for warrants and options.386 One commenter noted that the terms ‘‘foreign exchange swaps’’ and ‘‘foreign exchange forwards’’ are defined terms under the Commodity Exchange Act, as amended by the Dodd-Frank Act and such terms exclude non-deliverable forwards, which are included in the Commodity Exchange Act’s definition of swaps. As the commenter pointed out, such distinctions between deliverable and non-deliverable forwards are not relevant in the context of reporting of forward contracts on Form N–PORT.387 Accordingly, in order to avoid confusion, we are replacing the terms ‘‘foreign exchange swaps’’ and ‘‘foreign exchange forwards’’ with terms used in Regulation S–X, ‘‘forward foreign 383 See Morningstar Comment Letter (‘‘Academic research recommends the use of a variety of models to calculate delta depending on the instrument: Equity option, swaption, foreign exchange option, interest-rate options, and others. The proposal could be modified to define a specific approach with specific derivations of inputs for the most common type of derivatives.’’). 384 See General Instruction G of Form N–PORT. 385 See Item C.11.d of proposed Form N–PORT. 386 See Item C.11.d.ii of proposed Form N–PORT. See also supra footnote 349. 387 See SIFMA Comment Letter I (the definitions of foreign exchange swaps and foreign exchange forwards include a distinction between deliverable and non-deliverable foreign exchange contracts). See also Department of Treasury, Determination of Foreign Exchange Swaps and Foreign Exchange Forwards under the Commodity Exchange Act (Nov. 16, 2012) (exempting foreign exchange swaps and foreign exchange forwards from the definition of ‘‘swap’’); rule 3a69–2(c)(1) of the Securities Exchange Act [17 CFR 240.3a69–2]. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 currency contracts’’ and ‘‘foreign currency swaps,’’ which make no distinction between deliverable and non-deliverable foreign exchange contracts.388 Other than modifying these terms, which should have no effect on how information is reported on Form N–PORT, we received no other comments to this section of Form N– PORT. We are therefore adopting the reporting for futures and forwards as proposed.389 We also received no comments relating to our proposed elements for reporting of foreign forward foreign currency contracts and foreign currency swaps (other than the above-mentioned term changes) and are adopting it substantially as proposed with one clarifying instruction with respect to reporting depreciation.390 Funds will therefore report the amount and description of currency sold, amount and description of currency purchased, settlement date, and unrealized appreciation or depreciation.391 For swaps (other than foreign currency swaps), as proposed, 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.392 The description of the reference instrument would conform to the same requirements as the description of reference instruments for forwards and futures.393 Funds would also report upfront payments or receipts, unrealized appreciation or depreciation, termination or maturity date, and notional amount.394 Commenters expressed concern that publicly disclosing financing rates for swaps contracts could harm 388 See rule 12–13B of Regulation S–X [17 CFR 210.12–13B]; see also infra section II.C.2.c. 389 See Item C.11.d of Form N–PORT. 390 Throughout, Item C.11, where funds must report unrealized appreciation or depreciation, we added the clarifying instruction that depreciation should be reported as a negative number. See Item C.11.c.viii, Item C.11.d.v, Item C.11.e.iv, Item C.11.f.v, and Item C.11.g.v of Form N–PORT. 391 See Item C.11.e of Form N–PORT. 392 See Item C.11.f of proposed Form N–PORT. Funds would separately report the description and terms of payments to be paid and received. The description of the reference instrument, obligation, or index would include the information required to be reported for the descriptions of reference instruments for warrants, options, futures, or forwards. 393 See id. 394 See Item C.11.f.ii–Item C.11.f.v of proposed Form N–PORT. PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 81903 shareholders as financing rates are commercial terms of a deal that are negotiated between the fund and the counterparty to the swap.395 As several commenters discussed, 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.396 Counterparties could also choose not to transact with funds as a consequence of this disclosure, increasing the competition for the remaining counterparties resulting in higher fees for funds. However, the increased disclosure of a swap’s terms may also improve the ability of other funds to negotiate more favorable terms resulting in more favorable fees and financing terms for funds. Further, we designed Form N–PORT to provide information sufficient to allow our staff, investors, and other potential users to better understand the investments held in a fund’s portfolio. Without information like the payment terms for derivative instruments, valuing the risks and rewards of such an investment could be difficult for investors and other potential users. Moreover, in order for the Commission to understand such investments, the Commission staff must have access to the terms and conditions of such investments, of which the financing rates are a critical part. One commenter noted that proposed Form N–PORT did not include certain data elements that relate to the detailed calculations of cash flows, such as inflation index based values and lags associated with principal resets for overthe-counter swaps and caps and floors embedded in swaps.397 As we discussed above, as proposed, Form N–PORT would require funds to provide a description and terms necessary for a user of financial information to understand the terms of payments to be paid and received.398 We recognize that in complying with these instructions funds could determine that they should report terms like those suggested by the commenter for certain instruments. Given the variety of swaps instruments—for example, interest rate swaps, credit defaults swaps, total return swaps, each with its own respective terms and conditions—however, we do not believe that it is appropriate to specify the terms 395 See, e.g., MFS Comment Letter; Invesco Comment Letter; ICI Comment Letter (public benefit of disclosure does not outweigh potential competitive harm). The commenters’ concerns regarding the public reporting of financing rates is discussed in more detail below in section II.A.4. 396 Id. 397 See Morningstar Comment Letter. 398 See supra footnote 392. E:\FR\FM\18NOR2.SGM 18NOR2 81904 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations of the swap with the level of granularity suggested by the commenter beyond what we specified in the instructions to Form N–PORT. As a result, we are adopting Form N–PORT’s swaps reporting section substantially as proposed.399 Finally, for derivatives that do not fall into the categories enumerated in Form N–PORT, we proposed that funds would provide a description of information sufficient for a user of financial information to understand the nature and terms of the investment.400 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.401 As proposed, the description of the reference instrument would conform to the same requirements as the description of reference instruments for options and warrants.402 Funds would also report termination or maturity (if any), notional amount(s), unrealized appreciation or depreciation, and the delta (if applicable).403 We received no comments on this aspect of the proposal other than one commenter that noted that the proposed list of derivative ‘‘categories’’ could leave major categories of derivatives to be reported as ‘‘other.’’ 404 As we discussed above, we continue to recognize that new derivatives products will evolve, and therefore Form N– PORT’s derivatives reporting requirements are designed to be flexible enough to include the reporting of new investment products that may emerge. Moreover, funds may only categorize a derivatives as ‘‘other’’ if none of the identified categories applies, thus limiting the number of derivatives that will be categorized as ‘‘other.’’ 405 For these reasons, we are adopting the reporting requirements for other derivatives as proposed.406 v. Securities on Loan and Cash Collateral Reinvestment As discussed above, and as we proposed, we will require funds to 399 See Item C.11.f of Form N–PORT. Item C.11.g of proposed Form N–PORT. 401 See Item C.11.g.i of proposed Form N–PORT. 402 See id; see also supra footnote 393 and accompanying text. 403 See Item C.11.g.ii–Item C.11.g.v of proposed Form N–PORT. 404 Morningstar Comment Letter. 405 See also Morningstar Comment Letter (noting that the current taxonomy for Form N–PORT does not provide sufficient details for credit default swaps—including whether credit default swaps should be categorized as swaps or options). As discussed above, we have modified the swaps section of the form to make clear credit default swaps would be reported as a swap. 406 See Item C.11.g of Form N–PORT. mstockstill on DSK3G9T082PROD with RULES2 400 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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.407 We are also requiring, substantially as proposed, 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 will report: (1) Whether any portion of the investment was on loan by the fund, and, if so, the value of the investment on loan; 408 (2) whether any amount of the investment represented reinvestment of the cash collateral and, if so, the dollar amount of such reinvestment; 409 and (3) whether any portion of the investment represented non-cash collateral treated as part of the fund’s assets and received to secure loaned securities and, if so, the value of such non-cash collateral.410 These disclosures will 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 information will also allow us to determine whether funds that are relying on exemptive orders or noaction assurances to engage in securities lending are complying with any associated conditions regarding collateral received for such activities. This will 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 risk and risk of loss, as well as better understand any potential leverage creation through the reinvestment of collateral.411 These disclosures will also help identify those investments that funds might have to sell or redeem in the event of widespread termination or default by borrowers. More generally, we expect that this information will help to address concerns expressed by industry participants about the lack of transparency in funds’ securities lending transactions.412 407 See supra footnote 196 and preceding, accompanying, and following text. 408 See Item C.12.c of Form N–PORT. 409 See Item C.12.a of Form N–PORT. 410 See Item C.12.b of Form N–PORT. 411 As discussed above, commenters to the FSOC Notice suggested that enhanced securities lending disclosures could be beneficial to investors and counterparties. See supra footnote 190. 412 See, e.g., SEC, Transcript of Securities Lending and Short Sale Roundtable (Sept. 29, 2009), PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 One commenter suggested that noncash collateral information should not be publicly disclosed but did not elaborate on why such information should be kept nonpublic.413 As discussed herein, we believe that disclosure of this information can serve many purposes, including improving the ability of Commission staff, as well as investors, brokers, dealers, and other market participants to better understand the collateral received by funds and the associated potential liquidity and loss risks, as well as identification of those instruments that one or more funds might have to sell in the event of default by borrowers. For these reasons, we are requiring, as proposed, that this information be publicly reported on Form N–PORT. Several commenters recommended that non-cash collateral be reported in aggregate terms rather than as individual portfolio positions.414 As discussed above in section II.A.2.d, one commenter explained that funds typically do not treat non-cash collateral as fund assets and consequently do not generally include non-cash collateral in their schedule of portfolio investments.415 As discussed above, we are revising Form N–PORT to add a new Item requiring funds to report the aggregate principal amount and aggregate value of each type of non-cash collateral received for loaned securities that is not treated as a fund asset.416 If the fund does treat the non-cash collateral as a fund asset and it is therefore included in the fund’s schedule of portfolio investments, the fund will identify such assets on an investment-by-investment basis, as proposed.417 h. Miscellaneous Securities In Part D of Form N–PORT, as we proposed, and as currently permitted by Regulation S–X, funds will have the option of identifying and reporting certain investments as ‘‘miscellaneous securities.’’ 418 Specifically, Form N– PORT permits funds to report an available at https://www.sec.gov/news/ openmeetings/2009/roundtable-transcript092909.pdf (discussing, among other things, the lack of publicly available information to market participants about securities lending transactions). 413 See Schwab Comment Letter. 414 See RMA Comment Letter; ICI Comment Letter. 415 See ICI Comment Letter. 416 Id. (the Commission should require an additional item in which funds could disclose the details of any non-cash collateral received). See Item B.4 of Form N–PORT. See also supra footnote 208 and accompanying text. 417 See Item C.12.b of Form N–PORT. 418 See generally supra footnote 99 and accompanying text. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations aggregate amount not exceeding 5 percent of the total value of their portfolio investments in one amount as ‘‘Miscellaneous securities,’’ provided that securities so listed are not restricted, have been held for not more than one year prior to the date of the related balance sheet, and have not previously been reported by name to the shareholders, or set forth in any registration statement, application, or report to shareholders or otherwise made available to the public. Funds electing to separately report miscellaneous securities will use the same Item numbers and report the same information that would be reported for each investment if it were not a miscellaneous security.419 Consistent with the disclosure regime under Regulation S–X, all such responses regarding miscellaneous securities will be nonpublic and will 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 will otherwise be publicly available.420 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.421 The only information publicly reported for miscellaneous securities will be their aggregate value, which is consistent with current practice as permitted by Regulation S–X.422 Commenters generally supported the separate nonpublic disclosure of individual miscellaneous securities, and noted that the current reporting provisions under Regulation S–X regarding miscellaneous securities have been effective and not abused.423 One commenter sought clarification as to whether an investment identified as a miscellaneous security in reports filed on Form N–PORT for the third month of each fiscal quarter (i.e., reports that would be made public) would also need to be identified as a miscellaneous security in reports for the first and second months of each fiscal quarter (i.e., reports that would be nonpublic).424 As discussed further below, all information reported on Form N–PORT for the first and second months of each fiscal quarter will be nonpublic. Consequently, there is no need for funds to designate any of their investments for those reporting periods as miscellaneous securities. For additional clarity, however, we are adopting a modification from the proposal to instruct funds to only identify miscellaneous securities in reports filed for the last month of each fiscal quarter.425 Another commenter questioned whether miscellaneous securities should be measured at fair value or estimated exposure, and recommended that miscellaneous securities should be measured at notional, or delta-adjusted exposure, rather than book value.426 As we noted in the proposal, our intent in allowing funds to designate certain investments as miscellaneous securities is to allow funds to continue to report such information consistent with current practice as permitted by Regulation S– X.427 Accordingly, we continue to believe that value rather than exposure should be used in determining which investments qualify as miscellaneous securities (i.e., investments totaling 5 percent or less of the total value of the fund’s portfolio), which is consistent with current practice as permitted under Regulation S–X. For these reasons, we are adopting this aspect of Form N– PORT as proposed. i. Explanatory Notes In Part E of Form N–PORT, as was proposed, funds will have the option of providing explanatory notes relating to the filing.428 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) will be publicly available, whereas notes provided in nonpublic filings of Form N–PORT will remain nonpublic.429 Funds will also report, as applicable, the Part or Item number(s) to which the notes are related.430 These notes, which will be optional, could be used to explain assumptions 424 See mstockstill on DSK3G9T082PROD with RULES2 419 See Part D of Form N–PORT. 420 See rule 12–12 of Regulation S–X. 421 See, e.g., Shareholder Reports And Quarterly Portfolio Disclosure Of Registered Management Investment Companies, Investment Company Act Release No. 26372 (Feb. 27, 2004) [69 FR 11243 (Mar. 9, 2004)] (‘‘Quarterly Portfolio Holdings Adopting Release’’) at n. 64 and accompanying text. 422 See supra footnotes 98–99 and accompanying text. 423 See SIFMA Comment Letter I; Morningstar Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 CRMC Comment Letter. Part D of Form N–PORT (‘‘For reports filed for the last month of each fiscal quarter, report miscellaneous securities. . . .’’). 426 See Morningstar Comment Letter. 427 See Proposing Release, supra footnote 7, at n. 149 and accompanying and following text. 428 See Part E of Form N–PORT. Cf. Item 4 of Form PF (providing advisers to private funds the option of explaining any assumptions that they made in responding to any questions in the form). 429 See infra section II.A.4. 430 See Part E of Form N–PORT. 425 See PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 81905 that funds made in responding to specific items in Form N–PORT. Funds could also provide context for seemingly anomalous responses that may benefit from further explanation or discuss issues that could not be adequately addressed elsewhere given the constraints of the form. Similar information in other contexts has assisted Commission staff in better understanding the information provided by funds, and we expect that explanatory notes provided on Form N– PORT would do the same.431 One commenter supported the proposal to allow funds to report explanatory notes, but requested that the notes remain nonpublic.432 Likewise, another commenter recommended that funds be allowed to designate explanatory notes as nonpublic, on a case-by-case basis.433 We are partially persuaded by these requests. We believe that to the extent the explanatory notes would be helpful to investors, such notes ideally should be publicly available. We also note that similar explanatory notes are available on Form N–MFP and are publicly available.434 However, we recognize that certain items on Form N–PORT will involve nonpublic information, and thus we believe it is appropriate that explanatory notes related to those items should be nonpublic as well. As a result, we have determined that explanatory notes related to nonpublic items such as miscellaneous securities, country of risk and economic exposure, or delta for individual options, warrants, and convertible securities will be nonpublic.435 However, explanatory notes related to other items on Form N– PORT will be publicly available. As discussed above, funds may generally use their own internal methodologies and the conventions of their service providers in reporting information on Form N–PORT.436 Funds may explain any of their methodologies, 431 See, e.g., Item C.24 of Form N–MFP (‘‘Explanatory notes. Disclose any other information that may be material to other disclosures related to the portfolio security.’’). 432 See SIFMA Comment Letter I. 433 See Dechert Comment Letter. 434 See Item C.24 of Form N–MFP (‘‘Explanatory notes. Disclose any other information that may be material to other disclosures related to the portfolio security. If none, leave blank.’’). 435 See supra footnotes 282–287 and accompanying and preceding text (discussing country of risk and economic exposure) and footnotes 378–381 and accompanying text (discussing delta for options, warrants, and convertible securities). 436 See supra footnote 79. E:\FR\FM\18NOR2.SGM 18NOR2 81906 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations including related assumptions, in Part E of Form N–PORT.437 mstockstill on DSK3G9T082PROD with RULES2 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, as proposed, a fund will also attach the fund’s complete portfolio holdings as of the close of the period covered by the report. These portfolio holdings will be presented in accordance with the schedules set forth in §§ 210.12–12 to 12–14 of Regulation S–X, and will not be required to be reported in a structured data format. As discussed further below in section II.B, we are rescinding Form N–Q because reports on Form N–PORT for the first and third fiscal quarters will 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 also recognize that some individual investors may not want to access the data in an XML format. 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, as proposed, we are requiring that, for reports on Form N–PORT for the first and third quarters of a fund’s fiscal year, the fund will 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 will 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. This will 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. Consistent with current practice and our proposal, funds will 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 437 See Instruction G to Form N–PORT (‘‘A Fund may explain any of its methodologies, including related assumptions, in Part E.’’). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 reporting period.438 In addition, although we proposed that 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, we have modified this requirement from the proposal to allow funds 60 days. Several commenters requested that funds be permitted to file Regulation S– X compliant portfolio holdings schedules within 60 days after the end of the reporting period for the first and third fiscal quarters consistent with how Form N–Q is filed today, rather than within 30 days after the end of the reporting period, as we proposed.439 In light of the concerns raised by commenters about the time needed to prepare, validate, and file this information, as well as the fact that these schedules are designed for the benefit for investors rather than the Commission and regardless of when this information is filed with us it would not be made public to investors until 60 days after the end of the reporting period, we are extending the deadline to file such information until 60 days after the end of the relevant reporting period for the first and third fiscal quarters.440 3. Reporting of Information on Form N– PORT As discussed above, we proposed that funds would report information on Form N–PORT in XML, so that Commission staff, investors, and other potential users could download structured data for immediate aggregation and comparison, for example by creating 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.441 By contrast, requiring that reports on Form N–PORT be structured would allow the Commission 438 See supra footnote 27 (discussing current requirements to transmit reports to shareholders); infra section II.C (discussing our amendments to Regulation S–X). 439 See Oppenheimer Comment Letter; State Street Comment Letter; Vanguard Comment Letter; Pioneer Comment Letter; Invesco Comment Letter; SIFMA Comment Letter I; ICI Comment Letter. 440 See Part F of Form N–PORT. 441 Forms N–CSR and N–Q are required to be filed in HTML or ASCII/SGML. See rule 301 of Regulation S–T [17 CFR 232.301]; EDGAR, Filer Manual—Volume II, Version 27 (June 2014) at 5– 1, available at https://www.sec.gov/info/edgar/ edgarfm-vol2-v27.pdf. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 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 manual entry.442 Most commenters generally supported reporting in a structured format. Several commenters supported our proposal to require reports on Form N–PORT in XML,443 while others advocated for the eXtensible Business Reporting Language (‘‘XBRL’’), a tagged system that is based on XML and was created specifically for the purpose of reporting financial and business information.444 Another commenter noted that the Commission should standardize the formatting requirements across all fund reporting in order to ease the burden on funds that would have to comply with different formatting requirements (i.e., ASCII/TXT, HTML, XBRL, XML).445 Finally, another commenter noted that much of the information that will be reported in reports on Form N–PORT is already available in other Commission filings and is duplicative.446 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 is the most appropriate method of structuring this type of data.447 Moreover, the 442 See, e.g., IDC Comment Letter (‘‘We fully support the SEC’s efforts to collect information in a structured data format to enhance its ability to aggregate and analyze the information and data.’’); but see Comment Letter of John Wahh (May 27, 2015) (‘‘Wahh Comment Letter’’) (questioning why the Commission needs to require structured data for funds); Comment Letter of L.A. Schnase (July 2, 2015) (‘‘Schnase Comment Letter’’) (questioning whether requiring structured reporting is appropriate or necessary for fund filings). See also Proposing Release, supra footnote 7, at 92–93. 443 See, e.g., SIFMA Comment Letter I; ICI Comment Letter; Morningstar Comment Letter (‘‘We believe a single standard XML framework, as either an extension of current schema or an alignment with the emerging interoperability of the ISO standard, could ease reporting burdens.’’). 444 See, e.g., Comment Letter of XBRL US (Aug. 11, 2015) (‘‘XBRL US Comment Letter’’); Comment Letter of Deloitte & Touche LLP (Aug. 11, 2015) (‘‘Deloitte Comment Letter’’); but see Morningstar Comment Letter (‘‘Extensible Business Reporting Language has had very limited success, and certain aspects of the standard are too lenient for regular data validation.’’). 445 See Schnase Comment Letter (Commission should also ease the burdens on funds by allowing funds to input their data through a pre-formatted web portal or web form). Based on staff experience with XML filings, we believe that it is actually less burdensome for most funds to report fund information directly into an XML filing, rather than go through the time consuming exercise of manually entering fund data into a pre-formatted web form. 446 See Wahh Comment Letter. 447 We anticipate that the XML structured data file would be compatible with a wide range of open E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 interoperability of data between Forms N–MFP, PF, and N–PORT will aid the staff with cross-checking information reported to the Commission and in monitoring the fund industry.448 As discussed further below in the economic analysis, the XML format will also improve the quality of the information disclosed by imposing constraints on how the information will be provided, by providing a built-in validation framework of the data in the reports.449 While we acknowledge that some of the information we are requiring in Form N–PORT is duplicative to information filed in other forms, filing this information in an XML format will allow the staff to more efficiently review and analyze data for industry trends and risk monitoring purposes. We are therefore adopting the requirement that reports on Form N–PORT be filed in an XML format as proposed.450 We considered, as several commenters suggested, alternative formats to XML, such as XBRL. However, while XBRL allows issuers to capture the rich complexity of financial information presented in accordance with GAAP, we believe that XML is more appropriate for the reporting requirements that we are adopting. Form N–PORT, as well as Form N–CEN, as adopted, will contain a set of relatively simple characteristics of the fund’s portfolio- and position-level data, such as fund and class identifying information, that is more suited for XML than XBRL, as explained further in section III.F below. We also considered, as one commenter suggested, ways to standardize the formatting requirements across all fund reporting. However, based on staff experience reviewing fund filings, we believe that different filing formats (e.g., PDF, HTML, XML) are appropriate for different types of filings, depending on their uses. For example, while PDF and HTML filings might be appropriate based on the filer, the content, and the end-user of the data, the PDF and HTML formats are not designed for conveying large quantities of data that require more robust validations to ensure data quality and source and proprietary information management software applications. Continued advances in structured data software, search engines, and other web-based tools may further enhance the accessibility and usability of the data. See, e.g., Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 10059 (Mar. 4, 2010)] (‘‘Money Market Fund Reform 2010 Release’’) at n. 341. 448 See Morningstar Comment Letter. 449 See infra section III.B.2. 450 See also infra section II.D.1. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 consistency for aggregation, comparison, and analysis purposes.451 We proposed that funds report information on Form N–PORT on a monthly basis, no later than 30 days after the close of each month.452 For the reasons discussed herein, 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.453 Several commenters requested that we instead require quarterly reporting, either permanently or for an initial period, citing to either data security concerns (discussed below), the increased filing burdens of Form N– PORT, or both.454 However, 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 will increase the frequency of portfolio reporting, which we believe will be useful to the staff for fund monitoring, particularly in times of market stress. This will also triple the frequency that data is reported to the Commission in a given year, as well as ensure that the Commission has more current information, which should in turn enhance the ability of staff to perform analyses of funds in the course of monitoring for industry trends, or identifying issues for examination or inquiry. Notwithstanding data security concerns, which are discussed further below, commenters generally supported the proposed requirement for monthly 451 See id. 452 Commission staff understands that certain funds currently report their investments to shareholders as of the last business day of the reporting period, while other funds report their investments as of the last calendar day of the reporting period. In recognition of this fact, and in an effort to avoid disruptions to current fund operations, the information reported on Form N– PORT may reflect the fund’s investments as of the last business day, or last calendar day, of the month for which the report is filed. 453 As discussed above, portfolio schedules are currently available to the public in reports that are mailed to shareholders or filed with the Commission either 60 or 70 days following the end of each reporting period. See supra footnote 27 and accompanying text. 454 See, e.g., Comment Letter of Dodge & Cox (Aug. 7, 2015) (‘‘Dodge & Cox Comment Letter’’) (data security concerns); ICI Comment Letter (Commission should ensure that it is prepared to protect sensitive fund data before requiring monthly disclosures of fund holdings); MFS Comment Letter (same); Oppenheimer Comment Letter (data security concerns and burden of monthly filings); Carol Singer Comment Letter. PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 81907 reporting.455 However, some commenters requested that we extend the monthly reporting deadline from 30 days to a longer period, such as 45 or 60 days.456 Commenters noted that the data required by Form N–PORT resides on multiple platforms, including with third-party service providers, and that the time it will take to compile data, verify it, and convert it to an XML filing format is significant.457 Additionally, one commenter stated that funds that have high volumes of as-of trades, such as funds that invest heavily in bonds and derivatives, could take longer to complete their month-end reconciliations.458 Finally, the same commenter noted that retrieving information from multiple portfolio managers of sub-advised funds could also delay the process of month-end reconciliations.459 Other commenters requested that we revise the filing periods for closed-end funds because closed-end funds may not have approved NAVs for 45-days or longer following month-end.460 We are requiring that funds file reports on Form N–PORT within 30 days of month-end. Based on staff experience with funds and fund filings, we believe that 30 days is sufficient time to report this information. Separately, we believe that requiring funds to file reports more than 30 days after month end will result in less timely data being submitted to the 455 Vanguard Comment Letter (‘‘We generally support filing the new Form N–PORT on a monthly basis with a 30-day lag.’’); Morningstar Comment Letter; Franco Comment Letter. 456 See, e.g., Vanguard Comment Letter (45 days after month end); MFS Comment Letter (same); ICI Comment Letter (same); T. Rowe Price Comment Letter (same); BlackRock Comment Letter (same); SIFMA Comment Letter I (45–60 day reporting window); SIFMA Comment Letter II (same); Dreyfus Comment Letter (45–60 days after month-end and move to bi-monthly or quarterly reporting); CRMC Comment Letter (60 days after close of month); Pioneer Comment Letter (same); Invesco Comment Letter (same); Dechert Comment Letter (longer period, generally); but see State Street Comment Letter (Supporting 30 day deadline, but requesting an additional 15 days for the first-year of reporting). 457 See, e.g., Vanguard Comment Letter; MFS Comment Letter. 458 See State Street Comment Letter. The same commenter also noted that funds that have high volumes of over-the-counter derivatives trading would need more time to file reports on Form N– PORT because it would take the funds time to collect all of the fully executed derivatives contracts from counterparties before reporting at month-end. 459 See id. 460 See Comment Letter of UMB Fund Services, Inc. (Aug. 14, 2015); Carol Singer Comment Letter. Based upon staff experience, it is our understanding that most closed-end funds strike their NAV on atleast a monthly basis. Those that do not can do so, for Form N–PORT reporting purposes, by using the internal methodologies consistent with how they report internally and to current and prospective investors. See General Instruction G of Form N– PORT. E:\FR\FM\18NOR2.SGM 18NOR2 81908 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Commission, which will reduce the utility of portfolio information to the Commission. Therefore, we believe a 30day filing period strikes the proper balance even though we recognize that preparing reports on Form N–PORT will initially require a significant effort by funds.461 Moreover, as one commenter noted while advocating for bi-monthly or quarterly reporting, lag times of more than 30 days would make monthly reporting impractical, as reports would overlap with preparation time.462 We also note that several commenters also noted that reporting on the same basis the fund uses to calculate NAV (which is generally on a T+1 basis), which the Form, as adopted, explicitly requires, will take less time relative to reporting on a T+0 basis, which is used for financial reporting.463 For each of these reasons, we are adopting, as proposed, our requirement for reports on Form N– PORT to be filed with the Commission within 30 days of month-end.464 Several commenters discussed the need for appropriate data security practices for the data on Form N–PORT that will be kept nonpublic.465 In many cases, these commenters stated that these data items could be competitively sensitive and that a breach could result in harm to the reporting funds. Some commenters also highlighted the need for appropriate data security safeguards 461 See infra section III.B.3. Comment Letter (advocating for bimonthly or quarterly reporting, with 45–60 days to file reports on Form N–PORT). 463 See Schwab Comment Letter (reporting that converting from T+1 to T+0 accounting would add approximately 6–10 days to the process of compiling data for Form N–PORT). Commenters acknowledged that reporting holdings on a T+1 basis would save time and compiling data for month-end reporting. Some commenters stated that 45-days would be needed to file reports on Form N–PORT on a T+0 basis, however they suggested that 30 days could be sufficient with T+1 reporting. See Schwab Comment letter (urging the use of T+1 accounting or ‘‘alternatively’’ recommending a minimum of 45 days); Wells Fargo Comment Letter (recommending a 45 day reporting period if T+0 reporting is required); Others explicitly recommended a 45-day filing period even if we allow filing on T+1 basis. See ICI Comment Letter; Oppenheimer Comment Letter. 464 See General Instruction A of proposed Form N–PORT. 465 See CRMC Comment Letter; Dodge & Cox Comment Letter (recommending that the reporting requirement be suspended in the event of a data security breach); IDC Comment Letter; ICI Comment Letter; MFS Comment Letter; Comment Letter of Mutual Fund Directors Forum (Aug. 11, 2015) (‘‘Mutual Fund Directors Forum Comment Letter’’) (recommending that the Commission implement data security recommendations of the Government Accountability Office); Oppenheimer Comment Letter; SIFMA Comment Letter II; Simpson Thacher Comment Letter; State Street Comment Letter; Vanguard Comment Letter (recommending that the compliance period be extended to allow more time for the Commission to assess the data security of its systems). mstockstill on DSK3G9T082PROD with RULES2 462 Dreyfus VerDate Sep<11>2014 22:30 Nov 17, 2016 Jkt 241001 should the Commission determine in the future to share any of the nonpublic information with one or more other regulatory agencies.466 Some of these commenters believed that, before requiring nonpublic reports on Form N– PORT, the Commission should complete an independent, third-party review and verification of its data security practices and recommended that the Commission revisit its practices on an ongoing basis.467 Some commenters suggested that the Commission provide additional information about its data security controls or its protocols for responding to an identified breach.468 As discussed above, several commenters requested that we require quarterly, rather than monthly, reports on Form N–PORT, citing to data security concerns.469 The Commission recognizes the importance of sound data security practices and protocols for nonpublic information, including information that may be competitively sensitive. The Commission has substantial experience with the storage and use of nonpublic information reported on Form PF, delayed public disclosure of information on Form N–MFP (although the Commission no longer delays public disclosure of reports on Form N–MFP), as well as other nonpublic information that the Commission handles in its course of business. Commission staff is carefully evaluating the data security protocols that will apply to nonpublic data reported on Form N–PORT in light of the specific recommendations and concerns raised by commenters. Drawing on its experience, the staff is working to design controls and systems for the use and handling of Form N– PORT data in a manner that reflects the sensitivity of the data and is consistent with the maintenance of its confidentiality.470 In advance of the 466 See CRMC Comment Letter; ICI Comment Letter. 467 See IDC Comment Letter (noting recent report by the Government Accountability Office); ICI Comment Letter (noting recent reports by the Government Accountability Office and the Commission’s Office of Inspector General and recommending specific data security practices); MFS Comment Letter; Oppenheimer Comment Letter (noting recent reports by the Government Accountability Office and the Commission’s Office of Inspector General). 468 See ICI Comment Letter (recommending that the Commission notify affected funds in the event of a breach); MFS Comment Letter; SIFMA Comment Letter II; Simpson Thacher Comment Letter (recommending that the Commission issue a release addressing data security and accepting public comments before adopting new reporting requirements). 469 See supra footnote 454 and accompanying text. 470 See Form PF Adopting Release, supra footnote 80. We recognize that there are differences between the N–PORT reporting requirements and the Form PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 compliance date, we expect that the staff will have reviewed the controls and systems in place for the use and handling of nonpublic information reported on Form N–PORT. 4. Disclosure of Information Reported on Form N–PORT As discussed above, we proposed that the information reported on Form N– PORT for the third month of each fund’s fiscal quarter be made publicly available 60 days after the end of the Fund’s fiscal quarter.471 We also proposed that the information reported on Form N–PORT for the first and second months of each fund’s fiscal quarter, and any information reported in Part D of the Form, not be made public.472 Comments were mixed on this aspect of the proposal. We received a number of comments objecting to the public disclosure of any information on Form N–PORT on a quarterly basis.473 Others generally supported, or did not oppose, quarterly public disclosure of Form N– PORT, but requested that certain information items be kept nonpublic.474 In discussing these alternatives, several commenters noted similarity to the data that the Commission collects on a nonpublic basis from private funds on Form PF.475 Finally, some commenters called for more frequent public disclosure of the information on Form N–PORT, as the information could assist intermediaries and market professionals with evaluating whether funds are PF reporting requirements, such as frequency, granularity, and registration status, and our recognition of these differences guides our evaluation of appropriate measures for preservation of data security for reported information. 471 See General Instruction F of proposed Form N–PORT. 472 Id. 473 See SIFMA Comment Letter II (‘‘The fund’s quarterly data could be mined for trading patterns in order to replicate the portfolio’s underlying strategy (e.g., the underlying analytics or equations behind a quantitative strategy.) This could lead to an attempt to front-run a fund.’’); see also SIFMA Comment Letter I; Schwab Comment Letter; Fidelity Comment Letter; T. Rowe Price Comment Letter. 474 See, e.g., ICI Comment Letter (portfolio risk metrics, delta, liquidity determinations, country of risk and derivatives financing rates should be kept non-public.); BlackRock Comment Letter (risk metrics); Invesco Comment Letter (portfolio level risk metrics, derivatives information, illiquidity determinations, and securities lending information should remain non-public); Oppenheimer Comment Letter (risk metrics, illiquidity determinations, country of risk determinations, derivatives payment terms (including financing rates), and securities lending fees and revenue sharing splits should be kept non-public) SIFMA Comment Letter II (risk metrics; illiquidity determinations; country of risk; and derivative financing rates, custom baskets); BlackRock Derivatives Comment Letter (derivatives positions). 475 See, e.g., SIFMA Comment Letter I; ICI Comment Letter; BlackRock Comment Letter; see also AIMA Comment Letter; Confluence Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 consistently executing their stated portfolio strategies.476 These comments are addressed below. Most commenters who addressed this issue did not support the public reporting of all Form N–PORT filings (i.e., public disclosure on a monthly basis).477 Such commenters generally believed that disclosure of all monthend Form N–PORT filings could increase the risk of front-running or free-riding, ultimately harming investors.478 These commenters noted that more frequent disclosures would provide non-investors with free access to the research and analysis that investors pay advisers for through management and other fees. As discussed further below, commenters that believed that Form N– PORT should remain nonpublic, or that believed certain information items should remain nonpublic, raised two concerns. First, some commenters argued that some of the information on Form N–PORT could potentially be proprietary, and lead to harm to the fund and its investors if publicly released. For example, for derivatives, payment terms, including financing rates, are negotiated rates; as a result, commenters expressed concern that public disclosure may harm a fund’s ability to negotiate favorable terms on behalf of its investors.479 Similarly commenters argued that disclosing detailed information on the components of nonpublic indexes could violate the intellectual property rights that index providers might assert and, as a result, harm investors who may lose the benefit of index products that would no longer be available to them, should an index provider choose to no longer do business with a fund, rather than have its index’s components made publicly available. Second, some commenters noted that if certain information items, such as the proposed risk metrics, monthly return information, and country of risk are publicly disclosed, it could potentially confuse and mislead investors.480 For example, some commenters argued that risk metrics are calculated using inputs 476 See Franco Comment Letter (requesting that all portfolio filings be made public 180 to 360 days after filing); Morningstar Comment Letter (requesting public disclosure on a monthly basis reasoning that many fund complexes currently make portfolio holdings information public on at least a monthly basis). 477 See, e.g., Dodge & Cox Comment Letter; ICI Comment Letter; MFS Comment Letter. 478 See id. 479 See, e.g., Oppenheimer Comment Letter; SIFMA Comment Letter I. 480 See, e.g., SIFMA Comment Letter I; SIFMA Comment Letter II; Fidelity Comment Letter; MFS Comment Letter; ICI Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 and assumptions that could make them subjective and investors could mistakenly seek to compare risk metrics across funds or believe that risk metric data represents a fund’s overall risk.481 Similarly, monthly return data (including monthly returns attributable to derivatives) could cause investors to mistakenly focus on short-term results or otherwise confuse investors.482 Likewise, commenters noted that the country of risk determination is subjective and open to different determinations among funds and advisers which may lead to investor confusion.483 Finally, some commenters that argued Form N–PORT should remain completely nonpublic questioned the utility of the information in Form N–PORT for investors.484 Subject to discrete information items discussed further below, the Commission is adopting as proposed the public disclosure of funds’ quarter-end Form N–PORT with a 60-day delay from the reporting period. We decline to adopt the suggestion of some commenters that all reports filed on Form N–PORT remain nonpublic. The Commission believes that the public reporting requirements of Form N– PORT generally are appropriate given the filer’s status as a registered investment company with the Commission, which is based on the tenets of disclosure and transparency to fund investors, and not as a private fund.485 Moreover, as we discuss below, funds currently publicly report holdings information on a quarterly basis through Forms N–CSR and N–Q. We also note that Section 45(a) of the Investment Company Act requires information in reports filed with the Commission pursuant to the Investment Company Act be made public unless we find that public disclosure is neither necessary nor appropriate in the public interest or for the protection of investors.486 For 481 See, e.g., ICI Comment Letter; Pioneer Comment Letter; SIFMA Comment Letter II. 482 See CRMC Comment Letter; SIFMA Comment Letter I. 483 See, e.g., MFS Comment Letter; Pioneer Comment Letter; Schwab Comment Letter; Oppenheimer Comment Letter. 484 See, e.g., SIFMA Comment Letter I; Schwab Comment Letter; Fidelity Comment Letter. 485 See, e.g., section 45(a) of the Investment Company Act (requiring information in reports filed with the Commission pursuant to the Investment Company Act be made public unless we find that public disclosure is neither necessary nor appropriate in the public interest or for the protection of investors). Regarding those commenters that compared the information that Form N–PORT requires to that in Form PF, we note that Form PF is filed by private funds pursuant to Advisers Act section 204(b), making such data subject to the confidentiality protections applicable to data required to be filed under that section. 486 See id. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 81909 the reasons discussed above, we continue to believe that public disclosure of information about most of the items required on Form N–PORT is appropriate in the public interest, as well as for the protection of investors. 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 risks and returns of a particular fund.487 Accordingly, whether directly or through third parties, we believe that the periodic public disclosure of the information to be reported on Form N–PORT could benefit fund investors. Moreover, we generally believe that investors should have access to portfolio information in a structured data format, and be given the opportunity to make their own decisions regarding the usefulness of the data. We have, however, made several modifications to our proposals, discussed above, in response to commenters. We believe that, on balance, investors would benefit from the information that will be reported on Form N–PORT. Likewise, the Commission continues to believe that public availability of information, including the types of information that will be collected on Form N–PORT that may not currently be reported or disclosed by funds, can benefit investors and other potential users by assisting them in making more informed investment decisions. We continue to recognize, however, that more frequent portfolio disclosure than is currently required 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 ‘‘frontrunning.’’ 488 Similarly, the Commission is sensitive to concerns that more frequent portfolio disclosure may facilitate the ability of non-investors to ‘‘free ride’’ on a mutual fund’s investment research, by allowing those investors to reverse engineer and 487 See Russ Wermers Comment Letter; see generally Franco Comment Letter (‘‘. . . the Commission [should] adopt a more expansive view of its disclosure rulemaking mandate and more specifically a view that considers layered forms of its disclosure (and disclosure documents) that meet the needs of different constituent end-users of disclosure.’’). 488 See, e.g., Quarterly Portfolio Holdings Adopting Release, supra footnote 421, at n. 128 and accompanying text. E:\FR\FM\18NOR2.SGM 18NOR2 81910 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations ‘‘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.489 Both front-running and copycatting can adversely affect funds and their shareholders.490 We raised such concerns in the Proposing Release, and, many commenters that discussed public disclosure of portfolio information agreed with these concerns.491 However, one commenter argued that such effects were unlikely.492 We recognize that some free-riding and front running activity can occur even with quarterly disclosure, with the potential for investor harm.493 Conversely, however, and as we noted in the Proposing Release, we previously received petitions 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 more information about how a fund is complying with its stated investment objective.494 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 489 See, e.g., id. at n. 129 and accompanying text. ICI, The Potential Effects of More Frequent Portfolio Disclosure on Mutual Fund Performance, Perspective Vol. 7, No. 3 (June 2001) (‘‘Potential Effects of More Frequent Disclosure’’), available at https://www.ici.org/pdf/per07-03.pdf. 491 See, e.g., ICI Comment Letter (noting the risk of predatory trading with an increase in frequency of public disclosure of fund portfolio holdings); SIFMA Comment Letter I (same); Simpson Thacher Comment Letter (same); Vanguard Comment Letter (same); see also Proposing Release, supra footnote 7, at 33613–33614. 492 See Morningstar Comment Letter (arguing that reverse-engineering concerns are largely unfounded). 493 See infra section III.B.3 494 See Quarterly Portfolio Holdings Adopting Release, supra footnote 421, at n. 32 and accompanying text (discussing prior investor petitions for rulemaking). Investors that petitioned for quarterly disclosure also argued that increasing the frequency of portfolio disclosure would expose ‘‘style drift’’ (when the actual portfolio holdings of a fund deviate from its stated investment objective) and shed light on and prevent several potential forms of portfolio manipulation, such as ‘‘window dressing’’ (buying or selling portfolio securities shortly before the date as of which a fund’s holdings are publicly disclosed, in order to convey an impression that the manager has been investing in companies that have had exceptional performance during the reporting period) and ‘‘portfolio pumping’’ (buying shares of stock the fund already owns on the last day of the reporting period, in order to drive up the price of the stocks and inflate the fund’s performance results). mstockstill on DSK3G9T082PROD with RULES2 490 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 to investors, notwithstanding the opportunities for front-running and reverse engineering it might create.495 We have considered both 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 will be required on Form N–PORT, as well as the potential costs associated with making that information available to the public, which could be ultimately borne by investors.496 Accordingly, in an attempt to minimize these potential costs and competitive harms from frontrunning and reverse engineering, we are requiring public disclosure of fund reports on Form N–PORT once each quarter, rather than monthly. This maintains the status quo regarding the frequency and timing of public portfolio disclosure, while providing investors and other potential users with the benefit of having more detailed portfolio information in a structured format. As commenters pointed out, we recognize that we are requiring additional data points in Form N–PORT, as well as requiring the data to be structured, which represents a change regarding the scope of information available to the public. As discussed above, however, we believe that generally this additional information can benefit investors. Additionally, while we recognize that an increase in the amount of publicly available information has the potential to facilitate predatory trading, as discussed in section III.B.3 below, we do not believe that quarterly public disclosure with a 60-day lag will have a significant, additional competitive impact. We discuss commenters’ concerns about specific data items below. Funds are currently required to disclose their portfolio investments quarterly, via public filings with the Commission and semi-annual reports distributed to shareholders, with the exception of ‘‘miscellaneous securities’’ which funds are not required to disclose pursuant to Regulation S–X. Consequently, the Commission will not make public the information reported for the first and second months of each fund’s fiscal quarter on Form N–PORT, nor any ‘‘miscellaneous securities’’ 495 See id. doing so, we also considered the various comment letters that we received regarding our proposal to make the third month’s report public, and the costs and benefits of doing so. See, e.g., SIFMA Comment Letter II; SIFMA Comment Letter I; Schwab Comment Letter; Fidelity Comment Letter; T. Rowe Price Comment Letter; see also Franco Comment Letter; Morningstar Comment Letter. 496 In PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 reported for the third month of each fund’s fiscal quarter.497 Only information reported for the third month of each fund’s fiscal quarter on Form N–PORT will be made publicly available, and such information will not be made public until 60 days after the end of the third month of the fund’s fiscal quarter.498 We continue to believe that maintaining the status quo with regard to the frequency and the time lag of portfolio reporting will 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.499 For the reasons discussed above, we find that it is neither necessary nor appropriate in the public interest or for the protection of investors to make information reported for the first and second months of each fund’s fiscal quarter on Form N–PORT or ‘‘miscellaneous securities’’ reported for the third month of each fund’s fiscal quarter publicly available.500 As noted above, some commenters, while generally supporting quarterly 497 See General Instruction F of Form N–PORT. are maintaining 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 will be concurrent with the public portfolio disclosures reported on a semiannual fiscal year basis on Form N–CSR. We believe that such overlap will minimize the risks of predatory trading, because otherwise funds with fiscal year-ends that fall other than on a calendar quarter- or year-end will 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. 499 See also supra footnote 360 and accompanying text (non-public indexes and custom baskets); supra footnotes 395–399 and accompanying text (derivatives financing rates); supra footnote 203 and accompanying text (securities lending counterparties); supra footnote 281 and accompanying text (repurchase and reverse repurchase agreements). 500 See section 45(a) of the Investment Company Act. Form N–PORT has also been modified from the proposal to clarify that the Commission does not intend to make public the information reported on Form N–PORT for the first and second months of each fund’s fiscal quarter that that is identifiable to any particular fund or adviser or any information reported with regards to country of risk and economic exposure, delta, or miscellaneous securities, or explanatory notes related to any of those topics that is identifiable to any particular fund or adviser. See General Instruction F of Form N–PORT. However, the SEC may use information reported on Form N–PORT in its regulatory programs, including examinations, investigations, and enforcement actions. 498 We E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations disclosure on Form N–PORT, believed that certain information items should remain nonpublic. Some commenters believed that some of the information in Form N–PORT could contain potentially proprietary information, and lead to harm to the fund and its investors if publicly released. For example, commenters expressed concern that public disclosure of negotiated payment terms for derivatives, such as financing rates, could harm a fund’s ability to negotiate favorable terms.501 However, as we discussed above in section II.A.2.g.iv, we designed Form N–PORT to provide information sufficient to allow our staff, investors, and other potential users to better understand the investments held in a fund’s portfolio. This necessarily involves disclosing the payment terms for derivative instruments a fund invests in. Without such information, valuing the risks and rewards of such an investment could be difficult for investors and other potential users. We therefore do not believe that it would be necessary or appropriate in the public interest for the benefit of investors to mask such information for all reports on Form N– PORT. Similarly, as discussed above, commenters noted that disclosing detailed information on the components of nonpublic indexes could violate the intellectual property rights that index providers might assert. This could result in harm to investors who may lose the benefit of index products that would no longer be available to them, should an index provider choose to no longer do business with a fund, rather than have its index’s components made public and open the index to front-running and reverse engineering.502 As we discussed more fully above in section II.A.2.g.iv, we continue to believe that it is important for the Commission, investors, and other potential users to have transparency into a fund’s exposures to assets, regardless of whether the fund directly holds investments in those assets or chooses to create those exposures through a derivatives contract.503 Commenters also objected to the public disclosure of securities lending information, such as the identity of borrowers and the aggregate value of securities on loan to a counterparty, as such disclosures could cause securities lending counterparties, in an attempt to keep their securities lending exposures private, to be less willing to borrow 501 See, e.g., Oppenheimer Comment Letter; SIFMA Comment Letter I. 502 See supra section II.A.2.g.iv. 503 See id. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 securities from funds.504 However, as we stated in section II.A.2.g.v, above, public disclosure of this information will improve the ability of Commission staff, as well as investors, brokers, dealers, and other market participants to better understand the collateral received by funds and associated potential liquidity and market risks, as well as identify those instruments that one or more funds might have to sell in the event of default by borrowers. For similar reasons, one commenter requested that the identity of counterparties to repurchase and reverse repurchase agreements be kept nonpublic.505 However, as indicated above in section II.A.2.g.iii, such information is routinely publicly disclosed in other contexts, and we are unaware of any evidence that such disclosures have resulted in competitive disadvantages to the entities required to make such disclosures. As we discussed in section II.A.2.g.ii, one commenter noted that public disclosure on default, arrears, or deferred coupon payments raises competitive concerns when a debt security relates to an issuer that is a private company, as private borrowers may avoid registered funds in order to avoid public disclosure if the company becomes distressed. However, as we noted in that section, we believe that it is important that a fund’s investors have access to this information so that they can make fully informed decisions regarding their investment. Finally, some commenters believed that certain items could be misinterpreted by investors, resulting in investors being misled or confused. Specifically, some commenters believed that monthly return data (including monthly returns attributable to derivatives) could cause investors to mistakenly focus on short-term results or otherwise confuse investors.506 We disagree. As discussed in section II.A.2.e above, we agree with another commenter that believed such disclosures could improve information to investors, and noted that many funds already disclose monthly returns.507 Several commenters also believed that investors would be unduly confused by the disclosure of the portfolio-level and position-level risk metrics.508 We decline to make the portfolio-level risk 504 See, e.g., SIFMA Comment Letter I; BlackRock Comment Letter; SIFMA Comment Letter II; see also supra section II.A.2.g.v. 505 See SIFMA Comment Letter I. 506 See CRMC Comment Letter; SIFMA Comment Letter I. 507 See Morningstar Comment Letter. 508 See, e.g., SIFMA Comment Letter I; Dechert Comment Letter; Invesco Comment Letter. PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 81911 metrics (DV01/DV100 and SDV01/ SDV100) nonpublic but have determined to keep the position-level risk metrics (delta) nonpublic for all N– PORT filings.509 We agree with commenters that the calculation of delta can require a number of inputs and assumptions.510 As a result, reported deltas for the same or similar investment products could vary because of complex differences in methodologies and assumptions that are not reported on the form nor easily explained to investors. Moreover, the disclosure of delta could, for some investors, imply a false sense of precision about how a particular investment’s valuation will change in volatile market conditions. However, we continue to believe that such information is useful for the Commission’s monitoring purposes, as the Commission has the ability to contact funds directly, when necessary, to better understand a fund’s methodologies and assumptions. Thus, upon consideration of the comments, we find that it is neither necessary nor appropriate in the public interest or for the protection of investors to make delta publicly available at this time.511 We recognize that, like delta, inputs and assumptions are used for calculating DV01, DV100, and SDV01. We believe, however, that the fact that these metrics will not be reported at the position-level sufficiently mitigates the potential risks discussed above. Because these measures will not be reported by position-level, investors and other potential users will not be comparing different risk metrics for the same investment in different funds. Similarly, we believe that portfolio level risk metrics are less likely to imply a false sense of precision for some investors because such measures are, by design, the aggregation of each investment’s assumptions and projections.512 For similar reasons, we intend to keep information reported for country of risk and economic exposure nonpublic.513 We are persuaded by commenters that this information is evaluated by funds using multiple factors, making it subjective, and acknowledge that, while useful to the Commission in terms of understanding the country-specific risks, may convey a false level of 509 See, e.g., ICI Comment Letter. id. 511 See section 45(a) of the Investment Company Act which requires information in investment company forms to be made available to the public, unless we find that public disclosure is neither necessary nor appropriate in the public interest or for the protection of investors. 512 See also supra footnotes 173–178 and accompanying text. 513 See supra footnote 287 and accompanying and following text. 510 See E:\FR\FM\18NOR2.SGM 18NOR2 81912 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations precision.514 We also acknowledge arguments by commenters that disclosure of such information could stifle divergences in determinations and incentivize funds to seek homogenized determinations from third party firms, potentially rendering the information less useful to Commission staff than if it were not publicly disclosed.515 For these reasons, we find that it is neither necessary nor appropriate in the public interest or for the protection of investors to make information reported for country of risk and economic exposure publicly available at this time.516 Lastly, as discussed above, we recognize that explanatory notes related to nonpublic items should be nonpublic as well.517 As a result, we find that it is neither necessary nor appropriate in the public interest or for the protection of investors to make explanatory notes reported for delta or country of risk and economic exposure publicly available at this time.518 However, explanatory notes related to other items on Form N– PORT will be publicly available. B. Rescission of Form N–Q and Amendments to Certification Requirements of Form N–CSR 1. Rescission of Form N–Q mstockstill on DSK3G9T082PROD with RULES2 Along with our adoption of new Form N–PORT, we are also rescinding Form N–Q, as we proposed. 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 Form N–PORT will include the portfolio holdings information contained in reports on Form N–Q, we believe that Form N–PORT will 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. 514 See, e.g., ICI Comment Letter; Pioneer Comment Letter; Schwab Comment Letter; MFS Comment Letter; SIFMA Comment Letter II; Morningstar Comment Letter (commenting on the usefulness of this information to investors, but not offering an opinion as to whether this information should be publicly disclosed). 515 See, e.g., ICI Comment Letter; Oppenheimer Comment Letter. 516 See section 45(a) of the Investment Company Act. We note that we are, for similar reasons, determining not to require disclosure of a fund’s determination of the liquidity classification assigned to each investment as required to be reported on Form N–PORT. Liquidity Adopting Release, supra footnote 9. 517 See supra footnote 435 and accompanying text. 518 See section 45(a) of the Investment Company Act. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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, and as proposed, we are requiring that, for reports on Form N–PORT for the first and third quarters of a fund’s fiscal year, the fund will 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]. We requested comments on our proposed rescission of Form N–Q. One commenter supported our proposed rescission of Form N–Q.519 Other commenters recommended maintaining Form N–Q, noting that Form N–PORT might not serve the interests of investors, while Form N–Q is an established channel through which funds currently provide pertinent information to shareholders.520 We understand these concerns, but as noted above because the data reported on Form N–PORT will include the portfolio holdings information that would be contained in reports on Form N–Q, we believe that Form N–PORT will render reports on Form N–Q unnecessarily duplicative. We are also concerned about the possibility of investor confusion that may arise in the event of simultaneous public disclosure of portfolio reporting information for the same reporting periods on Form N– PORT as well as on Form N–Q. For these reasons, we are rescinding Form N–Q. Form N–Q will eliminate certifications as to the accuracy of the portfolio schedules reported for the first and third fiscal quarters. Under today’s amendments, and as we proposed, the certifications as to the accuracy of the portfolio schedules reported for the second and fourth fiscal quarters on Form N–CSR will remain. However, and as we proposed, we are amending 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.522 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 will cover the first and second fiscal quarters and third and fourth fiscal quarters, respectively, will fill the gap in certification coverage regarding the registrant’s internal control over financial reporting that will 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. However, we expect such effects, if any, to be minimal because certifying officers will continue to certify portfolio holdings for the 2. Amendments to Certification fund’s second and fourth fiscal quarters Requirements of Form N–CSR and will further provide semi-annual In connection with the Commission’s certifications concerning disclosure implementation of the Sarbanes-Oxley controls and procedures and internal Act of 2002, Form N–Q and Form N– control over financial reporting that CSR currently require the principal would cover the entire year. executive and financial officers of the Commenters generally agreed with fund to make quarterly certifications our proposed approach, although relating to (1) the accuracy of several commenters suggested information reported to the Commission, and (2) disclosure controls maintaining Form N–Q on the grounds that Form N–PORT may not serve the and procedures and internal control over financial reporting.521 Rescission of interests of investors or because of their assertions that reports on Form N–PORT 519 See Schnase Comment Letter. Schwab Comment Letter; Fidelity Comment Letter; SIFMA Comment Letter I. 521 See Item 3 of Form N–Q (certification requirement); Form N–Q Adopting Release, supra footnote 421; Item 12 of Form N–CSR (certification requirement); Certification of Management Investment Company Shareholder Reports and Designation of Certified Shareholder Reports as 520 See PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 Exchange Act Periodic Reporting Forms; Disclosure Required by Sections 406 and 407 of the SarbanesOxley Act of 2002, Investment Company Act Release No. 24914 (Jan. 27, 2003) [68 FR 5348 (Feb. 3, 2003)] (adopting release for Form N–CSR). 522 Amended Item 11(b) of Form N–CSR; amended paragraph 4(d) of certification exhibit of Item 12(a)(2) of Form N–CSR. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations should be nonpublic.523 For the reasons discussed above, and since we have determined not to make all filings of N– PORT nonpublic, we are rescinding Form N–Q and amending the certification requirements in Form N– CSR, as proposed. 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, we are adopting amendments to Regulation S–X, which prescribes the form and content of financial statements required in registration statements and shareholder reports.524 As discussed above, many of the amendments to Regulation S–X, particularly the amendments to the disclosures concerning derivative contracts, are similar to the requirements concerning disclosures of derivatives that will be required on reports on Form N– PORT.525 The amendments to Regulation S–X will, among other mstockstill on DSK3G9T082PROD with RULES2 523 See, e.g., ICI Comment Letter (agreeing with the proposed approach); State Street Comment Letter (same). See also Schwab Comment Letter (stating that Form N–PORT might not serve the interests of investors); Fidelity Comment Letter (same); SIFMA Comment Letter I (stating that reports on Form N–PORT should be nonpublic). 524 See rule 1–01, et seq. of Regulation S–X [17 CFR 210.1–01, et seq.]. While ‘‘funds’’ are defined in the preamble as registered investment companies other than face-amount certificate companies, and any separate series thereof—i.e., management companies and UITs—we note that our amendments to Regulation S–X apply to both registered investment companies and BDCs. See infra section II.C.6. Therefore, throughout this section, when discussing fund reporting requirements in the context of our amendments to Regulation S–X, we are also including changes to the reporting requirements for BDCs. 525 See supra section II.A.2.g.iv. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 things, require similar disclosures in a fund’s financial statements in order to provide investors, particularly individual investors, with clear and consistently presented disclosures across funds concerning fund investments in derivatives in an unstructured format. As outlined below, we are adopting amendments to Articles 6 and 12 of Regulation S–X that will: (1) Require new, standardized disclosures regarding fund holdings in open futures contracts, open forward foreign currency contracts, and open swap contracts,526 and additional disclosures regarding fund holdings of written and purchased option contracts; (2) update the disclosures for other investments and investments in and advances to affiliates, 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 will require prominent placement of details regarding investments in derivatives in a fund’s schedule of investments, rather than allowing such schedules to be disclosed in the notes to the financial statements. The comments that we received relating to our proposal to amend Regulation S–X were generally supportive of our efforts to improve the information that funds report to 526 We recognize that under the federal securities laws, certain derivatives fall under the definition of securities, notwithstanding, for purposes of our amendments to Regulation S–X, we expect funds to adhere to the requirements of the disclosure schedules for the relevant derivative investment, regardless of how it would be defined under the federal securities laws. See, e.g., rule 12–13C of Regulation S–X (Open swap contracts). PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 81913 shareholders and the Commission.527 However, commenters did provide comments on many aspects of our proposal, which we discuss below. The rules that we are adopting will renumber the current schedules in Article 12 of Regulation S–X and break out the reporting of derivatives currently on Schedule 12–13 into separate schedules.528 These changes are summarized in Figure 1, below. 527 See, e.g., Comment Letter of Ernst & Young LLP (Aug. 10, 2015) (‘‘EY Comment Letter’’) (‘‘We agree that many of these amendments would improve the transparency and comparability of investment company financial statements for their intended users.’’); Deloitte Comment Letter (‘‘We believe that the proposed rule related to the Commission’s modernization project is consistent with the SEC’s stated objective of improving the type and format of information regarding fund activities that investment companies provide to the Commission and investors . . . .’’); SIFMA Comment Letter I (‘‘We support the Commission’s initiative to enhance and standardize the disclosure of derivatives and other portfolio investments in fund financial statements and believe that most of the proposed amendments to Regulation S–X will achieve that goal.’’); see also AICPA Comment Letter. One commenter recommended that the Commission dispense with any requirement for position-level reporting of information regarding derivatives, as this information could confuse or mislead investors and could contain confidential information relating to a fund’s investment strategy. Simpson Thacher Comment Letter. However, Article 12 of Regulation S–X already requires all position-level derivatives to be reported. Moreover, GAAP already requires a minimum level of position-level reporting of investments that does not distinguish between derivatives and securities. See, e.g., FASB ASC 946–210–50–1 (Financial Services–Investment Companies-Disclosure— General-Schedule of Investments-Investment Companies Other than Nonregistered investments Partnerships). 528 Throughout this release when we refer to a rule as it exists prior to any amendments we are making today, it is described as a ‘‘current rule,’’ while references to a rule as amended (or an existing rule that is not being amended today) are described as a ‘‘rule’’ or ‘‘new rule.’’ E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations We believe, and commenters agreed, that these amendments will assist comparability among funds, and increase transparency for investors regarding a fund’s use of derivatives.529 We have endeavored to mitigate burdens on the industry by requiring similar disclosures both on Form N– PORT and in a fund’s financial statements.530 As we discussed in the Proposing Release, we continue to believe that these amendments are generally consistent with how many funds are currently reporting investments (including derivatives).531 2. Enhanced Derivatives Disclosures mstockstill on DSK3G9T082PROD with RULES2 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.532 We received comment letters on the concept release from a variety of stakeholders. Several commenters noted that holdings of derivative investments are not currently reported by funds in a consistent manner.533 Commenters also 529 See, e.g., EY Comment Letter; SIFMA Comment Letter I. 530 See generally supra section II.C. 531 See Proposing Release, supra footnote 7, at 33616. 532 Derivatives Concept Release, supra footnote 38. 533 Comments submitted in response to the Derivatives Concept Release are available at https:// www.sec.gov/comments/s7-33-11/s73311.shtml. See Morningstar Derivatives Concept Release Comment VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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.534 Another commenter specifically requested that we revise Regulation S–X in order to keep ‘‘financial reporting current with developments in the financial markets.’’ 535 Letter (‘‘This is because fund companies are not reporting derivative holdings in a consistent manner and are not reporting derivative holdings in a manner that identifies the underlying risk exposure.’’); Comment Letter of Rydex|SGI to Derivatives Concept Release (Nov. 7, 2011) (‘‘Rydex| SGI Derivatives Concept Release Comment Letter’’) (‘‘However, the quality and extent of such derivatives disclosure still varies greatly from registrant to registrant.’’). 534 See Morningstar Derivatives Concept Release Comment Letter (‘‘Notional exposure . . . is a better measure of risk’’); Comment Letter of Oppenheimer Funds to Derivatives Concept Release (Nov. 7, 2011) (‘‘Instead, counterparty risks incurred through the investments in derivatives . . . should be considered in a new SEC rulemaking that is primarily disclosure based.’’); Rydex|SGI Derivatives Concept Release Comment Letter (recommending that funds that invest in derivatives should disclose notional exposure for nonexchanged traded derivatives and a fund’s exposure to counterparties). Commenters to the FSOC Notice made similar observations relating to counterparty disclosures. See, e.g., Americans for Financial Reform FSOC Notice Comment Letter (‘‘Counterparty data is also often not available.’’); Comment Letter of The Systematic Risk Council Comment to FSOC Notice (Mar. 25, 2015) (discussing the need to have information about investment vehicles that hold bank liabilities). 535 Comment Letter of Stephen A. Keen to Derivatives Concept Release (Nov. 8, 2011). PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 We are adopting rules that will standardize the reporting of certain derivative investments for fund financial statements. While the current 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 other than options. Current 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 current rules 12–12, 12–12A, 12–12B, and 12–14.536 Thus, currently, 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 amending Regulation S–X by adopting new schedules for open futures contracts, open forward foreign currency contracts, and open swap contracts. We received several comments generally supporting the Commission’s proposals to provide 536 The current schedule to rule 12–13 requires disclosure of: (1) Description; (2) balance held at close of period—quantity; and (3) value of each item at close of period. See current rule 12–13 of Regulation S–X. E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.000</GPH> 81914 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations more information about derivatives.537 Other commenters objected to the public reporting of position level derivatives reporting arguing instead that we should focus on portfolio-level metrics analysis as it would more accurately reflect an investment company’s overall use of, and, more meaningfully reflect its net exposure to derivatives.538 Funds are currently required to report their position-level derivatives in accordance with Article 12 of Regulation S–X.539 We believe that it is important for funds to continue to report position-level data for all investments in order to allow investors and other interested parties to fully understand their fund’s holdings.540 We are also modifying the current disclosure requirements for purchased and written option contracts. Finally, we are adopting certain instructions regarding the presentation of derivatives contracts that are generally consistent with instructions that are currently included, or that we are adding, in either rule 12–12 (Investments in securities of unaffiliated issuers) or current rule 12–13 (Investments other than securities).541 a. Open Option Contracts Written—Rule 12–13 (Current Rule 12–12B) and Rule 12–12 (as Applicable to Options Purchased) mstockstill on DSK3G9T082PROD with RULES2 We are amending the current disclosure of written option contracts substantially as proposed.542 We proposed to add 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,543 and the contract’s notional amount, which we are adopting as proposed.544 Thus, for rule 12–13, for each open written options contract, funds will be required to disclose: (1) Description; (2) counterparty; (3) number of contracts; (4) notional 537 See, e.g., CFA Comment Letter; Wells Fargo Comment Letter. 538 See, e.g., Simpson Thacher Comment Letter. 539 See supra footnote 536 and accompanying text. 540 See id. 541 See, e.g., rule 12–12, n. 2 of Regulation S–X (instructions for categorizing investments). 542 Under current rule 12–12B, funds are required to report, for open option contracts, the name of the issuer, number of contracts, exercise price, expiration date, and value. See current rule 12–12B of Regulation S–X [17 CFR 210.12–12B]. 543 See infra footnote 554–555 and accompanying text. 544 While rule 12–13 is specific to open option contracts written, the same disclosures also apply for purchased options as required by proposed Instruction 3 to rule 12–12. See also proposed rule 12–12B, n. 5 of Regulation S–X. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 amount; (5) exercise price; (6) expiration date; and (7) value.545 We received several comments relating to the proposed requirement to disclose notional amounts for open options contracts. Some commenters recommended that the Commission either eliminate the proposed notional amount column for certain options contracts as they believed it was unnecessary because, unlike the notional amount of swaps and futures, which communicates economic exposure, the notional amount of an option, without a delta adjustment, may not represent an equivalent position in the underlying reference asset 546 or, in the alternative, provide a clear definition of notional amount.547 As we previously stated in the Derivatives Proposing Release, we believe that, although derivatives vary widely in terms of structure, asset class, risk and potential uses, for most types of derivatives the notional amount generally serves as an important data point for investors that seek to determine a fund’s economic exposure to an underlying reference asset or metric.548 We do not believe that it is necessary to provide funds with a prescriptive formula for calculating notional amount because we understand funds today calculate their derivatives’ notional amounts for risk management, reporting or other purposes, and that funds would be able to use these calculations for financial statement reporting. Moreover, the Commission has previously discussed different types of derivatives transactions that are commonly used by funds, together with the method by which we understood a fund, for risk management, reporting or other purposes, could calculate a 545 See rule 12–13 of Regulation S–X. ICI Comment Letter (recommending the elimination of notional amount for written options because the exercise price component of an option contract makes the notional amount less relevant than other derivative instruments, such as swaps and futures); MFS Comment Letter (recommending that the Commission eliminate the proposed notional amount column in the options table). 547 See EY Comment Letter (supporting disclosures of notional amounts for open options contracts and notional and value amounts for open futures contracts, but noting that such requirements should include clear definitions); MFS Comment Letter (suggesting that the Commission either eliminate the notional amount column for open options contracts or, if the requirement is retained, clarify the methodology for calculating the notional amount of an option.); ICI Comment Letter (recommending that the Commission eliminate this requirement, or, should the Commission require notional amount, specify the calculation as: [number of contracts] × [exercise price] × [contract multiplier]). 548 See Derivatives Proposing Release, supra footnote 7, at, n. 159 and accompanying text. See also Derivatives Concept Release, supra footnote 38, at n. 19 and accompanying text. 546 See PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 81915 derivatives notional amount.549 We believe that Regulation S–X will allow a fund to use these calculations methods, as well as other reasonable methods, to determine notional amounts of such derivatives transactions.550 We also proposed to add an instruction (proposed instruction 3) to current rule 12–12, which is the schedule by 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.551 One commenter noted that some options contracts allow for a range of underlying securities to be delivered and requested that funds only be required to identify the security type to be delivered, rather than the full description called for in instruction 3 to rules 12–12 and 12– 13.552 We believe that providing a description of the investment underlying an option is necessary in order to fully understand the risks and rewards of such investment. For example, an options contract could allow for a range of underlying investments to be delivered and at the time the option is exercised, some of the investments could be riskier than others. We are therefore adopting the instruction as proposed. 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, we also proposed requiring that the presentation of that underlying investment must include a description, as required by those provisions.553 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). We received no comments on this aspect of the proposal, and we are adopting it as proposed. In order to assist investors in identifying and monitoring the counterparty risks associated with a fund’s investments in derivatives, we proposed to require funds to disclose 549 See Derivatives Proposing Release, supra footnote 7, at Table 1; see also id. 550 See id. 551 See proposed rule 12–12, n. 3 of Regulation S–X. 552 See AICPA Comment Letter. 553 See proposed rules 12–12, n. 3; 12–12B, n. 5; and 12–13, n. 3 of Regulation S–X. One commenter requested clarification whether Regulation S–X would require disclosure of any investment with optionality. See AICPA Comment Letter. We did not intend to extend this requirement to bonds or other non-derivative instruments that contain optionality features. E:\FR\FM\18NOR2.SGM 18NOR2 81916 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations the counterparty to a derivative.554 We also acknowledged that counterparty risk is mitigated for exchange-traded instruments and therefore proposed an instruction for options and swaps that funds need not disclose the counterparty for exchange-traded instruments.555 Commenters agreed, but noted that, like exchange-traded instruments, centrally cleared derivatives also do not bear the same type of risks (such as counterparty risk), as over-the-counter instruments.556 Based on the comments that we received, we agree that counterparty risk can also be mitigated through central clearance and are therefore changing instruction 4 to rule 12–13 (open options contracts) (and instruction 4 to rule 12–13C (open swaps contracts)) to not require disclosure of the counterparty for both exchange-traded options and swaps and centrally cleared options and swaps.557 Another commenter suggested that funds should be required to present counterparty exposures net of collateral received or margin posted.558 While we agree that receiving collateral and posting margin may mitigate some counterparty risk, in order to simplify the disclosures for investors and limit the burden for funds, we continue to believe that it is appropriate for funds to limit disclosure to the counterparty to the transaction, without the additional burden of providing collateral or margin information.559 As required in Form N–PORT,560 in the case of an option contract with an underlying investment that is an index or basket of investments for which components are publicly available on a Web site as of the fund’s balance sheet date,561 or if the notional amount of the mstockstill on DSK3G9T082PROD with RULES2 554 See proposed rule 12–13, Column B. 555 See proposed rules 12–13, n. 4 and 12–13C, n. 4 of Regulation S–X. 556 See State Street Comment Letter (requesting clarification on whether funds should report counterparty for exchange-traded derivatives); see also Morningstar Comment Letter (‘‘The proposal to report counterparties for non-exchange-traded instruments is reasonable. Exposures to counterparties should be presented net of collateral received or margin posted.’’). 557 See rule 12–13, n. 4 of Regulation S–X; see also rule 12–13C, n. 4 of Regulation S–X; supra section II.A.2.g.iv. 558 See Morningstar Comment Letter; see also CFA Comment Letter (generally supporting requirements for funds to report information relating to counterparty exposure). 559 See rule 12–13, Column B; see also rule 12– 13B, Column C; rule 12–13C, Column C. 560 See Item C.11.c.iii of proposed Form N–PORT; see also supra section II.A.2.g.iv. 561 As proposed, the components would be required to be publicly available on a Web site as of the fund’s balance sheet date at the time of transmission to stockholders for any report required to be transmitted to stockholders under rule 30e– VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 investment does not exceed one percent of the fund’s NAV as of the close of the period, we proposed that the fund provide information sufficient to identify the underlying investment.562 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, as proposed, the fund would list separately each of the investments comprising the index or basket of investments.563 We continue to 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. The disclosures will provide investors with more transparency into both the terms of the underlying investment and the terms of the option. We also proposed to include a similar instruction for swap contracts.564 We received a number of comments on our proposal to publicly disclose the components of an underlying index, both with respect to Form N–PORT (discussed above) and Regulation S–X.565 While one commenter agreed with our proposal,566 others requested that we include a higher threshold before requiring disclosure, such as 5 percent.567 Others agreed with our proposed 1% threshold but stated that reporting should be based on a percentage of net asset value, rather than notional value, as percentage of net asset value is a better indicator of materiality.568 1. The components would be required to remain publicly available on a Web site as of the fund’s balance sheet date until 70 days after the fund’s next fiscal year-end. For example, components of an index underlying an option contract for a fund’s 12/ 31/14 annual report must be made publicly available on a Web site as of 12/31/14 by the time that the 12/31/14 annual report is transmitted to stockholders. The components must remain publicly available until 3/10/16. 562 See proposed rule 12–13, n. 3 of Regulation S–X. See supra footnotes 360–362 and accompanying text (discussing the rationale for similar proposed requirements in Form N–PORT). 563 See id. 564 See proposed rule 12–13C, n. 3 of Regulation S–X. 565 See also supra section II.A.2.g.iv. 566 See, e.g., Morningstar Comment Letter (‘‘Index providers are earning revenues from the licensing fees embedded in the derivative cost that is born by the fund and therefore its shareholders.’’). 567 See, e.g., ICI Comment Letter; Wells Fargo Comment Letter (additional index reporting should only be triggered when a derivative represents 5% of NAV). 568 See, e.g., SIFMA Comment Letter I (‘‘We believe the original 1% value requirement is a far PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 As stated in the Proposing Release and in the Form N–PORT discussion above, we continue to believe that it is important for the Commission, investors, and other potential users to have transparency into 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.569 The 1% threshold is 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.570 We believe that, similar to the 1% threshold in the summary schedule of investments, providing a 1% de minimis threshold 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 nonpublic index for instruments that represent a smaller risk to the fund’s overall performance. Separately, as discussed further below, we believe that this modification mitigates concerns some commenters had about public disclosure of such indexes.571 We also believe that it is appropriate to measure whether such derivative instrument exceeds the 1% threshold based on the derivative’s notional value, as opposed to the current market value because derivatives with a small market value and a large notional amount could magnify losses or gains in net assets as compared to derivatives with a smaller notional amount, and thus believe that a derivative’s notional value better measures its potential contribution to the gains or losses of the fund. Furthermore, as in Form N–PORT, we believe that providing a 1% de minimis for disclosing the components of a derivative with nonpublic reference assets considers the need for 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 nonpublic index for instruments that represent a better indicator of materiality and should be adopted in this connection as well.’’); Oppenheimer Comment Letter (1% of net asset value). 569 We are also modifying Form N–PORT to require similar disclosures. See generally supra section II.A.2.g.iv. 570 See Instruction 3 to rule 12–12C of Regulation S–X; see also PwC Comment Letter. 571 See also supra section II.A.2.g.iv. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations small amount of the fund’s overall value. Commenters also suggested that funds should provide narrative disclosures about the components of a referenced index or custom basket, including any applicable industry or sector concentrations.572 The same commenters and others suggested that once a nonpublic index crosses the reporting threshold, we limit disclosure to the top 50 components and components that represent more than one percent of the index based on the notional value of the derivatives, as this standard is analogous to the current reporting requirement to identify holdings in the summary schedule of investments.573 As discussed above, we continue to believe that the notional amount generally serves as an appropriate measure of the index’s economic exposure to an underlying reference asset or metric.574 While, as we discussed above, we believe that it is appropriate to adopt a tiered reporting requirement for reporting on Form N–PORT, we are not adopting a tiered reporting requirement for disclosures under Regulation S–X. Unlike Form N–PORT, which will be reported in a structured XML format, schedules of investments are designed to be investor friendly documents. By requiring the reporting in the schedule of investments of all components of an underlying index or custom basket, we agree with commenters that noted that requiring the potential volume of disclosing components in an index in financial statements could add considerable length to the schedule of investments, rendering them more difficult for investors to review than limiting such disclosures to the most significant components.575 Additionally, such disclosures may minimize the importance to investors of direct portfolio holdings and increase reporting costs to funds.576 Finally, mstockstill on DSK3G9T082PROD with RULES2 572 See, e.g., PwC Comment Letter; AICPA Comment Letter. 573 See, e.g., PwC Comment Letter; AICPA Comment Letter; ICI Comment Letter; MFS Comment Letter. Commenters also noted their belief that reporting should be based on a percentage of NAV, rather than notional value, as percentage of NAV is a better indicator of materiality. See SIFMA Comment Letter I; Oppenheimer Comment Letter (1% based on net, not notional, values); contra Morningstar Comment Letter (‘‘Arbitrary limits on positions that should be disclosed for portfolios or reference indexes can mask the risk of an instrument.’’). 574 See id. 575 See AICPA Comment Letter; PwC Comment Letter. 576 See PWC Comment Letter (expressing concern that the cost of presenting numerous immaterial notional positions in the financial statements will exceed the benefit to the financial statement VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 investors or others interested in knowing all components of such indexes will still have access to such information on Form N–PORT, without adding the volume to the financial statements that could occur by requiring complete disclosure in the financial statements.577 As a result, we are making a modification from our proposed amendments to Regulation S–X to require funds to only report the top 50 components of the index or custom basket and any components that represent more than one percent of the notional value of the index or custom basket.578 Thus, if the index’s or custom basket’s components are not publicly available and the notional amount of the derivative represents more than 1% of the net asset value of the fund, the fund will provide a description of the index or custom basket and list separately (i) the 50 largest components in the index or custom basket and (ii) any other components where the notional value for that component exceeds 1% of the notional value of the index or custom basket.579 For each investment separately listed, the fund will include the description of the underlying investment as would be required by Article 12 of Regulation S–X as part of the description, the quantity held, the value at the close of the period, and the percentage value when compared to the custom basket’s net assets.580 As discussed more fully above, commenters also objected to the public disclosure of the components underlying an index as that disclosure could harm the intellectual property rights that index providers might assert and, as a result, harm investors who may lose the benefit of index products that would no longer be available to them.581 However, we believe that it is important that fund investors are provided with the information readers); AICPA Comment Letter (expressing concern that the cost of identifying and auditing numerous individual notional positions which typically are not reflected in the same accounting records as investment positions directly held, but instead appear in term sheets, counterparty confirmations, and off-line valuation spreadsheets—will exceed the benefit to financial statement readers). 577 Cf. Franco Comment Letter (supporting more layered forms of disclosure ‘‘that meet the needs of different constituent end-users of disclosure.’’) 578 See Instruction 3 to rule 12–13. 579 See rules 12–13, n.3 and 12–13C, n.3 of Regulation S–X. We also modified language from the proposal to delete duplicative wording; see rule 12–13, n. 3 (deleting duplicative wording to ‘‘list separately’’) and clarify instructions and conform to similar instructions in Form N–PORT; see rules 12– 13, n. 3 and 12–13C, n. 3 (changing ‘‘is over’’ to ‘‘exceeds’’ and adding ‘‘custom’’ to ‘‘baskets’’). 580 See id.; see also supra section II.A.2.g.iv. 581 See supra section II.A.2.g.iv. PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 81917 necessary to make informed investing decisions.582 This necessarily means that investors and other potential users have access to relevant information relating to investments in derivatives, including the components underlying an index.583 As discussed further in section II.A.4, above, we believe that the potential for harm to fund investors is mitigated through the current public reporting delays for fund shareholder reports.584 We are also adopting, as proposed, but subject to the modifications discussed below,585 certain instructions for rule 12–13 that are generally the same across all of the schedules for derivatives contracts.586 b. Open Futures Contracts—New Rule 12–13A We are adopting as proposed new rule 12–13A, which will require standardized reporting of open futures contracts. Under current rule 12–13, many funds currently report for each open futures contracts 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).587 In order to allow investors to better understand the economics of a fund’s investment in futures contracts, new rule 12–13A will require funds to also report notional amount and value.588 Therefore, under new rule 12–13A, funds with open futures contracts will report: (1) Description; (2) number of contracts; (3) expiration date; (4) notional amount; (5) value; and (6) unrealized appreciation/ depreciation.589 582 Id. 583 Id. 584 See also infra footnote 1271. supra section II.C.4. 586 Instruction 2 will add ‘‘description’’ and ‘‘counterparty’’ to the organizational categories of options contracts that must be listed separately. See rule 12–13, n. 2 of Regulation S–X. Instruction 4 will clarify that the fund need not include counterparty information for exchange-traded or centrally cleared options. See rule 12–13, n. 4 of Regulation S–X. Instruction 6 will require the fund to indicate each investment which cannot be sold because of restrictions or conditions applicable to the investment. See rule 12–13, n. 6 of Regulation S–X; see also infra section II.C.4. Instruction 7 will require the fund to indicate each investment whose value was determined using significant unobservable inputs. See rule 12–13, n. 7 of Regulation S–X; see also infra section II.C.4. Instruction 8 will require Column G (Value) to be totaled and agree with the correlative amount shown on the related balance sheet. See rule 12– 13, n. 8. 587 See current rule 12–13 of Regulation S–X. 588 See rule 12–13A, Columns D and E of Regulation S–X. 589 See rule 12–13A of Regulation S–X; see also Morningstar Comment Letter (‘‘The notional of a 585 See E:\FR\FM\18NOR2.SGM Continued 18NOR2 81918 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 We proposed a requirement that funds must reconcile the total of Column F (unrealized appreciation/depreciation) to the total variation margin receivable or payable on the related balance sheet.590 Although we received no comment on this aspect of the proposal, upon further review, we recognize that there may be instances where the total unrealized appreciation or depreciation for the fund’s futures contracts might not reconcile to the variation margin receivable or payable on the balance sheet. As a result, we are therefore not adopting this proposed instruction. We received a comment that suggested that the Commission provide specific definitions for the terms ‘‘notional amount’’ and ‘‘value’’ for futures contracts.591 According to the commenter, ‘‘notional amount’’ may reference either the notional amount at the time the futures contract was entered into or the current notional value. Since we believe, for Regulation S–X purposes, that it would be more useful for investors to understand the current notional amount for a futures contract, we are adopting rule 12–13A with a new instruction from the proposal that instructs funds to report ‘‘current notional amount’’ pursuant to Column D of new rule 12–13A.592 For purposes of Article 12 of Regulation S– X, we note that section 2(a)(41) of the Investment Company Act currently contains a definition of ‘‘value’’ which is applicable to Regulation S–X.593 We are also adopting, as proposed, but subject to the modifications discussed below,594 certain new instructions to the schedule for rule 12– 13A that are similar to the other derivatives disclosure requirements.595 futures contract is a key characteristic that is used to evaluate the impact on the portfolio. The disclosure is relevant and informative for investors and for fiduciaries acting on the behalf of shareholders and other investors.’’). 590 See proposed rule 12–13A, n. 7 of Regulation S–X. 591 See AICPA Comment Letter. 592 See rule 12–13A, n. 6. 593 See section 2(a)(41) of the Investment Company Act. 594 See infra section II.C.4. 595 See infra section II.C.4. Instruction 1 will require funds to organize long purchases of futures contracts and futures contracts sold short separately. See rule 12–13A, n. 1 of Regulation S– X. Instruction 2 will require funds to list separately futures contracts where the descriptions or expiration dates differ. See rule 12–13A, n. 2 of Regulation S–X. Instruction 3 will clarify that the description should include the name of the reference asset or index. See rule 12–13A, n. 3 of Regulation S–X. Instruction 4 will require the fund to indicate each investment which cannot be sold because of restrictions or conditions applicable to the investment. See rule 12–13A, n. 4 of Regulation S–X; see also infra section II.C.4. Instruction 5 will require the fund to indicate each investment whose value was determined using significant VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 c. Open Forward Foreign Currency Contracts—New Rule 12–13B We are also adopting as proposed new rule 12–13B, which requires standardized disclosures for open forward foreign currency contracts.596 Under current rule 12–13, many funds reported for each open forward foreign currency contract, 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).597 In order to allow investors to better understand counterparty risk for forward foreign currency contracts, we are adopting as proposed, a requirement that funds also disclose the counterparty to each transaction.598 Under new rule 12–13B, funds holding open forward foreign currency contracts will 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; (5) unrealized appreciation/ depreciation.599 One commenter recommended that we include a clear definition of ‘‘forward contract’’ to avoid potential confusion and foster consistent derivatives disclosure under Form N– PORT, Regulation S–X, and Form ADV.600 Many funds appear to be already classifying forward foreign currency contracts in their financial statements, and the approach we are adopting allows flexibility as products evolve. We are therefore declining to adopt a definition of ‘‘forward contract.’’ Commenters suggested that open forward foreign currency contracts be grouped by currencies purchased or sold, or more specifically by US dollars when US domiciled funds mark currency to the US dollar within financial statements.601 We do not believe that further refinement to the grouping of forward foreign currency contracts is necessary, as the commenters suggested, as new rule 12– unobservable inputs. See rule 12–13A, n. 5 of Regulation S–X; see also infra section II.C.4. 596 See proposed rule 12–13B of Regulation S–X. 597 See rule 12–13 of Regulation S–X. 598 See rule 12–13B, Column C of Regulation S– X. 599 See rule 12–13B of Regulation S–X. 600 See T. Rowe Price Comment Letter. 601 See State Street Comment Letter (forward foreign currency contracts should be grouped by purchased or sold US dollars); Morningstar Comment Letter (foreign currency forwards should be grouped and subtotaled by currencies purchased or sold). PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 13B provides funds with the flexibility to organize foreign currency contracts in the manner that they believe provides the clearest presentation of their financial statements. For example, if a fund concentrates its investments in a country such that its investments are generally denominated in a currency other than the US dollar, it may determine that grouping its contracts, including cross-currency forwards, by that currency would provide a clearer presentation to investors. We are therefore adopting instruction 1 to rule 12–13B as proposed, which will require the fund to separately organize forward foreign currency contracts where the description of currency purchased, currency sold, counterparties, or settlement dates differ.602 One commenter suggested that since most funds report derivatives on a gross basis, appreciation and depreciation for the disclosures of non-exchange-traded derivatives such as forward foreign currency contracts and swaps contracts should be disclosed in two separate columns or include subtotals, rather than in one column, as was proposed.603 We agree that in certain circumstances this change in format would assist with reconciling the unrealized appreciation and depreciation with the corresponding figures on the fund’s balance sheet and would encourage this presentation to the extent it provides such assistance. In some cases, however, an extra column may not be necessary 604 and we are therefore not adopting the commenters’ suggested modifications to the disclosure tables for those rules, although we note that the rules do not prevent a fund from presenting the information in two separate columns, if it so chooses.605 We are also adopting, as proposed, but subject to the modifications discussed below,606 certain new instructions to the schedule for rule 12– 13B that are similar to the other derivatives disclosure requirements.607 602 See rule 12–13B, n. 1 of Regulation S–X. BlackRock Comment Letter. 604 For example, if derivatives are presented net in accordance with ASC Topic 210 (Balance Sheet). 605 See rule 12–13A, Column F and rule 12–13C, Column H of Regulation S–X. 606 See infra section II.C.4. 607 Instruction 1 will require the fund to separately list forward foreign currency contracts where the description of currency purchased, currency sold, counterparties, or settlement dates differ. See rule 12–13B, n. 1 of Regulation S–X. Instruction 2 will require the fund to indicate each investment which cannot be sold because of restrictions or conditions applicable to the investment. See rule 12–13B, n. 2 of Regulation S– X; see also infra section II.C.4. Instruction 3 will require the fund to indicate each investment whose value was determined using significant unobservable inputs. See rule 12–13B, n. 3 of 603 See E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 d. Open Swap Contracts—New Rule 12– 13C We are also adopting, substantially as proposed, rule 12–13C, which will standardize reporting of fund positions in open swap contracts.608 Under current rule 12–13, for each open swaps contract, funds reported 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).609 Under new rule 12– 13C, funds will also be required to report the counterparty to each transaction (except for exchange-traded and centrally cleared swaps), the contract’s value, and any upfront payments or receipts.610 This additional information will allow investors to both better understand the economics of the transaction, as well as its associated risks.611 Therefore, funds will 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.612 Commenters were generally supportive of this proposed disclosure, although some expressed concerns about some aspects of the disclosures, as discussed in more detail below. We are adopting rule 12–13C substantially as proposed in an effort to increase transparency of swap contracts, but are making some Regulation S–X; see also infra section II.C.4. Instruction 4 will clarify that Column E (unrealized appreciation/depreciation) should be totaled and agree with the total of correlative amounts shown on the related balance sheet. See rule 12–13B, n. 4 of Regulation S–X. 608 See rule 12–13C of Regulation S–X. 609 See rule 12–13 of Regulation S–X. 610 See rule 12–13C, Columns C, F, and G of Regulation S–X. 611 For example, upfront payments or receipts disclose whether cash was paid or received when entering into a swap contract, allowing investors to better understand the initial cost of the investment, if any. 612 See rule 12–13C of Regulation S–X. The description and terms of payments to be paid and received (and other information) to and from another party should reflect the investment owned by the fund and allow an investor to understand the full nature of the transaction. One commenter suggested that, for over-the-counter swaps, appreciation and depreciation should be disclosed in two separate columns or include subtotals for appreciation and depreciation instead of one column. See BlackRock Comment Letter. But, for the same reasons as discussed in our discussion of rule 12–13B, we are not adopting the corresponding modification to the table for rule 12–13C, although the rules do not prevent a fund from presenting the information in two separate columns, if it so chooses. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 modifications in response to comments, which are discussed below. The final rules are designed to maintain enough flexibility for the variety of swap products that currently exist and future products that might come to market. In addition to the major categories of swaps, commenters also recommended that centrally cleared swaps be grouped separately from over-the-counter swaps, as centrally cleared swaps do not bear the same types of risks as over-thecounter swaps.613 While we do not believe that it is necessary to separately categorize centrally cleared swaps for purposes of Regulation S–X, as discussed more fully above, we are modifying proposed instruction 4 to Rule 12–13C to reflect that both exchange-traded and centrally cleared swaps need not list counterparty information.614 Moreover, instruction 1 to rule 12–13C provides enough flexibility as drafted to allow funds to further categorize swaps contracts by over-the-counter or centrally cleared, should they choose to do so.615 We are also adopting instruction 3 of rule 12–13C as proposed, which will provide specific examples of the more common types of swap contracts (e.g., credit default swaps, interest rate swaps, and total return swaps).616 We recognize that other types of swaps exist (e.g., currency swaps, commodity swaps, variance swaps, and subordinated risk swaps). For example, for a crosscurrency swap, funds will report for purposes of Column A of 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 rule 12–13C will 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 will include both notional amounts and the currency in which each is denominated, or the same information could be presented in two separate columns. In the context of providing comments on Form N–PORT, one commenter noted that credit default swaps are unique enough instruments that they should be treated separately from other types of swaps.617 We designed our 613 See, e.g., State Street Comment Letter; BlackRock Comment Letter. 614 See supra footnote 557 and accompanying text; see also rule 12–13C, n. 4 of Regulation S–X. 615 See rule 12–13C, n. 1 of Regulation S–X. 616 See rule 12–13C, n. 3 of Regulation S–X. 617 See Morningstar Comment Letter (Commission should require disclosure of protection written and protection purchased with the description containing the underlying, as well as columns for notional, ongoing payment, initial payment, maturity, and value.); see also supra section II.A.2.g.iv. PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 81919 amendments to Regulation S–X with enough flexibility to allow funds to report the significant elements of current and future investments and believe that rule 12–13C adequately requires funds to disclose the information sufficient for a user of financial information to understand the terms of payments to be received and paid of a fund’s investments in swaps contracts, including credit default swaps. We are therefore adopting this portion of instruction 3 as proposed and not providing a separate schedule for credit default swaps.618 Consistent with comparable reporting requirements that we proposed in connection with Form N–PORT and rule 12–13 (open options contracts), in the case of a swaps contract with an underlying investment that is an index or basket of investments for which components are publicly available on a Web site as of the fund’s balance sheet date,619 or if the notional amount of the investment does not exceed one percent of the fund’s NAV as of the close of the period, we proposed that the fund provide information sufficient to identify the underlying investment.620 We also proposed that 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 swaps 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.621 In a modification from the proposal, and as discussed more fully in the open option contracts 622 and the Form N– PORT sections of this release,623 in the case of a swaps contract with a referenced asset that is an index whose components are publicly available on a 618 See rule 12–13C, n. 3 of Regulation S–X. proposed, the components would be required to be publicly available on a Web site as of the fund’s balance sheet date at the time of transmission to stockholders for any report required to be transmitted to stockholders under rule 30e– 1. The components would be required to remain publicly available on a Web site as of the fund’s balance sheet date until 70 days after the fund’s next fiscal year-end. For example, components of an index underlying an option contract for a fund’s 12/ 31/14 annual report must be made publicly available on a Web site as of 12/31/14 by the time that the 12/31/14 annual report is transmitted to stockholders. The components must remain publicly available until 3/10/16. 620 See proposed rule 12–13, n. 3 of Regulation S– X. See supra footnotes 360–362 and accompanying text (discussing the rationale for similar proposed requirements in Form N–PORT). 621 See id. 622 See supra section II.C.2.a. 623 See supra section II.A.2.g.iv. 619 As E:\FR\FM\18NOR2.SGM 18NOR2 81920 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 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 requiring that the fund provide information sufficient to identify the referenced asset, such as a description.624 If the referenced asset is an index or custom basket whose components are not publicly available on a Web site as of the balance sheet date, and the notional amount of the derivative represents more than 1% of the net asset value of the fund as of the close of the period, the fund will provide a description of the index or custom basket and list separately (i) the 50 largest components in the index or custom basket and (ii) any other components where the notional value for that components is over 1% of the notional value of the index or custom basket.625 For each investment separately listed, the fund will include the description of the underlying investment as would be required by Article 12 of Regulation S–X, as part of the description, the quantity held, the value at the close of the period, and the percentage value when compared to the custom basket’s net assets.626 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, we proposed that 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 12–12.627 Commenters expressed concern that disclosing financing rates for swaps contracts could harm fund investors as financing rates are negotiated between parties.628 We believe, however, that the Commission’s objective to increase transparency and enhance investor understanding in these instruments by giving investors the opportunity to better understand the investments held in a fund’s portfolio justifies the disclosure of financing rates for swaps contracts.629 We are therefore adopting 624 See rule 12–13C, n. 3 of Regulation S–X. rule 12–13C, n. 3 of Regulation S–X. 626 See id. 627 See proposed rules 12–13C, n. 3; and 12–12, n. 4 of Regulation S–X. 628 See, e.g., MFS Comment Letter; Invesco Comment Letter; ICI Comment Letter (public benefit of disclosure does not outweigh potential competitive harm). 629 For example, negotiated terms of an investment in a restricted security of a private company are required to be disclosed. See current mstockstill on DSK3G9T082PROD with RULES2 625 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 this portion of instruction 3 to rule 12– 13C as proposed.630 We are also adopting, as proposed, but subject to the modifications discussed below,631 other instructions to this rule that are similar across all of our rules for derivatives contracts, as well as one modification to our proposed instruction 7.632 e. Other Investments—Rule 12–13D (Current Rule 12–13) We are also adopting, as proposed, amendments to current rule 12–13 and, for organization and consistency, are renumbering it as rule 12–13D.633 Rule 12–13D will 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 12.634 We received no comments on our proposed amendments to current rule 12–13 (and are adopting rule 12–13D as proposed). Thus rule 12–13D will require reporting of: (1) Description; (2) balance held at close of period-quantity; and (3) value of each item at close of period.635 We expect that funds will report, among other holdings, investments in physical holdings, such as real estate or commodities, pursuant to rule 12–13D. As discussed below, we are amending current rule 12–13’s requirement that funds disclose ‘‘each investment not readily marketable’’ 636 in favor of disclosures concerning whether an investment is restricted and if an investment’s value was determined using significant unobservable inputs.637 We are also adopting the rule 12–12, n. 6 of Regulation S–X. For the same reasons we discussed above, we believe that it is necessary for funds to report the specific terms for other derivatives holding information. 630 See rule 12–13C, n. 3 of Regulation S–X. 631 See infra section II.C.4. 632 Instruction 5 will require the fund to indicate each investment which cannot be sold because of restrictions or conditions applicable to the investment. See rule 12–13C, n. 5 of Regulation S– X; see also infra section II.C.4. Instruction 6 will require the fund to indicate each investment whose value was determined using significant unobservable inputs. See rule 12–13C, n. 6 of Regulation S–X; see also infra section II.C.4. Instruction 7 will require that Columns G (upfront payments/receipts) and H (unrealized appreciation/ depreciation) be totaled and agree with the totals of their respective amounts shown on the related balance sheet. See rule 12–13C, n. 7 of Regulation S–X. Note we proposed for instruction 7 to also include Column F (value) in the total, however, upon further review, we have determined that correlating the amounts from Columns F, in addition to Columns G and H would be duplicative and therefore unnecessary. 633 See rule 12–13D of Regulation S–X. 634 See id. 635 Id. 636 See rule 12–13, n. 4 of Regulation S–X. 637 See proposed rule 12–13D, n. 6 of Regulation S–X (requiring the fund to indicate each investment PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 proposed new instructions to the schedule that are generally the same across all the schedules for derivatives contracts, subject to the modifications discussed below.638 3. Amendments to Current Rules 12–12 Through 12–12C While we did not propose changes to the current schedules for rules 12–12, 12–12A, and 12–12C, we proposed certain additional rule instructions that would include new reporting requirements, as well as certain clarifying changes, including renumbering several of the schedules. With the exception of the instructions discussed below, we are adopting the amendments to new rules 12–12 through 12–12B as proposed. We proposed several modifications to the instructions to rule 12–12, the rule concerning disclosure of investments in securities of unaffiliated issuers. We proposed to modify instruction 2 to rule 12–12 (and the corresponding instructions to proposed rules 12–12A, 12–12B, 12–13D, and 12–14) which would require funds to categorize the schedule by type of investment, the related industry, and the related country, or geographic region.639 Commenters noted that requiring categorization of both the industry and geographic region (as opposed to categorizing one factor) would add considerable length to the schedule of investments and make it more difficult to understand.640 We were persuaded which cannot be sold because of restrictions or conditions applicable to the investment); rule 12– 13D, n. 7 (requiring the fund to indicate each issue of securities whose value was determined using significant unobservable inputs); see also infra section II.C.4. 638 Instruction 1 will require the fund to organize each investment separately where any portion of the description differs. See rule 12–13D, n. 1 of Regulation S–X. Instruction 2 will require the fund to categorize the schedule by the type of investment, and related industry, country, or geographic region, as applicable. See rule 12–13D, n. 2 of Regulation S–X. Instruction 3 will require that the description of the asset include information sufficient for a user to understand the nature and terms of the investment. See rule 12–13D, n. 3 of Regulation S–X; see also infra section II.C.4. 639 See proposed rule 12–12, n. 2 of Regulation S–X; see also proposed rules 12–12A, n. 2; 12–12B, n. 1; 12–13D, n. 2; and 12–14, n. 2 of Regulation S–X. 640 See, e.g., Oppenheimer Comment Letter; State Street Comment Letter; Vanguard Comment Letter; MFS Comment Letter; Wells Fargo Comment Letter (in chart or table); SIFMA Comment Letter I; ICI Comment Letter; BlackRock Comment Letter (results in additional costs to shareholders, without a corresponding benefit); AICPA Comment Letter. In response to our proposal to categorize investments by both industry and geographic regions, some commenters suggested as an alternative that funds should report the percentage of securities by country or geographic region as a separate schedule, graph, or chart. See, e.g., State E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 that requiring categorization of both industry and geographic region would add unnecessary length and confusion to the schedule of investments, which could ultimately undermine the schedule’s usefulness to investors, and are therefore not adopting these requirements.641 One commenter requested that, should we adopt the proposed instructions relating to categorization of both industry and geographic region (which, as discussed in the prior paragraph, we are not adopting), the instructions should be integrated into Regulation S–X that standardize how funds report geographic concentrations.642 Others noted that the disclosure of country of risk or geographic region should be treated as nonpublic since it is subjective in nature and based on unique assumptions and inputs used by fund management.643 Since we have decided to not adopt the proposed instructions which would have required funds to categorize investments by both industry and geographic regions, we do not think it is necessary to include specific instructions on how funds should report geographic concentrations or treat the disclosure as nonpublic. However, we note the current GAAP requirement to disclose significant concentrations of credit risk, which includes information about shared regions that identify the concentration remains unchanged.644 In order to provide more transparency to a fund’s investments in debt securities, we are adopting, with certain modifications discussed below, our proposed instruction to rule 12–12 requiring a fund to indicate the interest rate or preferential dividend rate and maturity date for certain enumerated debt instruments.645 When disclosing the interest rate for variable rate securities, we proposed that the fund describe the referenced rate and spread.646 In proposing disclosures for variable rate securities, we requested comment on other alternatives, such as period-end interest rate (e.g. the Street Comment Letter; MFS Comment Letter; ICI Comment Letter; BlackRock Comment Letter; AICPA Comment Letter. However, given the fact that we are not adopting this proposal, we believe a separate schedule is unnecessary. 641 See rule 12–12, n. 2 of Regulation S–X; see also rules 12–12A, n. 4; 12–12B, n. 2; 12–13D, n. 2; and 12–14, n. 2 of Regulation S–X. 642 See SIFMA Comment Letter I. 643 See, e.g., MFS Comment Letter; ICI Comment Letter (pertaining to disclosure of country of risk in Form N–PORT). 644 See FASB ASC 825–10–50–21(a) (Financial Instruments-Overall-Disclosure-Concentrations of Credit Risk of All Financial Instruments). 645 See proposed rule 12–12, n. 4 of Regulation S–X. 646 See id. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 investment’s interest rate in effect at the end of the period).647 We received several comments supporting our proposal to provide the reference rate and spread for variable rate securities, reasoning that the disclosure of the components of the variable rate would be easier for investors and other interested parties to determine the investment’s current rate at any given time (as opposed to the rate at the end of the reporting period).648 However, another commenter suggested that the period-end interest rate is the most appropriate variable rate security disclosure for shareholders.649 We continue to believe that disclosure of the referenced rate and spread will allow investors to better understand the economics of the fund’s investments in variable rate debt securities. We are persuaded, however, that the period-end interest rate is also important for investors because it will provide investors with the actual interest rate of the investment at the period end, thereby giving investors both the ability to understand the investment’s current return (through period-end rate) and to better understand how interest rate changes could affect the investment’s future returns. Therefore, in a modification from the proposal, we are now including in the instruction a requirement that the fund both describe the referenced rate and spread and provide the end of period interest rate for each investment, or include disclosure of each referenced rate at the end of the period.650 For securities with payments-in-kind, we proposed 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.651 We received no comments addressing this item and therefore are adopting as proposed.652 We also proposed to modify the current instruction to rule 12–12 653 that 647 See Proposing Release, supra footnote 7, at 33622. 648 See State Street Comment Letter; see also Morningstar Comment Letter (Disclosure would allow investors to identify when cash flows associated with a fund’s returns are fixed or variable). 649 See Wells Fargo Comment Letter. 650 See rules 12–12, n. 4; 12–12A, n. 3; 12–14, n. 3 of Regulation S–X. For purposes of clarity, we also amended our proposed instructions to 12–12A and 12–14 to state the complete instruction, rather than, as proposed, reference the instruction in rule 12–12, n. 4. Id. 651 See proposed rule 12–12, n. 4 of Regulation S–X. 652 See rule 12–12, n. 4 of Regulation S–X; see also See rules 12–12A, n. 3 and 12–14, n. 3 of Regulation S–X. 653 See current rule 12–12, n. 7 of Regulation S–X. PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 81921 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.654 We received no comments on this item. This disclosure, which we believe is consistent with current industry practices, will increase the transparency of the fund’s securities lending activities, and we are adopting the modification to the instruction as proposed.655 We proposed to modify current instruction 3 of rule 12–12 (proposed instruction 5 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.656 We received no comments on this item and are adopting as proposed.657 Likewise, we are adopting several modifications to rule 12–12A regarding the presentation of securities sold short, in order to conform the instructions to rule 12–12.658 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 654 See proposed rule 12–12, n. 11 of Regulation S–X; see also proposed rule 12–12B, n. 14 of Regulation S–X. 655 See rule 12–12, n. 10 of Regulation S–X; see also rule 12–12B, n. 13 of Regulation S–X. 656 See proposed rule 12–12, n. 5 of Regulations S–X; see also proposed rule 12–12B, n. 2 of Regulation S–X 657 See rule 12–12, n. 5 of Regulations S–X; see also rules 12–12A, n. 4; rule 12–12B, n. 2 of Regulation S–X; see also rule 12–14, n. 7 of Regulation S–X. 658 Instruction 2 will require the fund to organize the schedule in rule 12–12A in the same manner as is required by Instruction 2 of rule 12–12. See rule 12–12A, n. 2. Instruction 3 will require the fund to identify the interest rate or preferential dividend rate and maturity date as required by Instruction 4 of rule 12–12. See rule 12–12A, n. 3 of Regulation S–X. Instruction 4 will require the subtotals for each category of investments, subdivided both by type of investment and industry, country, or geographic region to be shown together with their percentage value compared to net assets, in the same manner as is required by Instruction 5 of rule 12–12. See rule 12–12A, n. 4 of Regulation S–X. Instruction 6 will require the fund to identify each issue of securities whose fair value was determined using significant unobservable inputs. See rule 12–12A, n. 6 of Regulation S–X; see also infra section II.C.4. The proposal included an instruction in the schedule, as we proposed in the other schedules, that would require the fund to identify each issue of securities held in connection with open put or call option contracts. See proposed rule 12–12A, n. 7 of Regulation S–X. We are not adopting this instruction because, as noted by one commenter, it is not relevant to securities sold short. See AICPA Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 81922 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations (Summary schedule of investments in securities of unaffiliated issuers) and the full schedule is filed under Form N– CSR.659 In order to maintain numbering consistency and organization throughout the regulation, we are renaming 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 proposed to modify the schedule of proposed rule 12–12B (current rule 12– 12C), but again added similar changes to its instructions. We received no comments addressing this proposal and, subject to the relevant modifications discussed above, we are adopting these instructions as proposed. 660 4. Instructions Common to Rules 12–12 Through 12–12B and 12–13 Through 12–13D mstockstill on DSK3G9T082PROD with RULES2 We proposed several instructions to the proposed rules in order to maintain consistency with the disclosures required by current rules 12–12 and 12– 13. Current rule 12–13 contains an instruction requiring identification of ‘‘each investment not readily marketable.’’ 661 We proposed to modify this requirement in current rule 12–13 (new rule 12–13D), and add it to the new schedules we are adopting or modifying concerning derivatives, by adding instructions that funds must indicate (1) whether an investment was fair valued by using significant unobservable inputs 662 and (2) whether an investment cannot be sold because of restrictions or conditions applicable to 659 See rule 6–10(c)(2) of Regulation S–X [17 CFR 210.6–10(c)(2)]; see also Quarterly Portfolio Holdings Adopting Release, supra footnote 421. 660 Instruction 2 will add ‘‘type of investment’’ to the current subtotal requirements for the summary schedule. See proposed rule 12–12B, n. 2 of Regulation S–X. Instruction 3 will extend rule 12– 12’s requirement that funds indicate the interest rate or preferential dividend rate and maturity date for certain enumerated securities. See rule 12–12B, n. 3 of Regulation S–X. Instruction 5 will require for options purchased all information that would be required by rule 12–13 for written option contracts. See rule 12–12B, n. 5 of Regulation S–X. Instruction 12 will require the fund to indicate each issue of securities whose fair value was determined using significant unobservable inputs. See rule 12–12B, n. 12 of Regulation S–X; see also infra section II.C.4. Instruction 13 will extend rule 12–12’s requirement that the fund indicate ‘‘where any portion of the issue is on loan.’’ See rule 12–12B, n. 13 of Regulation S–X. 661 See current rule 12–13, n. 4 of Regulation S– X (‘‘The term ‘investment not readily marketable’ shall include investments for which there is no independent publicly quoted market and investments which cannot be sold because of restrictions or conditions applicable to the investment or the company.’’). 662 See proposed rules 12–13, n. 7; 12–13A, n. 5; 12–13B, n. 3; 12–13C, n. 6; 12–13D, n. 7 of Regulation S–X. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 the investment.663 These proposed instructions were intended to increase transparency into the marketability of, and observability of valuation inputs for, a fund’s investments by instead requiring separate identification of investments that are restricted investments, as well as those investments that were fair valued using significant unobservable inputs. Similarly, for proposed rules 12–12, 12– 12A, and 12–12B, we proposed to include an instruction requiring funds to indicate whether an issue of securities was fair valued by using significant unobservable inputs.664 We received comments generally supporting the disclosure of investments fair valued using significant unobservable inputs.665 However, in order to make ‘‘value’’ consistent with current Article 12, the final rule amendments only refer to ‘‘value’’ (rather than ‘‘fair value,’’ as we do in the proposed amendments to Regulation S– X), which is consistently used and defined under Regulation S–X.666 We are therefore adopting the requirement that funds indicate if an investment’s value was determined using significant unobservable inputs.667 We received one comment relating to our proposed instruction requiring identification of a derivative that cannot be sold because of restrictions or conditions applicable to the derivative.668 That commenter noted that we should clarify and provide examples of what is meant by 663 See proposed rules 12–13, n. 6; 12–13A, n. 4; 12–13B, n. 2; 12–13C, n. 5;12–13D, n. 6, of Regulation S–X. 664 See proposed rules 12–12, n. 9; 12–12A, n. 6; 12–12B, n. 12. 665 See, e.g., Harvest Comment Letter; Markit Comment Letter. 666 See, e.g., current rule 12–12, Column C (‘‘Value of each item at close of period’’); current rule 12–13, Column C (same). 667 See rule 12–13, n. 7 of Regulation S–X; see also rules 12–12, n. 9; 12–12A, n. 6, 12–12B, n. 12; 12–13A, n. 5; 12–13B, n. 3; 12–13C, n. 6; and 12– 13D, n. 7 of Regulation S–X. These instructions will require funds to identify each investment categorized in Level 3 of the fair value hierarchy in accordance with ASC Topic 820. See FASB ASC 820–10–20 (Fair Value Measurement-OverallGlossary) (‘‘ASC 820–10–20’’) (defining ‘‘level 3 inputs’’ as ‘‘unobservable inputs for the asset or liability’’); see also FASB ASC 820–10–35–37A (Fair Value Measurement-Overall-Subsequent Measurement-Fair Value Hierarchy) (‘‘ASB 820–10– 35–37A’’) (‘‘In some cases, the inputs used to measure the fair value of an asset or a liability might be categorized within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.’’) (emphasis added); Harvest Comment Letter (supporting disclosure of level 3 securities). 668 See State Street Comment Letter. PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 restrictions applicable to derivatives.669 We believe the instruction is clear that a derivative that cannot be sold as of the reporting date because of a restriction applicable to the investment itself (as opposed to e.g. illiquidity in the market) should be identified. Therefore, we are adopting the instruction as proposed.670 Current rules 12–12, 12–12C, and 12– 13 each contain an instruction to include tax basis disclosures for investments.671 We proposed extending this requirement to the proposed rules concerning derivatives holdings and securities sold short 672 because we believed that this type of tax basis information may be important to investors in investment companies, which are generally pass-through entities pursuant to Subchapter M of the Internal Revenue Code.673 We received several comments arguing against extending our proposed tax basis disclosures to the proposed derivatives schedules. Several commenters noted their belief that disclosure of tax basis by investment type would not provide meaningful disclosure to investors, while increasing the volume and complexity of the financial statements.674 Others stated that the taxbasis information is unnecessary in light of recently added GAAP-required disclosure of tax basis components of dividends and distributions.675 The current GAAP requirement that funds disclose the components of distributable 669 Id. (‘‘For example, it is unclear whether the lockup period for trading blocks would be included as a restriction applicable to derivatives. If the SEC’s purpose is to have a narrow definition, then it is unclear whether the stricter definition includes limitation on the types of entities that would be able to buy an instrument such as rule 144a [sic] restrictions, which limits trading to qualified institutional buyers.’’). Consistent with this example, a restricted security subject to rule 144A would be identified as restricted under rules 12–12, 12–12A, or 12–12B only if the security has restrictions and the fund cannot sell the security to qualified institutional buyers at the report date due to those restrictions. 670 See rule 12–13, n. 6 of Regulation S–X; see also rules 12–13A, n. 4; 12–13B, n. 2; 12–13C, n. 5; and 12–13D, n. 6 of Regulation S–X. 671 See rule 12–12, n. 8; 12–12C, n. 11; and 12– 13, n. 7 of Regulation S–X. 672 See proposed rule 12–13, n. 10 of Regulation S–X; see also proposed rules 12–12A, n. 8; 12–13A, n. 8; 12–13B, n. 6; 12–13C, n. 9; and 12–13D, n. 11 of Regulation S–X. 673 See 26 U.S.C. 851, et seq. 674 See PwC Comment Letter; EY Comment Letter; CRMC Comment Letter; State Street Comment Letter; MFS Comment Letter; ICI Comment Letter; AICPA Comment Letter. 675 See Oppenheimer Comment Letter; MFS Comment Letter; and ICI Comment Letter (Recommending that the Commission require funds to present tax basis information relating to the tax basis components of dividends and distributions in the notes to the financial statements); see also FASB ASC 946–20–50–12 (Financial Services— Investment Companies, Investment Company Activities) (‘‘ASC 946–20–50–12’’); E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 earnings (including undistributed ordinary income, undistributed longterm capital gains, capital loss carryforwards and unrealized appreciation/depreciation) on a tax basis using the most recent tax year-end enables investors to determine the amount of accumulated and undistributed earnings that they could potentially receive in the future and on which they could be taxed.676 Some commenters recommended an alternative that funds should disclose the aggregate tax basis of all investments relating to the portfolio as whole, or those that are recorded as assets or liabilities.677 We agree that tax disclosures relating to the portfolio as a whole provides sufficient information for investors. However, current GAAP disclosures do not require funds to report the cost of all investments in an unrealized appreciation and the cost of all assets in an unrealized depreciation on a gross basis, which we believe may be useful to investors to further understand the potential amounts they might receive and on which they could be taxed. As a result, we have determined not to extend the tax basis disclosures currently required by rules 12–12, 12– 12B, and 12–13 to our new disclosures of derivative investments (rules 12–13 through 12–13C) and securities sold short (rule 12–12A). For the same reasons, we are removing this disclosure requirement from each of the rules 12– 12, 12–12B (current rule 12–12C), and 12–13D (current rule 12–13) 678 and instead moving it to Article 6 of Regulation S–X as a rule of general application requiring that funds report these tax basis disclosures relating to the portfolio as a whole.679 We also proposed to require funds to identify illiquid investments.680 As we 676 ASC 946–20–50–12; see also ICI Comment Letter. We believe that this level of information in the aggregate is sufficient for investor needs and additionally recognize the complexity involved in capturing the tax characterizations of certain investments in the format of the Schedules. See PwC Comment Letter. 677 See PwC Comment Letter; and Vanguard Comment Letter (federal tax disclosure should be provided, annually instead of semiannually, on an aggregate basis, instead of in separate investment schedules). 678 See current rules 12–12, n. 8; 12–12C, n. 11; 12–13, n. 7 of Regulation S–X. 679 See rule 6–03(h)(2) (adding the requirement that the fund ‘‘state the following amounts based on cost for Federal income tax purposes: (i) Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost, (ii) The aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value, (iii) The net unrealized appreciation or depreciation, and (iv) The aggregate cost of investments for Federal income tax purposes.’’) 680 See proposed rule 12–12, n. 10 of Regulation S–X; see also proposed rules 12–12B, n. 13; and 12– VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 stated in the proposal, liquidity is an important consideration for a fund’s investors in understanding the risk exposure of a fund.681 We received numerous comments registering concerns with this proposed instruction to require portfolio-level liquidity disclosures.682 For example, commenters noted that disclosure of illiquid assets could confuse fund shareholders, as they could erroneously assume that disclosure of illiquid assets is an objective determination.683 Similarly, commenters noted that liquidity information could become stale given the time delay between the end of the period and the time that such information would become available to the public.684 Others expressed concern that portfolio-level liquidity disclosures in financial statements would be difficult and costly to audit, as auditors would be required to engage specialists to determine the validity of the fund’s liquidity determinations for each investment.685 Moreover, as discussed in the Liquidity Adopting Release, we are concurrently adopting portfoliolevel liquidity reporting on Form N– PORT which we believe mitigates many of the commenters’ concerns and is a 13, n. 8 of Regulation S–X; see also proposed rules 12–13A, n. 6; 12–13B, n. 4; 12–13C, n. 7; and 12– 13D, n. 8 of Regulation S–X. See generally 1992 Release, supra footnote 290. 681 See Proposing Release, supra footnote 7, at 116. See also Liquidity Adopting Release, supra footnote 9. 682 See State Street Comment Letter (Commission should provide guidance as to what assumptions would be appropriate in determining if an investment is illiquid); PwC Comment Letter (Recommending disclosure of fund’s basis for determining illiquid investment as defined by management/board of directors); EY Comment Letter (defer adopting until the proposed illiquidity standards have been updated); CRMC Comment Letter (same); Pioneer Comment Letter; contra Morningstar Comment Letter (‘‘The requirement to identify positions that are illiquid is adequate and appropriate to replace ‘investments not readily marketable.’ This information can tie directly to monitoring of investment limitations under the Act.’’). 683 See, e.g., PwC Comment Letter; Oppenheimer Comment Letter; MFS Comment Letter (liquidity determinations should be non-public); Deloitte Comment Letter; Invesco Comment Letter; Schwab Comment Letter; ICI Comment Letter; and AICPA Comment Letter. 684 See Deloitte Comment Letter. 685 See, e.g., PwC Comment Letter; ICI Comment Letter; and AICPA Comment Letter. Commenters also suggested, as an alternative, requiring registrant to label the disclosure of illiquid investments as ‘‘unaudited subject to change based on market conditions’’ as a way to mitigate financial statement and audit costs. See Deloitte Comment Letter. However, while this suggestion may mitigate some auditing costs for funds, as discussed above, we have determined that disclosures on Form N–PORT, with portfolio-level liquidity information being made public, provides an appropriate method of providing information for the benefit of the Commission, investors, and other interested third parties. PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 81923 more appropriate method of public reporting.686 Accordingly, we are not adopting the proposed instructions in Regulation S–X relating to the liquidity of investments.687 5. Investments In and Advances to Affiliates—Rule 12–14 We proposed amendments to rule 12– 14 (Investments in and advances to affiliates).688 Rule 12–14 currently 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.689 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 had proposed to modify Column C of the schedule to rule 12–14 to require ‘‘net realized gain or loss for the period,’’ 690 and Column D to require ‘‘net increase or decrease in unrealized appreciation or depreciation for the period’’ for each affiliated investment.691 We received one comment supporting this aspect of the proposal and are adopting it as proposed.692 Likewise, in instruction 6(e) and (f), we proposed 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 686 See Liquidity Adopting Release, supra footnote 9. 687 See id. 688 See proposed rule 12–14 of Regulation S–X. 689 See rule 12–14 of Regulation S–X; see also section 2(a)(3)(A) of the Investment Company Act (defining an ‘‘Affiliated person’’ as ‘‘any person directly or indirectly owning, controlling, or holding with power to vote, 5 per centum or more of the outstanding voting securities of such other person.’’). 690 See proposed rule 12–14, Column C of Regulation S–X. Column C of current rule 12–14 requires disclosure of the ‘‘amount of equity in net profit and loss for the period,’’ which is derived from the controlled company’s income statement and does not directly translate to the impact to a fund’s statement of operations. We proposed to replace this requirement with ‘‘net realized gain or loss for the period.’’ 691 See proposed rule 12–14, Column D of Regulation S–X. 692 See Morningstar Comment Letter; see also Columns C and D of Rule 12–14 of Regulation S– X. E:\FR\FM\18NOR2.SGM 18NOR2 81924 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 correlate these totals to the statement of operations.693 Disclosure of these realized gains or losses and changes in unrealized appreciation or depreciation, in addition to the current requirement to disclose the amount of affiliated income, will allow investors to understand the full impact of an affiliated investment on a fund’s statement of operations.694 We received no comments on this proposal and are therefore adopting our modifications to instructions 6(e) and 6(f) as proposed.695 Additionally, we proposed 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 rules 12–12, 12–12A, and 12–12B, for which we received no comments and are adopting as proposed.696 We proposed several other amendments to the instructions to rule 12–14 in order to, in part, conform the rule to our disclosure requirements in rules 12–12 and 12–13. Subject to the modifications discussed above in section II.C.4, we are adopting as proposed.697 693 See proposed rule 12–14, n. 6(e) and (f) of Regulation S–X. 694 See current rule 6–07 of Regulation S–X [17 CFR 210.6–07]. 695 See rule 12–14, n. 6(e) and (f) of Regulation S–X. 696 See id., n. 7; see also proposed rules 12–12, n. 5; 12–12A n. 4; and 12–12B, n. 2 of Regulation S–X. 697 Instruction 1 will delete the instruction to segregate subsidiaries consolidated in order to make the disclosures under rule 12–14 consistent with the fund’s balance sheet. See rule 12–14, n. 1 of Regulation S–X. Instruction 2 will require the fund to categorize the schedule to rule 12–14 in the same manner as is required by Instruction 2 of rule 12– 12. See rule 12–14, n. 2 of Regulation S–X. Instruction 3 will require the fund to identify the interest rate or preferential dividend rated and maturity date, as applicable. See rule 12–14, n. 3 of Regulation S–X. Instruction 4 will add Column F to the columns to be totaled and update the instruction to state that Column F should agree with the correlative amount shown on the related balance sheet. See rule 12–14, n. 4 of Regulation S– X. Instruction 5 will update the reference to Instruction 8 of rule 12–12 and reference to rule 12– 13 to reflect the changes in the numbering of the instructions for those rules. See rule 12–14, n. 5 of Regulation S–X. Instructions 6(a) and (b) will update references to Column D to reference Column E in order to reflect our proposed changes to rule 12–14’s schedule. See rule 12–14, nn. 6(a) and (b) of Regulation S–X. Instruction 6(d), which adds clarifying language from Instruction 7 of rule 12– 12, will provide the fund with more detail on the definition of non-income producing securities. See rule 12–14, n. 6(d) of Regulation S–X. Instruction 8 will require the fund to identify each issue of securities whose fair value was determined using significant unobservable inputs. See rule 12–14, n. 8 of Regulation S–X; see supra section II.C.4. Instruction 9 will require the fund to indicate each issue of securities held in connection with open put or call option contracts, loans for short sales, or where any portion of the issue is on loan, as required by note 10 to rule 12–12. See rule 12–14, n. 9 of Regulation S–X. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 6. Form and Content of Financial Statements Finally, we are adopting substantially as proposed, 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 adopting today are intended to conform Article 6 with our changes to Article 12 and update other financial statement requirements.698 As part of these changes, we proposed to modify the title and the 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.699 This amendment is a technical amendment and does not change existing requirements for BDCs.700 Commenters did not object to this change,701 and we are adopting it as proposed.702 In order to allow a more uniform presentation of investment schedules in 698 We proposed to amend the reference in rule 6–03(c) to § 210.3A–05, as that section of Regulation S–X was rescinded in 2011. See Rescission of Outdated Rules and Forms, and Amendments to Correct References, Securities Act Release No. 33– 9273 (Nov. 4, 2011) [76 FR 71872 (Nov. 21, 2011)]. We received no comments on this proposed amendment and are adopting as proposed. See rule 6–03(c) of Regulation S–X [17 CFR 210.6–03(c)]. 699 See proposed rules 6–01; 6–03; 6–03(c)(1); 6– 03(d); 6–03(i); 6–04; and 6–07 of Regulation S–X. A BDC is a closed-end fund that is operated for the purpose of making investments in small and developing businesses and financially troubled businesses and that elects to be regulated as a BDC. See section 2(a)(48) of the Investment Company Act (defining BDCs). BDCs are not subject to periodic reporting requirements under the Investment Company Act, although they must comply with periodic reporting requirements under the Exchange Act. 700 See Instruction 1.a to Item 6.c of Form N–2 (‘‘A business development company should comply with the provisions of Regulation S–X generally applicable to registered management investment companies. (See section 210.3–18 [17 CFR 210.3– 18] and sections 210.6–01 through 210.6–10 of Regulation S–X [17 CFR 210.6–01 through 210.6– 10]).’’). 701 See, e.g., Deloitte Comment Letter. This commenter suggested that, in addition, we also clarify that Article 6 applies to Securities Act registrants who meet the definition of ‘‘Investment Company’’ under FASB or IFRS, yet are not registered under the Investment Company Act. Id. The change to reference BDCs is a technical change that is not intended to expand the entities subject to Article 6. See supra footnote 699 and accompanying text. The Proposing Release addressed the reporting and disclosure of information by registered investment companies and BDCs. Since the Proposing Release did not address the possibility of subjecting other entities, such as the ones described by the commenter, to this rulemaking, extending the regulations could have unforeseen implications, including potentially subjecting such entities to the requirements of Article 6. We believe such a change is beyond the scope of this rulemaking. 702 See rules 6–01; 6–03; 6–03(c)(1); 6–03(d); 6– 03(i); 6–04; 6–04.10; and 6–07 of Regulation S–X. PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 a fund’s financial statements, we proposed to rescind subparagraph (a) of rule 6–10 under Regulation S–X, regarding which schedules are to be filed.703 One commenter noted that consolidated subsidiary information could be useful for investors, as information about the specific entities’ ownership may make the structure of the fund more transparent to investors.704 We were persuaded that such information may be useful to investors and are therefore not rescinding subparagraph (a) of rule 6– 10.705 Another commenter requested that we require disclosure of costs associated with the management of controlled foreign corporations (‘‘CFCs’’) or expenses embedded in the return being received in the footnotes to the financial statements.706 The commenter also requested that funds be required to report these expenses either in calculations of total operating expenses or as acquired fund expenses in other filings.707 We believe that disclosure of these expenses are already included, as applicable, in (1) the expenses reported within the statement of operations of the consolidated investment company where the CFC is a consolidated entity,708 or (2) in the required Acquired Fund Fees and Expenses disclosures within the prospectus filing of the investment company where the CFC is not consolidated; and therefore no further modifications are necessary.709 Current rule 6–10(a) also 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.710 As we stated in the Proposing Release, 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 703 See proposed rule 6–10 of Regulation S–X. Comment Letter (‘‘For example, if certain consolidated investments are owned by a consolidated subsidiary domiciled in a foreign jurisdiction where the political climate might be unstable or where creditors may have inferior or superior rights to assets, investors are better served when informed of these economic distinctions.’’). 705 See rule 6–10(a) of Regulation S–X. 706 See Morningstar Comment Letter. 707 Id. 708 See FASB ASC 946–810 (Financial Services— Investment Companies—Consolidation). 709 See Item 3 and Instruction 3(f) to Item 3 of Form N–1A. 710 See current rule 6–10(a) of Regulation S–X. 704 Deloitte E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 12–12C. Our proposal to rescind rule 6– 10(a) would have also eliminated this instruction. Commenters generally supported eliminating this instruction as it would assist with the comparability of funds by shareholders.711 In light of the increased use of derivatives by funds, we continue to 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 this may 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. However, as discussed above, we were persuaded to not rescind rule 6–10(a) in these final rules. Thus we are adopting a conforming modification to rule 6– 10(a) to eliminate this specific instruction.712 We also proposed changes to rules 6– 03 and 6–04 to specifically reference the investments required to be reported on separate schedules in amended Article 12.713 We received no comment on these proposals and are adopting them as proposed.714 Additionally, we proposed 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.715 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 may present on its balance sheet an asset 711 See, e.g., State Street Comment Letter; ICI Comment Letter. 712 See rule 6–10(a) of Regulation S–X (‘‘When information is required in schedules for both the person and its subsidiaries consolidated, it may be represented in the form of a single schedule, provided that items pertaining to the registrant are separately shown and that such single schedule affords a properly summarized presentation of the facts.’’) Additionally, in order to conform rule 6– 10(c) with the new requirements under Article 12, we added schedules corresponding to our proposed new schedules of derivatives investments, as discussed above. See rule 6–10(c) of Regulation S– X. 713 See proposed rules 6–03(d); 6–04.3; 6–04.9 of Regulation S–X. We also proposed to amend rule 6–04.10 to reflect that the amount of liabilities for securities sold short and for open options contracts written would be reported under proposed rule 6– 04.9. See proposed rule 6–04.10 of Regulation S– X. 714 See rules 6–03(d); 6–04.3; 6–04.9; and 6–04.10 of Regulation S–X. 715 See current rule 6–04.4 of Regulation S–X [17 CFR 201.6–04.4]. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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 continue to believe eliminating current rule 6–04.4 would provide more complete information to investors. We received no comments on this proposal and are adopting this change as proposed, as well as the corresponding proposed change in rule 6–03(d) to remove the reference to ‘‘total investments reported under [rule 6– 04.4].’’ 716 As discussed above in section II.C.4, we are also adding a requirement to rule 6–03(h) requiring funds to report the cost of all investments in an unrealized appreciation and the cost of all assets in an unrealized depreciation on a gross basis.717 We are also adopting, as proposed, an amendment to rule 6–04 to refer individually to our derivatives disclosures in proposed rules 12–13A through 12–13C.718 As is currently the case, these proposed amendments are not meant to require gross presentation where netting is allowed under U.S. GAAP.719 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. We received no comments on this proposal. We also proposed, amendments to rule 6–05.3 which would specifically require presentation of items relating to investments other than securities in the 716 See rules 6–04.4; and 6–03(d) of Regulation S– X. 717 See rule 6–03(h). rules 6–04.3; 6–04.6; and 6–04.9 of Regulation S–X. 719 See FASB ASC 210 (Balance Sheet) and ASC 815. 718 See PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 81925 notes to financial statements.720 Current rule 6–05.3 only requires presentation in the notes to financial statements of disclosures required by rules 6–04.10 through 6–04.13, which include information relating to securities sold short and open option contracts written.721 Our proposal would also have amended rule 6–05.3 to require fund financial statements to reflect all unaffiliated investments other than securities presented on separate schedules under Article 12.722 We received no comments on this aspect of the proposal and are adopting it as proposed.723 We also proposed to add new disclosure requirements that are designed to increase transparency to investors about certain investments and activities. First, we proposed 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 in order to allow investors to better understand the income generated from, as well as the expenses associated with, securities lending activities.724 As discussed in more detail below, after consideration of issues raised by commenters, we have determined that it is more appropriate to require that these disclosures be made in a fund’s Statement of Additional Information (or, for closedend funds, reports on Form N–CSR) or in Form N–CEN, rather than to require their inclusion in its financial statements.725 Second, we proposed to amend rule 6–07 to require funds to make a separate disclosure for income from non-cash dividends and payment-in-kind interest on the statement of operations.726 Our proposed amendment to rule 6–07 was 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. While one commenter generally supported disclosure for in-kind payments,727 many recommended, if the Commission should adopt such a disclosure, that we provide a disclosure threshold for non-cash income, such as one similar to the requirement to disclose expense items that exceed 5 720 See proposed rule 6–05.3 of Regulation S–X. current rule 6–05.3 of Regulation S–X [17 CFR 210.6–05.3]. 722 See proposed rule 6–05.3 of Regulation S–X. 723 See rule 6–05.3 of Regulation S–X. 724 See proposed rule 6.03(m) of Regulation S–X. 725 See infra section II.F and section II.D.4.c.iii. 726 See proposed rule 6–07.1 of Regulation S–X. 727 See ICI Comment Letter (supporting disclosure of payment-in-kind income with a 5 percent threshold). 721 See E:\FR\FM\18NOR2.SGM 18NOR2 81926 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 percent of total expenses.728 We agree with commenters’ that a disclosure threshold for non-cash disclosures would alleviate unnecessary reporting burdens. We also agree with commenters that, in order to keep all income disclosures under rule 6–07.1 consistent, a 5 percent de minimis threshold, which is the current requirement for categories of investment income and expenses under current rule 6–07.1, is also appropriate for our amended non-cash income disclosure under rule 6–07.1.729 As a result, we are modifying the proposal by adopting a new instruction to rule 6–07.1 clarifying that a separate disclosure of income from payment-in-kind interest or noncash dividends, like other types of income under current rule 6–07.1, is only required if all income of this type exceeds 5 percent of the fund’s investment.730 Other commenters requested that we define ‘‘non-cash dividends’’ and ‘‘payment-in-kind-interest earned.’’ 731 Finally, as in Form N–PORT, some commenters noted that certain in-kind payments, such as when a fund has the option to elect to receive either cash or in-kind payments, do not raise the same risks as in-kind payments resulting from a distressed issuer and should therefore be disclosed separately.732 As discussed above in connection with Form N– PORT, we agree that in-kind payments resulting from an election, rather than, for example, issuer distress, do not involve the same risk of issuer default. Therefore not requiring funds to report on Form N–PORT interest paid in-kind if the fund has the option of electing inkind payments and has elected to be paid in-kind.733 However, we believe for the statement of operations, it is important that all types of income from in-kind payments be subject to the separate disclosure threshold so that investors can compare this information to other funds. Thus, we do not believe that it is appropriate or necessary to provide prescriptive definitions of 728 See State Street Comment Letter (recommending a 10% benchmark); AICPA Comment Letter (5% threshold); MFS Comment Letter (opposed to separate presentation of non-cash income for payment-in-kind securities because the schedule of investments provides adequate disclosure of securities with payment-in-kind income, but supporting a de minimis threshold for other types of non-cash income); PwC Comment Letter (same). 729 See, e.g., PwC Comment Letter; and MFS Comment Letter. 730 See rule 6–07.1 of Regulation S–X. 731 See PwC Comment Letter; and AICPA Comment Letter. 732 See, e.g., AICPA Comment Letter; and PwC Comment Letter; see also supra section II.A.2.g.ii. 733 See supra section II.A.2.g.ii; see also Item C.9.e of Form N–PORT. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 ‘‘non-cash dividends’’ and ‘‘payment-inkind-interest earned ’’for purposes of income statement disclosure and, unlike Form N–PORT, we are not amending Regulation S–X to differentiate income from different types of in-kind payments.734 We proposed 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.735 Likewise, we proposed similar changes to proposed rule 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.736 We received no comments on this proposal and are adopting both changes as proposed.737 We also proposed to eliminate Regulation S–X’s requirement for specific disclosure of written options activity under current rule 6–07.7(c).738 This provision was adopted prior to FASB adopting disclosures generally applicable to derivatives, including written options, now required by FASB ASC Topic 815.739 We continue to believe that the requirement for specific disclosures for written options activity should be removed because they are generally duplicative of the requirements of FASB 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.740 734 See rule 6–07.1 of Regulation S–X. Commenters specifically requested that we not require separate disclosures for amortization and accretion as it is unnecessary because shareholders generally do not distinguish between cash interest income and income in the form of accretion or amortization. See, e.g., PwC Comment Letter; MFS Comment Letter; ICI Comment Letter; AICPA Comment Letter. We agree and are not including a separate disclosure for amortizations and accretions. 735 See proposed rule 6–07.7(a) of Regulation S– X. 736 See proposed rule 6–07.7(c) of Regulation S– X. 737 See rules 6–07.7(a) and (c) of Regulation S–X. 738 See current rule 6–07.7(c) of Regulation S–X [17 CFR 210.6–07.7(c)]. 739 See ASC 815 (Derivatives and Hedging). 740 Id. Rule 6–07.7(c) requires disclosure in a note to the financial statements of the number and associated dollar amounts as to option contracts written: (i) At the beginning of the period; (ii) during the period; (iii) expired during the period; (iv) closed during the period; (v) exercised during the period; and (vi) balance at end of the period. The balances at the beginning of the period and end of the period are available in the prior period-end and current period-end schedules of open option PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 Commenters expressed support for this proposal, which we are adopting.741 We proposed 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.742 We believe that it is appropriate to eliminate this exception, because a fund may have significant notional amounts in its portfolio that could be valued at one percent or less of the value of total investments. Accordingly, removing this exception will provide more transparency to investors regarding a fund’s derivatives activity. We received no comments on this proposal, and we are adopting it as proposed.743 D. Form N–CEN and Rescission of Form N–SAR 1. Overview We are adopting a new framework by which registered investment companies will report census-type information to the Commission by rescinding Form N– SAR and replacing it with a new form— Form N–CEN.744 Most commenters generally supported our proposal to replace Form N–SAR with Form N– CEN, agreeing that Form N–CEN provides both the Commission and the public with enhanced and updated census-type information on a wide range of compliance, risk assessment, and policy related matters.745 Form N– SAR was adopted by the Commission in contracts written, respectively. By eliminating the written options roll-forward, investors would no longer have information regarding the number of contracts expired, closed, or exercised during the period. However, disclosures required by ASC 815 provide gains and losses on derivative instruments, including written options, along with information that would enable users to understand the volume of derivative activity during the period. 741 See, e.g., ICI Comment Letter; BlackRock Comment Letter. 742 See current rule 6–10(c)(1) Schedule II of Regulation S–X; see also proposed rule 6–10(b)(1) Schedule II of Regulation S–X. 743 We also made several technical, nonsubstantive changes to the proposed rules. See rules 6–03(d) and 6–07 (moved ‘‘business development companies’’ to after ‘‘other than face-amount certificates.’’). 744 We are rescinding Form N–SAR and replacing it with a new census reporting form, Form N–CEN, rather than amending Form N–SAR in order to avoid technical difficulties that could arise with filing reports on an amended Form N–SAR (e.g., difficulties related to changes to filing format and form specifications). We have modified the numbering convention for items within Form N– CEN to be consistent with that of the numbering conventions of other forms (e.g., Forms N–MFP and N–PORT). 745 See, e.g., SIFMA Comment Letter I; ICI Comment Letter; Invesco Comment Letter; Morningstar Comment Letter; BlackRock Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 1985 and requires that funds report a variety of census-type 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.746 By contrast, as discussed further below, all funds will now file reports on Form N– CEN annually.747 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. We believe that by updating the content and format requirements for census reporting through new Form N–CEN, the Commission will be better able to carry out its regulatory functions while at the same time reducing burdens on filers. Many commenters agreed that Form N–SAR is outdated and commended the Commission’s efforts to improve the relevance of information reported to the Commission.748 Commenters generally supported Form N–CEN as proposed, and we are adopting the form substantially as proposed with some modifications to address specific issues raised by commenters, as discussed in more detail below. Form N–CEN gathers similar census information about the fund industry that funds currently report on Form N–SAR, which will be able to be aggregated and analyzed by Commission staff to better understand industry trends, inform policy, and assist with the Commission’s examination program. To improve the quality and utility of information reported, Form N–CEN streamlines and updates information reported to the Commission to reflect current Commission staff information needs and developments in the industry.749 Where possible, we have 746 See current rule 30b1–1 and current rule 30a– 1. 747 See rule 30a–1. e.g., ICI Comment Letter; SIFMA Comment Letter I; Invesco Comment Letter; BlackRock Comment Letter. 749 We are streamlining our data collection, in part, through the use of yes/no questions in order to flag certain information for follow-up, if 748 See, VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 endeavored to exclude items from Form N–CEN that are disclosed or reported pursuant to other Commission forms, or are otherwise available; however, in some limited cases, we are collecting information on Form N–CEN 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 requiring that reports on Form N–CEN be structured in an XML format.750 Under this format, filers will no longer be required to use outdated technology for census reporting. Additionally, the XML structured format will allow reported information to be more efficiently and effectively validated, aggregated, compared, and analyzed through automated means and, therefore, more useful to end users. One commenter expressed support for the XML format.751 As discussed above in connection with Form N–PORT, certain others generally advocated for XBRL, a tagged system that is based on XML and was created specifically for the purpose of reporting financial and business information.752 Another commenter noted that the Commission should standardize the formatting requirements (i.e., ASCII/TXT, HTML, XBRL, XML) across all fund reporting in order to ease the burden on funds that would have to comply with different formatting requirements.753 As discussed above in connection with Form N–PORT, 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–CEN in an XML necessary, by Commission staff. See, e.g., Item B.10 and Item C.6.a of Form N–CEN. For example, staff of our Office of Compliance Inspections and Examinations may rely on responses to flag questions in Form N–CEN to indicate areas for follow-up discussion or to request additional information. 750 The Commission has adopted a number of other forms that are structured in an XML format, including Form N–MFP. Reports on Form N–SAR, by contrast, are filed using an outdated filing application. 751 Morningstar Comment Letter (noting that the format will provide more accessible data to the public and reduce the amount of defective reporting currently possible in Form N–SAR). 752 See AICPA Comment Letter; XBRL US Comment Letter; but see Morningstar Comment Letter (‘‘Extensible Business Reporting Language has had very limited success, and certain aspects of the standard are too lenient for regular data validation.’’). See also supra footnotes 444–449 and accompanying text. 753 See Schnase Comment Letter (opining that the Commission should also ease the burdens on funds by allowing funds to input their data through a preformatted web portal or web form). PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 81927 format will provide the information that we seek in an appropriate manner.754 Moreover, the interoperability of data between Forms N–MFP, PF, N–PORT, and N–CEN will aid the staff with crosschecking information reported to the Commission and in monitoring the fund industry.755 As discussed further below in the economic analysis, the XML format will also improve the quality of the information disclosed by imposing constraints on how the information will be provided and by providing a built-in validation framework of the data in the reports.756 We are therefore adopting the requirement that reports on Form N– CEN be filed in an XML format as proposed. 2. Who Must File Reports on Form N– CEN We are adopting, as proposed, the requirement that all registered investment companies, except faceamount certificate companies,757 file reports on Form N–CEN.758 No commenters objected to this requirement.759 As proposed, funds offering multiple series will 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 754 See supra footnotes 444–449 and accompanying text. Based on our experience with reports on Form N–MFP and other XML-based reports, we anticipate that the XML structured data file will be compatible with a wide range of open source and proprietary information management software applications. Continued advances in structured data software, search engines, and other web-based tools may further enhance the accessibility and usability of the data. See, e.g., Money Market Reform 2010 Release, supra footnote 447, at n. 341. 755 See Morningstar Comment Letter. 756 See infra section III.B. 757 Face-amount certificate companies are investment companies which are engaged or propose to engage in the business of issuing faceamount certificates of the installment type, or which have been engaged in such businesses and have any such certificates outstanding. See section 4(1) of the Investment Company Act. Face-amount certificate companies currently are not required to file reports on Form N–SAR. See General Instruction A of Form N–SAR. Face-amount certificate companies will continue to file periodic reports pursuant to section 13 [17 CFR 240.13a–1] or section 15(d) of the Exchange Act [17 CFR 240.15d–1]. 758 See Proposing Release, supra footnote 7, at section II.E.2. See also rule 30a–1. Consistent with Form N–SAR, BDCs, which are not registered investment companies, will not be required to file reports on Form N–CEN. 759 See Morningstar Comment Letter (noting that the filing requirement is appropriate, but also suggesting that the Commission allow flexibility on how a fund chooses to report the data, including filing at the CIK-level with separate ‘‘nodes’’ for each series ID and designing the data base that is to house this information using the filing data and CIK as a key for each registrant-level data record). E:\FR\FM\18NOR2.SGM 18NOR2 81928 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations or more series.760 One commenter opined that one report covering multiple series would be sufficient as many questions apply to the registrant.761 Like Form N–SAR, the sections of Form N–CEN that a fund is required to complete will depend on the type of registrant in order to better tailor the reporting requirements.762 As was proposed, all funds will be required to complete Parts A and B, and file any attachments required under Part G. In addition, funds will be required to complete the following Parts as applicable: • All management companies, other than SBICs, will complete Part C; • Closed-end funds and SBICs will complete Part D; • ETFs (including those that are UITs) will complete Part E; 763 and • UITs will complete Part F.764 3. Frequency of Reporting and Filing Deadline mstockstill on DSK3G9T082PROD with RULES2 Management investment companies currently file reports on Form N–SAR semi-annually,765 and UITs file such reports annually.766 To reduce reporting burdens, we proposed that reports on Form N–CEN be filed on an annual 760 General Instruction A of Form N–CEN. Unlike Form N–PORT where separate reports will be filed for each series, registrants will file one report on Form N–CEN covering all series (as is currently done with reports on Form N–SAR). We are adopting this framework for Form N–CEN to help minimize reporting burdens, as much of the information that will be required by Form N–CEN (for example, the information reported pursuant to Part A and Part B) will be the same across a fund’s various series. We note that Form N–SAR’s approach to series information is slightly different than that of Form N–CEN, in that Form N–SAR allows registrants to indicate instances where the information is the same across all series, rather than requiring repetitive information. See General Instruction D(8) of Form N–SAR. Unlike Form N– SAR, however, to limit the reporting of repetitive information, Form N–CEN is organized such that information that is generally the same for all series is reported in Parts A and B of the form, with Part C, the part of the form that requires each series to respond separately, requesting information that is more likely to differ between series. 761 See State Street Comment Letter. 762 See General Instruction A of Form N–CEN. As reflected in General Instruction A, registrants will be required to respond to each item in each required Part. To the extent an item in a required Part is inapplicable to a registrant, the registrant should respond ‘‘N/A’’ to that item. Registrants will not, however, have to provide responses to items in Parts they are not required to respond to. 763 See id. Certain investment products known as ‘‘exchange-traded managed funds’’ will also be required to complete Part E of Form N–CEN. 764 See id. Management companies that are registered on Form N–3 are also required to complete certain items in Part F as directed by Item B.6.c.i of Form N–CEN. See General Instruction A of Form N–CEN. 765 See current rule 30b1–1. 766 See current rule 30a–1. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 basis, regardless of type of filer.767 While one commenter suggested semiannual reporting on Form N–CEN if certain additional requirements were to be included,768 most commenters generally supported the annual filing requirement.769 Because Form N–CEN requires census-type information, which in our experience does not change as frequently as, for example, portfolio holdings information, we continue to believe that an annual filing requirement will be sufficient for purposes of review by Commission staff, as well as investors and other market participants that might use this information.770 We are, therefore, adopting as proposed the requirement that reports on Form N–CEN be filed on an annual basis.771 We proposed that for all funds, the reporting period for Form N–CEN reports would be based on the fund’s fiscal year.772 Currently, management companies file Form N–SAR reports on a fiscal year basis,773 while UITs file Form N–SAR reports on a calendar year basis.774 After further consideration, we have determined to require that management companies and UITs include in Form N–CEN reports information from the same time period as they currently report on Form N–SAR because we believe that calendar-year reporting for UITs will yield more comparable data while also reducing costs for reporting UITs.775 One 767 See Proposing Release, supra footnote 7, at 33634. 768 See Morningstar Comment Letter (suggesting semi-annual reporting as of the fund’s fiscal year end should the Commission decide to include Items 34–44, Items 47–52, Item 54, Item 72, and Item 75 of Form N–SAR, as suggested). See infra section II.D.5 concerning these current Form N–SAR Items. 769 See, e.g., Carol Singer Comment Letter; State Street Comment Letter; Wells Fargo Comment Letter. 770 As discussed above, certain items that are currently reported on Form N–SAR that would be helpful to have updated on a more frequent basis are included on Form N–PORT. For example, Item 28 of Form N–SAR requires the fund to provide its monthly sales and repurchases of the Registrant’s/ Series’ shares. In order to increase the timeliness of the information reported to the staff for funds flows, certain information relating to monthly flows will be reported on Item B.6 of Form N–PORT. 771 Because Form N–CEN is to be filed annually by all registered investment companies, we are rescinding 17 CFR 270.30b1–1 and revising 17 CFR 270.30a–1 to require all registered investment companies to file reports on Form N–CEN, as proposed. See infra section II.G (concerning technical and conforming amendments related to current rule 30b1–1 and current rule 30a–1). See rule 30a–1. 772 See Proposing Release, supra footnote 7, at 33634. 773 See current rule 30b1–1. 774 See current rule 30a–1. 775 In particular, we note that the items relating to UITs in Part F require reporting of aggregate information across all series of the UIT (as distinct PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 commenter expressed support for reporting by funds on a fiscal year basis, as that would permit comparisons by data users between information reported on Form N–CEN and information on Form N–CSR.776 As regards management investment companies, which are required to file reports on Form N–CSR, we agree that fiscal year reporting could have this beneficial effect, though the same would not be true of UITs. Therefore, under the final rule, management companies will file reports on Form N–CEN on a fiscal year basis while UITs will file such reports on a calendar year basis.777 We have also added an instruction to the form to clarify that management investment companies that offer multiple series with different fiscal year ends must file a report as of each fiscal year end that responds to (i) Parts A, B, and G, and (ii) Part C and, if applicable, Part E as to only those series with the fiscal year end covered by the report.778 UITs that offer multiple series will file a single annual report covering all series as of the end of the calendar year. Additionally, we received a number of comments on the proposed 60-day filing period. Some commenters supported this proposed filing period.779 Several other commenters, however, requested that the filing period be extended to at least a 75-day period, arguing, among other things, that a longer time period would help stagger the filing deadline from other end-of-month filing requirements and allow sufficient time to address accounting-related questions.780 from Part C, which requires series-specific information in the case of management companies offering multiple series). As proposed, UITs with multiple series with different fiscal year end dates would have been required to file more than once per year, at least once for each unique date. Considering that the reported information itself relates to the entire UIT and not each individual series, we have determined, after further consideration, that it would be less costly for UITs to report once per year, even if their series have different fiscal years. Moreover, we believe that the resulting data will be more useful to the Commission and other data users because the reported information will be as of a consistent date across UITs, and therefore more readily compared and contrasted. Accordingly, we are requiring UITs to file Form N–CEN reports on a calendar year basis even where the UIT offers multiple series with different fiscal years. 776 See Morningstar Comment Letter. 777 See rule 30a–1. 778 See General Instruction C.1 of Form N–CEN. 779 See Carol Singer Comment Letter; State Street Comment Letter. 780 See, e.g., Comment Letter of The Committee of Annuity Insurers (Aug. 11, 2015) (‘‘CAI Comment Letter’’) (75 days after fiscal year end); ICI Comment Letter (at least 75 days); Invesco Comment Letter (75 days after fiscal year end); MFS Comment Letter (75 days after fiscal year end, at least for initial filing for all funds in the fund complex); T. Rowe Price Comment Letter (75 days after fiscal year end). E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 We have been persuaded by these comments and are adopting a filing period of 75 days after the fiscal yearend (for management companies) and calendar year-end (for UITs). We believe that a 75-day filing period appropriately balances 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. Furthermore, the censustype information reported on Form N– CEN, in our experience, does not change frequently, thereby reducing the risk that a longer filing period would cause the information provided to become stale. Current rule 30b1–3 under the Investment Company Act requires a fund to file a transition report on Form N–SAR when a fund’s fiscal year changes.781 Because reports on Form N– CEN are required to be filed annually rather semi-annually, we believe that a rule outlining the requirements for a transition report will 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 rescinding rule 30b1–3 as proposed. We received no comments on this aspect of the proposal. To ensure, however, that reports are filed at least annually, we are requiring that reports on Form N–CEN not cover a period of more than 12 months as proposed.782 Thus, if a fund changes its fiscal year, a report filed on Form N–CEN may cover a period shorter than 12 months, but may not cover a period longer than 12 months or a period that overlaps with a period covered by a previously filed report.783 We received no comments on this aspect of the proposal. As proposed, a fund would be able to file an amendment to a previously filed report on Form N–CEN at any time, including an amendment to correct a mistake or error in a previously filed report.784 A fund that files an amendment to a previously filed report on the form should provide information in response to all items of Form N–CEN, regardless of why the amendment is filed.785 Commenters did not object to these proposed requirements although one commenter suggested that an amendment should not be required for 781 See current rule 30b1–3; see also infra section II.G concerning technical and conforming amendments to current rule 30b1–3. 782 See General Instruction C.1 of Form N–CEN. 783 Id. 784 See General Instruction E of proposed Form N–CEN. 785 Id. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 any subsequent changes to previously reported information and that, except for any material errors, any subsequent changes should be reported in the next filing period.786 We are adopting these requirements as proposed.787 Although funds generally should correct a material mistake in a Form N–CEN report by filing an amendment to that report, Form N–CEN does not generally require registrants to file amendments in order to update information throughout the year. Rather, changes in information during the course of the year would be reflected in the fund’s next report on the form. Similar to Form N–PORT,788 Form N– CEN also includes general filing instructions,789 as well as definitions of specific terms referenced in the form.790 As discussed in connection with Form N–PORT above, we have eliminated proposed instructions regarding the signature and filing of reports,791 because we believe that the general rules and regulations applicable under the Act provide sufficient guidance regarding those issues.792 As discussed further below, we have also revised, consistent with the changes to Form N– PORT discussed above, the definitions of ‘‘Exchange-Traded Fund’’ and ‘‘Exchange-Traded Managed Funds’’ to clarify that the terms would apply to a series or class of a UIT organized as an ETF or ETMF.793 We have also revised, as we did in Form N–PORT, the definition of ‘‘LEI’’ to reflect new terminology regarding LEIs.794 4. Information Required on Form N– CEN a. Part A—General Information We are adopting, as proposed, Part A of Form N–CEN. We did not receive comments on Part A. Part A, which will 786 See State Street Comment Letter. General Instruction C.2 of Form N–CEN. 788 See supra section II.A.3 regarding Form N– PORT. 789 See General Instruction C of Form N–CEN. 790 See General Instruction E of Form N–CEN. 791 General Instruction E of proposed Form N– CEN. 792 See General Instruction B to Form N–CEN (‘‘The General Rules and Regulations under the Act contain certain general requirements that are applicable to reporting on any form under the Act. These general requirements should be carefully read and observed in the preparation and filing of reports on this Form, except that any provision in the Form or in these instructions shall be controlling.’’). 793 General Instruction E of Form N–CEN. See supra footnotes 93–94 and accompanying text; infra footnote 896 and accompanying text. 794 See supra footnote 95 and accompanying text. Form N–CEN’s revised definition of ‘‘LEI’’ refers to the legal entity identifier ‘‘endorsed’’ by LEI ROC or ‘‘accredited’’ by GLEIF, as opposed to ‘‘assigned or recognized’’ by those two entities. General Instruction E to Form N–CEN. 787 See PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 81929 be completed by all funds, will collect information about the reporting period covered by the report. It requires funds to report the fiscal-year end date and indicate if the report covers a period of less than 12 months.795 b. Part B—Information About the Registrant We proposed a number of reporting items under Part B of Form N–CEN to provide information about the registrant. Although commenters did not raise broad objections to the reporting requirements under Part B, many commenters raised concerns with and/or requested clarification on specific reporting items. We are adopting Part B substantially as proposed with some modifications in response to comments on specific reporting items. Where we have received comments on specific reporting requirements, we discuss them in more detail below. As proposed, Part B of Form N–CEN would have been required to have been completed by all funds and would have required certain background and other identifying information about the funds. Part B of Form N–CEN, as proposed, would have included an instruction that required funds offering multiple series to provide a response for each series when the response to an item in Part B of the form differed between series, and to label the response with the name and series identification number of the series to which a response relates.796 In order to provide more clarity to filers as to when series information is required in Part B of the form, we have removed the proposed instruction to Part B and have instead added sub-items requesting series information, when applicable, for certain items in Part B of the form. We have added these sub-items to the items in Part B where we believe identification of the particular series would be most helpful to our monitoring efforts and general review and analysis of the information reported on the form.797 As proposed, Part B of the form requires certain background and other identifying information about the fund. This background information will allow the staff to categorize filers by fund type and will assist with our oversight of 795 See 796 See Item A.1 of Form N–CEN. Instruction to Part B of proposed Form N– CEN. 797 See Item B.10, Item B.11, Item B.14, Item B.19, Item B.20, Item B.22, and Item B.23 of Form N– CEN. We note that, with respect to those items in Part B that do not include sub-items for series information, a registrant may still provide more than one response to the item (where applicable), but the response will not be required to indicate the relevant series to which it relates. E:\FR\FM\18NOR2.SGM 18NOR2 81930 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations funds. Included in this background information is the fund’s name,798 Investment Company Act filing number,799 and other identifying information, such as its CIK 800 and LEI,801 each of which we are adopting as proposed. In addition, we are adopting as proposed the requirement that the report include the fund’s address, telephone number, and public Web site (if any),802 and the location of the fund’s books and records.803 While the fund’s name, address, telephone number, and filing number are currently required by Form N–SAR,804 some of the additional information, such as the fund’s CIK, LEI, public Web site and location of books and records are new. As discussed in the proposal and the Form N–PORT section above, information such as the CIK and LEI will assist the Commission and other data users with organizing the data and allow the data reported on Form N–CEN to be cross-referenced with data received from other sources.805 For tracking purposes, Form N–CEN also requires information relating to whether the filing is the initial or final filing.806 We are adopting, as proposed, the requirement that funds include the location of their books and records in reports on Form N–CEN. We note that books and records information is currently required by fund registration forms; 807 however, this information is 798 Item B.1.a of Form N–CEN. B.1.b of Form N–CEN. B.1.c of Form N–CEN. Because UITs that register on Form N–8B–2 obtain CIKs for the UIT itself as well as for series offered by the UIT, we have made a clarifying modification to Form N– CEN by including a requirement in Part F of the form that such UITs also report the CIKs for each of their existing series. See Item F.6.b of Form N– CEN. 801 Item B.1.d of Form N–CEN. 802 Item B.2 of Form N–CEN. 803 Item B.3 of Form N–CEN; see also infra footnotes 807–809 and accompanying text. 804 Item 1 and Item 2 of Form N–SAR. 805 See supra section II.A.2.a (discussing additional information such as CIK and LEI and comment letters received regarding the use of identifiers). 806 Item B.4 of Form N–CEN. As proposed, the instruction to Item B.4—then numbered as ‘‘Item 5’’—stated that a fund should indicate that a filing is its final filing on Form N–CEN only if the fund has filed an application to deregister on Form N– 8F ‘‘or otherwise.’’ We believe it would be useful to filers for the instruction to provide more context as to what should be considered ‘‘or otherwise.’’ Therefore, the final Form clarifies that a fund should indicate that a filing on Form N–CEN is its final filing ‘‘only if the Registrant has filed an application to deregister or will file an application to deregister before its next required filing on this form.’’ We note that even if a fund indicates a filing is its final filing on Form N–CEN, a fund is required to file reports on Form N–CEN until it is deregistered. 807 See Item 33 of Form N–1A; Item 32 of Form N–2; Item 36 of Form N–3; Item 30 of Form N–4; and Item 31 of Form N–6. 799 Item mstockstill on DSK3G9T082PROD with RULES2 800 Item VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 not filed with the Commission in a structured format. We believe that having books and records information in a structured format will increase our efficiency in preparing for exams and, thus, we have determined to include this information in Form N–CEN.808 In addition, so as not to create unnecessary burdens, we are adopting proposed amendments to 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 Form N–CEN.809 Similar to Form N–SAR,810 Form N– CEN requires information regarding whether the fund is part of a ‘‘family of investment companies.’’ 811 The form, which includes a substantially similar definition as Form N–SAR,812 defines 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.813 This item will assist Commission staff with analyzing multiple funds across the same family of investment companies. One commenter suggested that a broader term such as ‘‘fund complex’’ would be a beneficial alternative to the proposed term ‘‘family of investment companies.’’ 814 We believe, however, that ‘‘fund complex,’’ as such term is defined for purposes of Form N–1A, for example, could be overly broad (e.g., could unintentionally incorporate unaffiliated sub-advisers), 808 Additionally, by including books and records information in Form N–CEN, we may receive more frequently updated books and records information from closed-end funds. Closed-end funds do not update their registration statements as regularly as open-end funds and, thus, the information regarding their books and records may not always be current. 809 Funds that have not yet filed a report on Form N–CEN will have to continue to include this information in their registration statement filings. 810 Item 19, Item 94, and Item 116 of Form N– SAR; see also General Instruction H to Form N–SAR (defining ‘‘family of investment companies’’). 811 Item B.5 of Form N–CEN. 812 See id.; see also Instruction 1 to Item 17 of Form N–1A. 813 Instruction to Item B.5 of Form N–CEN. The instruction, like the definition of ‘‘family of investment companies’’ in Form N–SAR, also clarifies that insurance company separate accounts that may not hold themselves out to investors as related companies (products) for purposes of investment and investor services should consider themselves part of the same family if the operational or accounting or control systems under which these entities function are substantially similar. See General Instruction H to Form N–SAR. 814 See Morningstar Comment Letter. PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 and thus, we have determined to adopt the item as proposed.815 We are adopting, as proposed, a requirement in Form N–CEN that the fund provide its classification (e.g., open-end fund, closed-end fund), similar to Form N–SAR.816 Unlike the requirements of Form N–SAR, however, we are also adopting, as proposed, a requirement in Form N–CEN that specifically asks whether the fund issues a class of securities registered under the Securities Act.817 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). We are also adopting, as proposed, the requirement in Form N–CEN that a management company 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.818 Some commenters supported inclusion of such information 819 and one commenter suggested that the Commission request additional information concerning individual directors (and chief compliance officers (‘‘CCOs’’)), such as length of service, roles certain directors have on the board, and prior experience as fund directors.820 Another commenter opposed the inclusion of additional disclosure requirements concerning the board or individual directors beyond those in the proposed 815 See Instruction 1(b) to Item 17 of Form N–1A (defining ‘‘fund complex’’ to mean two or more registered investment companies that: (1) Hold themselves out to investors as related companies for purposes of investment and investor services; or (2) have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies). 816 Item B.6 of Form N–CEN; see also Item 5, Item 6, Item 27, Item 58, Item 59 and Item 117 of Form N–SAR. If the registrant is an open-end fund, Form N–CEN also requires information on the total number of series of the registrant and, if a series of the registrant with a fiscal year end covered by the report was terminated during the reporting period, information regarding that series. See Item B.6.a.i– Item B.6.a.ii of Form N–CEN. In addition, registrants that indicate they are management companies registered on Form N–3 are directed by Item B.6 to respond to certain additional items in Part F of the form that relate to insurance company separate accounts. See Item B.6.c.i of Form N–CEN. 817 Item B.7 of Form N–CEN. 818 Item B.8 of Form N–CEN. 819 See Franco Comment Letter; Morningstar Comment Letter. 820 Morningstar Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 form without a prior statement of regulatory purpose and opportunity for public comment.821 We have determined to adopt these requirements as proposed because we believe it appropriately balances the need for director information in a structured format with efforts to minimize the partially duplicative reporting requirements.822 However, in a modification from the proposal, we have determined to add one additional reporting requirement concerning directors. In the Proposing Release, we solicited comment regarding whether Form N–CEN should require any additional information concerning directors. In response, a commenter stated that, as discussed below, the proposed form would require funds to report CRD numbers for CCOs, as applicable, and suggested that data users could more readily analyze particular directors across funds and over time if a unique identifier were reported for each director.823 We acknowledge that not all fund directors have associated CRD numbers, but we are persuaded by the commenter that, for those that do, reporting of the CRD number would improve data 821 See IDC Comment Letter. It was unclear whether the commenter intended also to express concerns about the proposed requirements concerning directors, in addition to the concerns it expressed about other potential requirements concerning directors. Id. (‘‘First, the Release asks about the information regarding fund directors that is proposed to be included in Form N–CEN, which includes each director’s name, whether they are an ‘‘interested person’’ and the Investment Company Act file number of any other fund for which they serve as a director. Specifically, the Release asks whether funds should be required to include on Form N–CEN any additional information concerning the board or individual directors, such as information about the length of service of directors. The Release does not discuss why the Commission might be interested in this or other possible director-related information or how it would be used. Absent a clear statement of how information about directors would assist the Commission in carrying out its regulatory functions, and the opportunity to comment on any such information, we do not support adding it to Form N–CEN.’’) To the extent that the commenter was commenting on the proposed requirements, we note, as we did in the Proposing Release, that although the 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 data users to sort and analyze the data more efficiently. See Proposing Release, supra footnote 7, at 33636. 822 This information (along with additional director information) is also disclosed in a management company’s Statement of Additional Information and its annual report to shareholders, albeit in an HTML or ASCII, rather than structured, format. See, e.g., Item 17 and Item 27(b)(5) of Form N–1A (requiring, for example, disclosures regarding length of service, position(s) held with the fund, and other directorships held by the director). 823 See Morningstar Comment Letter; infra notes 825–833 and accompanying text. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 comparability and help us in our risk assessment and examination functions by making it easier for Commission staff to identify persons and collect information across funds.824 In addition, as proposed, a fund will be required to provide the CCO’s name, CRD number (if any), address, and phone number,825 as well as indicate if the CCO has changed since the last filing.826 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 will also be required to report the name and IRS Employer Identification Number of the person providing such compensation.827 One commenter objected to this reporting requirement stating that the information is already provided in other Commission filings.828 As we stated in the Proposing Release, we recognize that some funds provide this information in their registration statements. However, as we also noted, not all funds do 829 and we believe that this requirement will provide staff with information on all fund CCOs and will allow the staff to contact a fund’s CCO directly. One commenter suggested that the Commission require additional information concerning CCOs, such as ‘‘length of service and prior experience in order to aid in assessing the caliber of a fund or a fund company’s regulatory practices.’’ 830 We believe, however, that the reporting requirement as proposed and adopted is sufficient for our regulatory oversight purposes and appropriately balances the benefits of additional information for Form N– CEN data users against the burdens 824 Item B.8.b of Form N–CEN. B.9 of Form N–CEN. Because we expect that funds will provide the CCO’s direct phone number in response to this information request, the CCO’s phone number will not be made publicly available in Form N–CEN filings on EDGAR. See General Instruction D to Form N–CEN. 826 Item B.9.i of Form N–CEN. 827 Item B.9.j of Form N–CEN. We proposed to require funds provide the name and ‘‘Employee Identification Number’’ of the person providing compensation for CCO services (Proposing Release, supra footnote 7, at n. 409 and accompanying text). We are adopting a reference to ‘‘IRS Employer Identification Number’’ to conform with Form ADV (see, e.g., Item 7 of Schedule A of Form ADV). 828 See Schnase Comment Letter. 829 See, e.g., Item 17 of Form N–1A (requesting information regarding fund officers). For example, Form N–1A defines the term ‘‘officer’’ to mean ‘‘the president, vice-president, secretary, treasurer, controller, or any other officer who performs policymaking functions.’’ It is our understanding that in some fund complexes, the CCO does not fit within the category of officers covered by this definition (i.e., the CCO does not perform a policy-making function), and therefore, information as to their CCO is not provided pursuant to the item. 830 Morningstar Comment Letter. 825 Item PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 81931 imposed upon filers. Specifically, because Commission data users could link Form N–CEN information about CCOs across filings, over time, using the required CRD number, the reporting requirements that we are adopting today will still allow users to inform themselves about a CCO’s length of service without adding another reporting requirement.831 Another commenter expressed support for the CCO reporting requirement but suggested that the item should also require the fund to report the name of the investment adviser’s CCO as well.832 We are not adopting this suggestion because Form N–CEN is designed to collect census-type information, including certain corporate governance information, about funds—not similar information about investment advisers. Investment advisers are currently required to report the name and contact information of the adviser’s CCO on Form ADV, which facilitates the ability of the Commission to link fund and investment adviser CCO data without imposing an additional reporting burden on funds.833 Accordingly, we believe that the item requirement as proposed is appropriate and are adopting it without any changes. We are also adopting, substantially as proposed, the requirement in Part B that funds report matters that have been submitted to a vote of security holders during the relevant period.834 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.835 In order to alleviate the burden on filers, we are reducing 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.836 831 The same commenter stated that the required CRD numbers should be sufficiently specific to analyze the information over time. See id. 832 See Franco Comment Letter. 833 See, e.g., Item 1.J of Part 1A of Form ADV. 834 See Item B.10 of Form N–CEN. We have added an instruction to the item to clarify that registrants registered on Forms N–3, N–4 or N–6, should respond ‘‘yes’’ to the item only if security holder votes were solicited on contract-level matters. 835 See Item 77.C of Form N–SAR; see also Instruction to Specific Items for Item 77C of N– SAR. 836 See, e.g., rule 30e–1(b) under the Investment Company Act (requiring management companies to include in shareholder reports certain information relating to matters submitted to a vote of shareholders through the solicitation of proxies or E:\FR\FM\18NOR2.SGM Continued 18NOR2 81932 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 Form N–CEN, like Form N–SAR, will also include an item relating to material legal proceedings during the reporting period.837 One commenter suggested that the Commission define legal proceedings for purposes of Form N– CEN.838 The relevant item includes an instruction highlighting certain proceedings that should be described in response to the item 839 and the item itself only requests information on ‘‘material legal proceedings, other than routine litigation incidental to the business.’’ We believe the instruction and language of the item appropriately describes the legal proceedings funds should include when responding to this item. Another commenter suggested that the Commission state that derivative suits reported in response to this item are deemed to satisfy the requirements under section 33 of the Investment Company Act for filing pleadings and other documents in connection with that type of lawsuit.840 Section 33 requires every fund which is a party and every affiliated person of such fund who is a party defendant to any action or claim by a fund or a security holder thereof in a derivative capacity or representative capacity against certain persons to file certain documents related to the action or claim with the Commission.841 We do not believe that reporting pursuant to this requirement, taken alone, would be an appropriate otherwise) [17 CFR 270.30e–1(b)]. The information request in Form N–CEN applies to UITs as well as management companies. The Form N–SAR requirement applies only to management companies (see Item 77.C of Form N–SAR; see also Instruction to Specific Items for Item 77C of Form N–SAR). We believe it is important for the Commission to have information for all registered investment companies on matters submitted for security holder vote in order to assist us in our oversight and examination functions. 837 Item B.11 of Form N–CEN. As in Item 77.E of Form N–SAR, if there were any material legal proceedings, or if a proceeding previously reported had been terminated, the registrant will file an attachment as required by Part G of Form N–CEN. See Item G.1.a.i of Form N–CEN. We note that Form N–CEN, unlike Form N–SAR, will require UITs to respond to the information request related to material legal proceedings. For the same reasons discussed above with respect to matters submitted for security holder vote, we believe it is important to have information on material legal proceedings of all registered investment companies. See supra footnotes 834–836 and accompanying text. 838 See State Street Comment Letter. 839 See Instruction to Item B.11 of Form N–CEN, which states, ‘‘[f]or purposes of this Item, the following proceedings should be described: (1) Any bankruptcy, receivership or similar proceeding with respect to the Registrant or any of its significant subsidiaries; (2) any proceeding to which any director, officer or other affiliated person of the Registrant is a party adverse to the Registrant or any of its subsidiaries; and (3) any proceeding involving the revocation or suspension of the right of the Registrant to sell securities.’’ 840 See Schnase Comment Letter. 841 Section 33 of the Investment Company Act. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 alternative for a fund to use to satisfy the legal proceeding filing requirements under section 33, as Form N–CEN requires only a brief description of the proceeding (as well as the case or docket number (if any) and names of the principal parties to the proceeding) and does not itself require the filing of all materials plainly required by section 33.842 Moreover, for data users interested in the materials required to be filed under section 33, the reporting required by Form N–CEN would not be the same as, nor in many cases a suitable substitute for, the materials themselves. Accordingly, we are adopting the reporting item as proposed. 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.843 As proposed, we are limiting this request to two separate items in Form N–CEN in order to limit the number of items to those most useful to the Commission staff and reduce burdens on filers. One item requires funds to report if any claims were filed under the management company’s fidelity bond and the aggregate dollar amount of any such claims.844 One commenter requested that we eliminate the item requesting fidelity bond information, stating that the information is already provided elsewhere by funds.845 The other item requires registrants to report 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 reporting period with respect to the registrant.846 The staff appreciates that some of this information may be disclosed in other filings with the Commission, although it is not reported in a structured data format.847 We continue to believe that having responses to these questions in a structured data format will help alert Commission staff to insurance claims 842 We note that the commenter did not explain how reporting pursuant to this requirement, taken alone, would be consistent with the requirements of section 33. 843 Items 80–85 and Items 105–110 of Form N– SAR. 844 Item B.12 of Form N–CEN; cf. Item 83 of Form N–SAR. 845 See Schnase Comment Letter (referring to fidelity bond disclosures submitted on Edgar Form 40–17G and Form 40–17G/A (for amendments)). 846 Item B.13 of Form N–CEN; cf. Item 85 of Form N–SAR. 847 For example, a fund is required to provide and maintain a fidelity bond against larceny and embezzlement, which in general covers each officer and employee of the fund who has access to securities or funds. See rule 17g–1(a) under the Investment Company Act [17 CFR 270.17g–1(a)]. PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 made by the fund or its officers and directors as a result of legal issues related to the fund. Accordingly, we are adopting these reporting requirements as proposed. In order to better understand instances when funds receive financial support from an affiliated entity, we are adopting, substantially as proposed but with a modification that is designed to address a commenter’s suggestion, a new requirement for information regarding the provision of such financial support.848 We 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, reporting, among other things, the receipt of financial support.849 As with money market funds, we believe that it is important that the Commission understand the nature and extent to which a fund’s sponsor provides financial support to a fund. Therefore, we are extending this requirement to all funds that will file reports on Form N– CEN. As we stated in the Proposing Release, 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 will allow Commission staff to readily identify any funds that have received such support for further analysis and review, as appropriate. One commenter suggested that, for purposes of Form N–CEN, the instruction concerning the definition of ‘‘financial support’’ provide additional guidance concerning exclusions from the definition. The proposed instruction regarding the definition of ‘‘financial support’’ provided for certain of the exclusions suggested by the commenter, such as for routine waiver of fees or reimbursement of fund expenses and routine inter-fund lending.850 We continue to think that the proposed exclusions are appropriate, and we are adopting those exclusions today.851 However, the commenter also suggested specifying that the purchase of a defaulted or devalued security would constitute ‘‘financial support’’ only when it is intended to increase or stabilize the value or liquidity of the fund’s portfolio.852 We agree with the commenter that purchases of a defaulted 848 Item B.14 of Form N–CEN. Money Market Fund Reform 2014 Release, supra footnote 33. 850 See Dechert Comment Letter; Instruction to Item 15 of proposed Form N–CEN. 851 See Instruction to Item B.14 of Form N–CEN. 852 See Dechert Comment Letter. 849 See E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations or devalued security at fair value need only be characterized as ‘‘financial support’’ for purposes of Form N–CEN if they are intended to increase or stabilize the value or liquidity of the fund’s portfolio, and, accordingly, have modified the instruction in this manner.853 In addition, and as proposed, if a fund other than a money market fund received financial support, it will also be required to provide more detailed information in the form of an attachment as required by Part G of Form N–CEN.854 We are also adopting, as proposed, an item in Form N–CEN 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.855 Funds are required to identify any such order by release number.856 Collecting this information in a structured format will assist us with our oversight functions and improve our ability to monitor fund reliance on exemptive orders. One commenter expressed support for this new reporting requirement, including the reporting of release numbers applicable to such exemptive orders.857 The commenter suggested, however, that in addition to release numbers, the form include the classification or category of the exemptive order in relation to the Commission’s Investment Company Act Notices and Orders Category Listing Web page 858 and similar reporting requirements for a fund’s reliance on staff no-action letters.859 We have determined to adopt the reporting item as proposed. We believe that reporting requirements regarding reliance on noaction letters may impose additional Instruction to Item B.14 of Form N–CEN. G.1.a.ii of Form N–CEN. Money market funds currently provide this information through reports on Form N–CR. However, all funds, including money market funds, will be required to respond ‘‘yes’’ or ‘‘no’’ to Item B.14 of Form N– CEN. 855 Item B.15 of Form N–CEN. If any actions were taken during the reporting period, which were required to be reported on Form N–1Q pursuant to an exemptive order, Form N–SAR requires that information be reported in response to Sub-Item 77P of Form N–SAR. See Instructions to Sub-Items 77P and 102O of Form N–SAR. Form N–CEN requires the fund to file as an attachment any information required to be filed pursuant to exemptive orders issued by the Commission and relied on by the fund. Instruction 5 to Item G.1 of Form N–CEN. 856 See Item B.15.a.i of Form N–CEN. 857 See Morningstar Comment Letter. 858 Investment Company Act Notices and Orders Category Listing Web page is available at: https:// www.sec.gov/rules/icreleases.shtml. 859 See Morningstar Comment Letter. administrative costs on filers. Therefore, we believe that the requested information as proposed balances the Commission’s need for information to monitor a fund’s regulatory compliance with the costs imposed on registrants reporting this information. As proposed, Form N–CEN, similar to Form N–SAR,860 will require identifying information for the fund’s principal underwriters 861 and independent public accountants,862 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.863 We are adopting these requirements as proposed. If the independent public accountant changed since the last filing, under the proposal, the fund would also have been required to provide a detailed narrative attachment to Form N–CEN similar to the exhibit in Form N–SAR reporting a change in independent registered public accountants, along with the predecessor accountant’s letter reporting the change in independent registered public accountants also required to be reported on Form N–SAR.864 Some commenters expressed concern that because Form N–CEN would be an annual reporting form, rather than a semi-annual reporting form like Form N–SAR, the exhibit may be filed a significant amount of time after an accountant had changed.865 Commenters instead suggested that the proposed attachment be filed by funds with their semi-annual Form N–CSR filings.866 We are persuaded by these concerns, and are modifying the requirement by moving the change in independent public accountant attachment from Form N–CEN to Form N–CSR as a new attachment to reports 853 See mstockstill on DSK3G9T082PROD with RULES2 854 Item VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 860 Item 11, Item 13, Item 77.K, Item 91, Item 102.J, Item 114, and Item 115 of Form N–SAR. 861 Item 17 of proposed Form N–CEN. 862 Item 18 of proposed Form N–CEN. 863 Item 17.b and Item 18.f of proposed Form N– CEN, respectively. 864 Item 79.a.iii of proposed Form N–CEN. 865 See AICPA Comment Letter; and PwC Comment Letter (noting that Item 27(c)(4) of Form N–1A and Item 24, Instruction 5, of Form N–2 both require that the management statement required under Item 4.01 of Form 8–K be presented in both semi-annual and annual shareholder reports. Thus, for any change in accountants occurring in the first six months of a registrant’s fiscal year, management’s statement regarding a change in accountants would be required to be issued and filed publicly in the fund’s semi-annual shareholder report while the predecessor accountant’s letter reported semi-annually on former Form N–SAR would, under the proposal, have been filed in Form N–CEN six months later). 866 See AICPA Comment Letter; and PwC Comment Letter. PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 81933 on that form.867 We share commenters’ concerns that, as proposed, a significant amount of time may lapse before shareholders would be provided the letter reporting a change in independent registered public accountants. We also believe that moving the attachment from Form N–CEN to Form N–CSR will help ensure concurrent review and written agreement by the predecessor accountant of the required management statement in both annual and semiannual reports, as reports on Form N– CSR are required to be filed no later than 10 days after reports to shareholders are transmitted. Thus, Form N–CEN provides a means to track funds that change accountants in a structured data format on an annual basis, while the accountant’s letter regarding the change will become available to the public semi-annually as an exhibit on Form N–CSR. We also proposed 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. Commenters generally did not object to these proposed reporting requirements,868 and we are adopting them largely as proposed, with some revisions in response to specific commenter suggestions. These items include a question relating to material changes in the method of valuation of the fund’s assets.869 If there have been material changes in the method of valuation of assets during the reporting period, Item B.20 requires that the fund report the types of investments involved. One commenter expressed support for this reporting requirement, noting that the information would be sufficient to conduct due diligence on pricing and valuation issues.870 This commenter 867 See Item 12(a)(4) of Form N–CSR. e.g., Morningstar Comment Letter. 869 Item B.20 of Form N–CEN. As discussed in the Proposing Release, valuation methodologies are approved by fund directors for use by funds to determine, in good faith, the fair value of portfolio securities (and other assets) for which market quotations are not readily available. For example, valuation methodology changes may include, but are not limited to, changing from use of bid price to mid-price for fixed income securities or changes in the trigger threshold for use of fair value factors on international equity securities. Unlike Form N– SAR, this requirement will apply to UITs as well as management investment companies. As we noted in the Proposing Release, we believe it is important for the Commission to have information on accounting and valuation for all registered investment companies in order to assist us in our oversight and examination functions. 870 Morningstar Comment Letter. 868 See, E:\FR\FM\18NOR2.SGM 18NOR2 81934 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations also suggested aligning the type of investments involved with the list of asset types identified in Form N– PORT.871 After considering the commenter’s request, we have added an additional sub-item and clarifying instructions to Item B.20 to require the applicable ‘‘asset type’’ category specified in Item C of Form N–PORT.872 We believe that requiring responses based on the categories used in Form N– PORT will provide some measure of standardization that will generally assist the staff in its monitoring of changes in valuation methodologies by asset class, and will provide regulatory consistency that will assist Commission staff in its review of information reported pursuant to both forms. In addition, and as proposed, funds will also be required to provide a brief description of the types of investments involved.873 However, we have modified the instruction to this sub-Item from the proposal to provide that if the change in methodology relates to a subasset type included in the response to Item B.20.c, then funds should report the sub-asset class in responding to Item B.20.d.874 This modification is intended to avoid duplicative responses to Item B.20.c and Item B.20.d by eliciting more specific information as to any sub-asset classes contained in the broader Form N–PORT asset categories that are impacted by the change of valuation methodologies. Unlike reports on Form N–SAR, Form N–CEN does not require a separate attachment detailing the circumstances surrounding a change in valuation methods.875 Instead, to facilitate review of this information in a structured format, Form N–CEN includes 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.876 Also as proposed, Form N– 871 See id. Item B.20.c of Form N–CEN and related instruction (requiring responses to provide the applicable ‘‘asset type’’ category specified in Item C.4.a of Form N–PORT). 873 Item B.20.d of Form N–CEN. 874 See Instruction to Item B.20 of Form N–CEN. Thus, if a fund changed its valuation methodologies with respect to municipal securities, the fund would report ‘‘debt’ in response to Item B.20.c and ‘‘municipal securities’’ in response to Item B.20.d. 875 See Item 77.J and Item 102.I of Form N–SAR. 876 Compare Item 77.J of Form N–SAR with Item B.20 of Form N–CEN. An instruction to Item B.20 of Form N–CEN clarifies that we do not expect responses to this item to include changes to valuation techniques used for individual securities (e.g., changing from market approach to income approach for a private equity security). Form N– SAR does not contain a similar instruction, but we are including it in Form N–CEN to provide clarity for filers and because we believe that responding to mstockstill on DSK3G9T082PROD with RULES2 872 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 CEN carries forward the requirement from Form N–SAR 877 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.878 We are also adopting, largely as proposed, a requirement in Form N– CEN 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.879 To flag instances where a report noted any material weaknesses, Form N–CEN also includes, as proposed, a question that asks whether the report on internal control noted any material weaknesses.880 In addition, as was proposed, Form N–CEN contains a new requirement that the fund report if the certifying accountant issued an opinion other than an unqualified opinion with respect to its audit of the fund’s financial statements.881 These questions will elicit information on potential accounting issues identified by a fund’s accountant. We are also adopting, largely as proposed, a requirement in Form N– CEN, not contained in Form N–SAR, to indicate 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.882 One Item B.20 of Form N–CEN for individual securities may be overly burdensome. 877 See Item 77.L and Item 102.K of Form N–SAR. 878 Item B.21 and Item G.1.a.iv of Form N–CEN. Like the information requested regarding changes in valuation methods, Form N–SAR only requests information from management companies regarding changes in accounting principles and practices. Unlike Form N–SAR, Form N–CEN requires this information from UITs as well, for the same reasons as discussed above with respect to changes in valuation methods. See supra footnote 869. 879 Item G.1.a.iii of Form N–CEN. Management companies other than SBICs are currently required to file a copy of the independent public accountant’s report on internal control with their reports on Form N–SAR. See Item 77.B of Form N– SAR. We continue to believe that a copy of the management company’s report on internal control should be filed with the Commission and thus are carrying over the filing requirement to Form N– CEN. 880 Item B.18 of Form N–CEN. One commenter suggested that the word ‘‘find’’ in the text of proposed Item 19 be changed to ‘‘note,’’ stating that the term ‘‘find’’ could be misinterpreted, creating an ‘‘expectation gap’’ over the nature of the consideration of internal control in an audit of financial statements, particularly for investment companies, which (except for BDCs) are not subject to the integrated audit requirements of the Sarbanes-Oxley Act. See PwC Comment Letter. We are persuaded by the commenter’s concern and have revised the language of the item from ‘‘find’’ to ‘‘note’’ as recommended. 881 Item B.19 of Form N–CEN. 882 Item B.22 of Form N–CEN. PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 commenter expressed support for additional information related to NAV errors.883 Another commenter recommended that this item be omitted from Form N–CEN, arguing that the item is not an appropriate reporting item for a census form, would likely engender inquiries and claims from potential litigants, and could be obtained through the Commission’s examination program.884 We continue to believe, however, that the item will assist the staff’s monitoring efforts and the yes/no reporting structure of the item will be a useful means to flag the occurrence of NAV corrections whereby Commission staff can request further information in connection with staff examinations and other inquiries.885 In addition, one commenter requested that we revise the item to ensure that any errors that ‘‘exceeded the registrant’s threshold for reprocessing’’ were captured, even if the reprocessing was paid for by a service provider.886 After consideration of the comment, we agree that this question should capture all incidents of reprocessed shareholder accounts regardless of the source of payment and have revised the item to clarify that a registrant should respond affirmatively if any payments were made to shareholders (i.e., regardless of the source of the payment) or if any shareholder accounts were reprocessed as a result of an error in calculating the registrant’s NAV.887 As proposed, Form N–CEN also requires 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.888 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 883 Morningstar Comment Letter. SIFMA Comment Letter I. 885 Regarding the commenter’s concerns regarding potential increased litigation risk or inquiries based on public disclosure, based on our experience, we understand that these types of payments and reprocessing transactions are typically already disclosed to investors through account statements. 886 See BlackRock Comment Letter. 887 Item B.22.a of Form N–CEN. 888 Item B.23 of Form N–CEN. Section 19(a) of the Investment Company Act generally prohibits a fund from making a distribution from any source other than the fund’s net income, unless that payment is accompanied by a written statement that adequately discloses the source or sources of the payment. See 15 U.S.C. 80a–19(a). Rule 19a-1 under the Investment Company Act specifies the information required to be disclosed in the written statement. [17 CFR 270.19a–1]; see also Shareholder Notices of the Sources of Fund Distributions—Electronic Delivery, IM Guidance Update No. 2013–11 (Nov. 2013), available at https://www.sec.gov/divisions/ investment/guidance/im-guidance-2013-11.pdf. 884 See E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations requirements under section 19(a) and rule 19a–1. One commenter stated that there is not currently a consistent method used across funds to determine whether a rule 19a–1 notice is required, and that this inconsistency could limit comparability of the reported data.889 The commenter suggested that the Commission could increase comparability of the reported data by clarifying the method that should be used to determine whether a 19a–1 notice is required.890 Although we recognize, as the commenter suggests, that different substantive practices relating to 19a–1 notices could affect the comparability of the reported data, revising the substantive provisions of rule 19a–1 is beyond the intended scope of the requirements of Form N–CEN. c. Part C—Items Relating to Management Investment Companies mstockstill on DSK3G9T082PROD with RULES2 i. Background and Classification of Funds We proposed a number of reporting items under Part C of Form N–CEN 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 in Part C will 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. We are adopting those reporting items substantially as proposed with some modifications in response to comments. Where we have received comments on specific reporting requirements, we discuss them in more detail below. Part C will be completed by management investment companies other than SBICs. As in the proposal, for management companies offering multiple series, the required information will be reported separately as to each series.891 Similar to Form N–SAR and as proposed, Form N–CEN includes 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 time filing the form.892 889 See State Street Comment Letter. 890 Id. 891 General Instruction A to Form N–CEN. C.1 of Form N–CEN; see also supra section II.A.2.a (discussing the use of LEIs for purposes of Form N–PORT and related comments received regarding the use of LEIs). The 892 Item VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 Unlike Form N–SAR, 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 are required under Form N–CEN.893 In addition, Form N–CEN includes a requirement (unlike Form N–SAR) to specifically provide identifying information for each share class outstanding, including the name of the class, the class identification number, and ticker symbol.894 Form N–CEN also requires— substantially as proposed with some modifications in response to public comment—management companies to identify if they are any of the following types of funds: 895 ETF or exchangetraded managed fund (‘‘ETMF’’); 896 requirements relating to the name of the fund and if this is the first filing with respect to the fund are currently required by Form N–SAR. See Item 3 and Item 7.C of Form N–SAR. 893 Item C.2.a–Item C.2.c of Form N–CEN. 894 Item C.2.d of Form N–CEN. 895 Item C.3 of Form N–CEN. As discussed herein, many of the types of funds listed in Item C.3 are defined in Form N–CEN. With the exception of ‘‘index fund’’ and ‘‘money market fund,’’ these terms are not currently defined in Form N–SAR. See General Instruction H and Item 69 of Form N– SAR. 896 Item C.3.a of Form N–CEN. As discussed above, we have revised, consistent with the changes to Form N–PORT discussed above, the definitions of ‘‘Exchange-Traded Fund’’ and ‘‘Exchange-Traded Managed Funds’’ to clarify that the definitions would apply to a class or series of a UIT organized as an ETF or ETMF. See supra footnote 793 and accompanying text. Consequently, for purposes of reporting on Form N–CEN, ‘‘exchange-traded fund’’ is defined as an open-end management investment company (or series or class thereof) or UIT (or series thereof), the shares of which are listed and traded on a national securities exchange at market prices, and that has formed and operates under an exemptive order under the Investment Company Act granted by the Commission or in reliance on an exemptive rule under the Act adopted by the Commission. Similarly, ‘‘exchange-traded managed fund’’ is defined as an open-end management investment company (or series or class thereof) or UIT (or series thereof), the shares of which are listed and traded on a national securities exchange at NAV-based prices, and that has formed and operates under an exemptive order under the Investment Company Act granted by the Commission or in reliance on an exemptive rule under the Act adopted by the Commission. See General Instruction E of Form N–CEN. These definitions are substantially identical to the definitions we proposed, however, we have added a parenthetical to each definition to clarify that an ETF or exchange-traded managed fund would include a series of a UIT that meets the rest of the applicable definition. We believe that these are appropriate definitions as they are similar to the one used for determining the applicability of ETF registration statement disclosure requirements for open-end funds. See General Instruction A of Form N–1A. Currently, all ETFs and exchange-traded managed funds rely on relief from certain provisions of the Investment Company Act that is granted by Commission order. See ETF Proposing Release, supra footnote 5; Eaton Vance Management, et al., Investment Company Act Release No. 31333 (Nov. 6, 2014) [79 FR 67471 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 81935 index fund; 897 fund seeking to achieve performance results that are a multiple of an index or other benchmark, the inverse of an index or other benchmark, or a multiple of the inverse of an index or other benchmark; 898 interval fund; 899 fund of funds; 900 master-feeder fund; 901 money market fund; 902 target date fund; 903 and underlying fund to a variable annuity or variable life insurance contract. For purposes of reporting on Form N– CEN, as proposed, ‘‘index fund’’ is defined as an investment company, including an ETF, which seeks to track the performance of a specified index.904 The definition is largely similar to the definition of ‘‘index fund’’ in rule 2a19– 3 under the Investment Company Act, but will capture both broad-based and affiliated indexes.905 Additionally, we note that the definition is substantially similar to the definition of ‘‘index fund’’ in Form N–SAR, but also takes into account the emergence of ETFs.906 One commenter expressed support for the proposed definition of index fund, but (Nov. 13, 2014)] (Notice); Eaton Vance Management, et al., Investment Company Act Release No. 31361 (Dec. 2, 2014) (Order). The Commission, however, proposed in 2008 to codify the exemptive relief previously granted to ETFs by order. See ETF Proposing Release, supra footnote 5 (proposing rule 6c-11). 897 Item C.3.b of Form N–CEN. 898 Item C.3.c of Form N–CEN. This item is being modified from the proposed requirement, which would have required a fund to indicate if it seeks 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. The modifications clarify that the benchmark may be an index. 899 Item C.3.d of Form N–CEN. 900 Item C.3.e of Form N–CEN. 901 Item C.3.f of Form N–CEN. 902 Item C.3.g of Form N–CEN. 903 Item C.3.h of Form N–CEN. As in the proposal, for purposes of reporting on Form N–CEN, ‘‘target date fund’’ is defined as an investment company that has an investment objective or strategy of providing varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures that changes over time based on an investor’s age, target retirement date, or life expectancy. See Instruction 5 to Item C.3.b of Form N–CEN. This is the same definition as was proposed by the Commission in our 2010 proposing release relating to target date funds. See Investment Company Advertising Release, supra footnote 6. We note that one commenter suggested that target-date funds should also self-identify whether their glide path is ‘‘to’’ or ‘‘through’’ retirement. See Morningstar Comment Letter. We have not made any changes in response to this comment because we believe that the identifying information requested by the form with respect to target-date funds is sufficient for the Commission’s purposes. 904 See Instruction 2 to Item C.3 of Form N–CEN. 905 See rule 2a19–3 under the Investment Company Act [17 CFR 270.2a19–3] (referring to an index fund for purposes of the rule as a fund that has ‘‘an investment objective to replicate the performance of one or more broad-based securities indices . . .’’). 906 See Instruction to Item 69 of Form N–SAR. E:\FR\FM\18NOR2.SGM 18NOR2 81936 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations strongly encouraged that funds using indexes constructed by affiliated service providers be disclosed clearly and that funds disclose whether the index tracked by the fund is exclusively constructed for the fund.907 We agree with the commenter and are requiring index funds to indicate whether the index whose performance the fund tracks is constructed by an affiliated person of the fund and whether the index is exclusively constructed for the fund.908 We believe this information will further assist Commission staff in monitoring trends in funds that track these indexes, which often use more complex methodologies that choose constituents by weighing factors other than market capitalization. It also will assist staff in monitoring conflicts of interest that could exist when an index is constructed by an affiliated person of the fund or is exclusively constructed for the fund. As proposed, ‘‘interval fund’’ is defined as a closed-end management company that makes periodic repurchases of its shares pursuant to rule 23c–3 under the Investment Company Act.909 One commenter suggested that the definition of interval fund should not be limited to closedend funds, but rather, expanded to other investment companies.910 We believe, however, that the definition is appropriate as proposed because the term ‘‘interval fund’’ is commonly used to refer to funds that rely on rule 23c– 3.911 For purposes of reporting on Form N– CEN, we also proposed to define ‘‘fund of funds’’ as a fund that acquires securities issued by another investment company in excess of the amounts permitted under section 12(d)(1)(A) of the Investment Company Act.912 Some 907 Morningstar Comment Letter. C.3.b.i of Form N–CEN. 909 See Instruction 3 to Item C.3 of Form N–CEN. 910 Morningstar Comment Letter (noting that there is one investment company registered on Form N– 1A whose redemption parameters are largely similar to an interval fund pursuant to exemptive relief and suggesting that the definition of interval fund be expanded to other investment companies in light of the existence of this fund). 911 See rule 23c–3 under the Investment Company Act [17 CFR 270.23c–3]. We believe that it is more appropriate to maintain the definition of interval fund as a closed-end fund that makes periodic purchases of its shares pursuant to rule 23c–3 as proposed, rather than expand the definition to capture funds that share some similar characteristics with interval funds but operate outside the context of rule 23c–3. For example, we believe that reports on Form N–CEN will appropriately capture an open-end fund that operates with redemption procedures similar to an interval fund pursuant to exemptive relief in response to Item B.15 of Form N–CEN. 912 See 15 U.S.C. 80a–12(d)(1)(A); Instruction 1 to Item 27 of proposed Form N–CEN. mstockstill on DSK3G9T082PROD with RULES2 908 Item VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 commenters suggested that we revise the definition to exclude funds that invest in money market funds for cash management purposes in excess of the amount permitted under section 12(d)(1)(A) in reliance on rule 12d1–1 of the Investment Company Act.913 After consideration of these comments, we acknowledge that the definition as proposed would have included a larger universe of funds than we intended for our regulatory purposes. The proposed definition would have yielded data that would have impeded identification of those funds that acquire securities issued by another investment company in excess of the amounts permitted under section 12(d)(1)(A) other than those that do so only for short-term cash management purposes. Therefore, we have revised the instructions to Item C.3 to note that for purposes of the item, the term ‘‘fund of funds’’ does not include a fund that acquires securities issued by another investment company solely in reliance on rule 12d1–1.914 We received no other comments on the other definitions for fund types. As proposed, ‘‘master-feeder fund’’ was defined as a two-tiered arrangement in which one or more funds holds shares of a single fund in accordance with section 12(d)(1)(E) of the Investment Company Act.915 We understand that certain interpretations of this definition could exclude some funds that operate in a master-feeder structure and hold themselves out as master-feeder funds, but for technical reasons must obtain exemptive relief from the Commission rather than rely on section 12(d)(1)(E) to operate in this manner. Accordingly, we have revised the definition of ‘‘master-feeder fund’’ to more clearly include two-tiered arrangements in which one or more funds holds shares of a single fund pursuant to exemptive relief granted by the Commission.916 ETFs and ETMFs, index funds, and master-feeder funds are also required to provide additional information under Part C.917 First, as in the proposal, Form N–CEN requires a management company to further indicate if it is an 913 Schwab Comment Letter; ICI Comment Letter; MFS Comment Letter. 914 See Instruction 1 to Item C.3 of Form N–CEN. 915 See Instruction 4 to Item 27 of proposed Form N–CEN. 916 See Instruction 4 to Item C.3. of Form N–CEN which defines the term ‘‘master-feeder fund’’ to mean ‘‘a two-tiered arrangement in which one or more funds (each a feeder fund) holds shares of a single Fund (the master fund) in accordance with section 12(d)(1)(E) of the Act (15 U.S.C. 80a– 12(d)(1)(E)) or pursuant to exemptive relief granted by the Commission’’ (emphasis added). 917 See Item C.3.a, Item C.3.b, and Item C.3.f of Form N–CEN. PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 ETF or an ETMF.918 Second, as in the proposal, index funds will be required to report certain standard industry calculations of relative performance. In particular, index funds will be required to report a measure of the difference between the index fund’s total return during the reporting period 919 and the index’s return both before and after fees and expenses—commonly called the ‘‘tracking difference’’ 920—and also a measure of the volatility of the day-today tracking difference over the course of the reporting period—commonly called the fund’s ‘‘tracking error.’’ 921 One commenter suggested that tracking difference and tracking error should be reported monthly on Form N–PORT rather than annually on Form N–CEN, because monthly reporting would allow the Commission to receive observations for all index funds for the same time period, and the commenter opined that the additional information would help the Commission be more responsive, particularly in times of market stress.922 Although we recognize that there may be additional potential benefits of monthly reporting, as the commenter suggests, we continue to believe that annual reporting more appropriately balances the usefulness of the reported information to the Commission and other data users with the additional administrative costs that would be associated with a requirement for monthly reporting and the associated recordkeeping necessary to support it. 918 See Item C.3.a.i and Item C.3.a.ii of Form N– CEN. 919 With respect to index funds that are ETFs, we expect a fund to use its NAV-based total return, rather than market-based total return, in responding to Item C.3.a.i and Item C.3.a.ii of Form N–CEN. 920 Item C.3.b.i of Form N–CEN. The tracking difference is the return difference between the fund and the index it is following, annualized. Morningstar ETF Research, Ben Johnson, et al., On the Right Track: Measuring Tracking Efficiency in ETFs (Feb. 2013) (‘‘Morningstar Paper’’) at 29, available at https://media.morningstar.com/uk/ MEDIA/Research_Paper/Morningstar_Report_ Measuring_Tracking_Efficiency_in_ETFs_February_ 2013.pdf. Thus, tracking difference = (1 + RNAV¥RINDEX) 1⁄N¥1, where RNAV is the total return for the fund over the reporting period, RINDEX is the total return for the index for the reporting period, and N is the length of the reporting period in years. N will equal to 1 if the reporting period is the fiscal year. Id. 921 See Item C.3.b.ii of Form N–CEN. Tracking error is commonly understood as the standard deviation of the daily difference in return between the fund and the index it is following, annualized. Morningstar Paper, supra footnote 920, at 29. Thus, tracking error = std (RNAV ¥ RINDEX) × √n, where RNAV is the daily return for the fund, RINDEX is the daily return for the index, std(·) represents the standard deviation function, and n is the number of trading days in the fiscal year. Id. 922 See Morningstar Comment Letter (recommending that tracking difference and tracking error be reported on N–PORT with trailing one-year data rather than annually on Form N– CEN). E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 Moreover, we believe that the frequency and timeliness of reports on Form N– CEN are, both generally and specifically with respect to these reporting requirements, sufficient for collecting census-type information, but that reporting of these particular annualized figures on Form N–PORT would not be so timely or so frequent as to advance the purposes the commenter suggested (viz., to respond in periods of market stress), particularly in light of the Form N–PORT 60-day reporting delay. While supporting the inclusion of tracking difference and tracking error reporting items, a couple of commenters suggested alternatives to the calculation methods underlying the reporting requirements, including, for example, measuring tracking error on a weekly or monthly basis rather than a daily basis as proposed.923 With respect to tracking error, we believe that it is important to calculate tracking error using the same observation frequency across funds and that, based on staff experience, a daily frequency for tracking data is likely more commonly calculated and therefore more readily available to funds than the alternatives proposed. We also believe that daily calculations better reflect the nature of the daily redeemability of an open-end fund, including capturing the daily trading activities on the secondary market for ETFs. One commenter argued that daily tracking error calculations may contain temporary anomalies outside portfolio management control, such as differences in holidays or pricing sources used by the fund and/or index providers or temporary market aberrations which may cause a higher daily tracking error.924 We do not believe such differences would be uninformative. Rather, we believe receiving information on these potential anomalies will better inform investors and Commission staff about the behaviors of index funds and the indexes they track and assist the Commission in our oversight responsibilities. Overall, we do not perceive significant additional benefits in the alternative calculation methods recommended by commenters and continue to believe that the calculation methodologies for tracking difference 923 See Invesco Comment Letter (recommending that tracking error be based on a monthly basis rather than a daily basis and that tracking difference be calculated pursuant to an excess return calculation); Confluence Comment Letter (recommending that tracking error be based on a weekly basis rather than a daily basis, arguing that daily periodicity will show excess volatility, providing the Commission and investors with a skewed picture of tracking error). 924 See Invesco Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 and tracking error, as proposed, are appropriate. Specifically, tracking difference will be calculated as the annualized difference between the index fund’s total return during the reporting period and the index’s return during the reporting period, and tracking error will be calculated as the annualized standard deviation of the daily difference between the index fund’s total return and the index’s return during the reporting period.925 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.926 In addition, tracking difference and tracking error before fees and expenses 927 will allow data users to better understand the effect of factors other than fees and expenses on the degree to which the index fund replicates the performance of the target index.928 Finally, as proposed, master funds will 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.929 Similarly, a feeder fund will be required to provide identifying information of its master fund.930 We are also adopting, as proposed, the requirement in Form N–CEN that a management company report if it seeks to operate as a non-diversified company, as defined in section 5(b)(2) of the Investment Company Act.931 Form N– SAR, in contrast, asks if the management company was a diversified investment company at any time during the period or at the end of the reporting period.932 The item in Form N–CEN is forward looking rather than backward looking as in Form N–SAR and is intended to include as part of the universe of non-diversified funds those funds that seek to operate as nondiversified companies even if they 925 See Proposing Release, supra footnote 7, at 33639–40. See also Morningstar Paper, supra footnote 920, at 29. 926 See Morningstar Paper, supra footnote 920, at 5. We believe that this information will help data users understand which funds are best tracking their target indexes and could highlight outlier funds. 927 See Item C.3.b.ii.1 and Item C.3.b.iii.1 of Form N–CEN. 928 See Morningstar Paper, supra footnote 920, at 9. 929 Item C.3.f.ii of Form N–CEN. 930 Item C.3.f.i of Form N–CEN. 931 Item C.4 of Form N–CEN. 932 See Item 60 of Form N–SAR. PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 81937 should happen to meet the definition of a ‘‘diversified company’’ as of the end of a particular reporting period.933 We believe this item will allow our staff to more accurately ascertain the universe of non-diversified funds and, thus, better assist us in our analysis and inspection functions. One commenter suggested that this reporting requirement also consider the identification of funds that intended to operate as non-diversified at some point during the reporting period but have since changed to diversified status.934 We believe that the reporting requirement as proposed is appropriate for our purpose of being able to efficiently identify non-diversified companies. ii. Investments in Certain Foreign Corporations Form N–CEN requires, as proposed, that a management company identify if it invests in a CFC for the purpose of investing in certain types of instruments, such as commodities.935 If it does, it must include the name and LEI of such corporation, if any.936 As discussed above in section 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 CFC for the purpose of investing in certain types of instruments will provide investors greater insight into CFCs that may have certain legal, tax, and country-specific risks associated with them. Combined with the information that we are collecting in Form N–PORT, Commission staff will use this information to better understand the use of CFCs, which could allow for more efficient collaboration with foreign financial regulatory authorities to the extent the Commission may need books and records or other information for specific funds or general inquiries related to CFCs. iii. Securities Lending As discussed above, we are adopting requirements that funds provide certain 933 For example, if a fund generally operates as a non-diversified fund, but as a result of market conditions or other reasons, happens to meet the definition of ‘‘diversified fund’’ as of the end of the reporting period, it will still be required to indicate that it was a non-diversified fund for purposes of this item. 934 See Schnase Comment Letter. 935 Item C.5.a of Form N–CEN. As in the proposal, an instruction to the item defines ‘‘controlled foreign corporation’’ as having the meaning provided in section 957 of the Internal Revenue Code. 936 Id. E:\FR\FM\18NOR2.SGM 18NOR2 81938 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 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 related cash collateral reinvestments.937 Additionally, we are adopting requirements that funds include in their statements of additional information 938 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.939 We proposed, and continue to believe it is appropriate, 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 Form N–PORT. In this regard, we believe that the proposed annual reporting requirement on Form N–CEN yields sufficiently timely data and more appropriately balances the requirements’ benefits with their associated costs than would additional monthly reporting requirements on Form N–PORT. Some commenters expressed general support for reporting securities lending information on Form N–CEN.940 One commenter suggested that the Commission require even more detailed reporting requirements concerning services provided by securities lending agents, including, for example, information about how securities are selected for loan, contending that the public availability of the information may assist a fund board in understanding fees and services and drawing conclusions concerning their comparability.941 937 See supra sections II.A.2.d and II.A.2.g.v. of additional information’’ means the statement of additional information required by Part B of the registration form applicable to the fund. 939 See discussion infra section II.F regarding securities lending disclosures in the Statement of Additional Information and Form N–CSR; see also supra footnote 192. 940 See, e.g., BlackRock Comment Letter; Blackrock Directors Comment Letter; CFA Comment Letter; EY Comment Letter (suggesting, however, that securities lending disclosures proposed in Regulation S–X would be more appropriate in Form N–CEN than on Form N–PORT); Fidelity Comment Letter (recommending, however, that information concerning third-party lending agent arrangements should be non-public); Morningstar Comment Letter; RMA Comment Letter; SIFMA Comment Letter I; State Street Comment Letter. 941 See Blackrock Directors Comment Letter (recommending that the Commission specifically require disclosures on whether qualified dividend income management is provided by lending agents, the client fund, or other third parties; whether securities for loan are selected by the lending agent, the client fund, or other third parties; and whether the lender’s securities lending program includes mstockstill on DSK3G9T082PROD with RULES2 938 ‘‘Statement VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 We acknowledge that the commenter’s recommended additions could yield information that may be useful to the Commission as well as to some data users, and recognize that a fund board’s consideration of securities lending services may rightfully include consideration of how securities are selected for loan and the other matters raised by the commenter. However, the information required by Form N–CEN is intended primarily for Commission regulatory purposes, and—balancing those purposes against the reporting costs associated with additional requirements—we have determined that the requirements we are adopting today are appropriate. The adopted requirements are meant to yield censustype information that is, to the extent practicable, comparable across reporting funds and that permits the Commission and other potential users to follow up, as appropriate, on patterns and idiosyncrasies in the reported data. We believe, therefore, that the nuanced information the commenter suggests requiring is better provided in a fund’s registration statement than in reports on Form N–CEN, to the extent required. We are therefore adopting, as proposed, a requirement that each management company report annually on new Form N–CEN whether it is authorized to engage in securities lending transactions and whether it loaned securities during the reporting period.942 In addition, we are adopting, as proposed, reporting requirements regarding information about the fees associated with securities lending activity and information about the management company’s relationship with certain securities-lending-related service providers. As in the proposal, management companies that loaned any securities during the reporting period will be required to report certain information, with some modifications in response to comments. Specifically, those management companies will be required to report annually whether any borrower of securities failed to return the loaned securities by the contractual deadline with the result that the fund (or its securities lending agent) liquidated collateral pledged to secure the loaned securities or that the fund was otherwise adversely impacted during the reporting period.943 However, this reporting requirement has been modified from the proposal, which would have required funds to ‘‘specials’’ only (and, if so, how ‘‘specials’’ are defined) or general collateral as well). 942 Item C.6.a–Item C.6.b of Form N–CEN. 943 Item C.6.b.i of Form N–CEN. PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 report whether a borrower defaulted on its obligations to return loaned securities or return them on time in connection with a security on loan during that period. Some commenters requested that the Commission narrow the definition of borrower default to exclude ‘‘technical’’ defaults, citing concerns that the item, as proposed, could be read to require that funds report any default, including defaults that are not likely to result in potential harm to the fund and would not appropriately represent counterparty risk.944 These types of defaults may occur when loaned securities are returned to a fund after the contractual deadline due to operational issues related to processing or communication, which, according to commenters, is not uncommon.945 Commenters recommended various alternatives to defining borrower default, including, for example, as any default that causes a fund to liquidate securities lending collateral pledged in connection with the securities lending arrangement 946 or any default that results in losses to the fund.947 Others noted that a fund can be further protected from borrower default if it is indemnified by the securities lending agent against loss resulting from a shortfall in pledged collateral when a borrower has defaulted.948 We are persuaded by commenters and have modified the reporting requirement regarding borrower default to focus on failures to return loaned 944 See, e.g., Fidelity Comment Letter; SIFMA Comment Letter I; Vanguard Comment Letter. 945 See ICI Comment Letter; SIFMA Comment Letter I; Vanguard Comment Letter (recommending that the definition of borrower default be limited to any default that causes a fund to liquidate securities lending collateral pledged in connection with the securities lending arrangement); RMA Comment Letter and State Street Comment Letter (recommending that borrower default be limited to any default due to events of insolvency or upon an agent lender otherwise formally declaring a default by the borrower pursuant to the relevant borrower agreement); Fidelity Comment Letter (recommending that borrower default be limited to any default that results in losses to the fund, which could arise when the value of collateral for loaned securities and any reimbursement payments due to the fund are insufficient to eliminate losses associated with the default). 946 See ICI Comment Letter; Vanguard Comment Letter; SIFMA Comment Letter I. 947 See Fidelity Comment Letter. See also RMA Comment Letter and State Street Comment Letter (generally recommending borrower default being defined as any default due to events of insolvency or upon an agent lender otherwise formally declaring a default by the borrower pursuant to the relevant borrower agreement). We believe these recommended definitions of default are too narrow because a fund could be harmed by a borrower’s failure to return loaned securities whether or not the borrower is insolvent or the lending agent declares an event of default. 948 See, e.g., RMA Comment Letter; State Street Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations securities that result in the fund (or its securities lending agent) having to liquidate collateral pledged to secure the loaned securities or the fund otherwise being adversely impacted.949 We have also added an instruction to clarify that, for purposes of this reporting requirement, other adverse impacts to the fund would include, for example, (1) a loss to the fund if collateral and indemnification were not sufficient to replace the loaned securities or their value, (2) the fund’s ineligibility to vote shares in a proxy,950 or (3) the fund’s ineligibility to receive a direct distribution from the issuer.951 We believe that with these modifications to the proposal, the Commission may better monitor the risks associated with borrower defaults that have the potential to expose the fund and its shareholders to harm without having funds account for technical defaults that do not pose the same risks. We are also adopting, as proposed, a requirement that management companies report 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.952 In addition, in a modification from the proposal, we are now including a requirement that management companies report whether the fund exercised its indemnification rights during the reporting period.953 A commenter recommended that the Commission require funds to report whether they exercised their indemnification rights to, in part, provide information about defaults and the extent to which counterparty risks are covered by third parties that provide indemnification.954 We agree with the commenter that this additional requirement would illuminate the frequency of defaults and indemnifications thereby providing the Commission with information about such counterparty defaults and the extent to which those risks are covered by third parties that provide indemnification. We believe that this additional requirement, together with 949 See Item C.6.b.i of Form N–CEN. voting rights generally transfer with loaned securities. See Concept Release on the U.S. Proxy System, Investment Company Act Release No. 29340 (July 14, 2010) [75 FR 42982 (July 22, 2010)] at 42994–95. 951 See Instruction to Item C.6.b.i.2 of Form N– CEN. 952 Item C.6.c.iv and Item C.6.c.v of Form N–CEN. 953 Item C.6.c.vi of Form N–CEN. 954 See ICI Comment Letter. mstockstill on DSK3G9T082PROD with RULES2 950 Proxy VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 the other default and indemnification requirements, will yield data that will allow the Commission, investors, and other potential users to more effectively 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.955 One commenter recommended that details concerning indemnification protection should be made nonpublic.956 We continue to believe, however, that public reporting is a necessary part of improving transparency regarding a fund’s securities lending activities. Specifically, we believe that the information regarding indemnification provisions is relevant to investors evaluating the risks associated with securities lending and comparing those risks across funds, particularly for funds that regularly engage in securities lending activities. Because management companies often 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 the interconnectedness these service providers may have one with another. Accordingly, we are adopting, as proposed, a requirement that management companies report some basic identifying information about each securities lending agent and cash collateral manager.957 One commenter suggested that the Commission define the terms ‘‘securities lending agent’’ and ‘‘cash collateral manager’’ for purposes of Form N–CEN.958 While we continue to believe that these terms are generally understood within the fund industry, 955 As discussed above, commenters to the FSOC Notice suggested that enhanced securities lending disclosures could be beneficial to investors and counterparties. See supra footnote 190. 956 See Fidelity Comment Letter (noting that public disclosure may negatively impact a fund’s ability to negotiate for lending services). 957 Item C.6.c.i–Item C.6.c.ii and Item C.6.d.i–Item C.6.d.ii of Form N–CEN. 958 See RMA Comment Letter (noting that the terms are generally well-understood within the fund industry, but suggesting that, for purposes of Form N–CEN, the Commission could define the term ‘‘securities lending agent’’ to mean a party employed by a lender to administer the lender’s securities lending program according to the prescribed terms of a legal agreement and the term ‘‘cash collateral manager’’ to mean a party employed by the lender to manage cash collateral on behalf of securities loans). PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 81939 we have clarified in the Form that the term ‘‘cash collateral manager’’ refers to an entity that manages a pooled investment vehicle in which a fund’s cash collateral is invested.959 In addition, we are requiring that funds report whether each of these service providers is a first- or second-tier affiliated person of the management company.960 One commenter specifically expressed support for this reporting requirement.961 This data will highlight those funds that might be expected to rely on Commission exemptive relief in order to engage in securities lending activities with affiliates.962 Additionally, the disclosure of whether the cash collateral manager is a first- or second-tier affiliate of the securities lending agent 963 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 959 See Item C.6.d of Form N–CEN. Item C.6.c.iii and Item C.6.d.iv of Form N– CEN (requiring a Fund to report if the named securities lending agent or cash collateral manager is an ‘‘affiliated person’’ (i.e. first-tier affiliate) or ‘‘an affiliated person of an affiliated person’’ (i.e. second-tier affiliate) of the Fund). See also section 2(a)(3) of the Investment Company Act for a definition of the term ‘‘affiliated person.’’ 15 U.S.C. 80a–2(a)(3). 961 See RMA Comment Letter. 962 Section 17(d) of the Investment Company Act makes it unlawful for a first- or second-tier affiliate, among others, acting as principal, to effect any transaction in which the fund, or a company it controls, is a joint or a joint and several participant in contravention of Commission rules. 15 U.S.C. 80a–17(d). Rule 17d–1(a) prohibits a first- or second-tier affiliate of a registered fund, among others, acting as principal from participating in or effecting any transaction in connection with any joint enterprise or other joint arrangement or profitsharing plan in which the fund (or any company it controls) is a participant unless an application or arrangement or plan has been filed with the Commission and has been granted. 17 CFR 270.17d–1. These provisions would prohibit a fund from lending to a borrower that is a first- or secondtier affiliate or compensating a securities lending agent that is a first- or second-tier affiliate with a share of revenue generated by the lending program unless the fund (and/or its affiliate) has obtained an exemptive order from the Commission. These provisions also generally prohibit a fund from investing cash collateral in a first- or second-tier affiliated liquidity pool unless the fund satisfies the conditions in rule 12d1–1 under the Investment Company Act, which provides exemptive relief, subject to certain conditions, for fund investments in an affiliated registered money market fund and a pooled investment vehicle that would be an investment company but for sections 3(c)(1) and 3(c)(7) of the Investment Company Act and that the fund reasonably believes operates in compliance with money market fund regulations. See Fund of Funds Investments, Investment Company Act Release No. 27399 (June 20, 2006) [71 FR 36640 (June 27, 2006)] at n. 27 and accompanying text. 963 Item C.6.d.iii of Form N–CEN. 960 See E:\FR\FM\18NOR2.SGM 18NOR2 81940 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 a share of revenue generated by the cash collateral reinvestment pool. As proposed, Form N–CEN also requires each management company to report whether it has made any of several specific types of payments, including a revenue sharing split, nonrevenue 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.964 In the Proposing Release, we sought comment on whether, in addition to requiring management companies to report whether they made each of the proposed types of payments associated with securities lending, we should also require disclosure of specific rates or amounts paid for each of the enumerated types of compensation.965 Two commenters expressed general support for disclosure of securities lending income and compensation of securities lending agents and cash collateral managers but recommended that, if compensation figures were required, that they be calculated on the basis of income and fees paid during the reporting period.966 We believe that the information we proposed about the types of payments relating to securities lending activities will allow the Commission, investors and other management company boards of directors to understand better the nature 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.967 We 964 See Item C.6.e of Form N–CEN; see also Proposing Release, supra footnote 7, at section II.E.4.c.iii. Management companies that report that ‘‘other’’ payments were made to one or more securities lending agents or cash collateral managers during the reporting period will also be required to describe the type or types of other payments. See Item C.6.e.vi of Form N–CEN. In addition, management companies will be required to disclose the total amount of each payment for the reporting period and describe the services provided for the payment. See infra section II.F.2 regarding amendments to the Statement of Additional Information and Form N–CSR. 965 See Proposing Release, supra footnote 7, at 33641–42. 966 See RMA Comment Letter; State Street Comment Letter. 967 In evaluating the fees and services of any securities lending agent, the board of directors of a management company that engages in securities lending may be assisted by reviewing and comparing information on securities lending agent fee arrangements of other management companies. See, e.g., SIFE Trust Fund, SEC No-Action Letter (pub. avail. Feb. 17, 1982) (management company’s board of directors determines that the securities lending agent’s fee is reasonable and based solely VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 recognize the potential benefits for some data users of access to information about amounts paid for each of the types of compensation in a structured format. However, in light of the fact that Form N–CEN reporting requirements are intended primarily for the Commission’s regulatory purposes and that there would be additional reporting costs related to such a change, and further recognizing that additional securities lending information will now be available to investors pursuant to new Statement of Additional Information (or, for closed-end funds, Form N–CSR) requirements discussed below,968 we have determined not to require reporting of specific compensation amounts or fee rates in reports on Form N–CEN. In addition, we have included in Form N–CEN, a requirement that management companies report the monthly average of the value of portfolio securities on loan during the reporting period.969 This requirement was originally proposed to be included in Regulation S–X along with other securities lending disclosure requirements.970 We have determined to move this information to Form N–CEN as we believe having this information in a structured format will assist our staff in its analyses of the information. As previously noted, we have also determined to move the other proposed securities lending disclosures from Regulation S–X to the Statement of Additional Information (or, for closedend funds, Form N–CSR), as we believe the Statement of Additional Information (or, for closed-end funds, Form N–CSR) is a more appropriate location for these disclosures.971 One commenter recommended that funds be required to report average monthly aggregate dollar amounts on loan for each counterparty on the services rendered); Neuberger Berman Equity Funds, et al., Investment Company Act Release No. 25880 (Jan. 2, 2003) [68 FR 1071 (Jan. 8, 2003)] (Notice); Neuberger Berman Equity Funds, et al., Investment Company Act Release No. 25916 (Jan. 28, 2003) (Order) (management company’s board of directors, including a majority of independent directors, will determine initially and review annually, among other things, that (i) the services to be performed by the affiliated securities lending agent are appropriate for the lending fund, (ii) the nature and quality of the services to be provided by the agent are at least equal to those provided by others offering the same or similar services; and (iii) the fees for the agent’s services are fair and reasonable in light of the usual and customary charges imposed by others for services of the same nature and quality). 968 See infra section II.F. 969 Item C.6.f of Form N–CEN 970 See proposed rule 6–03(m)(6) of Regulation S– X; Proposing Release, supra footnote 7, at 33624. 971 See supra section II.C.6 (discussing securities lending disclosures in the Statement of Additional Information and Form N–CSR). PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 to the securities loan.972 We continue to believe, however, that information on the overall monthly average of the value of portfolio securities on loan provides a better understanding of a fund’s securities lending program without burdening registrants with additional counterparty reporting requirements. Finally, we are also adopting a requirement that funds report the net income from securities lending activities in Form N–CEN.973 We proposed to require disclosure of this information in fund financial statements pursuant to proposed amendments to Regulation S–X, and we sought comment on whether the information should be required in reports on Form N–CEN.974 One commenter suggested that the proposed securities lending financial statement disclosure requirements be instead included in Form N–CEN, as presentation there would be less likely to detract from other material information in the financial statements.975 Another commenter suggested that requiring additional information on Form N–CEN, including income from securities lending activities, would make the other required information more complete and useful.976 We agree with commenters that reporting of net income from securities lending activities would yield useful information for the Commission and other data users and have determined to add this requirement. In particular, information about net income from securities lending activity in a structured format provides useful context for the other securities lending reporting requirements, such as those concerning fees. Together, the data that these requirements will yield will allow the Commission to better understand the interaction of these service providers with management companies. We also believe that the reporting of this data will increase the transparency of information available to the public on the lending and borrowing of securities by funds, a subset of the market participants engaged in securities lending activities.977 In addition to informing the Commission’s risk analysis, we believe that this information will also help inform other data users about the use of, and possible risks associated with, the lending of 972 See John Adams Comment Letter. C.6.g of Form N–CEN. 974 Proposed rule 6–03(m)(3) of Regulation S–X; Proposing Release, supra footnote 7, at 33625. 975 EY Comment Letter. 976 See BlackRock Directors Comment Letter. 977 See, e.g., supra footnote 192. 973 Item E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations portfolio securities by management companies. iv. Reliance on Certain Rules We are adopting, as proposed, a requirement in Form N–CEN that management companies report whether they relied on certain rules under the Investment Company Act during the reporting period.978 A similar reporting item is contained in Form N–SAR.979 However, Form N–CEN requires information with respect to additional rules not currently covered by Form N– SAR.980 We are collecting 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. One commenter suggested that the Commission specify the name of each rule next to the rule number.981 We believe, however, that the rule number descriptions as proposed in Item C.7 are consistent with other reporting forms and provide sufficient information for registrants, and thus, are adopting the item as proposed. In addition, we are adopting, as proposed, amendments to rule 10f–3 to eliminate the requirement that funds provide the Commission with reports on Form N–SAR regarding any transactions 978 Item C.7 of Form N–CEN. id. (requiring management companies to identify if they relied upon any of the following rules: Rule 10f–3 (exemption for the acquisition of securities during the existence of an underwriting or selling syndicate) [17 CFR 270.10f– 3], rule 12d1–1 [17 CFR 270.12d1–1] (exemptions for investments in money market funds), rule 15a– 4 [17 CFR 270.15a–4] (temporary exemption for certain investment advisers), rule 17a–6 [17 CFR 270.17a–6] (exemption for transactions with portfolio affiliates), rule 17a–7 [17 CFR 270.17a–7] (exemption of certain purchase or sale transactions between an investment company and certain affiliated persons thereof), rule 17a–8 [17 CFR 270.17a–8] (mergers of affiliated companies), rule 17e–1 [17 CFR 270.17e–1] (brokerage transactions on a securities exchange), rule 22d–1 [17 CFR 270.22d–1] (exemption from section 22(d) to permit sales of redeemable securities at prices which reflect sales loads set pursuant to a schedule), rule 23c–1 [17 CFR 270.23c–1] (repurchase of securities by closed-end companies), rule 32a–4 [17 CFR 270.32a–4] (independent audit committees)) with Item 40, Item 77.N, Item 77.O, Item 102.M, and Item 102.N of Form N–SAR (requiring information regarding rule 2a–7 [17 CFR 270.2a–7] (money market funds), rule 10f–3 (see above for description), and rule 12b–1 [17 CFR 270.12b–1] (distribution of shares by registered open-end management investment company)). 980 Id. 981 Schnase Comment Letter. mstockstill on DSK3G9T082PROD with RULES2 979 Compare VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 effected pursuant to the rule.982 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.983 Our amendments to rule 10f–3 will eliminate the requirement to periodically report this information,984 but will 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.985 We did not receive comment on this aspect of the proposal. v. Expense Limitations As in Form N–SAR,986 Form N–CEN requires information regarding expense limitations.987 The requirements in Form N–CEN are, as proposed, modified from Form N–SAR and require 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.988 We 982 See adopted amendments to rule 10f–3. 983 See rule 10f–3(c)(12) under the Investment Company Act [17 CFR 270.10f–3(c)(12)]. 984 See rule 10f–3(c)(9) under the Investment Company Act [17 CFR 27010f–3(c)(9)]. 985 Similar exemptive rules take this approach and do not require filings with the Commission. See, e.g., rule 17a–7 under the Investment Company Act [17 CFR 270.17a–7] and rule 17e–1 under the Investment Company Act [17 CFR 270.17e–1]. We note that we previously proposed deleting this filing requirement from rule 10f–3 in 1996. See Exemption for the Acquisition of Securities During the Existence of an Underwriting Syndicate, Investment Company Act Release No. 21838 (Mar. 21, 1996) [61 FR 13620 (Mar. 27, 1996)]. We chose not to delete the filing requirement in the final amended rule in light of the other amendments to the rule at that time, including the increase in the percentage limit on the principal amount of an offering that an affiliated fund could purchase. See Exemption for the Acquisition of Securities During the Existence of an Underwriting of Selling Syndicate, Investment Company Act Release No. 22775 (July 31, 1997) [62 FR 42401 (Aug. 7, 1997)]. 986 See Item 53.A–Item 53.C of Form N–SAR (requiring the fund to identify if expenses of the Registrant/Series were limited or reduced during the reporting period by agreement, and, if so, identify if the limitation was based upon assets or income). 987 Item C.8 of Form N–CEN. 988 Id. Form N–CEN also includes an instruction that filers should provide information in response to the item concerning any direct or indirect limitations, waivers or reductions, on the level of expenses incurred by the fund during the reporting period. The instructions also provide an example of how an expense limit may be applied—when an adviser agrees to accept a reduced fee pursuant to PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 81941 believe that more specific questions relating to management company expense limitation arrangements will limit uncertainty for management companies when responding to these items and will be a useful means to flag the occurrence of expense limitations whereby Commission staff can request further information in connection with staff examinations and other inquiries. One commenter expressed support for the expense limitation reporting requirement but suggested that the item include reporting of the actual dollar values of the expense information.989 We continue to believe, however, that the reporting item, as proposed, appropriately balances the burden on funds of providing this information and information necessary for our regulatory purposes. The adopted requirements are meant to yield census-type information that is, to the extent practicable, comparable across reporting funds and that permits the Commission and other potential users to follow up, as appropriate, on patterns and idiosyncrasies in the reported data. We believe therefore that the detailed and nuanced information the commenter suggests requiring is better provided in a fund’s registration statement than in reports on Form N–CEN, to the extent required or otherwise appropriate. vi. Service Providers Form N–CEN (similar to Form N– SAR) 990 will, as proposed, collect identifying information on the management company’s service providers, including its advisers and sub-advisers,991 transfer agents,992 pricing services agents,993 custodians (including custodians that provide services as sub-custodians),994 shareholder servicing agents,995 administrators,996 and affiliated brokerdealers.997 Together, these items will 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. Unlike Form N–SAR, Form N–CEN will, as proposed, also require the a voluntary fee waiver or for a temporary period such as for a new fund in its start-up phase. See Instruction to Item C.8 of Form N–CEN. 989 See Morningstar Comment Letter. 990 See Item 8 and Items 10–15 of Form N–SAR. 991 Item C.9 of Form N–CEN. 992 Item C.10 of Form N–CEN. Form N–SAR equates a ‘‘shareholder servicing agent’’ with a ‘‘transfer agent.’’ See Instruction to Item 12 of Form N–SAR. 993 Item C.11 of Form N–CEN. 994 Item C.12 of Form N–CEN. 995 Item C.13 of Form N–CEN. 996 Item C.14 of Form N–CEN. 997 Item C.15 of Form N–CEN. E:\FR\FM\18NOR2.SGM 18NOR2 81942 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 management company to 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).998 In addition, like Form N– SAR, and as proposed, Form N–CEN requests custodians to indicate the type of custody, but will expand upon the types of custody listed.999 One commenter recommended that the text of Item C.10 separate the term ‘‘transfer agent’’ from ‘‘sub-transfer agents’’ by including disclosures about the nature of the services rendered by sub-transfer agents to help assess shareholder costs paid.1000 The commenter did not, however, suggest a particular list of specific services. We note that the proposed form requested information with respect to ‘‘each’’ service provider, which we believe would include service providers providing services to the fund in a subservice provider capacity.1001 However, in response to this comment, we have clarified for each relevant service provider, including transfers agents, that the fund must report sub-service providers in response to the service provider items.1002 Thus, with respect to the item, we have added a sub-item requiring that funds indicate if the transfer agent is a sub-transfer agent.1003 We have determined not to require a description of the services provided by each transfer agent (or of other service providers) in Form N–CEN as we believe the information as proposed is sufficient for our regulatory purposes and because it is unclear whether, absent a specific set of listed services in Form N–CEN, which the commenter did not provide, this information on services would yield comparable census-type data across funds. With respect to custodian information, one commenter suggested that the form should require identification of the primary custodian 998 See, e.g., Item C.9.a.vii, Item C.9.c.vii, Item C.9.c.viii, Item C.10.a.vi, Item C.10.b, Item C.11.a.v, Item C.11.b, Item C.12.a.v, Item C.12.b, Item C.13.a.v, Item C.13.b, Item C.14.a.v and Item C.14.b of Form N–CEN. 999 Compare Item 15.E and Item 18 of Form N– SAR with Item C.12.a.vii.1–Item C.12.a.vii.9 of Form N–CEN. 1000 Morningstar Comment Letter. 1001 We understand that a sub-service provider generally contracts with a primary service provider of the fund, rather than the fund itself, to provide a certain subset of the services that the primary service provider has otherwise agreed to provide the fund. 1002 See Item C.10.a.vii, Item C.12.a.vi, Item C.13.a.vi, and Item C.14.a.vi of Form N–CEN. We note that a similar requirement was proposed with respect to custodians. See Item 37.a.vi of proposed Form N–CEN. 1003 See Item C.10.a.vii of Form N–CEN. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 only, citing that the primary custodian is the primary service provider of the fund, whereas any sub-custodians, depositories, or clearing organizations that provide custodial services will be a function of the specific instruments that the fund invests in during the reporting period.1004 We note that identifying subcustodians on Form N–CEN is consistent with reporting requirements on Form N–SAR.1005 Because subcustodians and other sub-service providers may provide important services to funds, we continue to believe that requesting information about subcustodians and other sub-service providers in addition to the primary service providers is appropriate and useful for purposes of our oversight responsibilities. For example, should an adverse market event affect a particular sub-custodian, Commission data analysts could use the required information about sub-custodians to identify potentially affected funds. Information about the primary custodian alone would not permit such identification. As proposed, the form would have included two new requirements regarding pricing services. Management companies would have to provide identifying information on persons that provided pricing services during the reporting period,1006 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.1007 Based on staff experience, management companies and their boards often rely on pricing agents to help price securities held by the fund. One commenter expressed support for the new reporting requirements, noting that the information would be sufficient to conduct due diligence on pricing and valuation issues.1008 One commenter expressed concern that reporting pricing services no longer retained could improperly imply that valuation services provided by the former service provider were incorrect and/or unreliable.1009 In response to that comment, we have determined to remove from the form the item requiring funds to provide information on pricing services no longer retained. We have instead revised Item C.11 of the form, 1004 State Street Comment Letter. e.g., Instructions to Item 15 of Form N– SAR; see also Item 15 and Item 92 of Form N–SAR, including Item 15.E and Item 92.D of Form N–SAR, which require reporting of rule 17f–5 [17 CFR 270.17f–5] foreign custodians. 1006 See Item 35 of proposed Form N–CEN. 1007 See Item 36 of proposed Form N–CEN. 1008 Morningstar Comment Letter. 1009 See Fidelity Comment Letter. 1005 See, PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 which requires information on persons who provided pricing services to the fund during the reporting period, to ask whether a pricing agent was hired or terminated during the report period.1010 Unlike the proposed requirement and in response to the commenter’s concern, Item C.11 as modified does not identify specifically the pricing service that was terminated. A similar question is also included in the form for other fund service providers and, as with the information provided for other service providers, will still provide Commission staff with a method for identifying whether a fund has initiated or terminated a service provider relationship during the reporting period.1011 As in the proposal, Part C will 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 1012 and with which the management company did the largest dollar amount of principal transactions.1013 Form N–SAR also requests identifying information on these entities,1014 which is not available elsewhere in a structured format. We continue to believe that brokerage commission and principal transaction information provides valuable information to Commission staff about management company brokerage practices, and will assist the staff in identifying the 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. Additionally, similar to Form N–SAR, Form N–CEN requires information concerning whether the management company paid commissions to broker-dealers for ‘‘brokerage and research services’’ within the meaning of section 28(e) of 1010 As proposed, Item 35(f) would have asked ‘‘Was the pricing service first retained by the Fund to provide pricing services during the current reporting period?’’ As adopted, Item C.11.b asks ‘‘Was a pricing service hired or terminated during the reporting period?’’. 1011 See, e.g., Item C.10–Item C.14 of Form N– CEN (requesting information regarding transfer agents, custodians, shareholder servicing agents, and third-party administrators). 1012 Item C.16 of Form N–CEN. 1013 Item C.17 of Form N–CEN. 1014 Items 20–23 of Form N–SAR. Form N–SAR includes an instruction designed to help filers distinguish between agency and principal transactions for purposes of reporting information regarding brokerage commissions and principal transactions. See Instruction to Items 20–23 of Form N–SAR. A substantially similar instruction will be included in Form N–CEN. See Instructions to Item C.16 and Item C.17 of Form N–CEN. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations the Exchange Act.1015 We did not receive comment on these aspects of the proposal. In a modification from the proposal, we are now including a requirement that (1) funds other than money market funds report their monthly average net assets during the reporting period,1016 and (2) money market funds report the daily average net assets during the reporting period.1017 Funds currently report this information on Form N–SAR reports.1018 One commenter suggested that such net asset information (e.g., Item 75) as well as fee and expense information (e.g., Items 34–44, 47–52, 54, and 72), currently available semi-annually on Form N–SAR should carry over into Form N–CEN, arguing that the removal of these reporting items will make the fee and expense information more difficult to acquire and analyze.1019 The commenter argued, in part, that while this information could be calculated based on information available through other sources, the manual aggregation of this information would put comprehensive analysis out of reach for investors and fund boards unless they were using services from third-party market data providers that may have the means to conduct such data aggregation. We continue to believe that fee and expense information reported on Form N–SAR need not be reported on Form N–CEN because fee and expense information is largely already disclosed in fund registration statements and, with respect to some information, in a structured format.1020 However, we find mstockstill on DSK3G9T082PROD with RULES2 1015 Item C.18 of Form N–CEN; see also Item 26.B of Form N–SAR (requiring disclosure if the fund’s receipt of investment research and statistical information from a broker or dealer was a consideration which affected the participation of brokers or dealers or other entities in commissions or other compensation paid on portfolio transactions of Registrant). Section 28(e) of the Exchange Act establishes a safe harbor that allows money managers to use client funds to purchase ‘‘brokerage and research services’’ for their managed accounts under certain circumstances without breaching their fiduciary duties to clients. See 15 U.S.C. 78bb(e); see also Commission Guidance Regarding Client Commission Practices Under Section 28(e) of the Securities Exchange Act of 1934, Securities Exchange Act Release No. 34– 54165 (July 18, 2006) [71 FR 41978 (July 24, 2006)]. We continue to believe that an item indicating whether a fund uses soft dollars will assist our staff in their examinations and provide census data as to the number and type of funds that rely on the safe harbor provided by section 28(e). 1016 Item C.19.a of Form N–CEN. 1017 Item C.19.b of Form N–CEN. 1018 See Item 75 of Form N–SAR. 1019 See Morningstar Comment Letter. 1020 See infra footnote 1169 and accompanying text. We note that certain fee and expense information for closed-end funds, which is not disclosed in a structured format in closed-end fund registration statements, is included in Part D of VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 the commenter’s suggestion regarding reporting of average net assets persuasive and have added the reporting items of Item 75 of Form N–SAR into Form N–CEN.1021 We believe that this information will assist data users in their analysis of various reporting items, including other information reported on Form N–CEN (for example, the monthly average of the value of portfolio securities on loan that will be reported pursuant to Item C.6.f). d. Part D—Closed-End Management Companies and Small Business Investment Companies The Commission recognizes that closed-end funds and SBICs have particular characteristics that warrant questions targeted specifically to them.1022 Like Form N–SAR and as proposed, Form N–CEN requires additional information to be reported by closed-end funds in Part D of the form and also treats SBICs differently than other management investment companies, requiring them to complete Part D of the form in lieu of Part C.1023 The information required in Part D will provide us with information that is particular to closed-end funds and SBICs and, thus, will assist us in monitoring the activities of these funds and our examiners in their preparation for exams of these funds. Where we have received comments on specific reporting requirements of Part D, we discuss them in more detail below. Similar to Form N–SAR, we are adopting, as proposed, a reporting requirement in Part D of Form N–CEN for 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.1024 As in the proposal, we are requiring new Form N–CEN. See Item D.8 and Item D.9 of Form N–CEN. These items will provide Commission staff with the fee and expense information for closed-end funds that the staff finds most useful to have in a structured data format. 1021 See Item C.19 of Form N–CEN. 1022 See Items 86–88 of Form N–SAR (relating specifically to closed-end funds) and Items 89–104 of Form N–SAR (relating specifically to SBICs). 1023 As discussed above, SBICs are unique investment companies that operate differently than other management investment companies. See supra footnote 49. 1024 Item D.1 of Form N–CEN; cf. Items 87–88 and Item 96 of Form N–SAR (requesting information on the title and ticker of each class of securities issued on an exchange and information regarding certain specific types of securities). An instruction to Item D.1 of Form N–CEN indicates that the fund should provide the ticker symbol for any security not listed on an exchange, but has a ticker symbol. PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 81943 information relating to rights offerings 1025 and secondary offerings by the closed-end fund or SBIC,1026 including whether there was such an offering during the reporting period and if so, the type of security involved.1027 Together, this information will allow the staff to quickly identify and track the securities and offerings of closedend funds and SBICs when monitoring and examining these funds. Like Form N–SAR,1028 we are also adopting, as proposed, a requirement that each closed-end fund or SBIC report information on repurchases of its securities during the reporting period.1029 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, we are adopting, as proposed, the requirement in Form N–CEN that a closed-end fund or SBIC only needs 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.1030 As proposed, we are also carrying over Form N–SAR’s requirements 1031 relating to default on long-term debt 1032 and dividends in arrears.1033 However, unlike Form N–SAR, which requires an attachment providing detailed information on defaults and arrears on senior securities,1034 Form N–CEN only will require a yes/no question and textbased responses.1035 Also as proposed, 1025 Item D.2 of Form N–CEN. D.3 of Form N–CEN. 1027 See Item D.3.a and Item D.3.b of Form N– CEN. Item D.2.c of Form N–CEN also requires the percentage of participation in a primary rights offering and an accompanying instruction to this item addresses the method of calculating such percentage. 1028 See Item 86 and Item 95 of Form N–SAR. 1029 Item D.4 of Form N–CEN. 1030 We note that, with respect to closed-end funds, financial information relating to monthly sales and repurchases of shares will be reported monthly on Form N–PORT. See Item B.6 of Form N–PORT (requiring the aggregate dollar amounts for sales and redemptions/repurchases of fund shares during each of the last three months). 1031 See Item 77.G and Item 102.F of Form N– SAR. 1032 Item D.5 of Form N–CEN. 1033 Item D.6 of Form N–CEN. 1034 Item 77.G and Item 102.F of Form N–SAR. 1035 Item D.5 of Form N–CEN requires, with respect to any default on long-term debt, the nature of the default, the date of the default, the amount of the default per $1000 face amount, and the total amount of default. An instruction to this item defines ‘‘long-term debt’’ to mean a debt with a period of time from date of initial issuance to maturity of one year or greater. Item D.6 of Form N–CEN requires, with respect to any dividends in arrears, the title of the issue and the amount per 1026 Item E:\FR\FM\18NOR2.SGM Continued 18NOR2 81944 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 we are similarly carrying over the Form N–SAR requirement 1036 regarding modifications to the constituent’s instruments defining the rights of holders.1037 Similar to Form N–SAR, if a closed-end fund or SBIC made modifications to such an instrument, it also will be required to file an attachment in Part G of Form N–CEN with a more detailed description of the modification.1038 This item provides the Commission with information on and copies of documents reflecting changes to shareholders’ rights. We are also adopting, as proposed, requirements in Part G of Form N–CEN that closed-end funds or SBICs file attachments regarding material amendments to organizational documents,1039 new or amended investment advisory contracts,1040 information called for by Item 405 of Regulation S–K,1041 and, for SBICs only, senior officer codes of ethics.1042 Where possible, we sought to eliminate the need to file attachments with the report in order to simplify the filing process and maximize the amount of information we receive in a data tagged format. However, the attachments required by Form N–CEN will 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 Form N–CEN that are specific to closed-end funds and SBICs are also currently required by Form N–SAR.1043 Similar to Form N–SAR, we are adopting, as proposed, a requirement for other census-type information relating to management fees and net operating expenses. Closed-end funds will be required to report the fund’s advisory fee as of the end of the reporting period share in arrears. This item defines ‘‘dividends in arrears’’ to mean dividends that have not been declared by the board of directors or other governing body of the fund at the end of each relevant dividend period set forth in the constituent instruments establishing the rights of the stockholders. 1036 Item 77.I and Item 102.H of Form N–SAR. 1037 Item D.7 of Form N–CEN. 1038 Item G.1.b.ii of Form N–CEN. 1039 Item G.1.b.i of Form N–CEN. 1040 Item G.1.b.iii of Form N–CEN. 1041 Item G.1.b.iv of Form N–CEN. 1042 Item G.1.b.v of Form N–CEN. This item applies only to SBICs because other management investment companies, including closed-end funds, provide this information in filings on Form N–CSR. See Item 2 and Item 3 of Form N–CSR; see also rule 30d–1 under the Investment Company Act [17 CFR 270.30d–1]. 1043 Compare Item G.1.b of Form N–CEN with Item 77.Q.1, Item 77.Q.2, Item 102.P.1, Item 102.P.2, and Item 102.P.3 of Form N–SAR; see also Instructions to Specific Item 77Q1(a), Item 77Q1(e), Item 77Q2, Item 102P1(a), Item 102P1(e), Item 102P2, and Item 102P3 of Form N–SAR. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 as a percentage of net assets.1044 Some commenters expressed support for this specific item requirement.1045 One of the commenters also suggested that funds report the actual management fee paid as a percentage of the average NAV of the fund during the reporting period so that the fee reported reflects the fee charged during the reporting period.1046 We are adopting the requirement as proposed because it meets our regulatory purposes and is consistent with the fee disclosure requirements for closed-end funds in their registration statements.1047 We believe that reporting in this manner will yield information that is more readily comparable across types of funds, as open-end funds must currently disclose tagged fee information as a percentage of net assets in XBRL in the fund’s risk/ return summary.1048 Additionally, as proposed, closed-end funds and SBICs will 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.1049 Unlike open-end funds, which provide management fee and net expense information to the Commission in a structured format,1050 such information is not reported to or updated with the Commission in a structured format by closed-end funds or SBICs. This information will allow the Commission to track industry trends relating to fees. As proposed, Form N– CEN carries forward the Form N–SAR requirement that market price per 1044 Item D.8 of Form N–CEN; cf. Items 47–52 and Item 72.F of Form N–SAR (requesting advisory fee information for management companies, including closed-end funds). Whereas Form N–SAR requests information regarding the advisory fee rate and the dollar amount of gross advisory fees, an instruction to Item D.8 of Form N–CEN explains that the management fee reported should be based on the percentage of amounts incurred during the reporting period. 1045 See ICI Comment Letter (agreeing that management fee information should be backward looking); State Street Comment Letter (also agreeing that the advisory fee should be backward looking, noting that backward looking disclosures are consistent with the annual financial statements of regulated investment companies). 1046 See ICI Comment Letter. 1047 See Item 3 of Form N–2 (requesting management fee information as a percentage of net assets attributable to common shares). 1048 See General Instruction C.3.G to Form N–1A. 1049 Item D.9 of Form N–CEN; cf. Item 72.X and Item 97.X of Form N–SAR (requesting total expenses in dollars for closed-end funds and SBICs). 1050 Management fee information for open-end funds is currently tagged in XBRL format in the fund’s risk return summary and is therefore not required by Form N–CEN. See General Instruction C.3.G to Form N–1A. PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 share 1051 and NAV per share 1052 of the fund’s common stock be reported for the end of the reporting period. Finally, as proposed, Form N–CEN (like Form N–SAR) will require information regarding an SBIC’s investment advisers,1053 transfer agents,1054 and custodians (including custodians that provide services as subcustodians).1055 This information is the same as what will be reported by openend and closed-end funds in Part C of Form N–CEN, but SBICs will not be required to fill out Part C of the form. The majority of questions in Part C of Form N–CEN are inapplicable to SBICs or otherwise request information that will not be helpful to us in carrying out our regulatory functions with respect to SBICs. Accordingly, we are excepting SBICs from filling out Part C of the form and instead including for SBICs certain service provider questions from Part C in Part D of the form. e. Part E—Exchange-Traded Funds and Exchange-Traded Managed Funds As we proposed, we are adopting a section in Form N–CEN related specifically to ETFs—Part E—which ETFs will complete in addition to Parts A, B, and G, and either Part C (for openend 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 generally 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’’).1056 1051 Item D.10 of Form N–CEN; see Item 76 and Item 101 of Form N–SAR 1052 Item D.11 of Form N–CEN; see Item 74.V.1 and Item 99.V of Form N–SAR. 1053 Item D.12 of Form N–CEN. 1054 Item D.13; see supra footnotes 990–997 and accompanying text; see also supra footnotes 1000– 1002, and accompanying text (discussing the addition of a sub-item related to sub-transfer agents). 1055 Item D.14 of Form N–CEN. 1056 For purposes of Form N–CEN, ‘‘creation unit’’ is defined as ‘‘a specified number of ExchangeTraded Fund or Exchange-Traded Managed Fund shares that the fund will issue to (or redeem from) an authorized participant in exchange for the deposit (or delivery) of specified securities, positions, cash, and other assets.’’ Instruction to Item E.3 of Form N–CEN. We have made a modification from the proposed definition of ‘‘creation unit’’ to clarify, consistent with current Commission exemptive relief, that a ‘‘creation unit’’ could also include ‘‘positions’’ that may not be ‘‘assets.’’ For purposes of Form N–CEN, ‘‘authorized participant’’ is defined as ‘‘a broker-dealer that is also a member of a clearing agency registered with the Commission or a DTC Participant, and which has a written agreement with the Exchange-Traded Fund or Exchange-Traded Managed Fund or one of E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 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.1057 ETFs currently are subject to the same 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 1058 that are open-end funds to better meet the needs of investors who purchase those ETF shares in secondary market transactions.1059 We believe that it is appropriate to similarly tailor some of the comprehensive information reporting requirements in Form N–CEN to the special characteristics of ETFs. As we proposed, funds and UITs meeting the definition of ‘‘exchange-traded fund’’ in Form N–CEN will be required to report information pursuant to the items in Part E of the form, as will certain similar investment products known as ‘‘exchange-traded managed funds.’’ 1060 Taken together, we believe that, in addition to informing the Commission’s risk analysis and, potentially, future policymaking concerning ETFs, the information these requirements will yield could also help inform the interested public about the its designated service providers that allows the authorized participant to place orders to purchase or redeem creation units of the Exchange-Traded Fund or Exchange-Traded Managed Fund.’’ Instruction to Item E.1.b of Form N–CEN. We have made a modification from the proposed definition of ‘‘authorized participant’’ to clarify, consistent with current Commission exemptive relief, that the definition of ‘‘authorized participant’’ includes broker-dealers that are DTC participants and otherwise fall within the definition’s scope. 1057 See generally Actively Managed ExchangeTraded Funds, Investment Company Act Release No. 25258 (Nov. 8, 2001) [66 FR 57614 (Nov. 15, 2001)]; ETF Proposing Release, supra footnote 5. 1058 See General Instruction A of Form N–1A (defining ‘‘Exchange-Traded Fund’’). 1059 See Enhanced Disclosure and New Prospectus Delivery Option for Registered OpenEnd Management Investment Companies, Securities Act Release No. 8998 (Jan. 13, 2009) [74 FR 4546, 4558 (Jan. 26, 2009)]. 1060 General Instruction A to Form N–CEN; see also supra footnote 763. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 operation of, and possible risks associated with, these funds. Some commenters supported having a distinct section for ETFs.1061 However, as discussed in detail below, some commenters expressed certain concerns about specific reporting items, and, in particular, the public disclosure of certain reporting items.1062 We are adopting proposed Part E, with some modifications in response to specific commenter concerns, which are addressed in more detail below. In particular, several of the modifications we are making today are intended to address concerns raised by commenters that certain of the proposed Part E reporting requirements may yield data that is not representative of the ETF’s activity over the course of the reporting period and may not be appropriately reflective of the range of activity in the ETF primary market today or in the future.1063 Some of the new reporting requirements for ETFs that we are adopting 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.1064 Because of their importance, we proposed new reporting requirements concerning these entities,1065 and we have determined to adopt these new reporting requirements as proposed. 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 will 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 are adopting, as proposed, a new requirement for each ETF to report identifying information about its authorized participants.1066 More specifically, Form N–CEN will 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) 1067 and certain other identifying information,1068 including the authorized participant’s SEC file number.1069 One commenter expressly supported reporting of this information, but suggested that authorized participants, rather than funds, should be required to provide this identifying information to the Commission, reasoning that authorized participants would have more ready access to the required information than funds.1070 Although we acknowledge that authorized participants would be expected to have access to the required information, we believe that, because authorized participants are counterparties to ETFs in primary market transactions, the required information should also be available to ETFs with which the authorized participants contract and transact. Because the requirements are intended in part to yield information about reliance by ETFs on particular authorized participants, and the Commission as well as other data users seeking census-type information about ETFs will likely be able to find and analyze it most efficiently using reports on Form N–CEN, we believe that ETFs themselves are the most appropriate source for the required information. In addition, we are adopting a requirement for each ETF to report the dollar value of the ETF shares that each authorized participant purchased and redeemed from the ETF during the reporting period.1071 Some commenters objected to the inclusion of this requirement in Form N–CEN, expressing concerns that reporting authorized participant activities on Form N–CEN could discourage authorized participants from participating in the ETF market, leading to further concentration in the authorized participant community or authorized participants’ moving their ETF-related trading activities to banks or ‘‘clearing’’ 1067 Item 1061 See, e.g., BlackRock Comment Letter; Morningstar Comment Letter. 1062 See BlackRock Comment Letter; Invesco Comment Letter; SIFMA Comment Letter I; State Street Comment Letter. 1063 See, e.g., infra footnotes 1077, 1081, 1091– 1092 and accompanying text. 1064 See ETF Proposing Release, supra footnote 5, at 14620–21. 1065 Proposing Release, supra footnote 7, at 33645–46; Liquidity Proposing Release, supra footnote 11, at 62348. 1066 Item E.2.a–Item E.2.d of Form N–CEN. PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 81945 E.2.a of Form N–CEN. E.2.b–Item E.2.d of Form N–CEN. 1069 Item E.2.b of Form N–CEN. 1070 See State Street Comment Letter (stating that it would be appropriate for an ETF to list the authorized participants with which it has contracted, but that the additional information proposed in Part E (including the SEC file number, central registration depository (CRD) number, LEI number, and the dollar value of the ETF shares purchased and redeemed during the reporting period) would be more appropriately requested from the authorized participants themselves). 1071 Item E.2.e–Item E.2.f of Form N–CEN. 1068 Item E:\FR\FM\18NOR2.SGM 18NOR2 81946 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 authorized participants.1072 We continue to believe, however, that 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. We believe that adopting the new reporting requirements is appropriate in light of these benefits notwithstanding the possibility that public availability of the information might affect the ETF primary markets in the manner those commenters suggest. We also proposed, in the Liquidity Proposing Release, to require an ETF to report whether it required that an authorized participant post collateral to the ETF or any of its designated service providers in connection with the purchase or redemption of ETF shares during the reporting period.1073 We understand that some ETFs (or their custodians), particularly ETFs that invest in non-U.S. securities, require authorized participants transacting primarily on an in-kind basis to post collateral when purchasing or redeeming shares, most often for the duration of the settlement process. This can protect the ETF in the event, for example, that the authorized participant fails to deliver the basket securities.1074 The requirement to post collateral for creating or redeeming ETF shares impacts the authorized participant’s operating capital, which could, in turn, affect the ability and willingness of authorized participants to transact with such ETFs or transact with other market makers on an agency basis. Accordingly, we continue to believe that information about required posting of collateral by authorized participants when purchasing or redeeming shares— alongside the other information that will be required in Form N–CEN—will be helpful in understanding whether, and to what extent, there may be concentration in the authorized participant framework for such ETFs. 1072 See BlackRock Comment Letter; Invesco Comment Letter; SIFMA Comment Letter I; State Street Comment Letter. 1073 Liquidity Proposing Release, supra footnote 11, at 62348. 1074 See, e.g., ICI, The Role and Activities of Authorized Participants of Exchange-Traded Funds (Mar. 2015) at 4, available at https://www.ici.org/ pdf/ppr_15_aps_etfs.pdf. In addition to ETFs that invest in non-U.S. securities, Commission Staff understands that there are other ETFs that have collateral requirements for purchases and redemptions, such as ETFs that invest in debt securities. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 Therefore, we are adopting this requirement as proposed.1075 Other new reporting requirements relate to certain characteristics of ETF creation units—the large blocks of shares that authorized participants may purchase from or redeem with the ETF. In the primary market, ETF shares, bundled in creation units, are sold or redeemed for consideration composed of some combination of the ETF’s constituent portfolio securities (i.e., an ‘‘in-kind’’ basis) and cash (i.e., on a cash basis). Whether transacting in kind or in cash, there may be costs that result from the process of carrying out the transaction. In addition, 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. In the course of such primary market transaction, the particular authorized participant wishing to purchase (or redeem) shares typically bears the costs associated with transacting in the creation unit or units in the form of one or more transaction fees. The costs, therefore, are not directly borne by non-transacting shareholders. In the Proposing Release, we characterized these transaction fees as taking two specific forms (viz., ‘‘fixed fees’’ and ‘‘variable fees’’) with corresponding purposes, and that characterization reflects our understanding of the typical transaction costs in the ETF primary markets today.1076 As discussed below, a commenter raised concerns that transaction fees may not uniformly fit within the two types of fees discussed in the Proposing Release, and we are persuaded that it is appropriate to modify the proposed form’s characterization of these transaction fees in Form N–CEN as we are adopting it today.1077 In order to better understand the capital markets implications of different creation unit requirements, primary market transaction methods, and transaction fees, we proposed requirements that ETFs annually report summary information about these characteristics of creation units and 1075 Item E.2.g of Form N–CEN. Proposing Release, supra footnote 7, at 33646. We characterized a ‘‘fixed fee’’ as a fee covering the transactional costs associated with assembling (or disassembling) creation units. Id. We characterized a ‘‘variable fee’’ as one intended to ensure that the purchasing or redeeming party bears the costs associated with transacting entirely or partially on a cash basis. Id. 1077 See Invesco Comment Letter. 1076 See PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 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 new data items is limited and indeterminable. To better understand how common different transaction methods are and the degree to which they vary across ETFs and over time, we proposed 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; (ii) of those that were redeemed ‘‘primarily’’ on an in-kind basis; (iii) of those that were purchased by authorized participants ‘‘primarily’’ in exchange for cash; and (iv) of those that were redeemed ‘‘primarily’’ on a cash basis.1078 For purposes of these reporting requirements concerning transaction methods and transaction fees, we proposed to define ‘‘primarily’’ to mean greater than 50% of the value of the creation unit.1079 One commenter expressed general support for this information, opining that it would be helpful for investors.1080 Another commenter, however, expressed concerns with the proposed distinction between transactions conducted ‘‘primarily’’ on an in-kind basis and those conducted ‘‘primarily’’ in exchange for cash, arguing that treating a creation unit that is almost entirely inkind with a small cash balancing amount as equivalent to one that is effected with nearly half the value of the creation unit in the form of cash would yield data that would not serve the requirement’s purpose.1081 We found this comment persuasive, and we agree with the commenter that it would better achieve the proposed requirement’s purpose of better understanding different creation unit requirements, primary market transaction methods, and transaction fees to collect such information in a manner that obviates the need for the ‘‘primarily’’ distinction about which the commenter expressed concern. Therefore, in a modification from the proposal, we have eliminated the proposed distinction between ‘‘primarily’’ in-kind and ‘‘primarily’’ cash transactions. Instead, as adopted, Form N–CEN will require ETFs to report, based on the dollar value paid for each creation unit purchased by authorized participants during the 1078 See Item 60 of proposed Form N–CEN; see also Proposing Release, supra footnote 7, at 33646. 1079 Instruction 9 to Item 60 of proposed Form N– CEN; see also See Proposing Release, supra footnote 7, at 33646. 1080 See BlackRock Comment Letter. 1081 Invesco Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations reporting period, (i) the average percentage of that value composed of cash; 1082 (ii) the standard deviation of the percentage of that value composed of cash; 1083 (iii) the average percentage of that value composed of non-cash assets and other positions exchanged on an in-kind basis: 1084 And (iv) the standard deviation of the percentage of that value composed of non-cash assets and other positions exchanged on an inkind basis.1085 The ETF will also be required to report, based on the total dollar value of creation units redeemed by authorized participants during the reporting period, (i) the average percentage of that value composed of cash; 1086 (ii) the standard deviation of the percentage of that value composed of cash; 1087 (iii) the average percentage of that value composed of non-cash assets and other positions exchanged on an in-kind basis; 1088 and (iv) the standard deviation of the percentage of that value composed of non-cash assets and other positions exchanged on an inkind basis.1089 We believe that this modified requirement will better achieve the purposes of the proposed requirement and address the commenter’s concerns about the proposed distinction between ‘‘primarily’’ in-kind and ‘‘primarily’’ cash transactions. 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 proposed a requirement that ETFs report applicable transaction 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 inkind basis.1090 As discussed above, one commenter expressed concerns about a potential lack of uniformity in how ETFs name and calculate transactional fees and suggested that the Commission provide definitional guidance about the types of 1082 Item E.3.b.i of Form N–CEN. E.3.b.ii of Form N–CEN. 1084 Item E.3.b.iii of Form N–CEN. 1085 Item E.3.b.iv of Form N–CEN. 1086 Item E.3.c.i of Form N–CEN. 1087 Item E.3.c.ii of Form N–CEN. 1088 Item E.3.c.iii of Form N–CEN. 1089 Item E.3.c.iv of Form N–CEN. 1090 Proposing Release, supra footnote 7, at 33646; see also Item 60.e–Item 60.h of proposed Form N– CEN. mstockstill on DSK3G9T082PROD with RULES2 1083 Item VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 fees to be reported in order to receive accurate and standardized information.1091 Another commenter expressed concerns that the information the proposed requirement would have yielded—which would have pertained specifically to the last creation units purchased or redeemed in the reporting period—may not be representative of the transactions occurring during the period and suggested that an alternative formulation would be more meaningful and helpful for investors.1092 We find both of these comments persuasive, and consistent with our overarching objectives of the proposed requirement to collect information that helps data users better understand the effects of primary market transaction fees on ETF pricing and trading and to better inform the public about such fees in a manner that is more representative of the ETF’s activity over the course of the reporting period, while being flexible enough to embrace the range of activity in the ETF market today and, to the extent practicable, in the future. Therefore, in a modification from the proposal that we believe will better help us meet these objectives while also responding to commenters’ concerns, we are requiring reporting of average fees based on the terms by which they are applied rather than how they are characterized or what purpose they serve. Thus we have modified the proposed requirement in two respects: First, the terms ‘‘fixed fee’’ and ‘‘variable fee’’ have been eliminated, and the fees required to be reported have been specified in a manner that would allow ETFs that today or in the future employ an alternative transaction fee schedule to report those fees consistent with their actual practice. Second, the requirement to report as to the last creation unit purchased or redeemed has been replaced with a requirement to report as to the average creation unit purchased or redeemed during the reporting period, so that the information reported will better reflect the ETF’s fees over the course of the reporting period rather than at a specific moment in time. Accordingly, we are adopting a requirement that, as to creation units purchased by authorized participants during the reporting period, ETFs report the average transaction fee (i) charged in dollars per creation unit; 1093 (ii) charged for one or more creation units on the same business 1091 Invesco Comment Letter. Comment Letter (suggesting instead that a range of fees paid over the reporting period be required). 1093 Item E.3.d.i.1 Form N–CEN. 1092 BlackRock PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 81947 day; 1094 and (iii) charged as a percentage of the value of the creation unit.1095 ETFs will also be required to report, as to only those creation units purchased by authorized participants that were fully or partially composed of cash, the average transaction fee (i) charged in dollars per creation unit; 1096 (ii) charged for one or more creation units on the same business day; 1097 and (iii) charged as a percentage of the value of the cash in the creation unit.1098 Finally, as in the proposed requirements, ETFs will be required to report the parallel information for the redemption of creation units by authorized participants.1099 We believe that this modified requirement will better achieve the purposes of the proposed requirement and address the commenters’ concerns about the lack of uniformity in the naming and calculating of ETF primary market transaction fees as well as the representativeness of the fees on the last business day of the reporting period. We also are adopting, as proposed, a requirement for ETFs to report the number of ETF shares required to form a creation unit as of the last business day of the reporting period,1100 which we believe will 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. One commenter expressed support for this information, opining that it would be helpful for investors.1101 In addition to information about authorized participants and creation units, we are requiring, as proposed, that ETFs, like closed-end funds, report 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 affected should an idiosyncratic risk or market event arise in connection with a particular exchange.1102 In a modification from the proposal, we are also adopting a requirement that ETFs provide their ticker symbol. As discussed above, management investment companies with one or more classes of shares outstanding will be required to provide a ticker symbol, if any, relating to that class,1103 and as we observed 1094 Item E.3.d.i.2 Form N–CEN. E.3.d.i.3 Form N–CEN. 1096 Item E.3.d.ii.1 Form N–CEN. 1097 Item E.3.d.ii.2 Form N–CEN. 1098 Item E.3.d.ii.3 of Form N–CEN. 1099 Item E.3.e of Form N–CEN. 1100 Item E.3.a of Form N–CEN. 1101 See BlackRock Comment Letter. 1102 Item E.1.a of Form N–CEN. 1103 See Item C.2.d.iii; 892–894. 1095 Item E:\FR\FM\18NOR2.SGM 18NOR2 81948 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations throughout the Proposing Release, identifiers will assist the Commission with organizing the data received and allow the staff to cross-reference the data reported on Form N–CEN with data received from other sources.1104 We have determined that it is appropriate for ETFs to provide a ticker symbol also, as not all ETFs would be subject to the ticker symbol requirement for management investment companies. Finally, with respect to ETFs that are UITs, we are requiring information regarding whether the index whose performance the fund tracks is constructed by an affiliated person of the fund and/or exclusively constructed for the fund, as requested by a commenter,1105 and, as proposed, information regarding tracking difference and tracking error.1106 One commenter expressed support for the reporting of tracking difference and tracking error, stating that it would be helpful for investors.1107 Another commenter suggested that tracking error should be reported on a monthly basis, rather than on a daily basis, as proposed.1108 The index fund information is also required of open-end index funds and, for the same reasons discussed above in connection with those requirements, the form will require this same information of ETFs that are UITs.1109 As discussed above, commenters made similar suggestions about the methodology for calculating tracking error in the open-end fund index context, and we have determined to adopt the proposed methodology for the same reasons discussed in connection with the open-end index fund requirements.1110 mstockstill on DSK3G9T082PROD with RULES2 f. Part F—Unit Investment Trusts As proposed, Part F of Form N–CEN requires information specific to UITs. Like Form N–SAR, Form N–CEN recognizes that UITs have particular characteristics that warrant questions targeted specifically to them.1111 The information requested in Part F will inform us further about the scope and composition of the UIT industry and, thus, will assist us in monitoring the activities of UITs and our examiners in 1104 See, e.g., Proposing Release, supra note 7, at 33635. 1105 See supra footnote 907 and accompanying text. 1106 Item E.4 of Form N–CEN. 1107 See BlackRock Comment Letter. 1108 See Invesco Comment Letter. See supra footnotes 920–928 and accompanying text. 1109 See Item C.3.b of Form N–CEN; supra section II.D.4.c.i. 1110 See supra footnotes 923–928 and accompanying text. 1111 See Items 111–133 of Form N–SAR (relating specifically to UITs). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 their preparation for exams of UITs. We did not receive specific comments on Part F of the form and are adopting it as proposed. Form N–CEN (similar to Form N– SAR 1112) also requires certain identifying information relating to a UIT’s service providers and entities involved in the formation and governance of UITs, including its depositor,1113 sponsor,1114 trustee,1115 and administrator.1116 We are also adopting, as proposed, an item in Form N–CEN that asks whether a UIT is a separate account of an insurance company,1117 and, depending on a UIT’s response to this item, it will then proceed to answer certain additional questions in Part F.1118 While Form N– SAR generally does not differentiate between UITs that are and are not separate accounts of insurance companies, Form N–CEN makes 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. As in the proposal and similar to Form N–SAR,1119 a UIT that is not a separate account of an insurance company will provide the number of series existing at the end of the reporting period that had securities registered under the Securities Act 1120 1112 See Item 111 (depositor information), Item 112 (sponsor information), Item 113 (trustee information), and Item 114 (principal underwriter information) of Form N–SAR. 1113 Item F.1 of Form N–CEN. 1114 Item F.4 of Form N–CEN (only applies to UITs that are not insurance company separate accounts). 1115 Item F.5 of Form N–CEN (only applies to UITs that are not insurance company separate accounts). 1116 Item F.2 of Form N–CEN; see also supra footnotes 1001–1002 (discussing the addition of a sub-administrator sub-item). Form N–SAR does not request information about a UIT’s administrator. 1117 Item F.3 of Form N–CEN; see Item 117.A of Form N–SAR. 1118 If a UIT responds ‘‘yes’’ to this item, it will proceed to respond to Item F.12–Item F.17 of the form. However, if a UIT responds ‘‘no’’ to this item, it will proceed to Item F.4–Item F.11, and Item F.17. See Instruction to Item F.3 of Form N–CEN. 1119 See Items 118–120 of Form N–SAR (all UITs are required to complete these items). 1120 Item F.6.a of Form N–CEN. As noted earlier, because UITs that register on Form N–8B–2 obtain CIKs for the UIT itself as well as for series offered by the UIT, we have made a clarifying modification to Form N–CEN by including a requirement that such UITs report the CIKs for each of their existing series in response to Item F.6.b of Part F of the form PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 and, for new series, the number of series for which registration statements under the Securities Act became effective during the reporting period 1121 and the total value of the portfolio securities on the date of deposit.1122 As proposed, Form N–CEN also carries over from Form N–SAR 1123 requirements relating to the number of series with a current prospectus,1124 the number of existing series (and total value) for which additional units were registered under the Securities Act,1125 and the value of units placed in portfolios of subsequent series.1126 We are also adopting, as proposed, a requirement in Form N– CEN 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,1127 which is also currently required by Form N–SAR.1128 We are also adopting, as proposed, new requirements in Form N–CEN for separate accounts offering variable annuity and variable life insurance contracts. Specifically, if the UIT is a separate account of an insurance company, Form N–CEN requires reporting of its series identification number 1129 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.1130 With respect to insurance company separate accounts, we are also adopting, as proposed, new requirements in Form N–CEN to identify and provide census information for each security issued through the separate account. These requirements will include the name of the security,1131 contract identification number,1132 total assets attributable to the security,1133 number of contracts sold,1134 gross premiums received,1135 and amount of contract value in addition to reporting the CIK for the UIT itself in response to Item B.1.c. See supra footnote 800. 1121 Item F.7.a of Form N–CEN. 1122 Item F.7.b of Form N–CEN. 1123 See Items 121–124 of Form N–SAR (all UITs are required to complete these items). 1124 Item F.8 of Form N–CEN. 1125 Item F.9 of Form N–CEN. 1126 Item F.10 of Form N–CEN. 1127 Item F.11 of Form N–CEN. 1128 See Item 127.L of Form N–SAR (all UITs are required to complete this item). Form N–CEN does not require UITs to report certain assets held by a UIT as required by Item 127 of Form N–SAR. See Items 127.A–K of Form N–SAR. 1129 Item F.12 of Form N–CEN. 1130 Item F.13 of Form N–CEN. 1131 Item F.14.a of Form N–CEN. 1132 Item F.14.b of Form N–CEN. 1133 Item F.14.c of Form N–CEN. 1134 Item F.14.d of Form N–CEN. 1135 Item F.14.e of Form N–CEN. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations redeemed.1136 This item also requires additional information relating to section 1035 exchanges, including gross premiums received pursuant to section 1035 exchanges,1137 number of contracts affected in connection with such premiums,1138 amount of contract value redeemed pursuant to section 1035 redemptions 1139 and the number of contracts affected by such redemptions.1140 In addition, as proposed, insurance company separate accounts will be required to provide information on whether they relied on rules 6c–7 1141 and 11a–2 1142 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, as proposed, Form N–CEN carries over the Form N–SAR 1143 requirement that a UIT provide certain information relating to divestments under section 13(c) of the Investment Company Act.1144 Thus, if a UIT intends to avail itself of the safe harbor provided by section 13(c) with respect to its 1136 Item F.14.h of Form N–CEN. F.14.f of Form N–CEN. 1138 Item F.14.g of Form N–CEN. 1139 Item F.14.i of Form N–CEN. 1140 Item F.14.j of Form N–CEN. 1141 Item F.15 of Form N–CEN. Rule 6c–7 under the Investment Company Act provides exemptions from certain provisions of sections 22(e) and 27 of the Investment Company Act for registered separate accounts offering variable annuity contracts to participants in the Texas Optional Retirement Program. See 17 CFR 270.6c–7. 1142 Item F.16 of Form N–CEN. Rule 11a–2 under the Investment Company Act relates to offers of exchange by certain registered separate accounts or others, the terms of which do not require prior Commission approval. See 17 CFR 270.11a–2. 1143 Item 133 of Form N–SAR. Section 13(c) of the Investment Company Act provides a safe harbor for a registered investment company and its employees, officers, directors and investment advisers, based solely upon the investment company divesting from, or avoiding investing in, securities issued by persons that the investment company determines, using credible information that is available to the public, engage in certain investment activities in Iran or Sudan. The safe harbor, however, provides that this limitation on actions does not apply unless the investment company makes disclosures about the divestments in accordance with regulations prescribed by the Commission. See 15 U.S.C. 80a– 13(c)(2)(B). Management investment companies are required to provide the disclosure on Form N–CSR, pursuant to Item 6(b) of the form, and UITs are required to provide the disclosure on Form N–SAR, pursuant to Item 133 of the form. See Technical Amendments to Forms N–CSR and N–SAR in Connection With the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, Securities Exchange Act Release No. 34– 63087 (Oct. 13, 2010) [75 FR 64120 (Oct. 19, 2010)]. 1144 Item F.17 of Form N–CEN. mstockstill on DSK3G9T082PROD with RULES2 1137 Item VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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.1145 If the UIT holds any securities of the issuer on the date of the filing, it will 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.1146 g. Part G—Attachments Like Form N–SAR,1147 Form N–CEN requires, substantially as proposed, certain attachments to reports filed on the form in order to provide the staff with more granular information regarding certain key issues.1148 Due to the narrative format of the information required, these attachments will not be required to be reported in a structured data format. Where possible, we eliminated 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 structured format.1149 Accordingly, we believe we have limited 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 attachments to Form N–CEN are current requirements in Form N–SAR.1150 Thus, as proposed, all funds are required, where applicable, to file attachments regarding legal 1145 Item F.17.a of Form N–CEN. F.17.b of Form N–CEN. An instruction to Item F.17 addresses when the UIT should report divestments pursuant to this item. 1147 See Item 77.E, Item 77.I, Item 77.K, Item 77.L, Item 77.N, Item 77.P, Item 77.Q.1, Item 77.Q.2, Item 102.D, Item 102.H, Item 102.J, Item 102.K, Item 102.M, Item 102.O, Item 102.P.1, Item 102.P.2, and Item 102.P.3 of Form N–SAR. 1148 Form N–SAR requires only management companies to file attachments to reports on the form, whereas Form N–CEN requires certain attachments for all Registrants. 1149 With respect to certain attachments currently in Form N–SAR, we are integrating the data requirements into the form itself, rather than keep the attachment requirements. See, e.g., Item 77.G and Item 102.F of Form N–SAR; Item D.5 (default on long-term debt) and Item D.6 (dividends in arrears) of Form N–CEN. However, not all of the attachments currently required by Form N–SAR lend themselves to integration into the form, either because of the amount of information reported in the attachment or because the attachment is a standalone document (e.g., the accountant’s report on internal control). 1150 But see supra footnote 1148. 1146 Item PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 81949 proceedings,1151 provision of financial support,1152 independent public accountant’s report on internal control,1153 and changes in accounting principles and practices, where applicable.1154 Unlike the proposal, however, the registrant will not be required under the form to file an attachment related to changes in the fund’s independent public accountant (i.e., information called for by Item 4 of Form 8–K under the Exchange Act). As previously discussed in section II.D.4.b above, this change was made in response to comments.1155 In addition, as in the proposal, all funds will be required, where applicable, to provide attachments relating to information required to be filed pursuant to exemptive orders issued by the Commission and relied on by the registrant,1156 and other information required to be included as an attachment pursuant to Commission rules and regulations.1157 Moreover, we are adopting, as proposed, requirements for closed-end funds and SBICs to provide attachments, where applicable, relating to material amendments to organizational documents,1158 instruments defining the rights of the holders of any new or amended class of securities,1159 new or amended investment advisory contracts,1160 information called for by Item 405 of Regulation S–K,1161 and, for SBICs only, senior officer codes of ethics.1162 As proposed, each attachment required by Form N–CEN includes instructions describing the information that should be provided in the attachment.1163 1151 Item G.1.a.i of Form N–CEN. G.1.a.ii of Form N–CEN. 1153 Item G.1.a.iii of Form N–CEN. As noted in Item G.1.a.iii, this item will only apply to management companies other than SBICs. 1154 Item G.1.a.iv of Form N–CEN. 1155 See supra footnotes 860–867 and accompanying text. 1156 Item G.1.a.v of Form N–CEN. 1157 Item G.1.a.vi of Form N–CEN. 1158 Item G.1.b.i of Form N–CEN. Unlike openend funds, closed-end funds and SBICs do not otherwise update or file the information requested by this item with the Commission and, thus, we believe the information should continue to be filed as an attachment to the census reporting form. 1159 Item G.1.b.ii of Form N–CEN. 1160 Item G.1.b.iii of Form N–CEN. Unlike openend funds, closed-end funds and SBICs do not otherwise update or file the information requested by this item with the Commission and, thus, we believe the information should continue to be filed as an attachment to the census reporting form. 1161 Item G.1.b.iv of Form N–CEN. 1162 Item G.1.b.v of Form N–CEN. 1163 For example, the instructions to Item G.1.b.v require SBICs to attach detailed information regarding the senior officer code of ethics and certain information regarding the audit committee. The instructions also require SBICs to meet certain 1152 Item E:\FR\FM\18NOR2.SGM Continued 18NOR2 81950 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations As noted earlier, all of the attachments required by Form N–CEN, except one, are currently required by Form N–SAR.1164 The new attachment relates to the provision of financial support and will be filed by a fund (other than a money market 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.1165 As discussed in section II.D.4.b, we are adopting this requirement, as proposed, and including it in Form N–CEN because we believe that it is important that the Commission understand the nature and extent to which a fund’s sponsor provides financial support to a fund. 5. Items Required by Form N–SAR That Will Be Eliminated by Form N–CEN As we discussed above and in the Proposing Release, with Form N–CEN, we seek to modernize and improve the information that we collect in order to reflect changes in the fund industry since Form N–SAR’s adoption in 1985. Accordingly, and substantially as proposed, we are not carrying forward certain items in Form N–SAR to Form N–CEN that we believe are no longer needed by Commission staff or are outdated in their current form. For example, in Form N–CEN, we are not including 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.1166 Many commenters agreed that Form N–SAR is outdated and commended the Commission’s efforts to improve the relevance of information reported to the Commission.1167 Where we have received comments on specific reporting requirements, we discuss them in more detail below. mstockstill on DSK3G9T082PROD with RULES2 requirements regarding the availability of their senior office code of ethics. 1164 See supra footnote 1150 and accompanying text. 1165 Item G.1.a.ii of Form N–CEN. 1166 Item 26 of Form N–SAR. Form N–CEN does, however, contain information relating to funds that paid commissions to brokers and dealers for research services. See Item C.18 of Form N–CEN. 1167 See, e.g., ICI Comment Letter; SIFMA Comment Letter I; Invesco Comment Letter; BlackRock Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 As proposed, Form N–CEN eliminates a number of Form N–SAR items where the information is (or will be) reported elsewhere—for example, items relating to fees and expenses, including frontend and deferred/contingent sales loads, redemption and account maintenance fees, rule 12b–1 fees, and advisory fees.1168 Many of the fee and expense items required by Form N–SAR are already reported, 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.1169 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.1170 For similar reasons as above, we are also not requiring other information in 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, and certain other condensed balance sheet data items.1171 One commenter requested that the Commission include certain information 1168 See generally Items 29–44 and Items 47–52 of Form N–SAR. Form N–CEN does, however, contain an item relating to expense limitations, reductions, and waivers. See Item C.8 of Form N–CEN. As discussed above, Form N–CEN also requires information on management fees and net operating expenses for closed-end funds, as that information is not available elsewhere in a structured format. See Item D.8 and Item D.9 of Form N–CEN; see also supra section II.D.4.d. 1169 See General Instruction C.3.G to Form N–1A; see generally Form N–1A, Form N–2, Form N–4, Form N–5, and Form N–6. 1170 We acknowledge that some of the information reported in reports on Form N–SAR related to loads paid to captive or unaffiliated broker-dealers has been used by interested third-parties, including researchers. See, e.g., Susan E.K. Christoffersen, Richard Evans, & David K. Musto, What do Consumers’ Fund Flows Maximize? Evidence from Their Brokers’ Incentives, J. of Fin., Vol. 68(1), 201– 235 (2013) (‘‘Christoffersen Journal Article’’). While this is evidence of a discrete instance where such information has been useful to a third party, based on staff experience with this information and Form N–SAR information generally, we believe that no longer requiring funds to gather and report this information appropriately balances the burden on funds of providing this information and the overall utility of the information to the Commission, investors and third parties. 1171 See generally Item 57, Item 61, and Items 70– 74 of Form N–SAR. PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 required on Form N–SAR that was proposed to be eliminated in Form N– CEN.1172 That commenter, for example, suggested that certain fee and expense information currently available semiannually on Form N–SAR (e.g., Items 34–44, 47–52, 54, 72, and 75) should carry over into Form N–CEN. As discussed above, we find the commenter’s concerns persuasive with respect to Item 75 of Form N–SAR and have added a reporting requirement in Form N–CEN that (1) funds other than money market funds provide the fund’s monthly average net assets during the reporting period, and (2) money market funds provide the fund’s daily average net assets during the reporting period.1173 Otherwise, we continue to believe that Form N–CEN strikes an appropriate balance between the current information needs of Commission staff as well as the developments in the fund industry and the reduction of reporting burdens for registrants where information may be similarly disclosed or reported elsewhere. We are also eliminating, as proposed, 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 is minimal to the Commission’s oversight and examination functions while the burdens to these funds of reporting such information is costly.1174 Additionally, with respect to the Form N–SAR item relating to closed-end fund monthly sales and repurchases of shares,1175 this information will be reported on Form N–PORT,1176 rather than Form N–CEN. The full list of items from Form N– SAR that will be included in Form N– CEN or eliminated is included in Figure 2 below. BILLING CODE 8011–01–P 1172 See Morningstar Comment Letter. discussion at supra footnotes 1016–1021 and accompanying text (discussing Item C.19 of Form N–CEN. 1174 See Item 86, Item 93, Item 95, Items 97–100, Items 103–104, Item 109, and Items 125–132 of Form N–SAR. 1175 See Item 86 (closed-end funds) of Form N– SAR; see also Item 28 (management investment companies generally) of Form N–SAR. 1176 See Item B.6 of Form N–PORT. 1173 See E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 81951 INCLUSION OF FORM N-SAR DATA ITEMS IN FORM N-CEN FORM N-SAR ITEM NO. 1 5 7 DESCRIPTION INCLUDED WITHOUT CHANGE INCLUDED BUT MODIFIED SIMILAR DATA WILL BE AVAILABLE THROUGH OTHER SOURCES* NO LONGER REQUIRED TO BE REPORTED BY ALL FUNDS Registrant information SBIC identification Series or multiple portfolio company ALL MANAGEMENT INVESTMENT COMPANIES EXCEPT SBICS Independent public accountant 15 Custodian arrangements 19 Family of investment companies 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00083 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.001</GPH> Principal underwriter 13 VerDate Sep<11>2014 Investment adviser 11 mstockstill on DSK3G9T082PROD with RULES2 8 81952 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations INCLUSION OF FORM N-SAR DATA ITEMS IN FORM N-CEN FORM N-SAR ITEM NO. DESCRIPTION Open-end investment company 29 Registrant; series imposing a frontend sales load 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00084 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.002</GPH> Holding of securities of registrant's regular brokers or dealers 27 VerDate Sep<11>2014 Aggregate principal purchase;sale transactions 25 INCLUDED BUT MODIFIED NO LONGER REQUIRED TO BE REPORTED BY ALL FUNDS Aggregate brokerage commissions 23 mstockstill on DSK3G9T082PROD with RULES2 21 INCLUDED WITHOUT CHANGE SIMILAR DATA WILL BE AVAILABLE THROUGH OTHER SOURCES* Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 81953 INCLUSION OF FORM N-SAR DATA ITEMS IN FORM N-CEN FORM N-SAR ITEM NO. DESCRIPTION Account maintenance fees 41 Direct use of assets under 12b-1 plan 43 Payments under the 12b-1 plan 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00085 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.003</GPH> Deferred or contingent deferred sales loads collected 39 VerDate Sep<11>2014 Net amount paid to retail sales force 35 INCLUDED BUT MODIFIED NO LONGER REQUIRED TO BE REPORTED BY ALL FUNDS Net sales loads retained and paid out by underwriters 33 mstockstill on DSK3G9T082PROD with RULES2 31 INCLUDED WITHOUT CHANGE SIMILAR DATA WILL BE AVAILABLE THROUGH OTHER SOURCES* 81954 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations INCLUSION OF FORM N-SAR DATA ITEMS IN FORM N-CEN FORM N-SAR ITEM NO. DESCRIPTION Expense limitations or reductions 55 Overdrafts and bank loans 57 Stock splits or stock dividends 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00086 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.004</GPH> Performance based advisory fee 53 VerDate Sep<11>2014 Advisory fee based on percentage of income 51 INCLUDED BUT MODIFIED NO LONGER REQUIRED TO BE REPORTED BY ALL FUNDS Advisory fee based on percentage of assets 49 mstockstill on DSK3G9T082PROD with RULES2 47 INCLUDED WITHOUT CHANGE SIMILAR DATA WILL BE AVAILABLE THROUGH OTHER SOURCES* Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 81955 INCLUSION OF FORM N-SAR DATA ITEMS IN FORM N-CEN FORM N-SAR ITEM NO. DESCRIPTION Insured or guaranteed securities attributed to value used in computing NAV 67 Registrant; series investing primarily and regularly in a balanced portfolio of debt and equity securities 69 Registrant; series as an index fund 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00087 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.005</GPH> Dollar weighted average maturity 65 VerDate Sep<11>2014 Minimum required investment 63 INCLUDED BUT MODIFIED NO LONGER REQUIRED TO BE REPORTED BY ALL FUNDS Management investment company 61 mstockstill on DSK3G9T082PROD with RULES2 59 INCLUDED WITHOUT CHANGE SIMILAR DATA WILL BE AVAILABLE THROUGH OTHER SOURCES* 81956 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations INCLUSION OF FORM N-SAR DATA ITEMS IN FORM N-CEN FORM N-SAR ITEM NO. DESCRIPTION "811" numbers for wholly-owned investment company subsidiaries consolidated in report 83 Fidelity bond claims 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00088 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.006</GPH> Computation of average net assets 79 VerDate Sep<11>2014 Dividends and distributions 75 INCLUDED BUT MODIFIED NO LONGER REQUIRED TO BE REPORTED BY ALL FUNDS Portfolio purchases, sales, monthly average value, and turnover rate 73 mstockstill on DSK3G9T082PROD with RULES2 71 INCLUDED WITHOUT CHANGE SIMILAR DATA WILL BE AVAILABLE THROUGH OTHER SOURCES* Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 81957 INCLUSION OF FORM N-SAR DATA ITEMS IN FORM N-CEN FORM N-SAR ITEM NO. DESCRIPTION INCLUDED WITHOUT CHANGE INCLUDED BUT MODIFIED SIMILAR DATA WILL BE AVAILABLE THROUGH OTHER SOURCES* NO LONGER REQUIRED TO BE REPORTED BY ALL FUNDS Errors and omissions insurance policy 85 CLOSED-END MANAGEMENT INVESTMENT COMPANIES EXCEPT SBICs 86 Sales, repurchases, and redemptions of securities 88 Senior securities ./ SBICs Independent public accountant Advisory clients other than investment companies 95 Sales, repurchases, and redemptions of securities 20:36 Nov 17, 2016 Jkt 241001 PO 00000 ./ Frm 00089 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.007</GPH> 93 VerDate Sep<11>2014 Investment adviser 91 mstockstill on DSK3G9T082PROD with RULES2 89 81958 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations INCLUSION OF FORM N-SAR DATA ITEMS IN FORM N-CEN FORM N-SAR ITEM NO. DESCRIPTION Wholly-owned subsidiaries consolidated in report 105 Fidelity bonds in effect 107 Fidelity bond deductible 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00090 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.008</GPH> Market price per share 103 VerDate Sep<11>2014 Assets, liabilities and shareholders' equity 101 INCLUDED BUT MODIFIED NO LONGER REQUIRED TO BE REPORTED BY ALL FUNDS Income and expenses 99 mstockstill on DSK3G9T082PROD with RULES2 97 INCLUDED WITHOUT CHANGE SIMILAR DATA WILL BE AVAILABLE THROUGH OTHER SOURCES* Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 81959 INCLUSION OF FORM N-SAR DATA ITEMS IN FORM N-CEN FORM N-SAR ITEM NO. 109 DESCRIPTION INCLUDED WITHOUT CHANGE INCLUDED BUT MODIFIED SIMILAR DATA WILL BE AVAILABLE THROUGH OTHER SOURCES* NO LONGER REQUIRED TO BE REPORTED BY ALL FUNDS Losses that could have been filed as a claim under the fidelity bond UITs New series having effective registration statements 121 Series for which a current prospectus existed at the end of the period 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00091 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.009</GPH> Separate account of an insurance company 119 VerDate Sep<11>2014 Independent public accountant 117 mstockstill on DSK3G9T082PROD with RULES2 115 81960 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations INCLUSION OF FORM N-SAR DATA ITEMS IN FORM N-CEN FORM N-SAR ITEM NO. DESCRIPTION 123 Amount of sales loads collected 127 Classification of series and assets 129 INCLUDED BUT MODIFIED NO LONGER REQUIRED TO BE REPORTED BY ALL FUNDS Value of new securities deposited in existing series 125 INCLUDED WITHOUT CHANGE SIMILAR DATA WILL BE AVAILABLE THROUGH OTHER SOURCES* Insured or guaranteed securities securities * ** While not available in Form N-CEN, similar data is or will be available through other sources, such as 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. BILLING CODE 8011–01–P E. Option for Web Site Transmission of Shareholder Reports The Commission proposed new rule 30e–3 under the Investment Company VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 Act, which would have permitted a fund to satisfy requirements under the Act and rules thereunder to transmit reports to shareholders if the fund made E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.010</GPH> mstockstill on DSK3G9T082PROD with RULES2 Figure 2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 the reports and certain other materials accessible on a Web site. Reliance on the rule would have been subject to certain conditions, including conditions relating to (1) the availability of the shareholder report and other required information; (2) implied 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. The proposed option was intended to modernize the manner in which periodic information is transmitted to shareholders. When we proposed the rule, we stated that we believed it would improve the information’s overall accessibility while reducing burdens such as printing and mailing costs that are borne by funds and, ultimately, by fund shareholders.1177 Proposed rule 30e–3 generated substantial public comment, with over 900 commenters expressing views on the rule. Comments received on the proposal were mixed. Many commenters expressed support for the proposed rule, citing, for example, positive internet access and use trends, consistency with the preferences of many investors, intra- and inter-agency regulatory consistency benefits, and anticipated reduction in printing and mailing expenses for funds and their shareholders.1178 However, many other commenters expressed concerns with the proposed rule, arguing, for example, that the proposed rule would have potential adverse effects on investor readership of shareholder reports generally and on certain demographic groups in particular.1179 Commenters 1177 See Proposing Release, supra footnote 7, at 33626. 1178 See, e.g., BlackRock Comment Letter; ICI Comment Letter; Schnase Comment Letter. 1179 See, e.g., Comment Letter of Leah J. Adams (Jan. 9, 2016); Comment Letter of Anonymous (Jan. 10, 2016); Comment Letter of Julia Benson (Jan. 10, 2016); Comment Letter of Broadridge Financial Solutions, Inc. (Jan. 13, 2016) (‘‘Broadridge Comment Letter’’); Comment Letter of Julia Cole (Jan. 8, 2016); Comment Letter of Lisa A. Darling (Aug. 7, 2015); Comment Letter of Don (Jan. 10, 2016); Comment Letter of Keene Ferrer (Jan. 9, 2016); Comment Letter of Association of Free Community Papers (Aug. 11, 2015); Comment Letter of Anthony W. Golden (Aug. 11, 2015); Comment Letter of Patricia Hanbury (Jan. 10, 2016); Comment Letter of Zane Hollenberger (July 27, 2015); Comment Letter of Lucy James (Jan. 9, 2016); Comment Letter of Gary Kasufkin (Jan. 12, 2016); Comment Letter of Debbi Lambert (Aug. 6, 2015); Comment Letter of William D. Looman (Jan. 9, 2016); Comment Letter of Sharon L. McCain (Jan. 9, 2016); Comment Letter of National Association of Letter Carriers (Aug. 4, 2015); Comment Letter of Dan Oved (Jan. 8, 2016); Comment Letter of Tim Plunk (July 16, 2015); Comment Letter of Joanne Rock (Aug. 7, 2015); Comment Letter of Thomas Scibek (Aug. 10, 2015); Comment Letter of Robin Snyder (Aug. 6, 2015); Comment Letter of Teresa VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 also disagreed about the size and distribution of printing and mailing expense savings that would result from the rule as proposed, particularly in the context of investors who purchase shares through intermediaries.1180 While the Commission plans to continue to consider how to promote electronic transmission to those who might prefer it, the comments discussed above raised issues with respect to this proposal that merit further consideration. We have, therefore, determined not to adopt proposed rule 30e-3 at this time. F. Amendments to Forms Regarding Securities Lending Activities We are also adopting form amendments that require a management investment company to disclose in its registration statement (or, in the case of a closed-end fund, its reports on Form N–CSR) certain disclosures regarding securities lending activities.1181 We proposed similar requirements as part of the proposed amendments to Regulation S–X, including disclosure in the fund’s financial statements 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 fund 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 fund 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 fund 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 (Jan. 8, 2016); Comment Letter of Manuel E. Velosa, Jr. (Jan. 10, 2016); Comment Letter of Wise (Aug. 3, 2015); Form Letter Type A (7 copies received); Form Letter Type B (234 copies received); Form Letter Type C (57 copies received); Form Letter Type D (93 copies received); Form Letter Type E (43 copies received). 1180 See, e.g., Broadridge Comment Letter; ICI Comment Letter. 1181 See Item 19(i) of Form N–1A; Item 21(j) of Form N–3; Item 12 of Form N–CSR. Because closedend funds do not offer their shares continuously, and are therefore generally not required to maintain an updated Statement of Additional Information to meet their obligations under the Securities Act, we are requiring closed-end funds to disclose their securities lending activities information annually on Form N–CSR. PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 81961 loan.1182 We proposed these disclosures in order to allow investors to better understand the income generated from, as well as the expenses associated with, a fund’s securities lending activities.1183 We received a number of comments addressing our proposed securities lending disclosures. Comments on the proposed disclosure requirements were mixed. Most of the commenters who addressed the issue expressed support for requiring disclosure of securities lending income and fees, although some specifically opposed or expressed concerns about the proposed requirement to disclose the terms governing the compensation of the securities lending agent.1184 Some commenters expressed opposition generally to the public nature of the proposed new disclosure requirements concerning fund securities lending activities.1185 Some commenters also 1182 See proposed rule 6–03(m) of Regulation S– X; Proposing Release, supra footnote 7, at 33624. 1183 See id. 1184 See AICPA Comment Letter (stating that the requirements would provide meaningful information to investors and other potential users and allow them to better understand the fund’s securities lending activities, except for disclosure of the terms governing the compensation of the securities lending agent other than for related parties); BlackRock Comment Letter (stating that ‘‘investor protection is well served by a level playing field that allows investors to make informed choices on a risk adjusted basis’’ and that uniform and clear information requirements associated with securities lending activities will empower mutual fund directors to more effectively evaluate and compare securities lending services); Deloitte Comment Letter (opposing required financial statement disclosure of indirect fees); Fidelity Comment Letter (expressing support for enabling investors to better understand the income generated from securities lending activity and all proposed disclosures except for fee split with a third-party lending agent); ICI Comment Letter (expressing support for the proposed requirements except the required public disclosure of the terms governing the compensation of the securities lending agent); PwC Comment Letter (opposing the proposed financial statement disclosure requirement of the terms of compensation, including any revenue sharing split, while stating that the categories of disclosure would provide meaningful information to readers); RMA Comment Letter (opposing a requirement to disclose borrower rebates and recommending that, if required, revenue sharing percentage disclosure be calculated using the fund’s net lending income and fees paid during the reporting period); Simpson Thacher Comment Letter (opposing required public disclosure of securities lending splits); State Street Comment Letter (opposing disclosure requirement for borrower rebates and recommending requirements for actual income and fees paid rather than contractual terms); cf. BlackRock Directors Comment Letter (stating, in the context of proposed Form N–CEN requirements, that ‘‘[i]mproved transparency as to the economic terms in the market for securities lending services will assist independent directors in assessing annually the customary charges imposed for such services’’). 1185 See Invesco Comment Letter (opposing required public disclosure of fund’s securities lending activities); MFS Comment Letter (opposing E:\FR\FM\18NOR2.SGM Continued 18NOR2 81962 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations expressed particular concerns relating to the location of the required disclosure in the fund’s financial statements.1186 We continue to believe that because net earnings from securities lending can contribute to the investment performance of a fund, investors and others would benefit from the additional transparency into the impact of securities lending fees on the income from these activities and further believe that the benefits of this additional transparency justify the potential unintended consequences, highlighted by commenters and discussed below, of public disclosure of certain information. We have, however, made certain modifications to the proposed requirements in an effort to mitigate some of these potential consequences.1187 As discussed in greater detail below, these modifications include, for example, replacing the proposed requirement that funds disclose the terms governing the compensation of the securities lending agent—including any revenue split— with a requirement to report actual fees paid during the fund’s prior fiscal year, because commenters persuaded us that backward-looking dollar-based requirements would yield clearer disclosure than would the proposed requirements and may also enhance disclosure comparability across funds for investors and reduce preparation complexity for funds. 1. Determination To Adopt Requirements as Amendments to Registration Statement and Annual Report Forms As proposed, certain disclosures relating to securities lending activities, including income and expenses, would mstockstill on DSK3G9T082PROD with RULES2 required public disclosure of securities lending fees); SIFMA Comment Letter I (opposing public disclosure requirements concerning financial arrangements of fund securities lending activities); Wells Fargo Comment Letter (opposing required public disclosure of securities lending income and expenses); cf. IDC Comment Letter (opposing required public disclosure of compensation and other fee and expense information relating to securities lending arrangements). 1186 See infra note 1190. 1187 See infra footnotes 1212–1219 and accompanying text. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 have been required to be included in a fund’s financial statements.1188 However, we sought public comment on whether the proposed or similar disclosures should instead be provided as part of other disclosure documents such as the Statement of Additional Information.1189 In response, some commenters raised concerns about including this information in the fund’s financial statements, including concerns about cost and that lengthy disclosure concerning securities lending activity in a fund’s financial statements could detract from other financial statement disclosures.1190 After consideration of these issues raised by commenters, we have determined that it is appropriate to require funds to include these disclosures in their Statements of Additional Information (or, for closedend funds, in their reports on Form N– CSR), rather than to require their inclusion in fund financial statements. Therefore, we are adopting these disclosure requirements as amendments to the fund registration forms (viz., Forms N–1A and N–3) and reports on Form N–CSR (for closed-end funds only), rather than as amendments to Regulation S–X.1191 2. Requirement To Disclose Securities Lending Income, Expenses, and Services As discussed in detail below, the final rules will require funds to disclose gross and net income from securities lending activities, fees and compensation in total and broken out by enumerated types, and a description of the services 1188 See proposed rule 6–03(m) of Regulation S– X; Proposing Release, supra footnote 7, at 33624. 1189 See Proposing Release, supra footnote 7, at 33625. 1190 See Deloitte Comment Letter (noting that indirect fees ‘‘are typically management’s estimate that is imprecise’’ and stating that additional costs of auditing the disclosure of these fees ‘‘would most likely outweigh any benefits of reporting this information’’); EY Comment Letter (stating that ‘‘the proposed disclosures would result in the presentation of detailed information with varying degrees of usefulness that could detract from other material information presented in the financial statements’’ and recommending that ‘‘the Commission use other reporting mechanisms more suited for that purpose’’). 1191 See Item 19(i) of Form N–1A; Item 21(j) of Form N–3; Item 12 of Form N–CSR. PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 provided to the fund by the securities lending agent. We proposed to require disclosure of gross income from securities lending, including income from cash collateral reinvestment; 1192 the dollar amount of fees and compensation paid by the fund for securities lending activities and related services, including borrower rebates and payments for cash collateral management services; 1193 the net income from securities lending activities; 1194 the details of any other fees paid directly or indirectly, including any fees paid directly by the fund for cash collateral management and any management fee deducted from a pooled investment vehicle in which cash collateral is invested; 1195 and the terms governing the compensation of the securities lending agent, including any revenue sharing split, with the related percentage split between the fund and the securities lending agent, and/or any fee for service and a description of services included.1196 After consideration of issues raised by commenters, we are generally adopting the substance of the proposed fee disclosure requirements but are requiring funds to make these disclosures in their Statements of Additional Information (or, in the case of a closed-end fund, Form N–CSR) rather than as part of their financial statements (as proposed). We are amending the Statement of Additional Information requirements in Forms N– 1A and N–3, and Form N–CSR (for closed-end funds) to require funds to disclose dollar amounts of income and fees and compensation paid to service providers related to their securities lending activities during their most recent fiscal year, as illustrated in Table 1 below.1197 1192 Proposed rule 6–03(m)(1) of Regulation S–X. rule 6–03(m)(2) of Regulation S–X. 1194 Proposed rule 6–03(m)(3) of Regulation S–X. 1195 Proposed rule 6–03(m)(5) of Regulation S–X. 1196 Proposed rule 6–03(m)(4) of Regulation S–X. 1197 See Item 19(i)(1) of Form N–1A; Item 21(j)(i) of Form N–3; Item 12(a) of Form N–CSR. The disclosure need not be presented in a tabular format. 1193 Proposed E:\FR\FM\18NOR2.SGM 18NOR2 The modifications from the proposed requirements are designed to, among other things, enhance comparability of the disclosed information and potentially ameliorate some concerns commenters expressed about the proposed required public disclosure of the terms governing compensation of the securities lending agent. Several commenters expressed concern that the proposed disclosure requirements could yield information that would suggest, inaptly, that fees and expenses related to securities lending activities among funds are readily compared and contrasted.1198 Specifically, one commenter highlighted that information provided under the proposed requirements might not be comparable due to the subjectivity of related inputs and assumptions.1199 Another commenter, however, suggested that we could facilitate comparability by specifying the fees for particular services that must be disclosed.1200 We have considered these commenters’ views and suggestions and have been persuaded to specify in the final rules which specific fees should be disclosed and what those fees should include rather than requiring, as proposed, 1198 See MFS Comment Letter; PwC Comment Letter. 1199 See MFS Comment Letter. The commenter did not provide examples of specific subjective inputs and assumptions in connection with the terms of securities lending expenses. 1200 See Fidelity Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 disclosure of all fees and/or compensation paid for securities lending and related services without specifying which fees should be disclosed.1201 We believe that these modifications will enhance comparability of the disclosed fees and compensation. The list of specific fees we are enumerating has been adapted from the list of securities lending payments about which reporting will be required by Form N–CEN, which, as discussed above, we are adopting as proposed.1202 We have determined that, in specifying the specific categories of fees that are required to be disclosed, it is appropriate to adapt the list of fees from proposed Form N–CEN because 1201 Item 19(i)(1)(ii) of Form N–1A (requiring disclosure of all fees and/or compensation for each of the following securities lending activities and related services: Any share of revenue generated by the securities lending program paid to the securities lending agent or agents—the ‘‘revenue split’’; fees paid for cash collateral management services— including fees deducted from a pooled cash collateral reinvestment vehicle—that are not included in the revenue split; administrative fees that are not included in the revenue split; fees for indemnification that are not included in the revenue split; rebates paid to borrowers; and any other fees relating to the securities lending program that are not included in the revenue split, including a description of those fees); Item 21(j)(i)(B) of Form N–3 (same); Item 12(a)(2) of Form N–CSR (same). If a fee for a service is included in the revenue split, state that the fee is ‘‘included in the revenue split.’’ Instruction to Item 19(i)(1) of Form N–1A; Instruction to Item 21(j)(i) of Form N–3 (same); Instruction (a) to Item 12 of Form N–CSR (same). 1202 See Item 30.e of proposed Form N–CEN; Item C.6.e of Form N–CEN; supra section II.D.4.c.iii. PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 81963 consistency between the two lists will allow for better comparability of information from reports on Form N– CEN and disclosures in funds’ Statements of Additional Information and, with respect to closed-end funds, reports on Form N–CSR. The comparability of the disclosed fee and expense information may also depend on the nature of the services provided to a particular fund in connection with its securities lending activities. To that end, we proposed a disclosure requirement for a description of services included in the fund’s arrangement with its securities lending agent.1203 One commenter suggested robust disclosure of the services provided by the securities lending agent and provided several examples of the types of services that should be disclosed to improve comparability.1204 The commenter stated that it had observed a lack of uniformity in the package of services performed by securities lending agents, which can hinder understanding of securities lending fees.1205 We agree with the commenter that enhanced and more comparable disclosure of services provided can help users of the information to better understand the particular services provided by 1203 Proposed rule 6–03(m)(4) of Regulation S–X. BlackRock Directors Comment Letter (suggesting such a requirement in the context of reports on Form N–CEN). 1205 Id. 1204 See E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.011</GPH> mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 81964 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 securities lending agents for the aggregate fees they were paid over the reporting period. Accordingly, to further enhance the comparability of the disclosed information and allow users to better assess fee and expense information, we have determined to specify that this information should be provided on the basis of the services actually provided to the fund in its most recent fiscal year. Some examples of the types of services that could be enumerated include, as applicable, locating borrowers, monitoring daily the value of the loaned securities and collateral, requiring additional collateral as necessary, cash collateral management, qualified dividend management, negotiation of loan terms, selection of securities to be loaned, recordkeeping and account servicing, monitoring dividend activity and material proxy votes relating to loaned securities, and arranging for return of loaned securities to the fund at loan termination.1206 Another commenter expressed concerns that the proposed fee and expense information could be used to evaluate the terms of a fund’s lending arrangements and could, without access to additional information, result in potentially inappropriate conclusions that a fund negotiated its arrangements poorly or was otherwise disadvantaged in its negotiations.1207 That commenter noted that the revenue split can depend on numerous factors, including the range, amount, and attractiveness of the securities a fund complex as a whole may make available for loan.1208 Two commenters suggested eliminating the proposed requirement for disclosure of borrower rebates, reasoning that they are primarily a function of prevailing shortterm interest rates.1209 However, we continue to believe that it is appropriate to require disclosure of borrower rebates, because, irrespective of how they may be determined in particular cases, they are nonetheless an expense of securities lending. One commenter argued that a fund board wishing to evaluate the fund’s securities lending program would have access to more detailed analyses than could be practically included in the fund’s financial statements.1210 Conversely, 1206 Item 19(i)(2) of Form N–1A (requiring disclosure of the services provided to the fund by the securities lending agent); Item 21(j)(ii) of Form N–3 (same); Item 12(b) of Form N–CSR (same). 1207 PwC Comment Letter (particularly with respect to the proposed terms of compensation disclosure requirement); see also RMA Comment Letter (concerning borrower rebates). 1208 PwC Comment Letter. 1209 RMA Comment Letter; State Street Comment Letter. 1210 PwC Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 another commenter stated that uniform and clear information requirements would have the benefit of empowering more effective evaluation and comparison of securities lending services.1211 While, as commenters suggested, a thorough evaluation of a fund’s securities lending activities, such as an evaluation by that fund’s board, may appropriately include information beyond the scope of the disclosure requirements we are adopting today, we believe that these new requirements will nonetheless enhance comparability and allow investors to better understand the expenses associated with securities lending activities. We also note that today’s amendments are not meant to circumscribe the factors to be rightfully considered in such an evaluation. Commenters also expressed concerns with the proposed requirements based on the currently nonpublic character of some of the information that would be required to be disclosed publicly, particularly the proposed requirement to disclose the terms governing compensation of the securities lending agent.1212 Commenters argued that some funds currently enjoy privately negotiated competitive advantages with securities lending services or counterparties that could be jeopardized should their arrangements with their securities lending agents be made public.1213 We continue to believe, however, that the required fee information will allow investors to better understand the expenses associated with securities lending activities and have therefore determined to adopt these modified disclosure requirements with modifications to address commenters’ concerns. We believe that the modifications to the proposed requirements that we are making today eliminate the disclosures from the proposed requirements that some commenters indicated could be the most sensitive—specifically, the terms of the revenue split and the terms governing the compensation of the securities lending agent more generally—while retaining the required information that we think will be most BlackRock Comment Letter. AICPA Comment Letter (particularly concerned with respect to the terms governing the compensation of the securities lending agent); Fidelity Comment Letter (particularly concerned with respect to the revenue split); ICI Comment Letter; Invesco Comment Letter; MFS Comment Letter; SIFMA Comment Letter I; Simpson Thacher Comment Letter (particularly concerned with respect to the revenue split); Wells Fargo Comment Letter. 1213 See AICPA Comment Letter; Fidelity Comment Letter; ICI Comment Letter; Invesco Comment Letter; MFS Comment Letter; SIFMA Comment Letter I; Simpson Thacher Comment Letter; Wells Fargo Comment Letter. useful to investors in understanding the expenses associated with fund securities lending activities. In particular, some commenters suggested that, rather than requiring disclosure of the terms governing the compensation of the securities lending agent, as we proposed,1214 we consider instead requiring disclosure of backward-looking actual compensation levels.1215 One of these commenters argued that, because there are a variety of fee arrangements in the marketplace, such an alternative disclosure requirement may provide a clearer, more concise view of each party’s compensation.1216 We have been persuaded by these commenters’ suggestions that backward-looking dollar-based requirements would yield clearer disclosure than would the proposed requirements and may also enhance disclosure comparability across funds for investors and reduce preparation complexity for funds and thus have modified the requirements accordingly.1217 This dollar-based requirement would also eliminate the requirement that potentially sensitive negotiated contractual terms be disclosed, while nonetheless allowing investors to better understand the expenses associated with securities lending activities. A commenter also counseled against placing undue emphasis on the securities lending agent’s revenue split at the expense of other securities lending fees and expenses,1218 and we believe that the schedule of fees and expenses we are requiring to be disclosed places an appropriate level of emphasis on that figure situated among the other required fee and expense disclosures.1219 We also proposed to require disclosure of gross income from securities lending, including income from cash collateral reinvestment,1220 as well as net income.1221 We did not receive comments specific to these proposed requirements. We are adopting the proposed requirement to disclose gross income from securities lending activities. Moreover, as further clarification about the types of income that could be included in this total, we 1211 See 1212 See PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 1214 See proposed rule 6–03(m)(4) of Regulation S–X. 1215 See RMA Comment Letter (recommending that funds report a calculated split based on a fund’s actual net lending income and fees paid during the reporting period); State Street Comment Letter. 1216 State Street Comment Letter. 1217 Item 19(i)(1)(ii) of Form N–1A; Item 21(j)(i)(B) of Form N–3; Item 12(a)(1) of Form N–CSR. 1218 See Fidelity Comment Letter. 1219 See supra Table 1. 1220 Proposed rule 6–03(m)(1) of Regulation S–X. 1221 Proposed rule 6–03(m)(3) of Regulation S–X. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations note that—in addition to income from cash collateral reinvestment—disclosed gross income may also include negative rebates (i.e., those paid by the borrower to the lender), loan fees paid by borrowers when collateral is noncash, management fees from a pooled cash collateral reinvestment vehicle that are deducted from the vehicle’s assets before income is distributed, and any other income.1222 We are adopting the proposed requirement to disclose net income and clarifying that the reported figure should be equal to the difference between gross income and aggregate fees/compensation.1223 3. Required Disclosures of Monthly Average Value on Loan We also proposed to require disclosure of the monthly average of the value of portfolio securities on loan.1224 As discussed above, we have determined to adopt a similar requirement in Form N–CEN where it will be available in a structured data format and are not including it in the amendments to Forms N–1A, N–3, and N–CSR.1225 mstockstill on DSK3G9T082PROD with RULES2 G. Technical and Conforming Amendments As proposed, we are also adopting technical and conforming amendments to various rules and forms. As discussed above, we are rescinding Form N–Q and adopting new Form N–PORT. In order to implement this change, we are revising 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.1226 In addition, we are 1222 Item 19(i)(1)(i) of Form N–1A; Item 21(j)(i)(A) of Form N–3 (same); Item 12(a)(1) of Form N–CSR. Gross income for purposes of this disclosure generally should include indirect fees paid for cash collateral management services—i.e., management services provided to a pooled investment vehicle in which cash collateral is invested. Those fees are indirect because they are taken from the pooled assets before any income is distributed to the lending fund. In order for the net income disclosure from securities lending to sum to the net income for securities lending reported at period end, we believe that indirect fees for cash collateral management generally should be added to the gross income from securities lending in the Statement of Additional Information or, with respect to closedend funds, in reports on Form N–CSR. 1223 Item 19(i)(1)(iv) of Form N–1A; Item 21(j)(i)(D) of Form N–3; Item 12(a)(4) of Form N– CSR. 1224 See proposed rule 6–03(m)(6) of Regulation S–X. 1225 See supra footnotes 969–972 and accompanying text. 1226 See Instruction 3(b) to Item 16(f) of Form N– 1A; Instruction 4 to Item 27(d)(1) of Form N–1A; Instruction 6.b to Item 24 of Form N–2; Instruction 6(ii) to Item 28(a) of Form N–3; Instruction 3(b) to Item 19(e)(ii) of Form N–3. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 rescinding 17 CFR 249.332 and revising 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. We are also rescinding Form N–SAR and replacing it with new Form N–CEN. In order to implement this change, we are revising the following rules and sections to remove references to Form N–SAR and replacing 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, 17 CFR 274.101, and Form N–8F.1227 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 we are requiring reports on Form N–CEN to be filed annually by all registered investment companies, we are rescinding 17 CFR 270.30b1–1 and revising 17 CFR 270.30a–1 to require all registered investment companies to file reports on Form N–CEN. We are also revising the following rules to remove references to 17 CFR 270.30b1–1 and add references to revised 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 are rescinding 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 adopting new rule 17 CFR 270.30a–4— which will permit wholly-owned management investment company subsidiaries of management investment companies to not file Form N–CEN under those same circumstances. We are also amending 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 1227 Although we are deleting references to Form N–SAR in 17 CFR 232.301, we are not replacing them with references to Form N–CEN because the references in that section relate to specific portions of the EDGAR Filer Manual that would not be relevant to Form N–CEN. PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 81965 displays a currently valid OMB control number.1228 Our amendments to Regulation S–X will, among other things, require management investment companies to report new schedules for certain derivatives holdings.1229 To implement these changes, we are renumbering the sections for schedules required to be reported by management investment companies and renumbering the list of schedules provided in 17 CFR 210.6–10, which outlines the schedules to be reported by investment companies.1230 We are also adopting conforming changes to references to Regulation S– X in the following forms: Form N–1A, Form N–2, Form N–3, and Form N– 14.1231 We are also amending Form N–CSR to revise instructions addressing how disclosures and certifications as to the effectiveness and changes in the registrant’s internal control over financial reporting should be handled during the transition period when certifications for funds’ portfolio holdings for their first and third fiscal quarters will no longer be provided on Form N–Q but instead will provided on Form N–CSR.1232 In the Proposing Release we proposed deleting these instructions, but we are revising the instructions to clarify how these disclosures and certifications shall be handled with regards to smaller entities 1228 See infra section IV. amendments require new schedules to be filed to report open futures contracts, open forward foreign currency contracts, and open swap contracts. See new rules 12–13A–C of Regulation S– X. 1230 Among other things, our amendments will renumber the CFR sections for open option contracts and the summary schedule of investments in unaffiliated issuers from 17 CFR 210.12–12B and 17 CFR 210.12–12C to 17 CFR 210.12–13 and 17 CFR 210.12–B, respectively. These amendments group the schedule for open option contracts written together with the new schedules for open futures contracts, open forward foreign currency contracts, and open swap contracts, and list the summary schedule sequentially after the investments in securities of unaffiliated issuers. We are also amending 17 CFR 210.6–10 to, among other things, add new schedules V, VI, and VII for open futures contracts, open forward foreign currency contracts, and open swap contracts, respectively, and renumber schedule II for investments other than securities and schedule VI for summary of investments in securities of unaffiliated issuers as schedules VIII and IX, respectively. See amended rule 6–10 of Regulation S–X (listing the schedules required to be filed by management investment companies, UITs, and face-amount certificate companies). 1231 See Item 27(b)(1) of Form N–1A (reference to schedule VI changed to schedule IX and reference to schedule I are corrected to cite to the appropriate CFR section); Instruction 7 to Item 24 of Form N– 2 (we are updating references to schedule VI); Instruction 7(i) and (ii) to Item 28(a) of Form N–3 (we are updating references to schedule VI). 1232 Item 11 and Item 12 of Form N–CSR. 1229 Our E:\FR\FM\18NOR2.SGM 18NOR2 81966 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations as opposed to larger entities during the transition period. We are also removing and reserving paragraph (a) of 17 CFR 232.105, which currently requires electronic filers to submit Forms N–SAR and 13F in ASCII. We are rescinding Form N–SAR, and Form 13F has been submitted by electronic filers in XML, rather than ASCII, since 2013.1233 Although we also proposed to revise the section heading of 17 CFR 232.105 and redesignate paragraphs (b) and (c) as (a) and (b), respectively, upon further consideration we believe those changes are unnecessary at this time. We received no comments on these technical and conforming amendments, and are adopting them substantially as proposed, as discussed herein. H. Compliance Dates We are adopting the following compliance dates for our amendments, as set forth below. mstockstill on DSK3G9T082PROD with RULES2 1. Form N–PORT, Rescission of Form N–Q, and Amendments to the Certification Requirements of Form N– CSR As proposed, given the nature and frequency of filings on Form N–PORT, the Commission is providing 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’’ 1234 have net assets of $1 billion or more as of the end of the most recent fiscal year of the fund—we are adopting a compliance date of June 1, 2018. This will result in larger funds filing their first reports on Form N– PORT, reflecting data as of June 30, no later than July 30, and will provide those funds with a compliance period of 1233 See SEC, Announcement: Notice to EDGAR Form 13F Filers (Mar. 29, 2013), available at https:// www.sec.gov/divisions/investment/ imannouncements/notice-form-13f-im.htm (requiring funds to file Form 13F according to EDGAR XML Technical Specifications beginning on April 29, 2013). 1234 For these purposes, the threshold is based on the definition of ‘‘group of related investment companies,’’ as such term is defined in rule 0–10 under the Investment Company Act [17 CFR 270.0– 10]. Rule 0–10 defines the term as ‘‘two or more management companies (including series thereof) that: (i) Hold themselves out to investors as related companies for purposes of investment and investor services; and (ii) Either: (A) Have a common investment adviser or have investment advisers that are affiliated persons of each other; or (B) Have a common administrator; and [. . .] In the case of a unit investment trust, the term group of related investment companies shall mean two or more unit investment trusts (including series thereof) that have a common sponsor.’’ We believe that this broad definition will encompass most types of fund complexes and therefore is an appropriate definition for compliance date purposes. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 at least 18 months, consistent with our proposal. For these entities, we expect that this period of time will 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 new Form N–PORT with the Commission.1235 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 of the fund),1236 the compliance date will be June 1, 2019. This will provide smaller entities an extra 12 months, as proposed, to comply with the new reporting requirements. We believe that smaller groups will benefit from this extra time to comply with the filing requirements for Form N–PORT and will potentially benefit from the lessons learned by larger investment companies and groups of investment companies during the adoption period for Form N– PORT. In the Proposing Release, we stated that we intended to rescind Form N–Q and require implementation of the amendments to the certification requirements of Form N–CSR within a timing that would be consistent with this adoption. We received no comments on this aspect of the proposal. Therefore, consistent with the timing for the implementation of reporting requirements for Form N– PORT, we are also rescinding Form N– Q (referenced in 17 CFR 274.130) and implementing the amendments to the certification requirements of Form N– CSR (referenced in 17 CFR 274.128) with approximately the same time 1235 We believe that this compliance period for larger groups of investment companies is an adequate amount of time for funds to implement new Form N–PORT and make the necessary system and operational changes. We adopted a nine month compliance period when we first required money market funds to report their portfolio holdings to the Commission on a monthly basis on Form N– MFP. Based upon our Form N–MFP compliance experience, and the larger number of non-money market fund filers, we believe that doubling the Form N–MFP compliance period to eighteen months for filing reports on Forms N–PORT is appropriate. See Money Market Fund Reform 2010 Release, supra footnote 447, at 10087. 1236 Based on staff analysis of data obtained from Morningstar Direct, as of June 30, 2016, we estimate that a $1 billion assets threshold would provide an extended compliance period to more than 67% of fund groups, but only 0.6% of all fund assets. We therefore believe that the $1 billion threshold will appropriately balance the need to provide smaller groups of investment companies with more time to prepare for the initial filing of reports on Form N– PORT, while still including the vast majority of fund assets in the initial compliance period. PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 frame. However, we are delaying the rescission of Form N–Q by two additional months to allow funds sufficient time to satisfy Form N–Q’s 60day filing requirements with regard to their final filing on Form N–Q for the reporting period preceding their first filing on Form N–PORT. Thus, the compliance dates for the amendments to the certification requirements of Form N–CSR will be June 1, 2018 for larger entities, and June 1, 2019 (12 months later) for smaller entities. Form N–Q and related rules referencing Form N–Q will be rescinded two months later, on August 1, 2019. In addition, as discussed below, the compliance date for reporting a change in independent public accountant on Form N–CSR will be consistent with the compliance date for other information reported on Form N–CEN.1237 We understand that certain changes to issuers’ and market participants’ systems may not be able to occur until the final technical requirements are published in the EDGAR Filer Manual and EDGAR Technical Specifications documents. In order to provide issuers and other filers time to make adjustments to their systems, we anticipate making a draft of the EDGAR Technical Specifications documents available in advance. We believe that test submissions may assist both the Commission and issuers with addressing unknown and unforeseeable issues that may arise with the reporting of information on Form N–PORT. We will permit funds to file test submissions during a trial period. Additionally, we have determined to maintain as nonpublic all reports filed on Form N–PORT for the first six months following June 1, 2018. We believe that, separate from the voluntary trial, having a time period where all funds are required to file reports on Form N–PORT with the Commission but not have those reports disclosed publicly will allow funds and the Commission to make adjustments to fine-tune the technical specifications and data validation processes. We believe that this process can ultimately improve the data that is reported to the Commission and, as required disclosed to the public. Accordingly, we find that it is neither necessary nor appropriate in the public interest or for the protection of investors to make reports filed on Form N–PORT during the first six months following the compliance date publicly available.1238 However, portfolio information attached as 1237 See 1238 See infra section II.H.2. section 45(a) of the Investment Company Act. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 exhibits to Form N–PORT for the first and third quarters of a fund’s fiscal year will still be made public during this period, to ensure that information about funds’ portfolio holdings continues to be publicly available to investors and other users during the six month period when reports on Form N–PORT will not be made publicly available.1239 One commenter did not explicitly address compliance dates for Form N– PORT, but suggested that the compliance period for Regulation S–X be changed to 18 months so that Form N–PORT and the amendments to Regulation S–X would have the same compliance date.1240 Other commenters suggested extending the compliance period for Form N–PORT for all funds, including specific recommendations for 24 months, 30 months, or 36 months after the later of the effective date for this rulemaking or the adoption of amendments requiring funds to report liquidity information on Form N– PORT.1241 We are adopting an initial compliance date for Form N–PORT of June 1, 2018, which is consistent with the 18-month compliance period we proposed. As discussed above, we anticipate that the information that will be reported on Form N–PORT will enable us to further our mission to protect investors by assisting us in carrying out our regulatory responsibilities related to the asset management industry. We believe that it is important for the Commission to obtain and benefit from such information as soon as it is reasonably possible for this information to be reported. Although several commenters recommended extending the compliance period in order to update reporting systems,1242 based in part upon our experience with Form N–MFP reporting implementation, we continue to believe that 18 months for larger entities and 30 months for smaller entities will provide sufficient time for 1239 See supra section II.A.2.j (discussing exhibits to Form N–PORT). 1240 See State Street Comment Letter (stating that ‘‘[m]any of the changes to disclosures for derivatives are aligned with the information required within Form N–PORT and will require significant enhancements to systems’’). 1241 See, e.g., Dreyfus Comment Letter (compliance date of 24 months after the effective date); SIFMA Comment Letter I (later of 24 months following adoption or six months following publication of the final XML data structure for Form N–PORT); Fidelity Comment Letter (30 months after the effective date); ICI Comment Letter (30 months after the effective date of Form N–PORT or the requirement to report liquidity information on Form N–PORT); Oppenheimer Comment Letter (30 months after the effective date); Pioneer Comment Letter (36 months after the effective date). 1242 See, e.g., Fidelity Comment Letter; Vanguard Comment Letter; Pioneer Comment Letter; and Invesco Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 funds and their service providers to prepare to file reports on Form N– PORT. Separately, as discussed above, our adoption includes numerous modifications from or clarifications to the proposal that address concerns raised by commenters and that are intended, in part, to decrease reporting and implementation burdens relative to the proposal. For example, we have added an instruction to Form N–PORT specifying that funds must report portfolio information on the same basis used in computing NAV, which is generally a T + 1 basis, rather than on a T + 0 basis, which is currently used for financial statement reporting. Several commenters asked for this clarification, as filing on a T + 0 basis would have required time-intensive conversion of portfolio transactions normally recorded on a T+1 basis.1243 We are also permitting funds to attach Regulation S–X compliant portfolio holdings schedules to Form N–PORT within 60 days after the end of the first and third fiscal quarters as opposed to our proposed 30 days, thus allowing funds to focus on preparing their Form N–PORT filings as opposed to also preparing their Regulation S–X compliant portfolio holdings schedules simultaneously.1244 More generally, we are permitting a fund to generally use its own methodology or the methodology of its service provider, so long as the methodology is consistently applied and is consistent with the way the fund reports internally and to current and prospective investors, which should help circumvent operational challenges that would have arisen if firms had attempted to standardize reporting of certain non-standardized information such as country of risk for each portfolio holding.1245 Several commenters suggested that the Commission should provide for a phase-in period based on a fund’s fiscal year-end, such that the Commission would require each fund to first begin filing its Form N–PORT as of its next fiscal year following the compliance date.1246 We decline to adopt this suggestion. A rolling compliance period 1243 See supra footnotes 74–76 and accompanying text. 1244 See supra footnote 438 and accompanying and following text. 1245 See supra footnote 79 and accompanying and following text. 1246 See ICI Comment Letter (recommending a rolling compliance period, with each fund not required to file Form N–PORT until the beginning of its next fiscal year following 30 months after the effective date); Invesco Comment Letter (same, except each fund not required to file Form N–PORT until the beginning of its next fiscal year following 36 months after the effective date). PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 81967 based on fiscal year would mean that some funds would be filing reports on Form N–PORT while other funds would be filing reports on Form N–Q for the same reporting period, which would delay the Commission and other users from obtaining complete information about the industry on Form N–PORT for up to a year. Commission staff believes that this would diminish the value of the information reported on Form N– PORT in terms of assessing industry trends, identifying outliers, and monitoring industry developments, because only a portion of the industry would be filing reports on Form N– PORT each month in a structured data format. This would also create complexities for investors who might not understand why some of their funds would be reporting on one form while other funds would be reporting on a different form, and would diminish the ability of investors to compare the information reported by one fund with information reported by another fund if each fund reported information on a different form. While our staggered compliance approach will also result in some funds reporting on Form N–PORT while others are still reporting on Form N–Q, the difference will be less significant than with a rolling compliance date because under our approach only smaller funds representing a relatively small proportion of assets will continue to use Form N–Q after the initial compliance date. One commenter suggested that the Commission should consider limiting liability for Form N–PORT filings for a transition period, similar to what was done with earlier structured data reporting rules.1247 We decline to adopt this suggestion. In the prior structured data reporting rules, filers were required to report the same information in both structured and non-structured formats, with limited liability for the information reported in a structured format and full liability for that same information when reported in a non-structured format. In this case, the information will be reported on Form N–PORT in only a structured data format. One commenter suggested raising the asset threshold for determining the larger entities that would be required to comply with Form N–PORT filing 1247 See Simpson Thacher Comment Letter (for a two-year transition period, structured data filings remained subject to standard antifraud provisions under federal securities laws, but were not subject to section 34(b) of the Investment Company Act of 1940 or section 18 of the Securities Exchange Act of 1934). See also Interactive Data to Improve Financial Reporting, Investment Company Act Release No. 28609 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)]. E:\FR\FM\18NOR2.SGM 18NOR2 81968 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations requirements following an 18 month compliance period, as opposed to 30 months for smaller entities that fell below the asset threshold.1248 As discussed above, we estimate that our proposed $1 billion assets threshold will provide an extended compliance period to more than 67% of the fund groups, but only 0.6% of all fund assets, and therefore believe that the $1 billion threshold will appropriately balance the need to provide smaller groups of investment companies with more time to prepare for the initial filing of reports on Form N–PORT, while still including the vast majority of fund assets in the initial compliance period.1249 mstockstill on DSK3G9T082PROD with RULES2 2. Form N–CEN, Rescission of Form N– SAR, and Amendments to the Exhibit Requirements of Form N–CSR We are adopting a compliance date of June 1, 2018 to comply with the new Form N–CEN reporting requirements. We expect that this compliance period, consistent with the 18 month compliance period that we proposed, will 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 Form N–CEN with the Commission. We are adopting the same compliance date for the related amendments to other rules and forms we are adopting today, including the rescission of Form N–SAR and related rules referencing Form N–SAR.1250 We also are adopting a compliance date of June 1, 2018 to comply with the modified reporting requirement for a registrant to file as an exhibit to Form N–CSR the letter reporting a change in independent registered public accountants. This exhibit was already required to be reported semi-annually on Form N–SAR, and as such, we do not expect that registrants will require significant amounts of time to modify systems or establish internal processes to prepare exhibit filings on Form N– CSR in accordance with our amendments. Unlike Form N–PORT, we are not providing a tiered compliance date based on asset size. We believe that it is less likely that smaller fund complexes will need additional time to comply with the requirements to file Form N–CEN because the requirements are similar to the current requirements 1248 See Simpson Thacher Comment Letter. supra footnote 1236. 1250 We similarly are rescinding Form N–SAR (referenced in 17 CFR 274.101) with a timing that is consistent with this adoption. 1249 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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 requiring all funds, regardless of size, to file reports on Form N–CEN with the same compliance period. Furthermore, unlike Form N–PORT, we are not keeping reports filed during a phase in period after the compliance date nonpublic. Much of the information that will be filed on Form N–CEN is currently already reported by funds on Form N–SAR, and thus funds should already have processes and procedures in place to reduce the risk of inadvertent errors. In addition, filings on Form N–CEN are not expected to be as technically complex nor present comparable challenges in terms of reporting and data validation as filings on Form N–PORT. However, as with Form N–PORT, we anticipate allowing funds to file test submissions on Form N–CEN on a voluntary basis for a period of time before the compliance date. Some commenters suggested that the compliance period be extended to the later of 30 months after the adoption of Form N–CEN, or 18 months after the effective date of amendments requiring funds to report liquidity information on Form N–CEN.1251 We decline to adopt these suggestions. As discussed above, much of the information that will be reported on Form N–CEN is currently already reported by funds on Form N– SAR, and was reported by funds pursuant to a six-month compliance period upon our adoption of Form N– SAR.1252 One commenter also estimated in the Form N–PORT context that implementing processes to report structured information in an XML format would take six months following publication of the final XML data structure.1253 We therefore continue to believe, based in part upon this comment and also our prior experience with implementation of reporting requirements for Form N–SAR, that 18 1251 See, e.g., Fidelity Comment Letter (suggesting a compliance date of 30 months after the adoption of Form N–CEN); MFS Comment Letter (same); CAI Comment Letter (same); IDC Comment Letter (same); Comment Letter of David W. Blass, General Counsel, Investment Company Institute (Jan. 13, 2016) (suggesting the later of 30 months after the adoption of Form N–CEN or 18 months after the adoption of amendments requiring funds to report liquidity information on Form N–CEN). 1252 See Form N–SAR; Temporary Suspension of Quarterly Reporting Obligations of Certain Registered Investment Companies Pending Receipt of Comments on Proposed Final Action, Investment Company Act Release No. 14299 (Jan. 4, 1985) [50 FR 1442 (Jan. 11, 1985)]. 1253 See SIFMA Comment Letter I (estimating how long it would take to implement processes to report structured information in an XML format for Form N–PORT). PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 months is an appropriate compliance period for Form N–CEN. 3. Regulation S–X, Statement of Additional Information, and Related Amendments As discussed above, our amendments to Regulation S–X are largely consistent with existing fund disclosure practices. As such, we do not expect that funds, intermediaries, or service providers will 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 adopting a compliance date for our amendments to Regulation S–X of August 1, 2017. This is consistent with our proposed compliance period of eight months. The same compliance date will apply to conforming amendments related to our amendments to Regulation S–X, including the related amendments to the Statement of Additional Information (and Form N–CSR for closed-end funds) we are adopting today. One commenter supported the proposed compliance date for the amendments to Regulation to S–X, although the commenter suggested that implementation be required for each fund with its next fiscal year end following the proposed compliance date.1254 However, the commenter’s rationale for a rolling compliance date was not that funds needed more time to comply, but rather that enhanced disclosure pursuant to the amendments to Regulation S–X should be initially provided over an entire fiscal year, as opposed to just a portion of the first fiscal year during which the amendments become effective. Many other commenters requested that the compliance date be extended, with four commenters suggesting a compliance period of 18 months after the effective date of the amendments, one commenter recommending 24 months, and another commenter recommending 36 months.1255 Commenters supported their requests 1254 See Wells Fargo Comment Letter. Fidelity Comment Letter (recommending a compliance date of 18 months after the effective date); Oppenheimer Comment Letter (same); State Street Comment Letter (same); MFS Comment Letter (same, although with implementation on a rolling basis based on the fund’s fiscal year end); SIFMA Comment Letter I (recommending the compliance date for the amendments to Regulation S–X be the same as SIFMA’s recommended compliance date for Form N–PORT, namely 24 months after the effective date or six months after publication of the final XML data structure for Form N–PORT); Invesco Comment Letter (recommending 36 months, after the effective date with implementation on a rolling basis based on the fund’s fiscal year end). 1255 See E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations for a longer compliance date by asserting that the information that will be reported pursuant to the amendments to Regulation S–X overlaps with the information that will be reported on Form N–PORT, and thus the compliance date for Regulation S–X should be identical to the compliance date for Form N–PORT.1256 We decline to adopt these suggestions. Although some of the information that will be reported pursuant to the amendments to Regulation S–X overlaps with the information that will be reported on Form N–PORT, many of the amendments to Regulation S–X are unrelated to what will be reported in Form N–PORT. More significantly, as discussed above, our amendments to Regulation S–X are generally consistent with existing disclosure practices of many funds. As such, we do not expect that funds, intermediaries, or service providers will require significant amounts of time to modify systems or establish internal processes to prepare financial statements in accordance with our final amendments to Regulation S–X. Additionally, some of the amendments we are adopting to Form N–CEN and the Statement of Additional Information (and Form N–CSR for closed-end funds) were originally proposed as part of our amendments to Regulation S–X, and we received no objections to our proposed timeframe for compliance for those portions of the amendments to Regulation S–X. Furthermore, the amendments to the Statement of Additional Information and Form N–CSR, like the amendments to Regulation S–X, do not entail the complications of having to develop and test an XML schema or EDGAR validation behaviors, as is the case for our reporting requirements regarding information that will be reported on Form N–PORT and Form N–CEN. mstockstill on DSK3G9T082PROD with RULES2 III. 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 adopted changes to the current reporting regime. Changes to the current reporting regime include new Form N–PORT, the rescission of Form N–Q, amendments to the certification and exhibit filing requirements for Form N–CSR, amendments to Regulation S–X, new Form N–CEN, and the rescission of 1256 See SIFMA Comment Letter I; State Street Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 Form N–SAR. The economic effects of the adopted changes are discussed below. The Commission is modernizing 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 amendments are designed 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 section II above, the Commission is adopting the following changes to its rules and forms: • We are requiring registered management investment companies and ETFs organized as UITs, other than money market funds and SBICs, to report monthly portfolio information in a structured data format on a new form, Form N–PORT. • We are rescinding Form N–Q. We are also lengthening 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 are revising Regulation S–X to require new, standardized enhanced disclosures regarding fund holdings in derivatives instruments; update the disclosures for other investments; and amend the rules regarding the general form and content of fund financial statements. • We are rescinding Form N–SAR and replacing it with new Form N–CEN, which will require the annual reporting of similar and additional census information in an updated, structured data format. • We are adopting amendments to Forms N–1A, N–3, and N–CSR (for closed-end funds) to require certain disclosures in fund Statements of Additional Information regarding securities lending activities. 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 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 have PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 81969 established industry practices for the disclosure of a fund’s schedule of investments and financial statements. Lastly, the baseline includes the current practice of some funds to voluntarily disclose additional information, and the requirement that actively managed ETFs, and many index ETFs, disclose their portfolios on a daily basis. 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 will be affected by the new rules, forms, and 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, thirdparty 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 of the following new rules, forms, and amendments: The introduction of Form N–PORT, the rescission of Form N–Q, the amendments to Form N–CSR, the amendments to Regulation S–X, the introduction of Form N–CEN, the rescission of Form N–SAR, and the amendments to multiple registration statement forms. We identify for each of the new rules, forms, and amendments 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 2015, having grown from about $5.8 trillion at the end of 1998.1257 In addition, approximately 93 million individuals own shares of registered investment companies, representing 55 million or 44% of U.S. households.1258 Among investment companies, we estimate that, as of December 2015, there were 3,113 active investment companies registered with the Commission, of which 1,642 were open-end funds, 750 were closedend funds (including 1 SBIC), and 721 were UITs (including 5 exchange-traded funds).1259 We further estimate that those registered investment companies included 17,052 funds or series thereof, of which 1,594 were exchange-traded funds (including eight organized as 1257 See supra footnote 4. id. 1259 Based on data obtained from registrants’ filings with the Commission on Form N–SAR. 1258 See E:\FR\FM\18NOR2.SGM 18NOR2 81970 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mutual funds. The following table summarizes the entities likely to be affected by the new forms, rescissions, and amendments. 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, the new rules, forms, and amendments will modernize the fund reporting regime and, among other effects, will result in an increased transparency of fund portfolios and investment practices. The increased transparency will 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. We believe that the increase in transparency will 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. We also believe that the increase in transparency will 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 of the new rules, forms, and amendments 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 depend upon a number of factors that we cannot estimate or quantify. Factors include 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 change in the availability of fund information to all investors, institutional and individual; 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 VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.012</GPH> mstockstill on DSK3G9T082PROD with RULES2 UITs), 5,188 were UITs, 750 were closed-end funds, 481 were money market funds, and 9,039 were other Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations describe where possible the direction of these effects. In the Proposing Release, we requested general comment on the feasible alternatives to the information we proposed to require funds to report that would minimize the reporting burdens on funds while maintaining the anticipated benefits of the reporting and disclosure, as well as 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.1260 In adopting today’s rules, forms, and amendments, we considered, among other things, such alternatives, utility, and costs. mstockstill on DSK3G9T082PROD with RULES2 B. Form N–PORT, Rescission of Form N– Q, and Amendments to Form N–CSR 1. Introduction and Economic Baseline Form N–PORT will require registered management investment companies and ETFs organized as UITs, other than money market funds and 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 will 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 will be filed in a structured data format using XML to allow for easier aggregation and manipulation of the data. As discussed above, we are also rescinding Form N– Q but requiring that funds attach their complete portfolio holdings to Form N– PORT for the first and third fiscal quarters in accordance with Regulation S–X. We are also amending 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.1261 As discussed above, we also are moving the management’s statement regarding a change in accountant, which originally was an exhibit filed on Form N–SAR and was proposed as an attachment to Form N–CEN, to an exhibit to Form N– CSR.1262 In addition, as discussed 1260 See Proposing Release, supra footnote 7, at nn. 160–161. 1261 Amended Item 11(b) of Form N–CSR; amended paragraph 4(d) of certification exhibit of Item 11(a)(2) of Form N–CSR. 1262 Item 12(a)(4) of Form N–CSR; see also supra section II.D.4.b. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 above, we are adopting amendments to require closed-end funds to report on Form N–CSR certain disclosures regarding securities lending activities.1263 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 semiannual basis,1264 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.1265 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 Commission; the Commission; and other current and future users of investment company portfolio investment information including investors, thirdparty information providers, and 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.1266 These funds are required to provide this information in reports on Form N–Q as of the end of the first and third fiscal 1263 See Item 12 of Form N–CSR; see also supra footnote 1181 and accompanying text and section II.F. 1264 Form N–PORT will also require information that is currently being reported on Form N–SAR such as information on fund flows, assets, and liabilities. The current requirement to report this information as part of Form N–SAR is also part of this baseline. The baseline also includes the current obligation of Form N–Q filers to make certifications regarding (1) the accuracy of the portfolio holdings information reported on that form, and (2) the fund’s disclosure controls and procedures and internal control over financial reporting. 1265 Additionally, many funds currently provide information concerning derivatives investments, similar to the requirements we are adopting in our amendments to Regulation S–X. See discussion supra section II.C.2. 1266 See General Instruction A to Form N–CSR; Item 6 of Form N–CSR; General Instruction A to Form N–Q; Quarterly Portfolio Holdings Adopting Release, supra footnote 421. PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 81971 quarters of each year 1267 and in reports on Form N–CSR as of the end of the second and fourth fiscal quarters of each year.1268 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).1269 These reports are generally required to be filed on the EDGAR system and are made publicly available upon receipt.1270 Reports on Form N– CSR may be filed up to 70 days after the end of the reporting period,1271 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.1272 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.1273 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. We received no comments that specifically addressed the baseline described in the Proposing Release. We believe that the economic effects from the introduction of new Form N–PORT will largely result from the disclosure of portfolio investment information in a structured data format, as well as the additional information that investment companies will report relative to current reporting practices. We also believe that the economic effects will depend on the extent to which the portfolios and investment activities of investment 1267 Item 1 of Form N–Q. 6 of Form N–CSR. 1269 Instruction to Item 6(a) of Form N–CSR; Item 1 of Form N–Q. 1270 See rule 101(a)(i) of Regulation S–T [17 CFR 232.101(a)(i)]. 1271 Form N–CSR must be filed within 10 days after the shareholder report is sent to shareholders, and the shareholder report must be sent within 60 days after the end of the reporting period. Rule 30b2–1(a); rule 30e–1(c). 1272 See rule 301 of Regulation S–T; EDGAR Filer Manual (Volume II) version 27 (June 2014), at 5–1. 1273 In so doing, reporting persons typically strip out incompatible metadata (i.e., syntax that is not part of the HTML or ASCII/SGML specification) that their business systems use to ascribe meaning to the stored data items and to represent the relationships among different data items. 1268 Item E:\FR\FM\18NOR2.SGM 18NOR2 81972 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 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, investors, and others to utilize the information. The current reporting requirements for investment companies, however, limit the ability of Commission staff to evaluate the potential economic effects. For example, the non-structured data format of reported portfolio investment information and the lack of standardized reporting requirements for certain types of portfolio investments all reduce the ability of Commission staff to aggregate information across the fund industry and to evaluate the economic effects of the regulatory changes. The new rules, forms, and amendments will 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, will provide more information about 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 2015, on average 76.5% of investment companies reported as permitted investment policies involving the writing or investing in options or futures, and on average 5.3% of investment companies reported engaging in each one of these policies during the report period.1274 In 1274 See Item 70 of Form N–SAR for a list of permitted investment policies, and if permitted, the investment policies engaged in during the reporting period. The percentages are calculated from the percentage of funds that report affirmatively to either of the two parts for Items 70.B though 70.I. There is little difference in the proportion of investment companies that reported as permitted the investment practices relating to Items 70.B through 70.I. The greatest proportion of funds reported engaging in writing or investing in stock index futures (14.0%) and engaging in writing or investing in interest rate futures (12.5%), and the smallest proportion of funds reported engaging in writing or investing in other commodity futures (1.6%) and engaging in writing or investing in options on stock index futures (0.7%). Aggregate condensed balance sheet information reported on Form N–SAR indicates that funds held $3.4 billion in options on equities and options on all futures (Item 74.G and Item 74.H) or 0.018% of net assets from the second half of 2015. Aggregate condensed balance sheet information reported on Form N–SAR from the second half of 2015 also indicates that funds had $54.1 billion in short sales (Item 74.R.(2)) and $3.8 billion in written options (Item 74.R.(3)), VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 addition, the total net assets of alternative funds from which more information would become available were as of year-end 2015 approximately $219 billion or 1.3% of the total net assets of the mutual fund market.1275 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 11.9% in 2013, 4.0% in 2014, and 6.1% in 2015.1276 Information from a White Paper prepared by staff in the Division of Economic and Risk Analysis also describes current fund use of derivatives.1277 For example, based on data from Morningstar, the number of funds that can be categorized as engaging in alternative investment strategies increased from 2010 to 2014 at an annual rate of 17%, whereas the total number of all funds increased at an average annual rate of 8%.1278 In addition, based on a random sample of funds drawn from Form N–CSR filings, 32% of funds held one or more derivatives, and the average aggregate exposure from derivatives, financial commitment transactions and other senior securities was 23% of net asset value. Evidence from the random sample also indicates that funds engaging in alternative investment strategies tended to use derivatives more often than other fund types, which the White Paper described collectively as ‘‘Traditional’’ mutual funds. 2. Benefits As discussed, Form N–PORT will 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 or 0.291% and 0.020% of net assets, respectively. The estimates are approximate. 1275 See supra footnote 39. These statistics were obtained from staff analysis of Morningstar Direct data, and are based on fund categories as defined by Morningstar. 1276 See id. 1277 See White Paper entitled ‘‘Use of Derivatives by Investment Companies,’’ which was prepared by staff in the Division of Economic and Risk Analysis and was placed in the comment file for the Use of Derivatives by Registered Investment Companies and Business Development Companies, Investment Company Release No. 31933 (Dec. 11, 2015) [80 FR 80883 (Dec. 28, 2015)]. Daniel Deli, et al., Use of Derivatives by Registered Investment Companies, Division of Economic and Risk Analysis (2015) (‘‘DERA White Paper’’), available at https:// www.sec.gov/dera/staff-papers/white-papers/ derivatives12-2015.pdf. 1278 In 2010, 591 of the 8,577 sample funds were defined as engaging in alternative investment strategies, and in 2014 1,125 of the 11,573 sample funds were defined as engaging in alternative investment strategies. PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 update to the structure of the information that reporting funds will disclose, and the additional information that reporting funds do not currently disclose, discussed in further detail below, will improve the ability of the Commission to understand, analyze, and monitor the fund industry. We believe that the information we receive on these reports will facilitate the oversight of reporting funds and will 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 funds make available monthly portfolio investment information to the Commission on Form N–PORT will improve the ability of the Commission to oversee reporting funds by increasing the timeliness of the information available, and by providing a larger number of data points. The expanded reporting also will increase the ability of Commission staff to identify trends in investment strategies and fund products as well as industry outliers.1279 As discussed above, the quarterly portfolio reports that the Commission currently receives on Forms N–Q and N–CSR can become stale due to changes in the holdings of portfolio securities or fluctuations in the values of the portfolio’s investments. Requiring monthly filings on Form N–PORT will increase the timeliness of the information the Commission receives from funds. More timely portfolio investment information will improve the ability of Commission staff to oversee the fund industry by monitoring industry trends, informing policy and rulemaking, identifying risks, and assisting Commission staff in examination and enforcement efforts. The ability of Commission staff to effectively use the information reported 1279 See, e.g., supra section II. Although likely not a significant effect, the increase in the frequency of portfolio investment disclosure to the Commission could also reduce the ability of investment companies to alter or ‘‘window-dress’’ portfolio investments in an attempt to disguise investment strategies and risk profiles. To the extent that managers may window-dress to affect public perception, managerial incentives for doing so would not change because the frequency of public disclosure of portfolio investment information would remain the same. See, e.g., Vikas Agarwal, Gerald D. Gay, and Leng Ling, Window Dressing in Mutual Funds, Rev. of Fin. Stud., Vol. 27(11), 3133– 3170 (2014). E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations in Form N–PORT depends on the ability of staff to compile and aggregate information into a single database that can then be used to conduct industrywide 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. Several commenters agreed that the structuring of the information will improve the ability of the Commission to compile and aggregate information across all reporting funds, and to analyze individual funds or a group of funds, and will increase the overall efficiency of staff to analyze the information.1280 For example, the ability to compare portfolio investment information across reporting funds or for a single fund across report dates will improve the ability of the Commission to identify funds for examination and to identify trends in the fund industry. The Commission is requiring that filers disclose information using the Commission’s XML schema. Based on the comments received and the Commission’s experience, the Commission believes that requiring the information to be disclosed in an XML format will facilitate enhanced search capabilities, and statistical and comparative analyses across filings. With the data structured in XML, the Commission and the public can immediately download the information directly into databases and analyze it using various software packages. This enhances both the Commission’s and the public’s abilities to conduct largescale analysis and immediate comparison across funds and date ranges. The usefulness of structured data depends on the care with which filers report the data. If filers were to report data that did not conform to the Commission’s XML schema, data quality would be diminished and would impair the Commission’s and the public’s ability to aggregate, compare, and analyze the data. As a result, the Commission’s XML schema also incorporates certain validations to help ensure consistent formatting among all filings, in other words, to help ensure data quality. Validations are restrictions placed on the formatting for each data element so that comparable data is presented comparably. However, these formatting validations are not designed to ensure the underlying accuracy of the data; they can only help ensure data 1280 See, e.g., ICI Comment Letter (‘‘Receiving this information in XML format will facilitate the Commission’s ability to efficiently analyze fund portfolio information on a regular basis.’’); Morningstar Comment Letter; but see Federated Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 quality. These validations cannot exist in the current reporting formats for Form N–CSR and Form N–Q. XML is an open standard 1281 that is maintained by an organization other than the Commission and undergoes constant review. As updates to XML or industry practice develop, the Commission’s XML schema will also be updated to reflect those developments, with the outdated version of the schema replaced in order to maintain data quality and consistency. As we discussed above in section II.A.3, we considered, as several commenters suggested, alternative formats to XML, such as XBRL.1282 While the XBRL format allows funds to capture the rich complexity of financial information presented in accordance with GAAP, we believe that XML is more appropriate for the reporting requirements that we are adopting. Form N–PORT, as well as Form N–CEN, as adopted, will contain a set of relatively simple characteristics of the fund’s portfolio- and position-level data, such as fund and class identifying information that is more suited for XML. While XBRL has more enhanced validation features, the simpler reporting elements on Form N–PORT and Form N–CEN do not require those enhanced features to ensure similar levels of formatting consistency. In light of the benefits of structured data, we acknowledge that Form N– PORT duplicates some information filed in other forms, while also requiring funds to report information that is not currently required to be reported to the Commission, including portfolio- and position-level risk metrics and additional information describing debt securities and derivatives, securities lending activities, repurchase and reverse repurchase agreements, the pricing of securities, and fund flows and returns. Requesting data in a structured format may promote additional efficiency among investment companies to the extent that the new, standardized reporting requirements facilitate more automated report assembly, validation, and review processes for the disclosure and transmission of filings. Furthermore, filing this information in an XML format will allow the Commission staff to more efficiently 1281 The term ‘‘open standard’’ is generally applied to technological specifications that are widely available to the public, royalty-free, at no cost. 1282 See, e.g., XBRL US Comment Letter; Deloitte Comment Letter; but see Morningstar Comment Letter (‘‘Extensible Business Reporting Language has had very limited success, and certain aspects of the standard are too lenient for regular data validation.’’). PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 81973 review and analyze data for industry trends, and to better understand the risks of a particular fund (in the context of the fund’s investment strategy), a group of funds, and the fund industry by being able to conduct large-scale analysis more easily, which will help in identifying outliers or trends that could warrant further investigation in a more immediate fashion.1283 The requirement to report portfolioand position-level risk metrics will provide Commission staff with a set of quantitative measurements that provide information about the risk exposures of a fund. The risk metrics will improve the ability of Commission staff to efficiently analyze information for all reporting funds based on exposure to certain risks, and to determine whether additional guidance or policy measures are appropriate to improve disclosures. We are requiring funds to report risk measures, rather than the raw inputs used to calculate risk measures, because the calculation of 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 will not require.1284 While the Commission would retain greater flexibility if funds were required to report substantially more detailed information regarding raw inputs on Form N–PORT,1285 it could be difficult for the Commission to efficiently calculate these same measures and funds would incur an 1283 See supra section II.A.2.c. See also, e.g., BlackRock Comment Letter (‘‘Importantly, the greater depth and frequency of information requested by the Commission will help the Commission better identify and monitor emerging risks associated with specific RICs or categories of RICs as well as asset management activities.’’); Wells Fargo Comment Letter (‘‘we believe that the enhanced disclosure requirements of the Proposals represent appropriate valuable information for the Commission to have in order to assess trends in risks, for example, across the mutual fund industry.’’); CFA Comment Letter (supporting transparency of derivatives holdings); Morningstar Comment Letter. See also ICI Comment Letter (‘‘Much of the additional information the SEC proposes to collect can enhance its ability to monitor and oversee the fund industry.’’). But see Federated Comment Letter (‘‘A majority of the Commission’s proposed amendments to Form N– 1A, N–PORT, and N–CEN would require a large effort from funds while offering data that is, at best, of little utility, and, at worst, misleading. Many of these deficiencies relate to flaws inherent in a security-level disclosure scheme.’’). 1284 One commenter stated that the Commission should not require that funds report risk sensitivity measures, and instead calculate the risk sensitivity measures using raw inputs (Vanguard Comment Letter). The commenter noted that the Commission would therefore be able to calculate the measures consistently and in doing so draw ‘‘apples-toapples’’ comparisons. 1285 See id. E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 81974 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations increase in reporting costs. We recognize that requiring funds to report these risk measures increases reporting burdens, but as discussed above, based on staff experience and outreach, we understand that most funds currently calculate risk measures for such securities and hence do not believe that the burden is significant. The requirement for investment companies to provide risk metrics at the position-level and at the portfolio-level will improve the ability of staff to efficiently identify the risk exposures of funds regardless of the types of investments held or that could be introduced to the marketplace. The portfolio-level measures of risk will 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. Also, staff could use the risk measures in combination to conduct additional analyses. For example, Commission staff can use the two measures of interest rate duration (i.e., DV01 and DV100) to generate a proxy for interest rate convexity. We have, however, made certain modifications to the proposed reporting requirements regarding the reporting of risk metrics in response to comments received. For example, as discussed in detail above, we are requiring the reporting of fewer key rates to reduce the reporting burden for funds, adopting a 1% de minimis threshold for reporting risk metrics for each currency to which the fund is exposed, and raising the threshold for fixed income allocation for risk reporting from 20% to 25% to align the reporting requirement with current disclosures required in the prospectus. To the extent that adopting a de minimis amount for reporting risk metrics for each currency will prevent the Commission, investors, and other users from seeing an exhaustive view of fund’s currency risk exposures, there could be a reduction in the informational benefit to the Commission, investors, and other users relative to the proposal. However, relative to the baseline, we believe the economic effects of the disclosure of currency risk metrics are substantially similar with or without the adoption of a de minimis. Similarly, there could be a reduction in the informational benefit to the Commission, investors, and other users relative to the proposal to the extent that certain funds that would have had to report risk metrics under the 20% threshold do not have to report them under the 25% threshold, although we again believe that such a change will not significantly impact the VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 benefits of this disclosure relative to the baseline because it is unlikely that funds that make investments in debt instruments as a significant part of their investment strategy have less than 25% of their NAV invested in such instruments. We believe, however, that such modifications are appropriate in light of the lower reporting burden for funds. Conversely, the Commission is adding a requirement to report DV100 in addition to DV01 to provide information about larger changes in interest rates, as well as information about nonparallel shifts in the yield curve. While funds will have an increased reporting cost to report DV100 in addition to DV01 relative to the proposal, as DV100 is a standard measure of interest rate sensitivity and a common measure of duration we do not believe the cost to funds relative to the baseline will change. Furthermore, we believe that this modification will provide the Commission with the ability to analyze data about larger shifts in the yield curve, as well as changes in the shape of the yield curve. Similarly, while funds will have a decreased reporting cost in light of our modification to require the reporting of fewer key rates, we do not believe that the decrease in information collected by the Commission will substantially affect our ability to analyze how debt portfolios will react to different interest rate changes and credit spreads along the Treasury curve, given that the rates at which funds will report these metrics are, in general, largely representative of bond funds’ overall exposures. Form N–PORT will require reporting 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 convertible debt securities and derivatives; and information describing the size of the position. This information will provide Commission staff the 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 will 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 PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 counterparties, the loss of principal of the reinvested collateral, and leverage creation through the reinvestment of collateral. Form N–PORT will also require additional identification information regarding the reporting fund, the issuers of the fund’s portfolio investments, and the investments themselves, including the reference instruments for convertible debt securities and derivatives investments. The adopting release differs from the proposal with respect to the treatment of reference assets that are custom baskets or nonpublic indexes of securities in that for those that represent more than 1%, but less than 5%, of the fund’s NAV, funds will be required to disclose the top 50 components of the basket and, in addition, those components that exceed 1% of the notional value of the index. For nonpublic indexes or custom baskets that represent greater than 5% of the fund’s NAV, all components will be required to be disclosed. For nonpublic custom baskets or indexes that represent less than 1% of the fund’s NAV, no disclosure is required. Although this modification will provide the Commission, investors, and other users with less than complete transparency into any such derivative investment that represents between 1% and 5% of a fund’s NAV, given that this modification will still allow the Commission to collect information on a large portion of the significant reference assets for these investments, we do not believe this change will significantly impact the benefits derived relative to those discussed in the proposal. The additional identification information will benefit the Commission by improving the ability of staff to link the information from Form N–PORT to information from other sources that identify market participants and investments using these same identifiers, such as Form N–CEN. The additional identification information will improve upon the current requirement for funds to provide just the issuer name, and as such will aid the Commission in identifying both the issuers of fund portfolio investments and the investments themselves. As a result, Commission staff will be better able 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 will also experience benefits from the E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations introduction of Form N–PORT.1286 While the frequency of the public disclosure of portfolio information will not change, we believe that the structured data format of this information will allow investors and other potential users to more efficiently analyze portfolio investment information. Investors and other potential users will also have disclosure of additional information that is currently not included in the schedule of investments reported on Form N–Q and Form N–CSR. The structure of the information, as well as the additional information, will increase the transparency of a fund’s investment strategies and improve the ability of investors and other potential users to more efficiently identify its risk exposures. Form N–PORT will 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 will be able to more efficiently identify funds that use derivatives and the extent to which they use derivatives as part of their investment strategies.1287 In general, we expect that institutional investors and other market participants will directly use the information from Form N–PORT more so than individual investors. For individual investors who choose not to access the data in an XML format, those investors can access similar information through the additional disclosure requirements in an unstructured format for investment companies, 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.1288 Investors, and in particular individual investors, could also indirectly benefit from the information in Form N–PORT to the extent that third-party information providers and other interested parties obtain, aggregate, provide, and report on the information. Investors could also indirectly benefit from the information in Form N–PORT to the extent that other entities, including investment mstockstill on DSK3G9T082PROD with RULES2 1286 See also Morningstar Comment Letter (stating that modern electronic reporting should apply to all registered investment companies, as investors use open-end funds, ETFs, closed-end funds, and UITs as ‘‘tools to build portfolios.’’). 1287 Form N–PORT will also eliminate the reporting gap between money market funds, which report portfolio investment information in an XML format on Form N–MFP, and funds engaging in similar investment strategies such as ultra-short bond funds, which will be required to file reports on Form N–PORT. 1288 See discussion supra section II.A.2.j. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 advisers and broker-dealers, utilize the information to help investors make more informed investment decisions. We received a number of comments supporting quarterly public disclosure of Form N–PORT, but requesting that certain information items be kept nonpublic.1289 In response to these comments, and in contrast to the proposing release, three items reported on Form N–PORT will be kept nonpublic: Delta, country of risk, and the explanatory notes related to delta and country of risk. Given that the Commission will still collect this information, we do not believe there will be a significant economic impact relative to the Proposing Release due to keeping these data items nonpublic, as the Commission is the primary user of these data elements. A discussion of the issue of public versus nonpublic data can be found in section II.A.4. One clarifying change that has been made from the proposing release in response to commenters is the addition of an instruction that funds may use their own methodologies in General Instruction G. General Instruction G now provides that funds may respond to Form N–PORT using their own internal methodologies and the conventions of their service providers, provided the information is consistent with information that they report internally and to current and prospective investors, and the Fund’s methodologies and conventions are consistently applied and the Fund’s responses are consistent with any instructions or other guidance relating to the Form. To the extent this instruction decreases the comparability of the data collected, there could be some reduction in benefit relative to the proposal, although funds will likely benefit from the decreased reporting burden associated with explicitly allowing them to rely on their existing practices. The portfolio investment information that investment companies report to the Commission is informative in describing the investment strategy funds implement,1290 and investors could use 1289 See, e.g., ICI Comment Letter (portfolio risk metrics, delta, liquidity determinations, country of risk and derivatives financing rates should be kept non-public); BlackRock Comment Letter (risk metrics); Invesco Comment Letter (portfolio level risk metrics, derivatives information, illiquidity determinations, and securities lending information should remain non-public); Oppenheimer Comment Letter (risk metrics, illiquidity determinations, country of risk determinations, derivatives payment terms (including financing rates), and securities lending fees and revenue sharing splits should be kept non-public). 1290 Academic research indicates that the portfolio investment information funds provide to the Commission, such as on Form N–CSR and Form N–Q, has value even though the information is PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 81975 the information to select funds based on security selection, industry focus, level of diversification, and the use of leverage and derivatives.1291 We believe that an increase in the ability of investors to differentiate investment companies could 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, we believe that the introduction of Form N–PORT could also 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 each fund will 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. 3. Costs Form N–PORT will require registered management investment companies and ETFs organized as UITs, other than money market funds and SBICs, to incur one-time and ongoing costs to comply with the new filing requirements. Funds will 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 fund Web sites, including monthly portfolio investments, and additional information in fund financial statements, including additional information regarding derivatives similar to the requirements that we are adopting today, will bear publicly available only after a time-lag. See infra footnotes 1307–1314. Just as investors can use the information to front-run, predatory trade, or copycat/reverse engineer of the trading strategy of a reporting fund, investors of funds can also use the information to identify funds for investment. 1291 Empirical research shows that fund flows are sensitive to many factors including past fund performance and investor search costs. See, e.g., Erik R. Sirri & Peter Tufano, Costly Search and Mutual Fund Flows, 53 J. of Fin., 1589 (1998); Zoran ´ Ivkovic & Scott Weisbenner, Individual Investor Mutual Fund Flows, 92 J. of Fin. Econ., 223 (2009); George D. Cashman, Convenience in the Mutual Fund Industry, 18 J. of Corp. Fin., 1326 (2012). E:\FR\FM\18NOR2.SGM 18NOR2 81976 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 fewer costs than those funds that do not.1292 The Commission is aware that even funds that do so report will nonetheless likely incur additional costs on reports on Form N–PORT than on voluntary submissions, such as validation and signoff processes, given that reports on Form N–PORT will be a required regulatory filing and will require different data than the funds are currently providing to third-party information providers. However, over time, the filings could become highly automated and could involve fewer costs.1293 Funds will incur costs to file reports on Form N–PORT in a structured data format. Based on staff experience with other XML filings, however, these costs are expected to be minimal given the technology that will be used to structure the data.1294 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 should be able to accommodate XML data without significant costs, and large-scale changes will likely not be necessary to output structured data files. In an effort to reduce some of the potential burdens on smaller entities, we are extending 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.1295 The additional time could increase the ability of these investment 1292 Monthly portfolio investment information is available for approximately 42% of funds covered by The CRSP Survivor-Bias-Free US Mutual Fund Database as of the fourth quarter of 2015. The database covers more than 10,000 open-ended mutual funds during this time period. This estimate suggests that a large proportion of funds already report monthly portfolio investment information, although it is unclear whether monthly information is reported following each month or if information relating to several months is periodically reported at a later date. Calculated based on data from The CRSP Survivor-Bias-Free US Mutual Fund Database © 2015 Center for Research in Security Prices (CRSP®), The University of Chicago Booth School of Business. One commenter also cited the proportion of funds that are currently reporting monthly portfolio investment information, 6,500 of 12,000 portfolios, as well as the proportion of funds that report portfolio investment monthly information within 45 days, 6,200 of 6,500. Morningstar Comment Letter. 1293 Costs related to such processes are included in the estimate below of the paperwork costs related to Form N–PORT, discussed below. 1294 See, e.g., Form PF Adopting Release, supra footnote 80, at text following n. 357 (discussing the costs to advisers to private funds of filing Form PF in XML format); Money Market Fund Reform 2010 Release, supra footnote 447, at nn. 341–344 and accompanying text (discussing the costs to money market funds of filing reports on Form N–MFP in XML format). 1295 See supra section II.H.1. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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 will also require the disclosure of certain information that is not currently required by the Commission. To the extent that the new form will require information to be reported that is not currently contained in fund accounting or financial reporting systems, funds will bear onetime costs to update systems to adhere to the new filing requirements. The onetime costs will depend on the extent to which investment companies currently report the information required to be disclosed. The one-time costs will also depend on whether and to what extent an investment company would need to implement new systems and to integrate information maintained in separate internal systems or by third parties to comply with the new requirements. For example, based on staff outreach to funds, we believe that funds will 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 currently 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. In some instances, such as in the case of increased disclosures regarding derivatives investments and information concerning the pricing of investments, the Commission is requiring parallel disclosures in the fund’s schedule of investments prepared pursuant to Regulation S–X; accordingly, we expect funds will 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 will be disclosed on Form N–PORT only. The Commission is sensitive to the costs that funds will incur to prepare, review, and file reports on Form N– PORT. Relative to the proposal, the Commission is making modifications to these final rules that should reduce the burden on investment companies to file reports on Form N–PORT. In particular, and in response to commenters,1296 we have raised the threshold for requiring reporting of portfolio level risk metrics 1296 See, e.g., Oppenheimer Comment Letter; MFS Comment Letter; Wells Fargo Comment Letter. PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 and are providing a de minimis for requiring reporting of risk metrics for currency exposures. We are also modifying the requirements with respect to reference assets that are custom baskets or nonpublic indexes of securities so that for such investments that constitute more than 1%, but less than 5% of the fund’s NAV, funds will be required to report only the top 50 components of the basket and, in addition, those components that represent more than 1% of the notional value of the index. We believe this will result in a decreased burden for filers relative to the proposal. In addition, and as requested by commenters, funds will report portfolio information on Form N– PORT on the same basis they use in NAV calculations under rule 2a–4 (generally a T+1 basis), which will alleviate the need of the majority of funds to alter reporting systems to report on a T+0 basis.1297 Although we did not specify the appropriate basis for reporting in the proposing release, commenters suggested that reporting on the same basis used in NAV calculations (generally a T+1 basis) was preferable to T+0, and we are sensitive to their concerns. Finally, we are adopting a new General Instruction G that clarifies that in reporting information on Form N–PORT, the fund may respond using its own internal methodologies and the conventions of its service providers, provided the information is consistent with information that they report internally and to current and prospective investors, and the fund’s methodologies and conventions are consistent with any instructions or other guidance relating to the Form. We believe that this alteration eases the reporting burden on funds by allowing them to rely on their existing practices and could result in a cost savings for filers relative to the proposal as it makes clear that they do not have to alter systems or methodology for reporting information items on Form N–PORT. To the extent possible, we have attempted to quantify these costs. Based on updated industry statistics, we estimate that 11,382 funds will file Form N–PORT.1298 As discussed below, we estimate that these funds will incur certain costs associated with preparing, reviewing, and filing reports on Form N–PORT.1299 Assuming that 35% of 1297 Fidelity Comment Letter (requesting that funds be permitted to report on a T+1 basis); MFS Comment Letter (same); Pioneer Comment (same); Invesco Comment Letter (same). 1298 See infra footnote 1495 (explaining calculation of 11,382 funds). 1299 See infra section V.A.1. Commenters questioned the estimates in the proposal relating to the paperwork costs associated with preparing, E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 funds (3,984 funds) will choose to license a software solution to file reports on Form N–PORT, we estimate costs to funds choosing this option of $56,682 per fund for the first year 1300 with annual ongoing costs of $47,465 per fund.1301 We further assume that 65% of funds (7,398 funds) will 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 costs to funds choosing this option of $55,492 per fund for the first year 1302 with annual ongoing costs of $39,214 per fund.1303 In total, we estimate that funds will incur initial costs of $636,350,904 and ongoing annual costs of $479,205,732.1304 reviewing, and filing reports on Form N–PORT. See Invesco Comment Letter; Simpson Thacher Comment Letter. These comments are discussed infra section IV.A.1. 1300 See infra footnotes 1473–1476, 1486, 1494 and accompanying text. This estimate is based upon the following calculations: $56,682 = $4,805 in external costs + $51,876.50 in internal costs ($51,876.50 = (15 hours × $308/hour for a senior programmer) + (38.5 hours × $317/hour for a senior database administrator) + (30 hours × $271/hour for a financial reporting manager) + (30 hours × $201/ hour for a senior accountant) + (30 hours × $160/ hour for an intermediate accountant) + (30 hours × $306/hour for a senior portfolio manager) + (24 hours × $288/hour for a compliance manager)). The hourly wage figures in this and subsequent footnotes are from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. 1301 See infra footnotes 1477, 1486 and accompanying text. This estimate is based upon the following calculations: $47,465 = $4,805 in external costs + $42,660 in internal costs ($42,660 = (30 hours × $271/hour for a financial reporting manager) + (30 hours × $201/hour for a senior accountant) + (30 hours × $160/hour for an intermediate accountant) + (30 hours × $306/hour for a senior portfolio manager) + (24 hours × $288/ hour for a compliance manager) + (24 hours × $317/ hour for a senior database administrator)). 1302 See infra footnotes 1480–1482, 1487, 1494 and accompanying text. This estimate is based upon the following calculations: $55,492 = $11,440 in external costs + $44,051.50 in internal costs ($44,051.50 = (30 hours × $308/hour for a senior programmer) + (46 hours × $317/hour for a senior database administrator) + (16.5 hours × $271/hour for a financial reporting manager) + (16.5 hours × $201/hour for a senior accountant) + (16.5 hours × $160/hour for an intermediate accountant) + (16.5 hours × $306/hour for a senior portfolio manager) + (16.5 hours × $288/hour for a compliance manager)). 1303 See infra footnotes 1483, 1487 and accompanying text. This estimate is based upon the following calculations: $39,214 = $11,440 in external costs + $27,774 in internal costs ($27,774 = (18 hours × $271/hour for a financial reporting manager) + (18 hours × $201/hour for a senior accountant) + (18 hours × $160/hour for an intermediate accountant) + (18 hours × $306/hour for a senior portfolio manager) + (18 hours × $288/ hour for a compliance manager) + (18 hours × $317/ hour for a senior database administrator)). 1304 These estimates are based upon the following calculations: $636,350,904 = (3,984 funds × $56,682 VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 Although there will 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.1305 Investors that trade ahead of funds could reduce the profitability of funds by increasing the prices at which funds purchase securities and by decreasing the prices at which funds sell securities. These activities can reduce the returns to shareholders who invest in actively managed funds, making actively managed funds less attractive investment options.1306 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,1307 or create opportunities for other market participants to engage in predatory trading that could further hinder fund ability to unwind positions.1308 For example, Form N–PORT will result in the disclosure of additional information, such as pertaining to derivatives and securities lending activities, which could more clearly reveal the per fund) + (7,398 funds × $55,492 per fund). $479,205,732 = (3,984 funds × $47,465 per fund) + (7,398 funds × $39,214 per fund). 1305 One commenter questioned the potential impact of monthly public disclosure of Form N– PORT on the ability of other investors to engage in predatory trading or copycatting activities citing to the large proportion of funds that currently report monthly portfolio investment information (Morningstar Comment Letter). Although a large percentage of funds report monthly portfolio investment information, a large percentage of funds currently do not. See supra footnote 1292. The incentives of funds to report portfolio investment information on a more frequent basis is dependent on many factors including their perception of the impact of more frequent public disclosure on future returns. Other commenters expressed concern that the increase in the amount of publicly available information and the greater ability to analyze the information as a result of its structure would increase front-running, predatory trading, and copycatting/reverse engineering of trading strategies by other investors and suggested that reports filed on Form N–PORT be made non-public (Schwab Comment Letter; T. Rowe Price Comment Letter). Another commenter recommended the quarterly reporting of monthly information to reduce these concerns (Dodge & Cox Comment Letter). 1306 See, e.g., Potential Effects of More Frequent Disclosure, supra footnote 490. 1307 See, e.g., Joshua Coval & Erik Stafford, Asset Fire Sales (and Purchases) in Equity Markets, 86 J. of Fin. Econ., 479 (2007). 1308 See, e.g., Markus K. Brunnermeier & Lasse Heje Pedersen, Predatory Trading, 60 J. of Fin. 1825 (2005). PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 81977 investment strategy of reporting funds and their risk exposures.1309 We note, however, that much, though not all, of the information that Form N–PORT requires is already reported by funds on Form N–CSR and Form N–Q.1310 The structured data format of portfolio investments disclosure could improve the ability of other investors to obtain and aggregate the data, and identify specific funds to front-run or trade in a predatory manner. These activities could reduce the profitability from developing new investment strategies, and therefore could reduce innovation and adversely impact competition in the fund industry. A trading strategy that follows the publicly reported holdings of actively managed funds can also earn similar if not higher after expense returns.1311 An implication of this observation 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 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.1312 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 1309 See, e.g., Simpson Thacher Comment Letter (‘‘We further note that public disclosure of detailed information about each derivatives position will provide competitors of funds significantly enhances ability to reverse-engineer strategies.’’); Pioneer Comment Letter. 1310 See supra footnote 27 and accompanying text. 1311 See, e.g., Mary Margaret Frank, et al., Copycat Funds: Information Disclosure Regulation and the Returns to Active Management in the Mutual Fund Industry, 47 J. Law and Econ. 515 (2004). 1312 See, e.g., Vikas Agarwal, et al., Mandatory Portfolio Disclosure, Stock Liquidity, and Mutual Fund Performance, 70 J. of Fin. Econ. 2733 (Dec. 2015) (‘‘Agarwal et al.’’), available at https:// onlinelibrary.wiley.com/doi/10.1111/jofi.12245/pdf; Marno Verbeek & Yu Wang, Better than the Original? The Relative Success of Copycat Funds, 37 J. of Bank. & Fin., 3454 (2013) (‘‘Verbeek & Wang’’). E:\FR\FM\18NOR2.SGM 18NOR2 81978 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations of information that could have been acted upon by other investors. For example, studies suggest that the ability of copycat funds to outperform actively managed funds increased after the introduction of Form N–Q,1313 and additional studies suggest 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.1314 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 will not increase the frequency of public disclosure, Form N–PORT will increase the amount of portfolio investment information available. In addition, Form N–PORT, unlike Form N–Q, will also increase the accessibility of the information as a result of its structured data format. By maintaining the status quo with respect to the frequency and timing of the disclosure of publicly available portfolio information, we aim to mitigate added costs while allowing the Commission, the fund industry, and the marketplace to assess the impact of the structured, more detailed data reported on Form N–PORT, and the extent to which these changes might affect the likelihood of predatory trading. The additional information and the structure of the information that is required under Form N–PORT, however, could 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 frontrun, predatory trade, and copycat/ reverse engineer trading strategies, and in particular those funds that would have more additional information disclosed, such as funds that use derivatives as part of their investment strategies.1315 We believe, however, that even though the reported information will be more easily and efficiently accessed and aggregated given the nature of structured data, the contribution of structured data to frontrunning, predatory trading, and reverse1313 See Verbeek & Wang, supra footnote 1312. Agarwal et al., supra footnote 1312. Low information stocks include stocks with smaller market capitalization, less liquidity, and less analyst coverage. The authors also observed that the liquidity of stocks with higher fund ownership increased following the introduction of Form N–Q. Although the increase in liquidity will benefit investors by reducing trading costs, this benefit stems as a result of the costly disclosure of potential investment opportunities. 1315 See supra footnote 1314 and accompanying text. mstockstill on DSK3G9T082PROD with RULES2 1314 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 engineering will be minimal compared to the baseline given that funds currently have a quarterly public reporting frequency with a 60-day reporting delay. 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 will require the disclosure of information that is currently nonpublic and could result in additional or other costs to funds and to market participants. For example, we proposed that Form N–PORT would require a fund to report the identities and weights of all of the individual components in custom baskets or indexes comprising the reference instruments underlying the fund’s derivative investments, as well as each component that represents more than one percent of the reference asset based on the notional value of the derivatives, unless the reference instrument is an index or custom basket 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.1316 Commenters informed us that index providers assert intellectual property rights to many indexes or custom baskets used as reference instruments in derivative investments to index providers, and are subject to licensing agreements between the index provider and the fund.1317 As further noted by commenters, we acknowledge that disclosing the components of a nonpublic index or custom basket could result in costs to both the index provider, whose indexing strategy could be imitated, and the fund, whose investments could be front-run.1318 Moreover, as stated by commenters, disclosing the underlying components of such an index or custom basket could subject the fund to onetime costs associated with renegotiating licensing agreements and the ongoing payment of fees in order to obtain the rights to disclose the components of the 1316 See supra footnote 355 and accompanying text. 1317 See MSCI Comment Letter; SIFMA Comment Letter I; ICI Comment Letter. 1318 See, e.g., SIFMA Comment Letter I; see also Antti Petajisto, The Index Premium and its Hidden Cost for Index Funds, 18 J. of Empirical Fin. 271 (2011). Petajisto analysis suggests that mechanically induced demand changes to demand, such as index fund rebalancing, can result in price effects. If predictable, then other investors could take advantage of the changes to the proprietary indexes by front-running future trades. PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 index or custom basket.1319 Additionally, the increased transparency in nonpublic indexes and custom baskets could ultimately decrease the incentives of index providers to license the use of such indexes or custom baskets to funds as well as fund demand for securities products that incorporate these indexes. We are unable to quantify the extent to which these reporting requirements could affect the costs associated with licensing agreements, fees, and incentives. Although our determination to keep certain items nonpublic was based on factors other than competitive concerns,1320 by keeping delta and country of risk nonpublic relative to the proposal, as recommended by commenters, potential costs of disclosing previously nonpublic information may have been mitigated as well. We recognize that Form N–PORT, as well as the amendments to regulation S–X, will 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.1321 As asserted by commenters, 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 would be known to other funds negotiating the terms of such contracts.1322 There is a possibility, however, that counterparties may choose not to transact with funds as a consequence of this disclosure, in which funds would have fewer potential counterparties to work with and the fees paid by funds would likely rise. Form N–PORT also requires funds to disclose the variable financing rates for swaps that pay or receive financing payments.1323 Some commenters noted that variable financing rates for swap contracts are commercial terms of a deal that are negotiated between the fund and the counterparty to the swap.1324 Disclosure of favorable variable 1319 See ICI Comment Letter. The Commission does not have information available to provide a reliable estimate of the increased costs of such licensing agreements because funds are currently not required to disclose the agreements or the components of the index or custom basket. 1320 See generally supra section II.A. 1321 See, e.g., MFS Comment Letter; Invesco Comment Letter; ICI Comment Letter. 1322 See, e.g., MFS Comment Letter; Invesco Comment Letter. 1323 See Item C.11.f.i. of Form N–PORT. 1324 See, e.g., MFS Comment Letter; Invesco Comment Letter; and ICI Comment Letter (public benefit of disclosure does not outweigh potential competitive harm). E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 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. However, the increased transparency could increase the competition among swap and securitybased swap dealers to offer favorable fees and financing terms thereby decreasing the fees paid by funds. Counterparties could also choose not to transact with funds as a consequence of this disclosure, in which case competition for counterparties would increase and the fees paid by funds would rise. Finally, some commenters noted that reporting of distressed debt issued by private companies could affect the private company’s relationship with the fund. For example, one commenter argued that the public disclosure of default, arrears, or deferred coupon payments raises competitive concerns when a debt security is issued by a borrower that is a private company, as private borrowers may avoid registered funds in order to limit public disclosure if the company becomes distressed.1325 The commenter noted that public disclosure that a borrower is or may be financially distressed could increase prepayment risk and be disruptive to the fund’s or adviser’s relationship with the borrower.1326 Moreover, this disclosure could also harm private issuers by disclosing their financial distress to vendors and key employees and customers.1327 While we recognize that the disclosure of a private issuer in distress could result in costs for the issuer in the forms discussed above (e.g. a potentially negative impact on existing outside relationships or a decrease in prospective future borrowers), we believe that it is important that Commission staff have access to information relating to fund investments that are in default or arrears in order to monitor individual fund and industry risk. Moreover, funds investors will benefit from the transparency into the financial health of the fund’s investments which will allow them to make more fully informed decisions regarding their investment. Moreover, default or arrears relating to a fund’s investments in private issuer debt are already publicly available on a fund’s quarterly financial statements, further mitigating any potential new costs to the fund or its private counterparties.1328 1325 See Simpson Thacher Comment Letter. id. 1327 See id. 1328 See rule 12–12, n. 5 of Regulation S–X. 1326 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 As discussed, we expect that institutional investors and other market participants will directly use the information from Form N–PORT more so than individual investors as a result of the format and associated readability.1329 To the extent that thirdparty information providers obtain and present the information in a format that individual investors could understand, then individual investors will also benefit from the information that funds report on Form N–PORT. We recognize that some commenters were concerned that individual investors may misinterpret the portfolio investment information that funds report on Form N–PORT, possibly including portfolio and position level risk metrics, country of risk and portfolio return information. As discussed above, we have determined to keep position-level reporting of delta and of country of risk nonpublic.1330 Regarding the other information, however, while there is some possibility of misinterpretation, we believe investors could benefit from the information and, accordingly determined that the disclosure of such information is appropriate and in the public’s interest. For funds that invest in debt instruments or derivatives we are modifying our requirements from the proposing release in several ways that may affect the costs borne by affected filers. For example, as discussed in detail above, we are requiring the reporting of fewer key rates in order to reduce the reporting burden for funds, adding de minimis for reporting such metrics for certain currencies, and raising the threshold for fixed income allocation for risk reporting from 20% to 25% to align the reporting requirement with current disclosures required in the prospectus, which could reduce the number of funds that must report such metrics. We are also requiring filers to report DV100 in addition to DV01, which will result in an additional reporting cost relative to the proposal; however, we believe that the extent of such reporting costs will be mitigated 1329 As discussed in section I.B.1., while we do not anticipate that many individual investors will analyze data using Form N–PORT, we believe that individual investors will benefit indirectly from the information collected on reports on Form N PORT, through enhanced Commission monitoring and oversight of the fund industry and through analyses prepared by third-party service providers and other parties, such as industry observers and academics. 1330 See, e.g., IDC Comment Letter (warning of possible investor confusion from public disclosure of risk metrics); SIFMA Comment Letter I (same); Invesco Comment Letter (same); Schwab Comment Letter (same); ICI Comment Letter (same); CRMC Comment Letter (warning of possible investor confusion from public disclosure of portfolio return information); SIFMA Comment Letter I (same). PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 81979 because DV100 is among the most common measures of interest rate sensitivity and that it will not be costly to report. Similarly, we are adding the requirement to report net realized gain (or losses) and net change in unrealized appreciation (or depreciation) attributable to derivatives by derivative instrument, in addition to by asset category as proposed, which will add an incremental cost relative to the proposal; however, as discussed above, we understand from commenters that funds already keep this information by derivative instrument type, which should mitigate the incremental increase in cost relative to the proposal.1331 As discussed above, although Form N–Q would be rescinded, 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 to its reports on Form N–PORT for those reporting periods. The schedules attached to Form N–PORT would be largely identical to the information currently reported on Form N–Q to ensure that such information continues to be presented using the form and content which investors are accustomed to viewing in reports on Form N–Q, and we have modified this requirement from the Proposing Release to allow funds 60 days from the end of the reporting period to file this attachment, as opposed to 30 days as proposed. This should lower the burden of preparing such attachments relative to the proposal, without any change in benefit, as the attachment is intended for investors and quarter-end Form N– PORT filings are made public 60 days after the end of the reporting period. Rescission of Form N–Q would eliminate certifications of the accuracy of the portfolio schedules reported for the first and third fiscal quarters. Rescission would also result in funds certifying their disclosure controls and procedures and internal control over financial reporting semi-annually (at the end of the second and fourth quarters) 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 1331 See E:\FR\FM\18NOR2.SGM supra section II.A.2.e. 18NOR2 81980 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations procedures and internal control over financial reporting. 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. Lastly, registrants also will be required to file the management’s statement regarding a change in independent public accountant as an exhibit to reports on Form N–CSR. This exhibit filing requirement originated in Form N–SAR. Commission staff believes that moving this reporting requirement from Form N–SAR to Form N–CSR does not have new economic implications from the proposal. We have, however, attributed an annual burden of an additional one-tenth of an hour per registrant 1332 and approximately an additional $32.40 per registrant 1333 in reporting paperwork costs to Form N– CSR as a result of the modification. 4. Alternatives The Commission has explored other ways to modernize and improve the utility and the quality of the portfolio investment information that funds provide to the Commission and to investors.1334 Commission staff examined how portfolio investment 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. We have considered many alternatives to the individual elements contained in this release, and those alternatives are discussed above in the sections pertinent to the major components of this rulemaking.1335 Alternatives to the filing of Form N– PORT and the disclosure of portfolio investment information relate to the 1332 See infra footnote1612 and accompanying mstockstill on DSK3G9T082PROD with RULES2 text. 1333 See infra footnote 1609 and accompanying text. 1334 We discuss other alternatives to the adopted changes to the current regulatory regime in section III.F, below. Other alternatives include the information that funds will report on Form N– PORT relative to the information that funds will report on Form N–CEN, and alternative formats for structuring the data. 1335 See generally supra section II. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 timing and frequency of the reports, the public disclosure of the information, and the information that Form N–PORT would request. Funds will file reports on Form N– PORT no later than 30 days after the close of each month. The monthly reporting and the 30-day reporting lag will increase the timeliness of the information and improve the ability of the Commission to oversee investment companies. Alternatives include extending the filing period from thirty days, as recommended by many commenters, or shortening the filing period, which no commenters specifically recommended,1336 and to require the filing of monthly portfolio investment information at a quarterly frequency, as recommended by another commenter.1337 While a shorter filing period would provide more timely information to the Commission, it would also increase the burden on funds that need time to collect, verify, and report the required information to the Commission. Conversely, a longer filing period or a decrease in the frequency in which funds provide monthly information would give funds more time to report the information and may decrease the potential costs from front-running, predatory trading, and copycatting/reverse engineering of trading strategies by other investors,1338 but may also decrease the ability of the Commission to oversee investment companies and to identify risks a fund is facing, particularly during times of market stress, as the information is more likely to be stale or outdated. As discussed above in section II.A.3, we believe that the monthly reporting of Form N–PORT with a 30-day filing period appropriately balances the staff’s need for timely information against the appropriate amount of time for funds to 1336 See, e.g., State Street Comment Letter (supporting a 30-day reporting lag, but requesting an additional 15 days for the first year of reporting); Morningstar Comment Letter (supporting a 30- or 45-day reporting lag); Vanguard Comment Letter (supporting a 45-day reporting lag); CRMC Comment Letter (supporting a 60-day reporting lag); Dechert Comment Letter (generally supporting a longer reporting period, or alternatively a longer compliance period to enable the systems necessary to produce accurate information to be developed and implemented). 1337 See, e,g., Dodge & Cox Comment Letter (supporting quarterly filings of monthly data). 1338 See, e.g., Dodge & Cox Comment Letter (advocating for quarterly filings of monthly data due, in part, to concerns regarding potential data breaches regarding monthly portfolio data); Morningstar Comment Letter (supporting public disclosure of portfolio investment information at the monthly frequency, citing to the large number of funds already reporting monthly portfolio investment information without significant delay as evidence of a lack of industry concern relating to front-running or copycatting). PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 collect, verify, and report information to the Commission. As discussed above in section II.A.2.a and in response to comments received, the final amendments now include an instruction that funds report portfolio information on Form N–PORT on the same basis used in calculating NAV under rule 2a–4 (generally a T+1 basis). Alternatives include requiring all funds to file reports on Form N–PORT on a T+0 basis or, providing the reporting fund the explicit option to file reports on Form N–PORT on either a T+0 basis or a T+1 basis, as recommended by a commenter.1339 Although requiring funds to file reports on Form N–PORT on a T+0 basis would be consistent with the current filing requirements for Form N–CSR and Form N–Q and thus would result in information that is reported on a more consistent basis across reports, the shorter time to file Form N–PORT relative to Form N–CSR and Form N–Q could require funds to alter reporting systems and result in additional filing costs, as pointed out by several commenters.1340 In addition, although providing funds the option to report on either a T+0 or a T+1 basis would eliminate the potential costs for all funds to alter systems to report on either a T+0 or a T+1 basis, providing funds the option to report on either a T+0 or a T+1 basis would result in information that is less comparable between funds. Funds will have 18 to 30 months after the effective date to comply with the new reporting requirements for Form N– PORT. The compliance period varies with fund size, with smaller fund entities having an additional 12 months to comply with the new reporting requirements. An alternative would be to not allow for tiered compliance and require all investment companies to begin filing reports on Form N–PORT within 18 months. Other alternatives would be to extend the compliance period for all investment companies, as recommended by many commenters.1341 As discussed above, we believe it is appropriate to tier the compliance period to provide the smaller fund complexes more time to make the system and internal process changes necessary to prepare reports on Form N– PORT. We also continue to believe that 18 months would provide an adequate period of time for larger fund entities, 1339 SIFMA Comment Letter II. e.g., Fidelity Comment Letter; Pioneer Comment Letter; and Invesco Comment Letter. 1341 See, e.g., IDC Comment Letter; Dreyfus Comment Letter; Fidelity Comment Letter; Oppenheimer Comment Letter; Vanguard Comment Letter; MFS Comment Letter; Mutual Fund Directors Forum Comment Letter; ICI Comment Letter; and SIFMA Comment Letter I. 1340 See, E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations intermediaries, and other service providers to update systems to conduct the requisite operational changes to their systems and to establish internal processes to prepare, validate, and file reports on Form N–PORT with the Commission. Nonetheless, as discussed above, we intend to keep the first six months of filings reported on Form N– PORT after the compliance date nonpublic, to allow funds and the Commission to refine the technical specifications and data validation processes.1342 Another alternative for tiered compliance would be to set the threshold at a level different than $1 billion. A higher threshold, such as $20 billion, as recommended by one commenter,1343 would increase the number of entities that could benefit from the additional time to update systems to adhere to the additional filing requirements, but would also decrease the amount of portfolio investment information that would be available to the Commission, investors, and other interested parties in a structured data format. A lower threshold, on the other hand, would have the opposite effects. As discussed above, the Commission believes that a $1 billion threshold for tiered compliance will address the need for structured portfolio investment information while providing smaller entities in most need of additional time a better opportunity to update systems. The information that funds report on Form N–PORT for the last month of each fiscal quarter will be made publicly available (with the exception of delta, country of risk, and associated explanatory notes) 60 days after monthend (thirty days after the filing deadline). Additional alternatives include making more of the portfolio and other information reported on the form either nonpublic or public, including making all or none of the information reported on Form N–PORT each month publicly available, as discussed above in section II.A.3.1344 In response to comments received we have removed delta, country of risk, and the associated explanatory notes from the public reporting requirements, but we believe that making more of the portfolio and other information reported on Form N–PORT nonpublic would reduce the amount of information investors have access to when making investment decisions. However, as 1342 See supra section II.H.1. Thacher Comment Letter. 1344 Commenters had mixed views on the public disclosure of N–PORT information; those comments are discussed supra section II.A.3. 1343 Simpson VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 discussed above, making more of the portfolio and other information reported on the form public, including making all of the information reported on Form N– PORT each month publicly available, could increase the risk of front-running, predatory trading, and copycatting/ reverse engineering of trading strategies by other investors, as well as the public disclosure of proprietary or sensitive information.1345 We believe that making the vast majority of items reported on Form N–PORT public, as well as keeping eight of the twelve months of data collected by the Commission on Form N–PORT nonpublic, balances the public’s need for and the usefulness of the information without unnecessarily subjecting funds to potentially harmful trading strategies by other market participants. Form N–PORT will require funds to report additional portfolio investment information relative to what is currently reported in Form N–CSR and Form N– Q. Alternatives include not requiring some of this additional information, or requiring information in addition to what will be required to be reported as currently adopted. Other alternatives would be to request information that is more granular, information that is more aggregate, and information that is more consistent with other current regulatory forms or that substitutes compliance with other current regulatory regimes.1346 Although we recognize that there are various alternative reporting requirements imposed in other contexts and by other regulators, the reporting requirements imposed by Form N– PORT have been designed specifically to meet the Commission’s regulatory needs with regards to monitoring and oversight of registered funds. As discussed above, the information reported on Form N–PORT will increase the ability of Commission staff to better understand the risks of a particular fund, a group of funds, and the fund industry. Investors, third-party information providers, and other potential users will also experience benefits from the introduction of Form N–PORT. For example, to the extent that investors use the information, Form N– PORT will improve the ability of investors to differentiate funds based on their investment strategies and other activities. Although the new information that will be reported on 1345 See infra section III.C.3. commenter suggested that the Commission should use the same interest rate and credit spread risk metrics as is required in Form PF (BlackRock Comment Letter). Another commenter suggested that the Commission and the CFTC should agree on and implement a substituted compliance regime (SIFMA Comment Letter I). 1346 One PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 81981 Form N–PORT could increase the initial and ongoing reporting costs for investment companies, and could increase the likelihood of front-running, predatory trading, and copycatting/ reverse-engineering by other investors, the Commission continues to believe that the information is important to fully describe a fund’s investments. The Commission also believes that the reporting requirements of Form N– PORT are appropriate given each filer’s status as a registered investment company with the Commission and not as a private fund.1347 As discussed above, the Commission is requiring funds to report risk metrics at the portfolio and position level on Form N–PORT. In response to commenters’ suggestions, we are now requiring the disclosure of measures of duration for a smaller number of key interest rates than we had originally proposed. However, an alternative would be to request those key rates detailed in the proposing release, or even additional measures. As discussed above, we believe that the number of key rates that we are adopting today will provide us with sufficient information and flexibility while also reducing the reporting burden. Other alternatives that would increase the reporting of risksensitivity measures include requiring funds to report additional portfolio level measures that describe the sensitivity of a reporting fund at additional basis point changes in interest rates and credit spreads, and a measure (or measures) of convexity, and include requiring funds to report additional position level measures such as vega, as requested by one commenter.1348 Investment companies could also report fewer portfolio or position level risksensitivity measures, such as a single or total portfolio level measure of interest rate and credit spread duration, as recommended by some commenters,1349 or instead report the underlying data to calculate the measures, as recommended by another commenter.1350 As discussed above and in response to commenters’ suggestions, we have made 1347 See supra footnote 485 and accompanying text. 1348 See State Street Comment Letter (requesting that funds also be required to report credit spread, delta, duration, yield to maturity, option adjusted spread, exposure, delta-adjusted exposure, duration equivalents, foreign exchange sensitivity/risk, and vega). 1349 See Simpson Thacher Comment Letter; Fidelity Comment Letter; Dreyfus Comment Letter; ICI Comment Letter; and Wells Fargo Comment Letter. 1350 See Vanguard Comment Letter (suggesting that the Commission calculate risk metrics from information that funds report on Form N–PORT). E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 81982 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations a modification from the proposed requirement to report only DV01 to now require filers to report both DV01 and DV100 on Form N–PORT. The Commission believes that DV100 is among the most common measures of interest rate sensitivity and that it will, in conjunction with DV01, provide more useful information about non-parallel shifts in the yield curve than smaller measures, such as DV25 and DV5, while not requiring filers that do not calculate convexity internally to begin doing so. However, while potentially useful, requiring all funds to report further additional portfolio- or position-level risk-sensitivity measures would increase the burden on all funds and not significantly improve the ability of Commission staff to monitor the funds in most market environments, and in particular for funds which do not extensively use derivatives as part of their investment strategy (while we are requiring funds to report DV100, we believe the marginal cost of reporting it is minimal because we understand that many funds likely already calculate it). Although the burden to investment companies to report risk metrics would decrease if fewer or no risk-sensitivity measures were required by the Commission, the staff believes that the benefits from requiring the measures that we are including in Form N–PORT today, including the ability of Commission staff to efficiently identify and size specific investment risks, justify the costs to investment companies to provide the information. Lastly, we believe that requiring funds to provide the risk measures would improve the ability of the Commission, investors, or other potential users to efficiently analyze the information rather than requiring funds to provide the inputs that might be necessary for interested parties to calculate these measures themselves,1351 and would enhance the ability of Commission staff to efficiently identify risk exposures, especially during times of market stress. Other alternatives to the reporting of portfolio level risk-sensitivity measures relate to the allocation thresholds for funds to report portfolio interest rate risk exposures and currency risk exposures. Given commenters’ recommendations, we are raising the threshold for fixed income allocation for risk reporting from 20% to 25%, and providing a de minimis threshold for reporting currency risk of 1%. We could, however, require lower/higher thresholds that would result in more/ fewer funds reporting interest rate or currency risk exposures, respectively. 1351 See supra section II.A.2.g.iv. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 As discussed above, the Commission believes that the reporting thresholds for Form N–PORT provide Commission staff the ability to analyze interest rate and currency exposures while reducing reporting burdens and the potential that funds inadvertently trigger the reporting requirement when the exposures are not part of its principal investment strategy. Form N–PORT will also require funds to report terms and conditions of each derivative investment that are important to understanding the payoff profile of the derivative, including the reference instrument.1352 As discussed above, for reference instruments that are indexes or custom baskets of securities that are not publicly available, Form N–PORT will require funds to report all the components of the index or custom basket if the investment constitutes more than 5% of the fund’s NAV, and the top 50 components of the index or custom basket and any components that represent more than 1% of the notional value of the index or custom basket if the investment represents more than1% but less than 5% of the fund’s NAV. Alternatives would be for funds to report fewer or additional components of the underlying indexes or custom baskets. Lastly, funds will no longer be required to file reports on Form N–Q. An alternative is for funds to continue reporting Form N–Q along with Form N–PORT at the end of first and third fiscal quarters. 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 will increase the burden of filing Form N–CSR, these certifications will fill the gap in certification coverage regarding the registrant’s internal control over financial reporting that would otherwise exist once Form N–Q is rescinded. C. Amendments to Regulation S–X 1. Introduction and Economic Baseline Regulation S–X prescribes the form and content required in financial statements. The amendments to 1352 We are requiring similar information on a fund’s schedule of investments. See supra section II.A.2.g.iv. PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 Regulation S–X will require new 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.1353 The current set of requirements under Regulation S–X, as well as the current practice of many funds 1354 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.1355 The parties that could be affected by the amendments to Regulation S–X include funds that file or will file reports with the Commission and update or will 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. We did not receive any specific comments on the proposed 1353 See supra section II.C. As discussed above, rule 12–13 of Regulation S–X requires limited generic information on the fund’s investments other than securities. To address issues of inconsistent disclosures and lack of transparency, the amendments will have a consistent presentation of a fund’s disclosures of open futures contacts, foreign currency forward contracts, and swaps. In addition, while many of the amendments to Regulation S–X are similar to the proposed disclosures in Form N–PORT (e.g., enhanced derivatives disclosures), the amendments to Regulation S–X will be in an unstructured but consistently presented format (as opposed to Form N–PORT’s structured data). 1354 As we discussed supra footnote 524, while ‘‘funds’’ are defined in the preamble as registered investment companies other than face-amount certificate companies and any separate series thereof—i.e., management companies and UITs, we note that our amendments to Regulation S–X apply to both registered investment companies and BDCs. See supra footnotes 699 and 700. Therefore, when discussing fund reporting requirements in the context of our amendments to Regulation S–X, we are also including changes to the reporting requirements for BDCs. 1355 See discussion supra section II.C.1. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 economic baseline for the amendments to Regulation S–X. Previously, Regulation S–X did not prescribe specific information to be disclosed 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. We expect that many of the economic effects from the amendments to Regulation S–X will largely result from an increase in investor ability to make investment decisions dependent on the more transparent disclosure in financial statements, as noted by commenters.1356 As discussed above, the total economic effects will depend on the extent to which the portfolios and investment practices of all investment companies become more transparent, and the ability of investors, and in particular individual investors, to utilize financial statements to compare funds and to make investment decisions. The economic effects will also depend on the extent to which investment companies already voluntarily provide disclosures that will be required by the amendments, and the extent to which the amendments to Regulation S–X standardize financial statements across funds. As a result of these factors, some of which are difficult to quantify or unquantifiable, the discussion below is largely qualitative although certain onetime and ongoing costs associated with the amendments are quantified below. 2. Benefits The amendments to Regulation S–X will benefit investors by updating the information funds disclose in the financial statements of registration statements and shareholder reports. Several commenters noted that the amendments will benefit investors through increased transparency and comparability of fund financial statements, particularly for individual investors that we would not expect to use the information in Form N–PORT because of its structured data format.1357 In particular, the additional information that Regulation S–X will require for open option contracts both written and purchased, open futures contracts, open forward foreign currency contracts, 1356 See, e.g., PwC Comment Letter (’’We believe that the Proposed Rule will generally provide investors with greater access to information relating to their investments and investment advisors.’’); Deloitte Comment Letter. 1357 See PwC Comment Letter; EY Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 open swap contracts, and other investments will increase the transparency of the fund’s portfolio investments and risk exposures.1358 Other amendments will also improve the transparency into the fund’s investments. For example, we are requiring funds to identify each investment whose value was determined using significant unobservable inputs.1359 Likewise, we are requiring that funds separately identify restricted investments.1360 In addition, in a modification from the proposal, we are now including a requirement that should benefit investors and other users of the information by providing more transparency to a fund’s investments in debt securities, and in particular variable rate securities. As discussed more fully below and in section II.C.3, in light of comments we received and in order to give investors both the ability to understand the investment’s current return (through end-period rate) and to better understand how interest rate changes could affect the investment’s future returns, we are adopting an instruction that would require a fund, for its investments in variable rate securities, to both describe the referenced rate and spread and provide the end of period interest rate for each investment, or include disclosure of each referenced rate at the end of the period.1361 In a change from the proposal and Form N–PORT, we are requiring funds to separately list the top 50 components and the components that represent more than 1% of the notional value of the referenced assets underlying swap and option contracts, rather than separately listing every component. We believe that this alteration benefits investors by making it easy for them to understand and evaluate the specific risk exposures of a fund from certain swap and option contracts, while simultaneously reducing the reporting burden for funds. We believe that the changes to the form and content of financial statements in Article 6 of Regulation S–X will similarly benefit investors, particularly individual investors who in general may not have the tools and resources 1358 See, e.g., EY Comment Letter and Morningstar Comment Letter for statements in support of these ideas, and MFS Comment Letter and ICI Comment Letter for statements against, as well as the discussion in Section II.C.2. 1359 See, e.g., rule 12–13, n. 7 of Regulation S–X; see also rules 12–13A, n. 5; 12–13B, n. 3; 12–13C, n. 6; and 12–13D, n. 7 of Regulation S–X. 1360 See rule 12–13, n. 6 of Regulation S–X; see also rules 12–13A, n. 4; 12–13B, n. 2; 12–13C, n. 5; and 12–13D, n. 6 of Regulation S–X. 1361 See rules 12–12, n. 4 and 12–12B, n. 3 of Regulation S–X. PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 81983 possessed by institutional investors, through greater transparency in a fund’s financial statements. For example, we are requiring funds to disclose their investments in derivatives in the financial statements, as opposed to in the notes to the financial statements.1362 To the extent funds do not do this already, we believe, and commenters agreed, 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), will benefit investors through increased visibility of fund investments in derivatives and comparability between funds.1363 Likewise, we are eliminating the financial statement disclosure of ‘‘Total investments’’ on the balance sheet under ‘‘Assets’’.1364 As we discuss in more detail in section II.C.6, recognizing that funds could present investments in derivatives under both assets and liabilities on the balance sheet, eliminating this disclosure will benefit investors by providing a more complete representation of the effect of these investments on a balance sheet.1365 Other parties that will 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 will primarily benefit investors and particularly individual investors, the Commission and other market participants could use the information reported in a fund’s financial statements, and would benefit from an increase in transparency into a fund’s financial statements. For example, Commission staff could utilize the information in a fund’s 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 amendments to Regulation S–X, therefore, will effectively standardize the information that all funds disclose on financial statements, and make the schedule of investments and financial statement disclosures consistent and thus more comparable 1362 See rule 6–10(a) of Regulation S–X; see also discussion supra section II.C.6; see also ICI Comment Letter (supporting the requirement to present derivatives schedules in the fund’s financial statements). 1363 See State Street Comment Letter; ICI Comment Letter. 1364 See rule 6–04 of Regulation S–X; see also discussion supra section II.C.6. 1365 See id. E:\FR\FM\18NOR2.SGM 18NOR2 81984 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations across funds, as noted by commenters.1366 Similar to new Form N–PORT, the amendments to Regulation S–X, to the extent that they increase the transparency and consistency of shareholder reports across funds, could improve the ability of investors, particularly individual investors, to differentiate investment companies and make investment decisions either by themselves or by way of third-party information providers. An increase in the ability of investors to differentiate investment companies and allocate capital across reporting funds closer to their risk preferences will 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, we also believe that the introduction of Form N–PORT could also promote capital formation. 3. Costs mstockstill on DSK3G9T082PROD with RULES2 We believe that registrants on average will likely incur minimal costs from our 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 will be required by the amendments to Regulation S–X in their financial statements.1367 The costs to a fund of complying with the new rules will depend upon the extent to which funds are already making such disclosures currently.1368 As discussed above, the Commission will require parallel disclosures in Form N–PORT, and funds will incur one set of costs, both one-time and ongoing, to obtain the information that will be disclosed in Form N–PORT and in financial statements. In addition, other costs that relate to the disclosure of portfolio investment information, including the ability of other investors to front-run, trade predatorily, and copycat/reverse engineer trading strategies of funds, will 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 data format as compared to the non-structured data 1366 See, e.g., EY Comment Letter. order to reduce burdens on funds, we also endeavored, where appropriate, to require consistent derivatives holdings disclosures between Form N–PORT and Regulation S–X. 1368 Moreover, as we discussed above in section III.C.1, we expect minimal audit costs as a result of our amendments to Regulation S–X because many funds are already voluntarily providing this information in their audited financial statements. 1367 In VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 format of portfolio investment information reported in financial statements. For example, as discussed above in section II.C.2.a, in response to commenters’ concerns relating to the burdens associated with our proposed requirement that funds list all components underlying a nonpublic index or custom basket,1369 we are instead requiring funds to separately list the top 50 components and the components that represent more than 1% of the notional value of the referenced assets underlying swap 1370 and option contracts.1371 Commenters noted, and we agree, that the potential volume of all of the components underlying nonpublic indexes and custom baskets were disclosed would make the fund’s financial statements difficult to understand.1372 Thus requiring funds to report only the most significant components 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.1373 Moreover, limiting the reporting of nonpublic indexes and custom baskets will reduce fund auditing costs by eliminating the burdens of requiring an auditor to verify every component of a nonpublic index, which could potentially include thousands of investments. We further believe this change provides the necessary benefit without being unduly burdensome. We understand that index providers might assert intellectual property rights to certain indexes, and these may be subject to licensing agreements between the index provider and the fund.1374 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.1375 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 1369 See, e.g., PwC Comment Letter; Oppenheimer Comment Letter; ICI Comment Letter; and AICPA Comment Letter. 1370 See rule 12–13C, n. 3 of Regulation S–X; see also discussion supra section II.C.2.d. 1371 See rule 12–13, n. 3 of Regulation S–X; see also discussion supra section II.C.2.a. 1372 See AICPA Comment Letter; and PwC Comment Letter. 1373 Id. 1374 See discussion supra sections II.A.2.g.iv and II.C.2.a. 1375 See id. PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 a nonpublic index may include costs to both the index provider, whose indexing strategy could be reverseengineered, and the fund, whose rebalancing trades could be frontrun.1376 Finally, the possibility exists that index providers will refuse to permit disclosure and the funds might not be able to use such indexes any longer. This could potentially drive up competition for index providers, in turn raising costs for funds. Requiring the disclosure of only those proprietary components that meet a materiality threshold could help alleviate some of these costs and concerns. However, the underlying components would be more accessible in Form N–PORT as a result of its structured data format as compared to the non-structured data format of the information in financial statements, so we believe that the costs of disclosing the information will therefore primarily relate to Form N– PORT, and reporting of components will be more comprehensive in Form N– PORT, as discussed in greater detail above. As another example, the amendments include an instruction to disclose the variable financing rates for swaps that pay or receive financing payments.1377 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.1378 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 thereby decreasing the fees paid by funds. Counterparties could also, however, choose not to transact with funds as a consequence of this disclosure, in which case competition for counterparties would increase and the fees paid by funds would rise. 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, will instead derive from 1376 See id. rule 12–13C, n. 3 of Regulation S–X. 1378 See, e.g., MFS Comment Letter; Invesco Comment Letter; and ICI Comment Letter (public benefit of disclosure does not outweigh potential competitive harm). 1377 See E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 the similar requirements in Form N– PORT.1379 In response to commenters concerns, we also made changes from the proposal to eliminate several disclosures. For example, we are amending our proposed instruction which would require funds to categorize the schedule by type of investment, the related industry, and the related country or geographic region.1380 We agreed with commenters that requiring categorization of both the industry and geographic region (as opposed to categorizing one) would add considerable length to the schedule of investments, which could ultimately undermine the schedule’s usefulness to investors.1381 In the interest of reducing burdens for investors and making financial statements easier to review, we are not adopting this proposed requirement. We similarly determined to eliminate an instruction in Regulation S–X requiring funds to include tax basis disclosures. As discussed above in section II.C.4, this instruction is contained in current rules 12–12, 12– 12C, and 12–13 and we proposed to extend the instruction to proposed rules 12–12A, 12–13A, 12–13B, 12–13C, and 12–13D. We were, however, persuaded by commenters that this disclosure of tax basis by investment type would not provide meaningful disclosure to investors, while increasing the volume and complexity of financial statements.1382 In the interest of reducing burdens to both investors and funds, while making financial statements easier for investors to understand, we are eliminating the tax basis instruction from the current rules and not adopting it for the other rules. We also proposed to require funds to identify illiquid investments.1383 We received several comments noting that, among other things, this disclosure would be difficult and costly to audit, as auditors would be required to determine the validity of the fund’s liquidity determinations for each investment.1384 We were persuaded by comments relating to the costs of auditing liquidity disclosures and, as discussed further in the Liquidity Adopting Release we are adopting 1379 See Item C.11.f.i of Form N–PORT; see also discussion supra section II.A.2.g.iv. 1380 See supra section II.C.3. 1381 See Oppenheimer Comment Letter; State Street Comment Letter; Vanguard Comment Letter; MFS Comment Letter; and BlackRock Comment Letter. 1382 See, e.g. PwC Comment Letter; EY Comment Letter; CRMC Comment Letter; State Street Comment Letter; and MFS Comment Letter. 1383 See supra section II.C.4. 1384 See, e.g., PwC Comment Letter; ICI Comment Letter; and AICPA Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 concurrently, also believe that such position-level information regarding liquidity is better suited for nonpublic reporting to the Commission in Form N– PORT. Finally, in order to provide more transparency to a fund’s investments in debt securities, we had proposed an instruction requiring a fund to disclose, for its investment in variable rate securities, the referenced rate and spread.1385 We received several comments supporting our proposal to provide the reference rate and spread for variable rate securities, reasoning that the disclosure of the components of the variable rate would be easier for investors and other interested parties to determine the investment’s current rate at any given time (as opposed to the rate at the end of the reporting period).1386 However, another commenter suggested that the end-period interest rate is the most appropriate variable rate security disclosure for shareholders.1387 As discussed more fully in section II.C.3, in order to give investors both the ability to understand the investment’s current return (through end-period rate) and to better understand how interest rate changes could affect the investment’s future returns, we have made a change to the proposed instruction so that it now requires a fund to both describe the reference rate and spread and provide the end of period interest rate for each investment, or include disclosure of each reference rate at the end of the period.1388 Requiring a fund to disclose both the period-end rate and reference rate and spread will necessarily add costs relating to a fund’s financial statement and auditing costs, albeit, we expect that cost to be minimal because these pieces of information are generally not difficult to obtain and verify as, based on staff experience, we believe that this information is currently collected by funds and commonly available in a fund’s accounting system. Funds will 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 will incur onetime and ongoing costs to obtain the additional information that will be disclosed on shareholder reports and 1385 See proposed rule 12–12, n. 4; see also supra section II.C.3. 1386 See State Street Comment Letter; see also Morningstar Comment Letter (Disclosure would allow investors to identify when cash flows associated with a fund’s returns are fixed or variable). 1387 See Wells Fargo Comment Letter. 1388 See rules 12–12, n. 4 and 12–12B, n. 3 of Regulation S–X. PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 81985 registration statements, and that will also not be disclosed on Form N–PORT; and funds will also incur one-time costs to format for presentation all additional information that will be reported in financial statements. In addition, we will 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.1389 Funds that do not currently present their schedule of investments in this manner will incur a one-time cost of modifying the presentation of their financial statements to conform to the amendments. Additionally, we proposed to add a new disclosure requirement that was designed to increase transparency into a fund’s securities lending and cash collateral management activities.1390 Some commenters expressed concerns relating to the location of the required disclosure in the fund’s financial statements in particular.1391 One commenter in particular noted that additional costs of auditing the disclosure of these fees ‘‘would most likely outweigh any benefits of reporting this information.’’ 1392 While we continue to believe that investors and other interested parties will benefit from disclosures relating to a fund’s securities lending and cash collateral management activities, after consideration of the issues raised by commenters, including the added auditing costs that funds would incur, we determined that it is more appropriate to require these disclosures be made in a fund’s Statement of Additional Information (or, with respect to closed-end funds, a fund’s reports on Form N–CSR) rather than to require their inclusion in its financial statements.1393 To the extent possible, we have attempted to quantify these costs. As discussed below in section IV.C, we estimate that management investment companies will incur certain one-time additional paperwork and other costs 1389 See rule 6–10 of Regulation S–X; see also discussion supra section II.C.6. 1390 See proposed rule 6.03(m) of Regulation S– X; see also supra section II.C.6. 1391 See Deloitte Comment Letter (noting that indirect fees ‘‘are typically a management’s estimate that is imprecise’’); EY Comment Letter (stating that ‘‘the proposed disclosures would result in the presentation of detailed information with varying degrees of usefulness that could detract from other material information presented in the financial statements’’ and recommending that ‘‘the Commission use other reporting mechanisms more suited for that purpose’’). 1392 See Deloitte Comment Letter. 1393 See supra section II.F. E:\FR\FM\18NOR2.SGM 18NOR2 81986 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 associated with preparing, reviewing, and filing semi-annual reports in accordance with the amendments to Regulation S–X in the amount of approximately $1,911 per fund 1394 and $22,662,549 in the aggregate.1395 We similarly estimate that management investment companies will incur certain ongoing paperwork and other costs associated with preparing, reviewing, and filing semi-annual reports in accordance with our amendments to Regulation S–X in the amount of approximately $683 per fund 1396 and $8,099,697 in the aggregate.1397 Likewise, we estimate that UITs will incur certain one-time additional paperwork and other costs associated with preparing, reviewing, and filing semi-annual reports in accordance with the amendments to Regulation S–X in the amount of approximately $1,911 per fund 1398 and $1,377,831 in the aggregate.1399 We similarly estimate that UITs will incur certain ongoing paperwork and other costs associated with preparing, reviewing, and filing semi-annual reports in accordance with the amendments to Regulation S–X in the amount of approximately $683 per 1394 See infra footnote 1562 and accompanying text. The estimate is based upon the following calculations: ($1,911 = ($560 = 3.5 hours × $160/ hour for an Intermediate Accountant) + ($1,351 = 3.5 hours × $386/hour for an Attorney)). The hourly wage figures in this and subsequent footnotes are from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1800-hour workyear and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. 1395 See id. These estimates are based upon the following calculations: $22,662,549 = (11,859 funds × $1,911 per fund). 1396 See id. The estimate is based upon the following calculations: ($683 = ($200 = 1.25 hours × $160/hour for an Intermediate Accountant) + ($483 = 1.25 hours × $386/hour for an Attorney). The hourly wage figures in this and subsequent footnotes are from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. 1397 See id. These estimates are based upon the following calculations: $8,099,697 = (11,859 funds × $683 per fund). 1398 See infra footnote 1577 and accompanying text. The estimate is based upon the following calculations: ($1,911 = ($560 = 3.5 hours × $160/ hour for an Intermediate Accountant) + ($1,351= 3.5 hours × $386/hour for an Attorney)). The hourly wage figures in this and subsequent footnotes are from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1800-hour workyear and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. 1399 See id. These estimates are based upon the following calculations: $1,377,831 = (721 UITs × $1,911per UIT). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 UIT 1400 and $492,443 in the aggregate.1401 4. Alternatives The Commission has also explored other ways to modernize and improve the utility, quality, and consistency of the information that funds report to the Commission and to investors in the financial statements required in shareholder reports and other registration statements. Commission staff examined how the information funds provide to the Commission and to investors could be made more informative and more consistent across funds. Alternatives to the amendments to Regulation S–X relate to the compliance period to adhere to the new amendments and to the information that funds report in the financial statements. Funds will have 8 months after the effective date to comply with the amendments to Regulation S–X. An alternative would be to extend the compliance period, as suggested by several commenters.1402 We believe, however, that most entities would not need additional time to modify systems to adhere to the amendments to Regulation S–X because, with the exception of the disclosure of index components, the proposed amendments are largely consistent with current fund disclosure practices. As such, we do not expect that funds, intermediaries, or service providers will require significant amounts of time to modify systems or establish internal processes to prepare financial statements in accordance with our final amendments to Regulation S– X. Another alternative would be to provide a tiered compliance period to provide smaller fund complexes more time, as we do for Form N–PORT. However, we do not believe that smaller entities would relatively benefit from additional time, since while fixed costs in general are proportionately higher for smaller entities, the amendments to Regulation S–X do not add additional fixed costs, but rather the amendments are largely consistent with current 1400 See id. The estimate is based upon the following calculations: ($683 = ($200 = 1.25 hours × $160/hour for an Intermediate Accountant) + ($483 = 1.25 hours × $386/hour for an Attorney). The hourly wage figures in this and subsequent footnotes are from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. 1401 See id. These estimates are based upon the following calculations: $492,443 = (721 UITs × $683 per UIT). 1402 Fidelity Comment Letter; Oppenheimer Comment Letter; State Street Comment Letter; MFS Comment Letter; Invesco Comment Letter; SIFMA Comment Letter I; and Wells Fargo Comment Letter. PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 disclosure practices. Extending the compliance period for all entities or for smaller entities, however, would delay the benefits to investors (and to the Commission and to other market participants) from the increased transparency and standardization of shareholder reports and other financial statements. The amendments to Regulation S–X will update the information funds disclose in financial statements. Alternatives to the amendments to Regulation S–X include the disclosures of different information. For example, the amendments to Regulation S–X will require funds to report information describing derivative contracts including, in some instances, the components of reference indexes that surpass certain materiality thresholds. As alternatives, we could require funds to only disclose a brief description of the index, require a different threshold for identifying the components of the swap or options contract, or require the reporting of all components. Although the alternatives that would increase the reporting of the components of reference indexes would increase the transparency for investors into the assets underlying a swap or options contract including the underlying risks of the fund, these alternatives would increase the costs of funds to report the information. However, although the alternatives that would decrease the reporting of the components of reference indexes would decrease the costs to funds to report the information, these alternatives would decrease the ability of investors to understand fund portfolio investments. We believe that the amendments to Regulation S–X adopted today provide investors with sufficient information to broadly understand funds’ investments without unduly burdening funds. Amendments to Regulation S–X will also not require funds to report information describing their securities lending activities in the financial statements, as proposed, but will instead require funds to report the information in the Statement of Additional Information (or, for closedend funds, their reports on Form N– CSR). An alternative, similar to proposed rule 6.03(m), would be for funds to report information describing their securities lending activities as part of the financial statements. However, the requirement that securities lending information would be disclosed as part of financial statements would increase the costs to audit and report the information.1403 Another alternative 1403 Deloitte E:\FR\FM\18NOR2.SGM Comment Letter. 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 would be for funds to not provide the information altogether. However, we believe that the information is important to investors, the Commission, and other interested parties to understand the economic implications of a fund’s securities lending activities. To the extent that investors utilize this information or that it benefits the Commission, we believe that the Statement of Additional Information (or, for closed-end funds, reports on Form N–CSR) is an appropriate place to disclose this information. Similarly, amendments to Regulation S–X will also not require funds in their financial statements to identify illiquid securities, as was initially proposed. An alternative is to adopt the proposed approach and require funds in their financial statements to identify illiquid securities. The disclosure of the liquidity of securities on financial statements, however, could increase the costs to audit financial statements.1404 In addition, some commenters asserted the disclosure of security liquidity could cause investors, and in particular individual investors, to misinterpret the information as objective.1405 As discussed in the Liquidity Adopting Release, we are adopting portfolio-level liquidity reporting on Form N–PORT which we believe mitigates many of the commenters’ concerns and is a more appropriate method of public reporting.1406 Accordingly, we are not adopting the proposed instructions in Regulation S–X relating to the liquidity of investments. Lastly, amendments to Regulation S– X will include instructions to funds to make a separate disclosure for income from non-cash dividends and paymentin-kind interest on the statement of operations. Funds will report income from payment-in-kind interest or noncash dividends only if the income exceeds 5 percent of the fund’s investment income, as suggested by commenters who requested a materiality threshold, which is consistent with the other income disclosures under rule 6– 07.1.1407 An alternative, similar to the proposal, would be for funds to make a separate disclosure for all income from 1404 Deloitte Comment Letter; ICI Comment Letter; and AICPA Comment Letter. 1405 PwC Comment Letter; Oppenheimer Comment Letter; MFS Comment Letter; Deloitte Comment Letter; Invesco Comment Letter; Schwab Comment Letter; ICI Comment Letter; and AICPA Comment Letter. 1406 See discussion in section II.C.4. 1407 Several commenters suggested the materiality threshold including MFS Comment Letter; PwC Comment Letter; State Street Comment Letter; ICI Comment Letter; and AICPA Comment Letter; see also section II.C.6. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 payment-in-kind interest or non-cash dividends regardless of the amount. D. Form N–CEN and Rescission of Form N–SAR 1. Introduction and Economic Baseline Form N–CEN requires funds to report census information to the Commission on an annual basis. Although Form N– CEN includes many of the same data elements as the current census-type reporting form, Form N–SAR, it replaces items that are outdated or no longer informative with items of greater importance for the oversight and examination of investment companies, and eliminates certain items that are also reported to the Commission in other forms. Investment companies will file reports on Form N–CEN in a structured, XML format to allow for easier aggregation and manipulation of the data. Form N–SAR will be rescinded. The current set of requirements for funds to file reports on Form N–SAR is the baseline from which we discuss the economic effects of Form N–CEN.1408 The parties that could be affected by the introduction of Form N–CEN and the rescission of Form N–SAR include funds that currently file reports on Form N–SAR and funds that will 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. Likewise, the technology in which Form N–SAR is filed does not allow for certain validation checks, reducing the data quality of the information (e.g., the Form N–SAR application is unable to check related fields for arithmetic consistency) and therefore the ability of Commission staff to compare the information across funds is constrained. 1408 Management companies must file reports on Form N–SAR semi-annually, and UITs must file reports on Form N–SAR annually. See current rule 30b1–1 for management companies, and see current rule 30a–1 for UITs. PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 81987 The economic effects from the introduction of new Form N–CEN and the rescission of Form N–SAR will largely result from an update to the format of the information reported, as well as the update to the census information that investment companies will report. The economic effects will 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 requires census information about the fund industry reported in a structured data format. However, while Form N–SAR information is also reported in a structured data format, Form N–CEN information will be reported in XML format, a much more modern and useful data format, and one that allows for more efficient data collection than does the baseline format, aggregation, manipulation, and rendering. Therefore, although the introduction of Form N–CEN will increase the transparency of the fund industry by making the information reported therein more readily available, more easily shared or retrieved, and more relevant, we cannot quantify the significance of its economic implications. 2. Benefits The Commission is rescinding Form N–SAR and replacing it with new Form N–CEN to improve the quality and the utility of the information investment companies report to the Commission. The improvement in the quality and utility of the information will 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 will improve the ability and efficiency of Commission staff to obtain and analyze the information. An improved structured data format could also promote additional efficiency to the extent that the new standardized reporting requirements encourage more automated report assembly, validation, and review processes for the disclosure and transmission of information.1409 In 1409 See, e.g., CFA Comment Letter (noting that requiring information to be reported through a structured data format will allow better collection and analysis of information); see also XBRL US Comment Letter (expressing the belief that a structured data format will make data computer- E:\FR\FM\18NOR2.SGM Continued 18NOR2 81988 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 ways similar to those discussed above in relation to Form N–PORT, an XML format also improves the quality of census information obtained by the Commission by providing constraints as to how information can be provided and by allowing for built-in validation.1410 Form N–CEN also modernizes the census information that funds provide and increases its utility to Commission staff, investors, and other interested parties by reflecting the changes to the fund industry in a structured data format. The Commission will 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. Along with the other information, Form N–CEN adds new requirements for information specifically relating to the ETF primary markets, including more detailed information on authorized participants and creation unit requirements.1411 We believe that the additional information on ETFs will allow the Commission to better understand and assess the ETF market and also inform the public about certain characteristics of the ETF primary markets.1412 Additionally, Form N– CEN, like Form N–SAR, has particular sections for closed-end funds, SBICs, and UITs in order to obtain information about the particular characteristics of these entities to assist our staff in monitoring the activities of these funds and preparing for examinations. Form N–CEN also adds 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.1413 We are also requiring the monthly average value of securities on loan, the net income from securities lending, and the monthly readable, consistent and comparable across different reporting entities). 1410 See, e.g., Morningstar Comment Letter (noting that the XML format will reduce the amount of defective reporting currently possible in Form N– SAR); see also XBRL US Comment Letter (while specifically recommending an XBRL structured format, noting that checking the validity of data may still be required but, with structured data, the process can be automated, thereby reducing costs and at the same time increasing the consistency of the data produced). 1411 See discussion supra section II.D.4.e. 1412 Some commenters supported the inclusion of ETF-specific information in Form N–CEN. See supra footnote 1061 and accompanying text; but see infra footnote 1429 and accompanying text. 1413 See Item C.6 of Form N–CEN.; see also discussion supra section II.D.4.c.iii. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 average net assets in the fund.1414 Together with the requirements on securities lending activities in Form N– PORT and in fund Statements of Additional Information,1415 this information will 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.1416 We expect funds will also benefit from replacing Form N–SAR with Form N–CEN through reduced expenses. First, we estimate that Form 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 items on Form N–SAR that funds will not report on Form N–CEN. Second, funds that are management companies will experience a decrease in paperwork-related expenses from the decrease in the reporting frequency of census information from semi-annual to annual.1417 As discussed in detail below, we estimate that paperwork expenses associated with reporting on Form N–CEN will be, in the aggregate, about $14.6 million each year.1418 By 1414 The monthly average value of securities on loan and the net income from securities lending are being moved from Form S–X to Form N–CEN, while the monthly average net assets is a newly reported value, and while not specifically related to securities lending activity, it will facilitate the use of the monthly average value of securities on loan. 1415 See supra section II.A.2.d; section II.A.2.g.v; and section II.F. 1416 Some commenters expressed general support for reporting securities lending information on Form N–CEN; some commenters expressed certain concerns about particular proposed requirements and we have modified the securities lending requirements in certain respects after consideration of commenters’ views. See supra section II.D.4.c.iii. 1417 See supra notes 768–769 and accompanying text for a discussion of commenters’ views on the filing frequency. See also ICI Comment Letter (stating that reporting this data on an annual, rather than a semi-annual basis, would significantly lessen reporting burdens for funds). 1418 Below, we estimate that 3,113 funds will file reports on Form N–CEN each year. See infra footnote 1532. Below, we estimate that funds will, on average, incur 12.37 burden hours per fund per year to comply with the reporting requirements of Form N–CEN. See infra footnote 1532 and accompanying text. Therefore, in the aggregate, we estimate that such funds would incur about 38,508 burden hours to comply with these requirements. This estimate is based on the following calculation: 3,113 funds × 12.37 hours per fund per year = 38,508 hours per year. The Commission estimates the wage rate associated with these burden hours based on salary information for the securities industry compiled by the Securities Industry and Financial Markets Association. The estimated wage figure is based on published rates for senior programmers and compliance attorneys, modified PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 contrast, we estimate that paperwork expenses associated with reporting on Form N–SAR are about $25.5 million each year.1419 Accordingly, we estimate, on net, annual paperwork expense savings to funds associated with the adoption of Form N–CEN and rescission of Form N–SAR will be about $10.9 million.1420 We recognize that these ongoing annual expense savings will be partially offset by one-time expenses in the first year to file reports on Form N– CEN. We estimate that these expenses would be, in the aggregate, about $20.2 to account for an 1,800-hour work year; multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead; and adjusted to account for the effects of inflation, yielding effective hourly rates of $308 and $340, respectively. See Securities Industry and Financial Markets Association, Report on Management & Professional Earnings in the Securities Industry 2013. We estimate that senior programmers and compliance attorneys would divide their time equally, yielding an estimated hourly wage of $324. ($308 per hour for senior programmers + $340 per hour for compliance attorneys) ÷ 2 = $324 per hour. Based on the Commission’s estimate of 38,508 burden hours per year and the estimated wage rate of $324 per hour, the total annual paperwork expenses for funds associated with the internal hour burden imposed by the reporting requirements of Form N–CEN are about $12,476,592. This estimate is based upon the following calculation: 38,508 hours per year × $324 per hour = $12,476,592. Below, we also estimate that funds will incur aggregate annual external costs of $2,088,176 to comply with the requirements of Form N–CEN. See infra footnote 1538 and accompanying text. Thus the total estimated annual paperwork expenses associated with the reporting requirements of Form N–CEN are $14,564,768. This estimate is based upon the following calculation: $12,476,592 associated with internal burden + $2,088,176 external cost burden = $14,564,768. 1419 Below, we estimate that, in the aggregate, funds currently incur about 78,561 burden hours to comply with the requirements of Form N–SAR. See infra footnote 1541 and accompanying text. The Commission estimates the wage rate associated with these burden hours based on salary information for the securities industry compiled by the Securities Industry and Financial Markets Association. The estimated wage figure is based on published rates for senior programmers and compliance attorneys, modified to account for an 1,800-hour work year; multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead; and adjusted to account for the effects of inflation, yielding effective hourly rates of $308 and $340, respectively. See Securities Industry and Financial Markets Association, Report on Management & Professional Earnings in the Securities Industry 2013. We estimate that senior programmers and compliance attorneys would divide their time equally, yielding an estimated hourly wage of $324. ($308 per hour for senior programmers + $340 per hour for compliance attorneys) ÷ 2 = $324 per hour. Based on the Commission’s estimate of 78,561 burden hours and the estimated wage rate of $324 per hour, the total annual paperwork expenses for funds associated with the internal hour burden imposed by the reporting requirements of Form N–SAR are about $25,453,764. This estimate is based upon the following calculation: 78,561 hours per year × $324 per hour = $25,453,764. 1420 This estimate is based upon the following calculation: $25,453,764 in annual paperwork expenses associated with Form N–SAR ¥ $14,564,768 in annual paperwork expenses associated with Form N–CEN = $10,888,996 in annual paperwork expenses. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 million.1421 As indicated by commenters, the 75-day period to file Form N–CEN will also benefit funds by staggering the reports that funds file with the Commission at the end of each fiscal year.1422 The rescission of Form N–SAR and the introduction of Form N–CEN, to the extent relevant, could provide 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 data 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. However, individual investors may indirectly benefit from the increase in information to the extent that it becomes available through third-party information providers, as these information providers will likely have the capabilities to efficiently collect the data from Form N–CEN and present it for investors in user-friendly format. For certain investors and other potential users that would obtain and use the information that funds report in Form N–CEN directly, the update to the structure of the information should 1421 Below, we estimate that 3,113 funds will file reports on Form N–CEN each year. See infra footnote 1532. Below, we estimate that funds will, on average, incur 20 additional one-time burden hours per fund in the first year to comply with the reporting requirements of Form N–CEN. See infra footnote 1528 and accompanying text. Therefore, in the aggregate, we estimate that such funds would incur about 62,160 one-time burden hours to comply with these requirements. This estimate is based on the following calculation: 3,113 funds × 20 one-time burden hours per fund = 62,260 onetime hours. The Commission estimates the wage rate associated with these burden hours based on salary information for the securities industry compiled by the Securities Industry and Financial Markets Association. The estimated wage figure is based on published rates for senior programmers and compliance attorneys, modified to account for an 1,800-hour work year; multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead; and adjusted to account for the effects of inflation, yielding effective hourly rates of $308 and $340, respectively. See Securities Industry and Financial Markets Association, Report on Management & Professional Earnings in the Securities Industry 2013. We estimate that senior programmers and compliance attorneys would divide their time equally, yielding an estimated hourly wage of $324. ($308 per hour for senior programmers + $340 per hour for compliance attorneys) ÷ 2 = $324 per hour. Based on the Commission’s estimate of 62,260 one-time burden hours and the estimated wage rate of $324 per hour, the total one-time paperwork expenses for funds associated with the internal hour burden imposed by the reporting requirements of Form N–CEN are about $20,172,240. This estimate is based on the following calculation: 60,260 one-time hours × $324 per hour = $20,172,240 one-time expenses. 1422 CAI Comment Letter; T. Rowe Price Comment Letter; Invesco Comment Letter; and ICI Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 improve their ability to efficiently aggregate the information across all investment companies given the difficulty associated with extracting information from reports on Form N– SAR, due to its idiosyncratic reporting format.1423 The changes to the reporting of census information, including the reporting of the information in a modern structured data 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. In addition, these changes could enhance the ability of investors to understand the investment risks and practices (for example, securities lending activities) of investment companies, and therefore could improve the ability of investors to efficiently allocate capital. Consequently, the reporting changes could promote capital formation. 3. Costs As discussed above, we expect the new Form N–CEN will be less costly to file than Form N–SAR has been, because Form N–CEN will be filed annually while Form N–SAR is filed semiannually.1424 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 than previously reported.1425 There could also be costs as a result of the change in the frequency of disclosure of census information. For example, the Commission will receive census information on an annual instead of semi-annual basis, and therefore to the extent that the information changes intra-annually the information will be more dated than if the information was reported to the Commission on a semiannual basis.1426 As discussed above, we believe that the costs related to reducing the frequency of the information received on Form N–SAR are not significant as this information is unlikely to change frequently. Also, funds’ reporting costs may be reduced 1423 See, e.g., Morningstar Comment Letter (noting that the XML format will provide more accessible data to the public). 1424 See, e.g., Dreyfus Comment Letter (noting that the rescission of Form N–SAR and Form N–Q and replacement with Form N–CEN would result in a net reduction of 504 filings annually for the company). 1425 See supra section II.D.4.e for a discussion of the ETF requirements. 1426 However, as discussed supra footnote 770, this cost is mitigated, in part, by the fact that certain items from Form N–SAR that the Commission staff has deemed necessary on a more frequent basis are included instead in reports on Form N–PORT. PO 00000 Frm 00121 Fmt 4701 Sfmt 4700 81989 by the elimination, in Form N–CEN, of certain items from Form N–SAR that are no longer needed by Commission staff or are outdated in their current form.1427 In addition, as discussed above, we are moving the change in independent public accountant attachment proposed on Form N–CEN to Form N–CSR so that an accountant’s letter regarding a change in accountant will become available to the public semi-annually rather than annually,1428 which we expect will affect reporting and other costs only minimally. Additionally, we recognize that we are adding some additional information items from the proposal, such as average net assets and CRD numbers for directors, which will result in minor increases in reporting costs relative to the proposal. As discussed above, some commenters objected to the inclusion of the requirement for each ETF to report the dollar value of the ETF shares that each authorized participant purchased and redeemed from the ETF during the reporting period, expressing concerns that reporting authorized participant activities on Form N–CEN could discourage authorized participants from participating in the ETF market, leading to further concentration in the authorized participant community or authorized participants moving their ETF-related trading activities to banks or ‘‘clearing’’ authorized participants.1429 We expect that any effects of these reporting requirements on authorized participant participation in the ETF primary market will be minimal. We continue to believe, moreover, that 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, and we believe that adopting the new reporting requirements is appropriate in light of these benefits notwithstanding the possibility that public availability of the information might affect the ETF primary markets in the manner those commenters suggest. 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 1427 See discussion supra section II.D.5. One commenter did, however, suggest we reconsider the exclusion of several of these items. Comment Letter of Morningstar, Inc. (July 20, 2015). 1428 See supra section II.D.4.b. 1429 See supra footnote 1072 and accompanying text. E:\FR\FM\18NOR2.SGM 18NOR2 81990 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations will not be included on Form N–CEN but would be available through other filings. The information that will not be included on Form N–CEN and that will not be available elsewhere will impose costs on investors and other potential users from a loss of information to the extent that the information is found to be useful.1430 One commenter expressed concern that obtaining this information from various sources would reduce its availability to investors and other interested parties, but could be available through third-party information providers.1431 We have attempted to mitigate the potential cost relating to the loss of information by eliminating only those items which are either available elsewhere, not frequently used by Commission staff, or provide minimal benefit relative to the burdens of reporting such information. 4. Alternatives Similar to Form N–PORT, the Commission has explored other ways to modernize and improve the utility and the quality of the census information that funds provide to the Commission and to investors. Commission staff examined how census information reported to the Commission could be improved to assist the Commission in its oversight activities, as well as how the information could benefit investors and other potential users of the information. Alternatives to the filing of Form N–CEN and the reporting of census information relate to the timing and frequency of the reports, the public disclosure of the information, the information that Form N–PORT would request, and the rescission of Form N– SAR. Unlike Form N–SAR, on which management companies file reports on a semi-annual basis, management companies will report information on Form N–CEN on an annual basis. An alternative to the annual reporting of census information in Form N–CEN is a semi-annual reporting of the information similar to Form N–SAR. However, as we discussed above, the census-type nature of the information that we will collect from funds in Form N–CEN should not change as frequently as, for example, portfolio holdings mstockstill on DSK3G9T082PROD with RULES2 1430 Some of the information that funds will no longer report on a census-form, such as loads paid to captive or unaffiliated brokers, has been found by interested third-parties, including researchers, to be important in their analysis of the fund industry. See, e.g., Susan E. K. Christoffersen, Richard Evans & David K. Musto, What do Consumers’ Fund Flows Maximize? Evidence from Their Brokers’ Incentives, 68 J. of Fin. 201 (2013). See discussion supra section II.D.5. 1431 See, e.g., Morningstar Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 information.1432 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–CEN from 75 days. While a shorter filing period, such as 60 days (similar to the proposal) would provide more timely information to the Commission,1433 it would also place a burden on funds that need time to collect, verify, and report the required information to the Commission. Several commenters supported extending the filing period to at least a 75-day period, arguing, among other things, that a longer time period would help stagger the filing deadline from other end-ofmonth filing requirements, ensure that all accounting-related questions could be addressed more completely, and allow the appropriate time needed to update systems to report information in an XML format.1434 As discussed above, we have been persuaded by commenters to adopt a filing period of 75 days after the fiscal year-end (for management companies) and calendar year-end (for UITs). We believe that the 75-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. Funds will have 18 months after the effective date to comply with the new reporting requirements for Form N– CEN. An alternative would be to tier the compliance period, similar to the compliance period for Form N–PORT, dependent on entity size. However, as discussed above, we believe that it is less likely that smaller entities would need additional time to file Form N– CEN because the requirement to file Form N–CEN is similar to the current 1432 Unlike Form N–SAR, Form N–CEN will not require funds report information relating to fee and expense information. Morningstar Comment Letter suggested semi-annual reporting of Form N–CEN should fee and expense information be required on Form N–CEN. 1433 Several commenters supported the 60-day filing period (Carol Singer Comment Letter and State Street), other commenters supported a longer filing period (MFS Comment Letter; CAI Comment Letter; T. Rowe Price Comment Letter; Invesco Comment Letter; and ICI Comment Letter). One justification for a longer filing period provided by commenters is the time needed to update systems to report information in an XML format (MFS Comment Letter; Invesco Comment Letter; and ICI Comment Letter). 1434 MFS Comment Letter; CAI Comment Letter; T. Rowe Price Comment Letter; Invesco Comment Letter; and ICI Comment Letter. PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 requirement to file Form N–SAR, and we expect that filers will prefer the updated, more efficient filing format of Form N–CEN.1435 An additional alternative would be to extend the compliance period. Some commenters suggested that the compliance period be extended to the later of 30 months after adoption of Form N–CEN, or 18 months after the effective date of amendments requiring funds to report liquidity information on Form N–CEN.1436 Given that much of the information that will be reported on Form N–CEN is currently already reported by funds on Form N– SAR, funds should already have processes and procedures in place to reduce the risk of inadvertent errors. In addition, filings on Form N–CEN are not expected to be as technically complex nor present comparable challenges in terms of reporting and data validation as filings on Form N–PORT. As such, we expect that eighteen months will 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 Form N–CEN with the Commission. Funds will be required to report to the Commission information in Form N– CEN that will provide staff an ability to identify investment risks and engage in further outreach as necessary. Not requiring the information would substantially reduce the ability of the Commission to oversee the fund industry. In addition, the information reported on Form N–CEN could be important to investors to differentiate investment companies. An alternative to adopting Form N–CEN would be to revise Form N–SAR. The Commission believes, however, that the outdated technology associated with Form N– SAR requires the introduction of a new form in order to increase the benefits from the changes made to the reporting of census information. In addition, there were no commenters who explicitly stated that Form N–SAR should not be replaced by Form N–CEN. The information that funds report on Form N–CEN will be made publicly available. Additional alternatives include making some or all of the 1435 No commenters expressed an opinion specifically related to the filing format of N–CEN versus N–SAR. 1436 See, e.g., Fidelity Comment Letter (suggesting a compliance date of 30 months after the adoption of Form N–CEN); MFS Comment Letter (same); CAI Comment Letter (same); IDC Comment Letter (same); ICI Comment Letter (suggesting the later of 30 months after the adoption of Form N–CEN or 18 months after the adoption of amendments requiring funds to report liquidity information on Form N– CEN). E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations census information reported on the form nonpublic. Specific information that could be made nonpublic includes securities lending information,1437 service provider information,1438 and ETF authorized participant information.1439 Making more information reported on Form N–CEN nonpublic would reduce the amount of information available to investors and therefore reduce the ability of investors to differentiate investment companies. For example, one commenter recommended that details concerning indemnification protection should be made nonpublic.1440 Nonetheless, we continue to believe that public reporting is a necessary part of improving transparency regarding a fund’s securities lending activities. Specifically, we believe that the information regarding indemnification provisions is relevant to investors evaluating the risks associated with securities lending and comparing those risks across funds. One set of alternatives is to require funds to report additional information on Form N–CEN, including additional new information that is not currently reported on Form N–SAR.1441 Another set of alternatives is to require funds to report less information on Form N–CEN. For example, commenters expressed concern about providing new commenters suggested that certain securities lending information be kept non-public, including information describing third-party lending arrangements (Fidelity Comment Letter). 1438 Some commenters suggested that certain service provider information be kept non-public, including the identities of the pricing services used (Interactive Data Comment Letter) and the compensation and other fee and expense arrangements (IDC Comment Letter). 1439 Some commenters suggested that disclosure of information on authorized participants could discourage APs from participating in the ETF market (Invesco Comment Letter and BlackRock Comment Letter), while others suggested that disclosure of the creation and redemption activity of each AP is not helpful and is confusing to investors (BlackRock Comment Letter). See supra footnote 1429 and accompanying text. 1440 See Fidelity Comment Letter. 1441 Morningstar Comment Letter expressed concern that some of the information that would have been eliminated under the proposal would decrease the availability of the information for investors and other interested parties. mstockstill on DSK3G9T082PROD with RULES2 1437 Some VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 information related to securities lending, service providers, and ETF authorized participants, and one alternative is to not require this information to be provided.1442 One commenter, however, expressed concern about the exclusion from Form N–CEN of particular items on Form N– SAR.1443 As discussed above, the adoption of Form N–CEN and the rescission of Form N–SAR will improve the quality and utility of the information investment companies report to the Commission. Although additional information could further increase the benefits of Form N–CEN to Commission staff, investors, and other interested parties, the benefits may not justify the initial and ongoing costs for investment companies to report the information because the Commission believes that the information we are requesting strikes an appropriate balance between the current information needs of Commission staff as well as the developments in the fund industry and the reduction of reporting burdens for registrants, particularly where information may be similarly disclosed or reported elsewhere.1444 E. Amendments to Forms Regarding Securities Lending Activities 1. Introduction and Economic Baseline We are also adopting amendments to Forms N–1A and N–3 to require certain disclosures in fund Statements of Additional Information regarding securities lending activities, as well as amendments to Form N–CSR to require the same information from closed-end funds.1445 We proposed that similar 1442 See, e.g., Fidelity Comment Letter; Interactive Data Comment Letter; and BlackRock Comment Letter; supra footnote 1429 and accompanying text. 1443 Morningstar Comment Letter expressed concern that the exclusion of several Form N–SAR items would then require a manual aggregation of information that would put comprehensive analysis of the information out of reach for investors and fund boards unless they were using services from third-party providers that could aggregate such data. 1444 See, e.g., supra footnotes 941, 968, 989, 1000– 1003 and accompanying text. 1445 See Item 19(i) of Form N–1A; Item 21(j) of Form N–3; Item 12 of Form N–CSR; see also supra section II.F. PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 81991 requirements be included in fund financial statements as part of the proposed amendments to Regulation S– X in order to allow investors to better understand the income generated from, as well as the expenses associated with, a fund’s securities lending activities.1446 Some commenters stated that some of the proposed requirements would yield estimates that may be costly to audit, and that lengthy disclosure concerning securities lending activity in a fund’s financial statements could detract from other financial statement disclosures.1447 After consideration of these issues raised by commenters, we are adopting these disclosure requirements as amendments to the fund registration forms (viz., Forms N– 1A and N–3) or, in the case of closedend funds, as amendments to Form N– CSR, rather than as amendments to Regulation S–X.1448 The final rules will require funds to disclose gross and net income from securities lending activities, fees and compensation in total and broken out by enumerated types, and a description of the services provided to the fund by the securities lending agent. The quantitative disclosure requirements are discussed above in section II.F and also illustrated in Table 2 below. 1446 The proposed requirements would have included disclosure in the fund’s financial statements 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 fund 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 fund 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 fund 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. See proposed rule 6– 03(m) of Regulation S–X; Proposing Release, supra footnote 7, at 33624. 1447 See Deloitte Comment Letter; EY Comment Letter. 1448 See Item 19(i) of Form N–1A; Item 21(j) of Form N–3; Item 12 of Form N–CSR. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Modifications from the proposed rule include, for example, replacing the proposed requirement that funds disclose the terms governing the compensation of the securities lending agent—including any revenue split— with a requirement to report actual fees paid during the fund’s prior fiscal year,1449 because commenters persuaded us that backward-looking dollar-based requirements would yield clearer disclosure than would the proposed requirements and may also enhance disclosure comparability across funds for investors and reduce preparation complexity for funds. Additionally, as discussed above, while the proposed requirements would have included disclosure of all fees and/or compensation paid for securities lending and related services, we have determined that it is appropriate to clarify in the final rules the specific categories of fees and/or compensation that are required to be disclosed.1450 The current set of fund registration statement and reporting requirements under Forms N–1A, N–3, and N–CSR (for closed-end funds) is the baseline from which we discuss the economic effects of today’s amendments. The parties that could be affected by these amendments include funds that file or 1449 Compare proposed rule 6–03(m)(4) of Regulation S–X with Item 19(i)(1)(ii) of Form N–1A; Item 21(j)(i)(B) of Form N–3 (same); Item 12(a)(1) of Form N–CSR. 1450 Compare proposed rule 6–03(m)(2) with Item 19(i)(1)(ii) of Form N–1A; Item 21(j)(i)(B) of Form N–3; and Item 12(a)(1) of Form N–CSR. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 will file or update registration statements with the Commission (and closed-end funds that file or will file reports on Form N–CSR), the Commission itself, current and future investors of investment companies, and other market participants that could be affected by the increase in the disclosure of fund securities lending activity information. We expect that many of the economic effects from the amendments to Forms N–1A, N–3, and N–CSR will largely result from an increase in investor ability to make investment decisions dependent on the more transparent disclosure in fund Statements of Additional Information (or in Form N– CSR for closed-end funds), and the extent to which this transparency enhances the ability of the Commission to utilize the updated disclosures. As discussed above, the economic effects will depend on the extent to which the securities lending practices of all investment companies become more transparent, and the ability of investors—and, in particular, individual investors—to utilize Statements of Additional Information (and reports on Form N–CSR for closed-end funds) to compare funds and to make investment decisions. As a result of these factors, some of which are unquantifiable, the discussion below is largely qualitative. 2. Benefits The amendments to Forms N–1A, and N–3, and N–CSR will benefit investors by enhancing the information funds PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 disclose in the Statements of Additional Information (and reports on Form N– CSR for closed-end funds). We continue to believe that because net earnings from securities lending can contribute to the investment performance of a fund, the Commission, investors and others would benefit from the additional transparency of securities lending fees on the income from these activities. We further believe that the benefits of this additional transparency justify the potential unintended consequences, highlighted by commenters and discussed above, of public disclosure of certain information.1451 We have made modifications from the proposed requirements designed to, among other things, enhance comparability of the disclosed information and potentially ameliorate some concerns commenters expressed about the proposed required public disclosure of the terms governing compensation of the securities lending agent. A commenter suggested that we could facilitate comparability by specifying the fees for particular services that must be disclosed,1452 and we agree. We believe that these clarifications will enhance comparability of the disclosed fees and compensation across funds, and indirectly benefit investors to the extent that other entities, including investment advisers and broker-dealers, utilize the 1451 See supra footnotes 1212–1219 and accompanying text. 1452 See Fidelity Comment Letter. E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.013</GPH> mstockstill on DSK3G9T082PROD with RULES2 81992 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations information to help investors make more informed investment decisions. The comparability of the disclosed fee and expense information may also depend on the nature of the services provided to a particular fund in connection with its securities lending activities. Accordingly, to further enhance the comparability of the disclosed information and allow users to better assess fee and expense information, we have determined to specify that this information should be provided on the basis of the services actually provided to the fund in its most recent fiscal year and the discussion above provides some examples of the types of services that could be enumerated to illustrate such services.1453 As mentioned above, we are persuaded that backward-looking dollarbased requirements would yield clearer disclosure than would the proposed requirements and may also enhance disclosure comparability across funds for investors and reduce preparation complexity for funds. This change from the proposal allows investors and others to derive the informational benefit from the disclosure without any potentially sensitive negotiated contractual terms being made public. 3. Costs mstockstill on DSK3G9T082PROD with RULES2 We believe that registrants on average will likely incur minimal costs from our amendments to Forms N–1A and N–3, including certain paperwork and other expenses discussed below.1454 Several commenters expressed concern that the proposed disclosure requirements could yield information that would suggest, inaptly, that fees and expenses related to securities lending activities among funds are readily compared and contrasted.1455 While there is the potential for investor confusion with any disclosure, we believe we have mitigated these concerns through changes that we are 1453 Item 19(i)(2) of Form N–1A (requiring disclosure of the services provided to the fund by the securities lending agent (for example and as applicable, locating borrowers, monitoring daily the value of the loaned securities and collateral, requiring additional collateral as necessary, cash collateral management, qualified dividend management, negotiation of loan terms, selection of securities to be loaned, recordkeeping and account servicing, monitoring dividend activity and material proxy votes relating to loaned securities, and arranging for return of loaned securities to the fund at loan termination)); Item 21(j)(ii) of Form N– 3 (same); Item 12(b) of Form N–CSR (same). 1454 See infra footnotes 1460–1461 and accompanying text. See also supra section III.B.3 for related cost analysis associated with amendments to Form N–CSR. 1455 See MFS Comment Letter; PwC Comment Letter. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 making from the proposal, such as switching from terms of compensation to backward-looking dollar based requirements and providing clarification in the final rules as to the types of fees and/or compensation that must be enumerated. Another commenter expressed concerns that the proposed fee and expense information could be used to evaluate the terms of a fund’s lending arrangements and could, without access to additional information, result in potentially inappropriate conclusions that a fund negotiated its arrangements poorly or was otherwise disadvantaged in its negotiations.1456 That commenter noted that the revenue split can depend on numerous factors, including the range, amount, and attractiveness of the securities a fund complex as a whole may make available for loan.1457 We believe that the modifications we have made from the proposal, discussed above in Section II.F.2, help ameliorate these concerns. Commenters also expressed concerns with the proposed requirements based on the currently nonpublic character of some of the information that would be required to be disclosed publicly, particularly the proposed requirement to disclose the terms governing compensation of the securities lending agent.1458 Commenters argued that some funds currently enjoy privately negotiated competitive advantages with securities lending services or counterparties that could be jeopardized should their arrangements with their securities lending agents be made public.1459 First, we note that, as discussed herein, we have modified the rule from the proposal and are no longer requiring certain pieces of information be disclosed—specifically, the terms of the revenue split and the terms governing the compensation of the securities lending agent more generally. We acknowledge, as these commenters have asserted, that enhanced transparency into securities lending 1456 PwC Comment Letter (particularly with respect to the proposed terms of compensation disclosure requirement); see also RMA Comment Letter (concerning borrower rebates). 1457 PwC Comment Letter. 1458 See AICPA Comment Letter (particularly with respect to the terms governing the compensation of the securities lending agent); Fidelity Comment Letter (particularly with respect to the revenue split); ICI Comment Letter; Invesco Comment Letter; MFS Comment Letter; SIFMA Comment Letter I; Simpson Thacher Comment Letter (particularly with respect to the revenue split); Wells Fargo Comment Letter. 1459 See AICPA Comment Letter; Fidelity Comment Letter; ICI Comment Letter; Invesco Comment Letter; MFS Comment Letter; SIFMA Comment Letter I; Simpson Thacher Comment Letter; Wells Fargo Comment Letter. PO 00000 Frm 00125 Fmt 4701 Sfmt 4700 81993 arrangements could put funds at a competitive disadvantage by affecting the relative negotiating posture of funds that procure securities lending services, or dissuade counterparties from engaging in securities lending altogether, which could drive up the costs of lending services for funds. We believe, however, that the modifications to the proposed requirements that we are making today eliminate the disclosures from the proposed requirements that some commenters indicated could be the most sensitive while retaining the required information that we think will be most useful to investors in understanding the expenses associated with fund securities lending activities. This dollar-based requirement would also eliminate the requirement that potentially sensitive negotiated contractual terms be disclosed. As mentioned above, we are persuaded that backward-looking dollarbased requirements would yield clearer disclosure than would the proposed requirements, thus mitigating potential costs related to misinterpretation or a false sense of precision by investors. In addition, this switch from terms of compensation to backward-looking dollar-based requirements could yield a cost savings for filers by possibly reducing preparation complexity relative to the proposal. We expect that funds would incur certain paperwork and other expenses in connection with the new requirements. For funds that file registration statements on Forms N–1A and N–3, as discussed in detail below, we estimate that these paperwork expenses would be, in the aggregate, about $1.3 million each year.1460 Funds 1460 Below, we estimate that 9,502 and 16 funds per year could file registration statements on Forms N–1A and N–3, respectively. See infra text following footnote 1591. Below, we estimate that funds will, on average, incur 0.5 burden hours per fund per year to comply with the new registration statement requirements. See id. Therefore, in the aggregate, we estimate that such funds would incur about 5,038 burden hours to comply with these requirements. (9,502 funds + 16 funds) × 0.5 burden hours per fund per year = 4,759 burden hours per year. The Commission estimates the wage rate associated with these burden hours based on salary information for the securities industry compiled by the Securities Industry and Financial Markets Association. The estimated wage figure is based on published rates for intermediate accountants and attorneys, modified to account for an 1,800-hour work year; multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead; and adjusted to account for the effects of inflation, yielding effective hourly rates of $160 and $386, respectively. See Securities Industry and Financial Markets Association, Report on Management & Professional Earnings in the Securities Industry 2013. We estimate that intermediate accountants and attorneys would divide their time equally, yielding an estimated E:\FR\FM\18NOR2.SGM Continued 18NOR2 81994 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations would also incur initial one-time costs associated with establishing systems and procedures for compliance. We estimate that these expenses would be, in the aggregate, about $3.9 million.1461 For closed-end funds that file annual reports on Form N–CSR, we estimate that the new requirements will increase the hour burden associated with the paperwork costs of Form N–CSR for closed-end funds by an additional 2 burden hours with an additional internal cost burden of $648 per fund in the first year,1462 and an additional 0.5 hours with an additional internal cost burden of $162 per fund for filings in subsequent years.1463 mstockstill on DSK3G9T082PROD with RULES2 4. Alternatives The Commission has also explored other ways to modernize and improve the utility, quality, and consistency of the information that funds report to the Commission and to investors in the financial statements required in shareholder reports and other registration statements. Commission staff examined how the information funds provide to the Commission and to investors could be made more informative and more consistent across funds. Alternatives to the amendments to Forms N–1A, N–3, and N–CSR to require certain disclosures relate to information that funds report and the location in which the information is reported. One alternative would be simply to not adopt any new securities lending disclosure amendments. We believe, however, that information regarding securities lending activities can provide investors with insights into fund hourly wage of $273 per hour. ($160 per hour for intermediate accountants + $386 per hour for attorneys) ÷ 2 = $273 per hour. Based on the Commission’s estimate of 4,759 burden hours per year and the estimated wage rate of $273 per hour, the total annual paperwork expenses for funds associated with the new registration statement requirements are approximately $1,299,207. 4,759 hours per year × $273 per hour = $1,299,207 per year. 1461 Below, we estimate that funds will, on average, incur 1.5 one-time burden hours in the first year to comply with the new registration statement requirements. See infra text following footnote 1591. Therefore, in the aggregate, we estimate that such funds will incur about 15,114 one-time burden hours to comply with these requirements. (9,502 funds + 16 funds) × 1.5 one-time burden hours = 14,277 one-time burden hours. Based on the Commission’s estimate of 14,277 one-time burden hours and the estimated wage rate of $273 per hour, the total one-time paperwork expenses for funds associated with the new registration statement requirements are approximately $3,897,621. 14,277 one-time burden hours × $273 per hour = $3,897,621. 1462 See infra footnote 1610 and accompanying text; see also infra section IV.D.7. 1463 See infra footnote 1611 and accompanying text; see also infra section IV.D.7. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 activities, foster comparability across funds, and contribute to investors making informed investment decisions. We are adopting amendments to Forms N–1A, N–3, and Form N–CSR to require certain disclosures regarding securities lending activities. Alternatively, we could require these disclosures to be made in the financial statements, in Form N–PORT, or in Form N–CEN. Given that our objective was to make this information available to investors and other users of the data, after consideration of comments we have decided that the Statement of Additional Information (and, with respect to closed-end funds, reports on Form N–CSR) is an appropriate place for funds to be required to disclose this information. Finally, we could adopt different reporting requirements. For example, we could, as proposed, have required funds to disclose the terms of compensation in securities lending agreements rather than the backwardlooking, dollar-based values. However, as discussed previously, commenters suggested, that doing so could result in the loss of privately negotiated competitive advantages or a decrease in the number of counterparties willing to participate in the securities lending market, and we believe that the requirements, as adopted eliminate the disclosures from the proposed requirements that commenters indicated could be the most sensitive while retaining the required information that we think will be most useful to investors in understanding the expenses associated with fund securities lending activities. Hence, we have decided against such an alternative. F. Other Alternatives to the Reporting Requirements The Commission has explored additional ways to modernize and improve the utility and the quality of the information that funds provide to the Commission and to investors. The Commission has considered many alternatives to the individual elements contained in new Form N–PORT, amendments to Regulation S–X, and new Form N–CEN; alternatives specific to each of the new reporting requirements are discussed above. The following discussion addresses other significant alternatives which involve aspects of fund reporting that pertain to more than one of the new reporting requirements. The Commission considered the information that will be required on Form N–PORT as compared to the information on Form N–CEN. Commission staff considered the PO 00000 Frm 00126 Fmt 4701 Sfmt 4700 benefits to having the information more frequently updated as well as the cost to funds to report the information. Although the reporting of information on a more frequent basis imposes additional costs on funds, Commission staff believes the information that will 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. Commission staff also considered the benefits of identification information to link information between forms and with other sources of information, with the costs to funds to obtain and report the identification information on the new forms. The Commission is requiring that investment companies file Form N– PORT and Form N–CEN in an XML structured data 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 with which the information investment companies provide can be compiled and aggregated. Commission staff believes that the affected parties would experience substantially less benefit from the reporting of investment company information if the information is not structured because of the time it would take to parse the information and the potential for errors in data due to the fact that unstructured data cannot be validated during the filing process. In addition, based on the Commission’s understanding of current practices, it is likely that many investment companies and third party service providers have systems in place to accommodate the use of XML. Furthermore, based on our experiences with Forms N–MFP and PF, both of which require filers to report information in an XML format, we continue to believe that requiring funds to report information on Forms N–PORT and N–CEN in an XML format will provide the information that we seek in a timely and cost-effective manner. Therefore, requiring information in a format such as XML should impose minimal costs. The Commission will 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 data format. The Commission 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. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 The technology used to structure the data could affect the benefits and costs associated with the adopted rules, and we have therefore considered alternative formats for structuring the data.1464 Some commenters suggested XBRL, a tagged system that is based on XML and was created specifically for the purpose of reporting financial and business information,1465 so as to leverage existing data definitions and reduce implementation costs.1466 However, as noted earlier we believe that requiring funds to report information on Form N– PORT in XML will be both efficient and cost-effective for funds. Sending a data file from a sender to a recipient requires many conditions to be satisfied, and among those of crucial importance to regulatory data collection are compact transmission and efficient validation. XML Schema provides a widely used validation framework for XML, and is supported in all modern programming languages. The nature of the information we are collecting also lends itself to XML schema for almost all validation,1467 and the arithmetic validations not supported natively in XML Schema are straightforwardly expressible in any number of languages. For this data set, the additional flexibility offered by a broader XML based framework such as XBRL incurs data volume and processing overhead with little incremental benefit; for example, the information funds will report will be as of a single reporting date, the units of measurement are predetermined or are constrained by the data type, and there is little value in customizing the content or presentation. Finally, one commenter stated that we should not require funds to directly report information on their own behalf, but instead require other entities such as transfer agents and custodians to report 1464 One commenter suggested a pre-formatted web portal or web form as well as the further development of inline structured data to ease reporting burdens (Schnase Comment Letter). We believe, however, that the volume of data for a fund to report on Form N–PORT would not lend itself to a manual entry approach, although we are considering the possibility of providing an online form for filers to use at their option for filing Form N–CEN, as we have with some other Commission Forms, such as Form 13F. 1465 See, e.g., XBRL US Comment Letter; Deloitte Comment Letter; but see Morningstar Comment Letter (‘‘Extensible Business Reporting Language has had very limited success, and certain aspects of the standard are too lenient for regular data validation.’’). 1466 For example, public companies currently use XBRL taxonomies to file reports with the SEC, including investment companies that voluntarily file structured data on Form N–CSR. 1467 Some commenters discussed the additional benefits from the types of validation that can be conducted with XBRL (XBRL US Comment Letter and AICPA Comment Letter). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 information on behalf of funds.1468 Given our expertise and experience in regulating, examining, and overseeing funds, including fund reporting, recordkeeping, and compliance, we continue to believe that obtaining such information directly from funds is appropriate. IV. Paperwork Reduction Act New forms Form N–CEN and Form N–PORT contain ‘‘collections of information’’ within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).1469 In addition, the amendments to Articles 6 and 12 of Regulation S–X will impact the collections of information under rules 30e–1 and 30e–2 of the Investment Company Act,1470 and the amendments to Forms N–1A, N–2, N–3, N–4, N–6, and N–CSR under the Investment Company Act and Securities Act will impact the collections of information under those forms. Furthermore, implementation of new Forms N–PORT and N–CEN will coincide with rescission of Forms N–Q and N–SAR, thus eliminating the collections of information associated with those forms and impacting the collections of information under Form N–CSR. 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); 1471 ‘‘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 1468 See Federated Comment Letter (‘‘It would also reduce the reporting burden on funds for the Commission to acquire information directly from custodians and transfer agents, which are proficient in maintaining and reporting portfolio holdings and other information.’’). 1469 44 U.S.C. 3501 through 3521. 1470 The paperwork burden from Regulation S–X is imposed by the rules and forms that relate to Regulation S–X and, thus, is reflected in the analysis of those rules and forms. To avoid a PRA inventory reflecting duplicative burdens and for administrative convenience, we have previously assigned a one-hour burden to Regulation S–X. 1471 Currently, there is a collection of information associated with rule 30b1–5 under the Investment Company Act. See rule 30b1–5, ‘Quarterly Report’ Originally submitted and approved as Proposed Rule 30b1–4 under the Investment Company Act of 1940, ‘Quarterly Report’ ’’ (OMB Control No. 3235– 0577). Rule 30b1–5 is the rule that requires certain funds to file Form N–Q. Among other things, we are rescinding Form N–Q and requiring certain funds to file Form N–PORT pursuant to new rule 30b1– 9. With this in mind, we are discontinuing the information collection for rule 30b1–5. PO 00000 Frm 00127 Fmt 4701 Sfmt 4700 81995 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 OpenEnd 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); ‘‘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). The titles for the new collections of information are: ‘‘Form N–CEN Under the Investment Company Act, Annual Report for Registered Investment Companies’’ (OMB Control No. 3235– 0729 for N–CEN) and ‘‘Form N–PORT Under the Investment Company Act, Monthly Portfolio Investments Report’’ (OMB Control No. 3235–0730). We published notice soliciting comments on the collection of information requirements in the Proposing Release and submitted the proposed collections of information to the Office of Management and Budget (‘‘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 adopting new forms Form N–CEN and Form N–PORT 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 E:\FR\FM\18NOR2.SGM 18NOR2 81996 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 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 mstockstill on DSK3G9T082PROD with RULES2 1. Form N–PORT Certain funds will be required to file an electronic monthly report on Form N–PORT within thirty days after the end of each month. Form N–PORT is intended to improve transparency of information about funds’ portfolio holdings and facilitate oversight of funds. The information required by Form N–PORT will be data-tagged in XML format. The respondents to Form N–PORT will be management investment companies (other than money market funds and small business investment companies) and UITs that operate as ETFs. Compliance with Form N–PORT will be mandatory for all such funds. Responses to the reporting requirements will be kept confidential for reports filed with respect to the first two months of each quarter; the third month of the quarter will not be kept confidential, but made public sixty days after the quarter end. In the Proposing Release, we estimated that 10,710 funds 1472 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 structured data filings, we estimated 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 estimated that 35% of funds (3,749 funds) would license a software solution and file reports on proposed Form N– PORT in house.1473 We further 1472 This estimate includes 8,731 mutual funds (excluding money market funds), 1,411 ETFs and 568 closed-end funds and is based on ICI statistics as of December 31, 2014, available at https:// www.ici.org/research/stats. 1473 See Money Market Fund Reform 2014 Release, supra footnote 33, at 47945 (adopting amendments to Form N–MFP and noting that approximately 35% of money market funds that report information on Form N–MFP license a software solution from a third party that is used to VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 estimated 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 1474 and an average of approximately 14 burden hours for subsequent filings.1475 Therefore, we estimated the per fund average annual hour burden associated with proposed Form N–PORT for 3,749 fund filers would be 198 hours for the first year1476 and 168 hours for each subsequent year.1477 Amortized over three years, the assist the funds to prepare and file the required information). 1474 We anticipated that these funds would use the same software that was used to generate reports on Form N–Q and that the software vendor offering the Form N–Q software would likely offer an update to that software to handle reports on Form N–PORT. Accordingly, we estimated the burden associated with information that is currently filed on Form N–Q and that would also be filed on Form N–PORT to generally be the same—10.5 hours per filing. With respect to new data that would be required by Form N–PORT that was not required by Form N–Q, we generally estimated that it would initially take up to 10 hours to connect the software to the new data points. However, because we understand risk metrics data may be located on a different system than portfolio holdings data and because current reporting requirements do not require funds to have a process in place for these two systems to work together, with respect to the new risk metrics data that would be required by Form N–PORT, we estimated that it would initially take up to 15 hours to connect the risk metrics data to the software and that, once connected, it would take 5 hours to program the risk metrics software to output the required data to the Form N–PORT software. Additionally, we added another 3.5 hours to our estimated initial burden to account for the increased amount of information that would be required to be reported on Form N–PORT, but that is not currently required by Form N–Q. See infra footnote 1475 (discussing the additional 30% burden added to the current Form N–Q estimate). We also noted that funds that are part of a larger fund complex may realize certain economies of scale when preparing and filing reports on proposed Form N–PORT. For purposes of our analysis, however, we took a conservative approach and did not account for such potential economies of scale. 1475 We anticipated that most of the burden associated with licensing a software solution, as discussed above, would be a one-time burden. Accordingly, we estimated approximately 14 hours per fund for subsequent filings. This estimate is based on the 10.5 hours currently estimated for filings on Form N–Q, plus 30% to account for the amount of additional information that would be required to be filed on Form N–PORT. Additionally, because we believe that the required information is generally maintained by funds pursuant to other regulatory requirements or in the ordinary course of business, for the purposes of our analysis, we did not ascribed any time to collecting the required information. See also supra footnote 1474 (noting that our estimates do not account for economies of scale). 1476 The estimate is based on the following calculation: (1 filing × 44 hours) + (11 filings × 14 hours) = 198 burden hours in the first year. 1477 This estimate is based on the following calculation: 12 filings × 14 hours = 168 burden hours in each subsequent year. PO 00000 Frm 00128 Fmt 4701 Sfmt 4700 average aggregate annual hour burden would be 178 hours per fund.1478 In the Proposing Release, we further estimated 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.1479 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 anticipated that funds and their thirdparty service providers would 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 estimated 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 1480 and an average of approximately 9 burden hours for subsequent filings.1481 Therefore, we 1478 The estimate is based on the following calculation: (198 + (168 × 2))/3 = 178. 1479 See Money Market Fund Reform 2014 Release, supra footnote 33, at 47945 (adopting amendments to Form N–MFP and noting that approximately 65% of money market funds that report information on Form N–MFP retain the services of a third party to provide data aggregation and validation services as part of the preparation and filing of reports on Form N–MFP). 1480 In order to be able to automate the process of communicating data to a third-party service provider so that it can be reported on Form N– PORT, we estimated that it would initially take a fund 60 hours to either procure software and integrate it into its systems or, alternatively, to write its own software. For those funds that already have an automated portfolio reporting process in place, we estimated that they would initially incur the same burden as those funds that license a software solution and file reports on proposed Form N– PORT in house. For these latter funds, however, we used the higher burden hours estimated for using a third party service provider in order to be conservative in our estimates because we lacked data on the number of funds that currently have an automated portfolio reporting process in place. See supra footnote 1474 (discussing the burdens associated with licensing a software solution and filing reports on proposed Form N–PORT in house); see also supra footnote 1474 (noting that our estimates did not account for economies of scale). 1481 We anticipated that most of the burden associated with third-party aggregation and validation would be the result of creating an automated process, as discussed above, and thus would be a one-time burden. Accordingly, we estimated approximately 9 hours per fund for subsequent filings. This estimate was based on the 10.5 hours currently estimated for filings on Form N–Q, plus 30% to account for the amount of additional information that would be required to be filed on Form N–PORT, and subtracting 5 hours in recognition of the use of a third-party service provider to assist in the preparation and filing of reports on the form. Additionally, because we believe that the required information is generally maintained by funds pursuant to other regulatory requirements or in the ordinary course of business, E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 estimated 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 1482 and 108 hours for each subsequent year.1483 Amortized over three years, the average aggregate annual hour burden would be 125 hours per fund.1484 In sum, we estimated that filing reports on proposed Form N–PORT would impose an average total annual hour burden of 1,537,572 on applicable funds.1485 In the Proposing Release, we noted that 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 structured data filings, we estimated that funds that would file reports on proposed Form N– PORT in house would license a thirdparty software solution to assist in filing their reports at an average cost of $4,805 per fund per year.1486 In addition, we estimated 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.1487 In sum, we estimated that all applicable funds would incur on average, in the aggregate, external annual costs of $97,674,221.1488 for the purposes of our analysis, we did not ascribe any time to collecting the required information. See also supra footnote 1474 (noting that our estimates did not account for economies of scale). 1482 The estimate is based on the following calculation: (1 filing × 60 hours) + (11 filings × 9 hours) = 159 burden hours per year. 1483 The estimate is based on the following calculation: 12 filings × 9 hours = 108. 1484 The estimate is based on the following calculation: (159 + (108 × 2))/3 = 125. 1485 The estimate is based on the following calculation: (3,749 × 178 hours) + (6,962 × 125 hours) = 1,537,572. 1486 We estimated that money market funds that file reports on Form N–MFP in house license a third-party software solution for approximately $3,696 per fund per year. Due to the increased volume and complexity of the information that will be filed in reports pursuant to proposed Form N– PORT, we increased our external cost estimate for funds filing in house on proposed Form N–PORT by 30% (or $1,109). 1487 We estimated that money market funds that file reports on Form N–MFP through a third-party service provider pay approximately $8,800 per fund per year. Due to the increased volume and complexity of the information that will be filed in reports pursuant to proposed Form N–PORT, we increased our estimate for funds filing through a third-party service provider on proposed Form N– PORT by 30% (or $2,640). 1488 This estimate is based on the following calculation: (3,749 funds that will file reports on proposed Form N–PORT in house × $4,809 per fund, per year) + (6,962 funds that will file reports on proposed Form N–PORT using a third-party service provider × $11,440 per fund, per year) = $97,674,221. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 We received two comments on proposed Form N–PORT’s estimated hour and costs burdens. One commenter, who submitted a comment letter on behalf of certain asset management firms focused on alternative investment strategies, stated that the proposed estimates of hours and costs were not realistic.1489 The commenter stated that, based on its outreach, several firms were currently spending more than 198 hours per year on investment company quarterly reporting. 1490 This commenter additionally noted that Form N–PORT requires more information than current quarterly reports, particularly for funds that implement ‘‘alternative’’ strategies, and must be filed monthly. The commenter also indicated that at least one firm they reached out to anticipated hiring one or more full-time equivalents to handle the reporting requirements. We do not agree with the commenter’s suggestion that the burden estimates it compiled based on outreach to firms regarding their current time spent on quarterly reporting is necessarily inconsistent with the burden estimates we proposed. We understand that the burden will vary across funds depending on the size of the fund, the size of the fund complex, and the complexity of the portfolio, among other factors. The burden for some funds will exceed our estimate, and the burden for others will be less due to the nature of the fund. Also, while it is true that Form N–PORT will require more frequent reporting and information not currently required for quarterly reporting, not all requirements for quarterly reporting, such as reporting on a T + 0 basis, will be required on Form N–PORT. Thus, the commenter’s estimates, which revolved around alternative strategy funds, appear to be within, but on the high end of the Commission’s estimates. Another commenter suggested that complying with Form N–PORT reporting requirements could cost $800,000 to $1,500,000 for the fund complex (of approximately 250 1489 See Simpson Thacher Comment Letter. id. The commenter noted that in the Proposing Release that we estimated 198 burden hours in the first year, and 168 hours thereafter ‘‘for each investment company.’’ As noted in the proposing release, 168 hours was the Commission’s ‘‘per fund’’ burden hour estimate for the first year for funds preparing and filing the reports in house, where ‘‘fund’’ is a registered management investment company and any separate series thereof. It is not clear from the comment letter whether firms that provided estimates to the commenter were providing estimated burdens for quarterly reporting per fund series, per investment company, or per fund complex. For purposes of the PRA, however, we conservatively assume it is per fund series. 1490 See PO 00000 Frm 00129 Fmt 4701 Sfmt 4700 81997 funds).1491 The commenter specified that the initial burden associated with the proposed requirements would be over 6000 hours in total to conduct analysis, develop and test newly created interfaces between the reporting solution and internal and external data sources in an attempt to automate the collection, aggregation, and validation of data reported on Form N–PORT. The commenter further asserted that ongoing reporting requirements on Form N– PORT may require a support team of up to 10–15 members. The commenter’s estimates of initial burden hours are therefore approximately 24 hours, based on a complex of 250 funds, lower than our proposed estimated initial filing burden of 44 hours per fund for fund filers filing in-house, and 60 hours per fund for fund filers retaining a third party service provider. Assuming the support team was 15 members (i.e., the high end of the range set forth by the commenter), and a 2,000 hours work year, the commenter’s annual estimated burden to file reports on Form N–PORT would be approximately 120 hours per fund.1492 This is in the range of our proposed annual estimate of 168 hours per year for fund filers filing in house and 108 hours per year for fund filers retaining a third-party service provider. Finally, assuming that the dollar estimates that the commenter cited of between $800,000 to $1,500,000 were additional external costs of reporting on Form N–PORT, the commenter’s estimated external costs would be between $3,200 and $6,000 per fund. These are in the range of our estimated external costs per fund (not including monetization of internal burden hours) of $4,805 per year for fund filers filing in house, and $11,440 per year for fund filers using a service provider. As discussed above, our adoption includes some modifications from the proposal that address concerns raised by commenters and that are intended, in part, to decrease reporting and implementation burdens relative to the proposal.1493 We believe that our modifications from the proposal will reduce the estimated initial burden hours associated with implementation of Form N–PORT reporting requirements, relative to the proposal, particularly for funds that will be required to report risk metrics or custom derivatives transactions but will not affect external costs or ongoing burden hours. Based on our review of funds and the new reporting requirements, we 1491 See Invesco Comment Letter. members × 2000 hours = 30,000 hours. 30,000 hours/250 funds = 120 hours. 1493 See supra section III.B.2. 1492 15 E:\FR\FM\18NOR2.SGM 18NOR2 81998 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 believe that, on average, the initial burden to file reports on Form N–PORT will decrease by 0.5 hours, resulting in an initial burden of 43.5 hours per fund for the 35% of funds that choose to file reports on Form N–PORT in-house, and 59.5 hours for the 65% of funds that choose to retain a third-party service provider.1494 We have revised our estimate of the number of funds that will file Form N– PORT upward from 10,710 funds to 11,382 funds to reflect updates to the industry data figures that were utilized in the Proposing Release.1495 We continue to estimate that 35% of funds (3,984 funds, updated from 3,749 in our proposal) will license a software solution and file reports on Form N– PORT in house, and 65% of funds (7,398 funds, updated from 6,962 funds in our proposal) will 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 Form N–PORT.1496 The Commission estimates that, on an annual basis, funds generally will incur in the aggregate 1,959,423 burden hours in the first year and an additional 1,468,296 burden hours for filings in subsequent years in order to comply with Form N–PORT filing requirements.1497 Amortized over three years, the total annual hour burden of filing reports on Form N–PORT will be 1,632,005 hours, with an average annual hour burden of 143 hours per fund.1498 1494 See supra footnotes 1474 (estimating an initial burden of 44 hours per fund in the Proposing Release for the 35% of funds that choose to file reports on Form N–PORT in-house) and 1480 (estimating an initial burden of 60 hours per fund in the Proposing Release for the 65% of funds that choose to retain a third-party service provider). 1495 This estimate of 11,382 funds includes 9,039 mutual funds (excluding money market funds), 1,594 ETFs (including eight ETFs organized as UITs and 1,586 ETFs that are management investment companies), and 749 closed-end funds (excluding SBICs). Based on data obtained from the ICI and reports filed by registrants on Form N–SAR. See supra footnote 1259 and accompanying and following text; see also 2016 ICI Fact Book, supra footnote 2, at 22, 176. 1496 These estimates are based on the following calculations: 3,749 funds = 11,382 funds × 0.35. 7,398 funds = 11,382 funds × 0.65. 1497 These estimates are based on the following calculations: 1,959,423 hours in the first year = (3,984 funds × 43.5 hours for the first filing for funds filing in-house) + (3,984 funds × 14 hours for each subsequent filing × 11 filings) + (7,398 funds × 59.5 hours for the first filing for funds retaining a third-party service provider) + (7,398 funds × 9 hours for each subsequent filing × 11 filings). 1,468,296 hours in subsequent years = (3,984 funds filing in-house × 14 hours × 12 filings) + (7,398 funds retaining a third-party service provider × 9 hours × 12 filings). 1498 These estimates are based on the following calculations: 1,632,005 hours amortized over three years = (1,959,423 hours + (1,468,296 hours × 2))/ 3. 143 hours per fund = 1,632,005 hours/11,382 funds. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 We further estimate the total annual external cost burden of compliance with the information collection requirements of Form N–PORT will be $103,787,680, or $9,118 per fund.1499 2. Rescission of Form N–Q In connection with our adoption of Form N–PORT, and as proposed, our reforms will rescind Form N–Q in order to eliminate unnecessarily duplicative reporting requirements. The rescission of Form N–Q will affect all management investment companies required to file reports on the form. In our proposal, we estimated 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.1500 We received no comments on this estimate. We have revised our estimate of the number of funds that would file Form N–Q upward from 10,453 funds to 11,863 funds to reflect updates to the industry data figures that were utilized in the Proposing Release.1501 Accordingly, we estimate that, in the aggregate, our rescission would eliminate 249,123 annual burden hours that would be associated with filing Form N–Q.1502 Additionally, we 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 amended, rule 30a–1 will require all funds to file reports on Form N–CEN with the Commission on an annual basis.1503 Similar to current Form N– SAR, Form N–CEN requires reporting with the Commission of certain censustype information. However, unlike Form 1499 These estimates are based on the following calculations: $103,776,240 = (3,984 funds × $4,805) + 7,398 funds × $11,440). $9,118 per fund = $103,787,680/11,382 funds. 1500 This estimate is based on the following calculation: 219,513 hours per year = 10,453 funds × 10.5 hours × 2 filings per year. Management investment companies currently are required to file a quarterly report on Form N–Q after the close of the first and third quarters of each fiscal year. 1501 This estimate of 11,863 funds includes 9,520 mutual funds (including money market funds), 1,594 ETFs, and 749 closed-end funds (excluding SBICs). Based on data obtained from the ICI and reports filed by registrants on Form N–SAR. See supra footnote 1259 and accompanying and following text; see also 2016 ICI Fact Book, supra footnote 2, at 22, 176. 1502 This estimate is based on the following calculation: 249,123 hours per year = 11,863 funds × 10.5 hours × 2 filings per year. 1503 For purposes of the PRA analysis, the burdens associated with amended rule 30a–1 are included in the collection of information estimates of Form N–CEN. PO 00000 Frm 00130 Fmt 4701 Sfmt 4700 N–SAR, which requires semi-annual reporting for all management investment companies, Form N–CEN requires annual reporting.1504 Form N– CEN will 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 will be mandatory for all funds, and responses will not be kept confidential. In the Proposing Release, we estimated that the Commission would receive an average of 3,146 reports per year, based on the number of existing Form N–SAR filers.1505 We estimated that management investment companies would each spend as much as 13.35 hours annually, preparing and filing reports on proposed Form N–CEN.1506 The Commission further estimated 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.1507 As discussed below, we estimated that management investment companies each spend as much as 15.35 hours preparing and filing each report on Form N–SAR. We noted that we 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, we noted that 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 noted our belief that reports in XML on proposed Form N–CEN would 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.1508 As such, we estimated that the 1504 UITs are only required to file Form N–SAR on an annual basis. See rule 30a–1. 1505 This estimate was based on 2,419 management companies and 727 UITs filing reports on Form N–SAR as of December 31, 2014. 1506 Our estimate included the hourly burden associated with registering/maintaining LEIs for the registrant/funds, which would be required to be included in reports on Form N–CEN. 1507 See Proposing Release, supra footnote 7, at 33675. 1508 We note that reports on Form N–CEN would be filed annually, rather than semi-annually as in the case of reports on Form N–SAR. Thus, while we estimated that the burden associated with each E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 annual hour burden for management companies would be 13.35 per report on proposed Form N–CEN, down from 15.35 hours per report for Form N–SAR. In the Proposing Release, we also noted that UITs may, however, experience an increase in the hour burden associated with census-type reporting if proposed Form N–CEN were 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 increased the estimated annual hour burden for each UIT from 7.11 hours in the currently approved collection for Form N–SAR to 9.11 hours for proposed Form N–CEN. We also noted our belief that, in the first year reports on the form are filed, funds may require additional time to prepare and file reports. We estimated that, for the first year, each fund would each require 20 additional hours.1509 Accordingly, we estimated that management investment companies would each require 33.35 annual burden hours in the first year 1510 and 13.35 annual burden hours in each subsequent year for preparing and filing reports on proposed Form N–CEN. Additionally, we estimated that UITs would each require 29.11 annual burden hours in the first year 1511 and 9.11 annual burden hours in each subsequent year for preparing and filing reports on proposed Form N–CEN. In the Proposing Release, we further estimated that the average annual hour burden per response for proposed Form N–CEN for the first year would be 32.37 hours 1512 and 12.37 hours in report on Form N–CEN for management companies would be two hours less than the burden associated with each report on Form N–SAR, we estimated that the annual Form N–CEN burden for management companies would actually be 17.35 hours less than that associated with Form N–SAR. This estimate is based on the following calculation: 15.35 Form N–SAR burden hours × 2 reports) ¥ 13.35 Form N–CEN burden hours = 17.35 hours. 1509 This additional time may be attributable to, among other things, reviewing and collecting new or revised data pursuant to the Form N–CEN requirements or changing the software currently used to generate reports on Form N–SAR in order to output similar data in a different format. 1510 This estimate is based on the following calculation: 13.35 hours for each filing + 20 additional hours for the first filing = 33.35 hours. 1511 This estimate was based on the following calculation: 9.11 hours for each filing + 20 additional hours for the first filing = 29.11 hours. 1512 This estimate was based on the following calculation: ((2,419 management investment VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 subsequent years.1513 Amortizing the burden over three years, we estimated that the average annual hour burden per fund per year would be 19.04 1514 and the total aggregate annual hour burden would be 59,900.1515 With respect to the initial filing of a report on Form N–CEN, we estimated an external cost of $220 per fund and, with respect to subsequent filings, we estimated an annual external cost of $120 per fund.1516 We estimated the amortized annual external cost per fund would be $153.1517 We also estimated that no external cost burden was 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.1518 In sum, we estimated that all applicable funds would incur, in the aggregate, external annual costs of $1,748,637.1519 One commenter expressed the general belief that requiring census-type data on Form N–CEN on an annual basis, rather than on a semi-annual basis on Form N– SAR, would significantly lessen reporting burdens for funds and lower costs for fund shareholders when compared to the status quo.1520 We agree and continue to believe the estimated hour and cost burdens associated with Form N–CEN estimated in the Proposing Release reflect this reduction in burdens and costs. With the exception of this comment, we did not receive comments on the estimated hour and costs burdens discussed above associated with reporting census-type information on Form N–CEN. As discussed above, our adoption of Form N–CEN includes a number of modifications or clarifications from the proposal that address concerns raised by companies × 33.35 hours) + (727 UITs × 29.11 hours)) ÷ 3,146 total funds = 32.37 hours. 1513 This estimate was based on the following calculation: ((2,419 management investment companies × 13.35 hours) + (727 UITs × 9.11 hours)) ÷ 3,146 total funds = 12.37 hours. 1514 This estimate was based on the following calculation: (32.37 hours per management company in first year + (12.37 in each year thereafter × 2 years)) ÷ 3 years = 19.04 hours per year. 1515 This estimate was based on the following calculation: 3,146 funds × 19.04 hours per fund per year = 59,900 hours per year. 1516 See Proposing Release, supra footnote 7, at n.766 (discussing the costs associated with registering and maintaining an LEI). 1517 This estimate was based on the following calculation: ($220 in first year + (2 years × $120 each subsequent year)) ÷ 3 years = $153 per year. 1518 See Item B.1.d and Item C.1.c of Form N–CEN (requiring LEI for the registrant and each series of a management company). 1519 This estimate was based on the following calculation: $153 per year per fund × 11,429 funds = $1,748,637 per year. 1520 See ICI Comment Letter. PO 00000 Frm 00131 Fmt 4701 Sfmt 4700 81999 commenters and that are intended, in part, to decrease reporting and implementation burdens relative to the proposal. For example, we have extended the filing period for Form N– CEN from 60 days, as proposed, to 75 days to, in part, respond to commenters’ concerns that 60 days would not provide funds the time necessary to collect, verify, and report information on Form N–CEN.1521 We also have modified the proposal by moving the management’s statement regarding a change in independent public accountant originally filed on Form N– SAR from an attachment to Form N– CEN, as proposed, to an exhibit to Form N–CSR, thereby shifting burden associated with this exhibit filing from Form N–CEN to Form N–CSR. However, we recognize a few reporting items and sub-items have been added to the form that were not contemplated in the burden hours and costs we estimated in the Proposing Release. For example, we are adopting a requirement that a fund (other than a money market fund) provide its monthly average net assets during the reporting period,1522 and we are also requiring the reporting of CRD numbers for directors.1523 We believe that certain of the modifications from and clarifications to the proposal that we are adopting today will generally reduce the estimated burden hours and costs associated with implementation of Form N–CEN reporting requirements relative to the proposal, while a few others will increase those estimates. For these reasons, we believe that the net effect of such modifications from the proposal will not have a net impact on the estimated burden hours and costs stated in the Proposing Release. Accordingly, we are not estimating a change to the proposed per-fund estimates as a result of the modifications we have made to the proposed requirements. The Commission, however, has modified the estimated increase in aggregate annual burden hours and external costs that will result from reporting requirements on Form N–CEN in light of updated data regarding the number of management investment companies and UITs. We have revised our estimate of the number of reports on Form N–CEN per year downward from 3,146 reports to 3,113 reports to reflect updates to the industry data figures that were utilized 1521 See supra section II.D.3. supra footnotes 1016–1021 and accompanying and following text. 1523 See supra footnotes 823–824 and accompanying text. 1522 See E:\FR\FM\18NOR2.SGM 18NOR2 82000 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 in the Proposing Release.1524 We continue to estimate that management investment companies will each spend as much as 13.35 hours annually, preparing and filing reports on Form N– CEN.1525 The Commission also continues to estimate that UITs, including separate account UITs, will each spend as much as 9.11 hours annually, preparing and filing reports on Form N–CEN, since a UIT will be required to respond to fewer reporting items.1526 We continue to estimate that management investment companies currently spend as much as 15.35 hours preparing and filing each report on Form N–SAR, and note that we generally have sought to simplify and decrease the census-type reporting burdens placed on registrants by current Form N–SAR in adopting Form N–CEN. For example, Form N–CEN, as adopted, will 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 continue to believe that reports in XML on 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 continue to believe that the estimated hour burden for filing reports on Form N–CEN should be a reduced burden from the hour burden associated with Form N–SAR.1527 As such, we continue to estimate that the annual hour burden for management companies will be 13.35 per report on Form N–CEN, down from 15.35 hours per report for Form N– SAR. We continue to believe that UITs may, however, experience an increase in the hour burden associated with censustype reporting on Form N–CEN because UITs will be required to respond to more items in the form than they are 1524 This estimate is based on 2,392 management companies and 721 UITs filing reports on Form N– SAR as of December 31, 2015. 1525 Our estimate includes the hourly burden associated with registering/maintaining LEIs for the registrant/funds, which would be required to be included in reports on Form N–CEN. 1526 See id. 1527 We note that reports on Form N–CEN will be filed annually, rather than semi-annually as in the case of reports on Form N–SAR. Thus, while we estimate that the burden associated with each report on Form N–CEN for management companies will be two hours less than the burden associated with each report on Form N–SAR, we estimate that the annual Form N–CEN burden for management companies will actually be 17.35 hours less than that associated with Form N–SAR. This estimate is based on the following calculation: (15.35 Form N– SAR burden hours per report × 2 reports per year) ¥ 13.35 Form N–CEN burden hours per year = 17.35 hours per year. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 currently required to respond to under Form N–SAR. For example, UITs will be required to provide certain background information and attachments in their reports on Form N–CEN, which they are not currently required to provide in their reports on Form N–SAR. As a result, we continue to estimate an increase in the annual hour burden for UITs from 7.11 hours in the currently approved collection for Form N–SAR to 9.11 hours for Form N–CEN. In addition, we continue to believe that, in the first year reports on the form are filed, funds may require additional time to prepare and file reports. Therefore, we continue to estimate that, for the first year, each fund will require 20 additional hours.1528 Accordingly, we estimate that each management investment company will require 33.35 annual burden hours in the first year 1529 and 13.35 annual burden hours in each subsequent year for preparing and filing reports on Form N–CEN. Furthermore, we estimate that each UIT will require 29.11 annual burden hours in the first year 1530 and 9.11 annual burden hours in each subsequent year for preparing and filing reports on Form N–CEN. We also continue to estimate (after rounding to the nearest hundredth of an hour) that the average annual hour burden per response for Form N–CEN for the first year will be 32.37 hours 1531 and 12.37 hours in subsequent years.1532 Amortizing the burden over three years, we estimate that the average annual hour burden per fund per year will be 19.04 hours 1533 and the total aggregate annual hour burden will be 59,272 hours.1534 1528 This additional time may be attributable to, among other things, reviewing and collecting new or revised data pursuant to the Form N–CEN requirements or changing the software currently used to generate reports on Form N–SAR in order to output similar data in a different format. 1529 This estimate is based on the following calculation: 13.35 hours for filings + 20 additional hours for the first filing = 33.35 hours. 1530 This estimate is based on the following calculation: 9.11 hours for filings + 20 additional hours for the first filing = 29.11 hours. 1531 This estimate is based on the following calculation: ((2,392 management investment companies × 33.35 hours per management investment company in the first year) + (721 UITs × 29.11 hours per UIT in the first year)) ÷ 3,113 total funds = 32.37 hours in the first year. 1532 This estimate is based on the following calculation: ((2,392 management investment companies × 13.35 hours per subsequent year) + (721 UITs × 9.11 hours per subsequent year)) ÷ 3,113 total funds = 12.37 hours per subsequent year. 1533 This estimate is based on the following calculation: (32.37 hours in first year + (12.37 per subsequent year × 2 years)) ÷ 3 years = 19.04 hours per year. 1534 This estimate is based on the following calculation: 3,113 funds × 19.04 hours per year = 59,272 hours per year. PO 00000 Frm 00132 Fmt 4701 Sfmt 4700 External costs include the cost of goods and services, which with respect to reports on Form N–CEN, will include the costs of registering and maintaining an LEI for the registrant/funds.1535 We estimate an external cost of $219, rather than $220 per fund with respect to the initial filing of a report on Form N–CEN, and we estimate an annual external cost of $119, rather than $120 per fund with respect to subsequent filings, reflecting updates to the industry data figures that were utilized in the Proposing Release.1536 Accordingly, we estimate the amortized annual external cost per registrants and fund will be $152 per year, rather than $153 per year as proposed.1537 In sum, we estimate that all applicable funds will incur, in the aggregate, external annual costs of $2,088,176, rather than $1,748,637, reflecting updates to the industry data figures that were utilized in the Proposing Release.1538 2. Rescission of Form N–SAR In connection with our adoption of new Form N–CEN, we are rescinding Form N–SAR in order to eliminate unnecessarily duplicative reporting requirements. This rescission will affect all management investment companies and UITs. We received no comments on the estimates put forward in our proposal. Thus, as proposed, we estimate that the average annual hour burden per response for Form N–SAR is 15.35 hours for a management investment company and 7.11 hours for a UIT, since a UIT is required to answer fewer items.1539 We have revised our estimate of the weighted average annual burden per response to about 14.27 hours to reflect updates to the industry data figures that were utilized in the Proposing Release.1540 We therefore 1535 See Item B.1.d and Item C.1.c of Form N–CEN (requiring LEI for the registrant and each management company). 1536 See supra footnote 63 (discussing the costs associated with registering and maintaining an LEI). 1537 This estimate is based on the following calculation: ($219 in the first year + ($119 per subsequent year × 2 years)) ÷ 3 years = $152 per year. 1538 This estimate is based on the following calculation: $152 per registrant or fund per year × (3,113 investment company registrants + 9,039 mutual funds (which reflects the number of mutual fund series, but excludes money market funds, which would have already obtained LEIs pursuant to the requirements of Form N–MFP) + 1,586 ETFs (excluding 8 UITs that are not ETFs)) = $152 per fund per year × 13,738 registrants and funds = $2,088,176 per year. 1539 See Proposing Release, supra footnote 7, at n.724. 1540 This estimate is based on the following calculation: (15.35 hours per management investment company per response × 2,392 management investment companies × 2 responses E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations estimate an aggregate annual hour burden of about 78,561 hours.1541 Accordingly, we estimate that, in the aggregate, the rescission will eliminate the 78,561 annual burden hours that would be associated with filing Form N–SAR. Additionally, we estimate that there are no external costs associated with preparation of reports on Form N– SAR. C. Amendments to Regulation S–X As discussed above, we are adopting certain amendments to Articles 6 and 12 of Regulation S–X. As outlined in section 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 contracts; (2) update the disclosures for other investments and investments in and advances to affiliates, 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.1542 mstockstill on DSK3G9T082PROD with RULES2 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.1543 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 per year + 7.11 hours per UIT per response × 721 UITs) ÷ (2,392 management companies × 2 responses per management company per year + 721 UITs × 1 response per management company per year) = 78,561 hours ÷ 5,505 responses per year = ∼14.27 hours per response. The numbers of management investment companies and UITs are based on data obtained from the ICI and reports filed by registrants on Form N–SAR. See supra footnotes 2 and 1259 and accompanying and following text; see also 2016 ICI Fact Book, supra footnote 2, at 22, 176. 1541 This estimate is based on the following calculation: ∼14.27 hours per response × (2,392 management companies × 2 responses per management company per year + 721 UITs × 1 response per management company per year) = ∼14.27 hours per response × 5,505 responses per year = ∼78,561 hours per year. 1542 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. See supra section II.C. 1543 Section 30(e). VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 reports by the fund’s registration statement form under the Investment Company Act.1544 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.1545 Rule 30e–1 also permits, under certain conditions, delivery of a single shareholder report to investors who share an address (‘‘householding’’).1546 Specifically, rule 30e–1 permits householding of annual and semiannual 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 kept confidential. Based on staff conversations with fund representatives, we previously estimated 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 previously total estimated annual hour burden of responding to rule 30e– 1 was approximately 898,968 hours.1547 In the Proposing Release, we estimated that 11,230 management companies would have to comply with these amendments.1548 In addition, we 1544 Rule 30e–1. Item 27 of Form N–1A; and Item 24 of Form N–2. 1546 See rule 30e–1(f). 1547 This estimate is based on the following calculation: 84 hours per fund × 10,702 funds (the estimated number of portfolios the last time the rule’s information collections were submitted for PRA renewal in 2015) = 898,968 hours. 1548 See Proposing Release, supra footnote 7, at n. 777. As noted in the Proposing Release, this estimate included 9,259 mutual funds (including 1545 See PO 00000 Frm 00133 Fmt 4701 Sfmt 4700 82001 estimated that the 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 estimated that, on an annual basis, funds generally would incur an additional 9 burden hours in the first year 1549 and an additional 3 burden hours for filings in subsequent years in order to comply with the proposed amendments.1550 Amortized over three years, we estimated that the average annual hour burden associated with the amendments for Regulation S– X would be 5 hours per fund.1551 Accordingly, we estimated a total annual average hour burden associated with the amendments would be 56,150.1552 We also estimated an annual external cost burden of compliance with the information collection requirements of rule 30e–1, which is currently $31,061 per fund, would not change as a result of the proposed amendments to money market funds), 1,403 ETFs (1,411 ETFs ¥ 8 UIT ETFs) and 568 closed-end funds. 1549 With respect to the amendments to Article 6 of Regulation S–X, we estimated that each fund would spend an average of 5 hours to initially comply with the amendments. For example, amendments to Article 6–07.1 would likely require funds to identify non-cash income and put a process in place to capture it in the financial statements. In addition, some funds would also likely move their schedules from financial statement notes to the financial statements themselves. With respect to the amendments requiring disclosure of the components of a custom basket/index, some funds voluntarily provide this disclosure now, but others do not; we recognized that funds would be affected by this requirement differently depending on their investments. With respect to the amendments to Article 12 of Regulation S–X, we estimated each fund would spend an average of four hours to initially comply with the amendments. For example, while accounting guidance already requires funds to identify the level of each security (such as Level 3 securities), we estimated there will be an increased burden in adding another note to the financial statements. This increased burden would vary depending on the information already reported by funds in their financial statements. Likewise, while many funds voluntarily identify illiquid securities in their schedule of investments, the funds that do not make this disclosure would bear an initial burden to comply with these amendments. 1550 With respect to the amendments to Article 6 of Regulation S–X, we estimated each fund would require two hours to comply with the requirements in each subsequent year. We likewise estimated that each fund would require one hour to comply with the requirements of the proposed amendments to Article 12 in each subsequent year. 1551 Proposing Release, supra footnote 7, at n. 780. The estimate was based on the following calculation: (9 hours + (3 hours × 2))/3 = 5. 1552 See id., at n. 781. The estimate was based on the following calculation: 5 hours × 11,230 management investment companies = 56,150. E:\FR\FM\18NOR2.SGM 18NOR2 82002 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 Regulation S–X.1553 We further estimated that the total annual external cost burden for rule 30e–1 would be $348,815,030.1554 External costs included, for example, the costs for funds to prepare, print, and mail the reports. We did not receive any comments on the estimated hour and costs burdens relating to our proposed amendments to Regulation S–X. As discussed above, our adoption includes numerous modifications or clarifications from the proposal that address concerns raised by commenters and that are intended, in part, to decrease reporting and implementation burdens relative to the proposal. For example, we are limiting the requirement for nonpublic indexes to require funds to only report the top 50 components of the index or custom basket and any components that represent more than one percent of the notional value of the index or custom basket.1555 In order to eliminate the unnecessary disclosure of immaterial amounts of non-cash income, we adopted a 5 percent de minimis reporting threshold for reporting noncash income, such as payment-in-kind interest.1556 We also eliminated our proposed securities lending disclosures in fund financial statements in favor of disclosures that would be made in a fund’s Statement of Additional Information (or, for closed-end funds, reports on Form N–CSR) and in Form N–CEN.1557 In Article 12 of Regulation S–X, in response to commenter concerns, and as more fully discussed above in section II.C.4, we eliminated proposed disclosure requirements relating to the liquidity of securities and federal income tax basis.1558 We also eliminated a proposal to require funds to categorize the schedule of securities by type of investment, the related industry, and the related country, or geographic region.1559 However, for variable rate securities, we are now requiring funds to provide disclosure of both a description of 1553 Because the proposed amendments would largely reorganize information currently reported by funds in their financial statements, either voluntarily or because it is required, we did not believe the external costs, such as printing and mailing costs, would increase as a result of the amendments. 1554 See Proposing Release, supra footnote 7, at n. 783. This estimate was based on the following calculation: 11,230 funds × $31,061 = $348,815,030. The total annual cost burden of rule 30e–1 was $333,905,750, which reflected the higher estimated number of funds subject to rule 30e–1 at the time of the last renewal for the rule. 1555 See supra sections II.C.2.a and II.C.2.d. 1556 See supra section II.C.6 1557 Id. 1558 See supra section II.C.4. 1559 See supra section II.C.3. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 reference rate and spread and the end of period interest rate, rather than just the reference rate that we proposed, which may add additional burdens on funds.1560 For these and other reasons, we believe that our modifications from and clarifications to the proposal will, on a net basis, generally reduce the burden hours and costs associated with implementation of Regulations-X’s reporting requirements relative to the proposal. However, although we did not receive any comments specifically addressing the burden estimates for our proposed amendments to Regulation S– X, we recognize that several commenters, although they did not provide quantitative estimates, suggested that implementation of the proposed new reporting requirements, generally would be costly.1561 Based, in part, on the shifting of the securities lending disclosures to the Statement of Additional Information (or, for closedend funds, reports on Form N–CSR) and Form N–CEN, as well as the other modification discussed above, we estimate that funds will incur a reduction of 2 burden hours in the first year and a reduction of .5 hours for filings in subsequent years from our proposed estimates. The Commission has also modified the estimated increase in annual burden hours and total time costs that will result from the amendments based on updated industry data. We have revised our estimate of the number of management companies that will have to comply with the amendments to Regulation S–X upward from 11,230 management companies to 11,859 management companies to reflect updates to the industry data figures that were utilized in the Proposing Release.1562 The Commission now estimates that, on an annual basis, funds generally will incur an additional 7 burden hours in the first year and an additional 2.5 burden hours for filings in subsequent years in order to comply with the proposed amendments. Amortized over three years, the average aggregate annual hour burden associated with the amendments for Regulation S– X will be 4 hours per fund.1563 We therefore estimate an average total 1560 See id. e.g., Simpson Thacher Comment Letter; and Fidelity Comment Letter. 1562 This estimate included 9,520 mutual funds (including money market funds), 1,589 ETFs (1,594, ETFs ¥ 5 UIT ETFs) and 750 closed-end funds and was based on internal SEC data as well as ICI statistics as of December 31, 2015, available at https://www.ici.org/research/stats. 1563 The estimate is based on the following calculation: (7 hours + (2.5 hours × 2))/3 = 4. 1561 See, PO 00000 Frm 00134 Fmt 4701 Sfmt 4700 annual hour burden associated with the amendments of 47,436.1564 We continue to estimate an 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.1565 We further estimate that the total annual external cost burden for rule 30e–1 will be $368,352,399.1566 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.1567 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.1568 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.1569 Compliance with the disclosure requirements of rule 30e–2 is mandatory. Responses to the disclosure requirements are not kept confidential. As noted in the Proposing Release, the Commission previously estimates that the annual burden associated with rule 30e–2, including the householding requirements, was 121 hours per respondent. The Commission further estimated the total annual hour burden was approximately 91,960 hours.1570 As discussed above, we are adopting certain amendments to Articles 6 and 12 1564 The estimate is based on the following calculation: 4 hours × 11,859 management investment companies = 47,436. 1565 We continue to believe that amendments will largely reorganize information currently reported by funds in their financial statements, either voluntarily or because it is required and will therefore not result in an increase of external costs, such as printing and mailing costs. 1566 This estimate is based on the following calculation: 11,859 funds × $31,061 = $368,352,399. 1567 Rule 30e–2. 1568 As discussed above, rule 30e–1 (together with Forms N–1A and N–2) essentially requires management investment companies to transmit to their shareholders, at least semi-annually, reports containing the financial statements required by Regulation S–X. 1569 See rule 30e–2(b); see also supra footnote 1546 and accompanying text. 1570 This estimate is based on the following calculations: 700 UITs (the estimated number of UITs the last time the rule’s information collections were submitted for PRA renewal in 2015) × 121 hours per UIT = 84,700. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 of Regulation S–X that will increase the time spent preparing, reviewing and certifying reports.1571 The extent to which a UIT’s burden increases as a result of the adopted amendments will depend on the extent to which an underlying fund invests in the instruments covered by many of the amendments. In the Proposing Release, we estimated that there were 727 UITs that may be subject to the proposed amendments.1572 We also estimated that, on an annual basis, UITs generally would incur an additional 9 burden hours in the first year and an additional 3 burden hours for filings in subsequent years in order to comply with the proposed amendments. Amortized over three years, we estimated that the average annual hour burden associated with the proposed amendments would be 5 hours per fund.1573 Accordingly, we estimated that the total average annual hour burden associated with the proposed amendments to Regulation S– X would be 3,635 hours.1574 In addition, we estimated that the annual external cost burden of compliance with the information collection requirements of rule 30e–2, which are currently $20,000 per respondent, would not change as a result of the proposed amendments to Regulation S–X.1575 We further estimated that the total annual external cost burden for rule 30e–2 would be $14,540,000.1576 External costs include, 1571 As discussed above, the amendments will: (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 contracts; (2) update the disclosures for other investments and investments in and advances to affiliates, 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. In addition, our amendments will 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. 1572 See Proposing Release, supra footnote 7, at n. 789. This estimate was based on the number of UITs that filed Form N–SAR with the Commission as of December 31, 2014. 1573 The estimate was based on the following calculation: (9 hours + (3 hours × 2))/3 = 5. 1574 The estimate was based on the following calculation: 5 hours × 727 UITs = 3,635. 1575 See supra footnote 1553. 1576 This estimate is based on the following calculation: 727 UITs × $20,000 = $14,540,000. The current total annual cost burden of rule 30e–2 is $15,200,000, which reflects the higher estimated VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 for example, the costs for the funds to prepare, print, and mail the reports. We did not receive any comments on the estimated hour and costs burdens. For the reasons discussed above, we now estimate that funds will incur a reduction of 2 burden hours in the first year and a reduction of .5 hours for filings in subsequent years from our proposed costs. The Commission has also modified the estimated increase in annual burden hours and total time costs that will result from the amendments based on updated industry data. We have revised our estimate of the number of UITs that will have to comply with the amendments to Regulation S–X downward from 727 UITs to 721 UITs to reflect updates to the industry data figures that were utilized in the Proposing.1577 For the reasons discussed above, we now estimate that, on an annual basis, UITs generally will incur an additional 7 burden hours in the first year 1578 and an additional 2.5 burden hours for filings in subsequent years in order to comply with the amendments to Regulation S–X.1579 Amortized over three years, we now estimate that the average annual hour burden associated with the amendments will be 4 hours per fund.1580 We therefore estimate a total average annual hour burden associated with the amendments to Regulation S–X will be 2,884 hours.1581 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 amendments to Regulation S– X.1582 We further estimate that the total annual external cost burden for rule 30e–2 will be $14,420,000.1583 number of UITs at the time of the last renewal for the rule. See supra footnote 1570. 1577 This estimate is based on the number of UITs that filed Form N–SAR with the Commission as of December 31, 2015. 1578 See supra footnotes 1562–1563 and accompanying text. 1579 See id. 1580 The estimate is based on the following calculation: (7 hours + (2.5 hours × 2))/3 = 4. 1581 The estimate is based on the following calculation: 4 hours × 721 UITs = 2,884. 1582 See supra footnote 1553. 1583 This estimate is based on the following calculation: 721 UITs × $20,000 = $14,420,000. The current total annual cost burden of rule 30e–2 is $15,200,000, which reflects the higher estimated number of UITs at the time of the last renewal for the rule. PO 00000 Frm 00135 Fmt 4701 Sfmt 4700 82003 D. Amendments to Registration Statement Forms As discussed above, we are amending Forms N–1A, N–2, N–3, N–4, and N– 6.1584 We are adopting amendments to Forms N–1A and N–3 to require certain disclosures in fund Statements of Additional Information regarding securities lending activities.1585 We are also amending 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 Form N–CEN.1586 Form N–1A is the form used by openend management investment companies to register under the Investment Company Act and/or register their securities under the Securities Act. Form N–2 is the form used by closedend management investment companies to register under the Investment Company act and register their securities under the Securities Act. Form N–3 is the form used by separate accounts offering variable annuity contracts which are organized as management investment companies to register under the Investment Company Act and/or register their securities under the Securities Act. Form N–4 is the form used by insurance company separate accounts organized as unit investment trusts that offer variable annuity contracts to register under the Investment Company Act and/or register their securities under the Securities Act. Form N–6 is the form used by insurance company separate accounts organized as unit investment trusts that offer variable life insurance policies to register under the Investment Company Act and/or register their securities under the Securities Act. Compliance with the disclosure requirements of Forms N–1A, N–2, N–3, N–4, and N–6 is mandatory. Responses to the disclosure requirements are not kept confidential. Currently, we estimate the following total hour burden for each of the relevant forms: 1584 See supra section II.F; footnotes 807–809 and accompanying text. 1585 See Item 19(i) of Form N–1A; Item 21(j) of Form N–3; see also supra section II.F. We proposed similar requirements be included in fund financial statements as part of the proposed amendments to Regulation S–X. See proposed rule 6–03(m) of Regulation S–X; Proposing Release, supra footnote 7, at 33624. 1586 See footnotes 807–809 and accompanying text. E:\FR\FM\18NOR2.SGM 18NOR2 82004 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations hour burden associated with the amendments to Forms N–1A and N–3 is, respectively, 9,504,1593 and 16 hours.1594 For Forms N–4 and N–6, to which the securities lending activity disclosure requirement amendments do not apply, we continue to estimate total annual hour burden of 343,117 hours and 85,269 hours, respectively. In the Proposing Release, for both the books and records amendments and the Regulation S–X requirement, of which the securities lending requirements were a part, we estimated that there would be no changes to the annual external cost burden per fund as a result of the amendments, and accordingly estimated no change to the current estimated total external cost burden associated with the forms.1595 We did not receive any comments on the estimated external cost burden. We therefore continue to estimate no change to the external cost burden as a result of the amendments, and so we continue to estimate the total cost burden for each of the respective forms as follows: E. Amendments to Form N–CSR Form N–Q.1596 In connection with the rescission of Form N–Q, we also are adopting, as proposed, amendments to Form N–CSR, the reporting form used by management companies to file certified shareholder reports under the Investment Company Act and the Exchange Act.1597 Form N–Q currently 1589 Proposing Release, supra footnote 7, at 33676–77. 1590 9 hours in first year + (3 hours per year thereafter × 2 years) = 9 hours + 6 hours = 15 hours total. 15 hours total ÷ 3 years = 5 hours per year. 1591 11,957 funds × 5 hours per fund = 59,785. 1592 2 hours in first year + (0.5 hours per year thereafter × 2 years) = 2 hours + 1 hour = 3 hours total. 3 hours total ÷ 3 years = 1 hour per year. 1593 1 hour per fund × 9,504 funds per year = 9,504 hours per year. 1594 1 hour per fund × 16 funds per year = 16 hours per year. 1595 Proposing Release, supra footnote 7, at 33677, 33681. 1596 See supra section III.B. 1597 See Proposing Release, supra footnote 7, at section V.E. mstockstill on DSK3G9T082PROD with RULES2 As previously discussed above, we are adopting, as proposed, the rescission of 1587 We estimated in the Proposing Release that 11,230 management companies would be required to comply with the amendments. Proposing Release, supra footnote 7, at 33676. We also estimated that 727 UITs may be subject to the proposed amendments. Proposing Release, supra footnote 7, at 33677. 11,230 management companies + 727 UITs = 11,957. 1588 Proposing Release, supra footnote 7, at 33681. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00136 Fmt 4701 Sfmt 4700 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.015</GPH> amendments would be 59,785 hours.1591 We did not receive any comments on the estimated hour burden. We continue to estimate no change in burden hours as a result of the books and records disclosures. However, we now estimate that those forms—viz., Forms N–1A and N–3—that include the new disclosure requirements concerning securities lending activities would impose part, but not all, of the additional hour burden previously estimated for Regulation S–X as funds may need to collect, collate, tabulate, present, and review the information in order to prepare the required Statement of Additional Information disclosures. We estimate that 9,502 and 16 funds per year could file registration statements or amendments to registration statements on Forms N–1A and N–3, respectively. We estimate that funds will incur an additional 2 burden hours in the first year and an additional 0.5 hours for filings in subsequent years. Amortized over three years, the average additional annual hour burden will therefore be 1 hour per fund.1592 Accordingly, we estimate that the total annual average ER18NO16.014</GPH> In the Proposing Release, we estimated that 11,957 funds would have to comply with the proposed amendments to Regulation S–X, including, among other things, the proposed new disclosure in the notes to financial statements relating to a fund’s securities lending activities.1587 In the Proposing Release, we estimated that the total hour burden for each respective form would not change as a result of the proposed amendments concerning books and records disclosures.1588 We estimated, however, that the amendments to Regulation S– X—including the new required disclosures in the notes to the financial statements concerning the fund’s securities lending activities, but also a number of other amendments—would result in funds incurring an additional 9 burden hours in the first year and an additional 3 burden hours for filings in subsequent years.1589 Amortized over three years, the average additional annual hour burden was estimated to be 5 hours per fund.1590 Accordingly, we estimated that the total annual average hour burden associated with the Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 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.1598 The rescission of Form N–Q adopted today eliminates these certifications. Form N–CSR requires similar certification with respect to the fund’s second and fourth fiscal quarters. As a result of the rescission of Form N–Q adopted today, we are also adopting amendments to 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.1599 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 will cover the first and second fiscal quarters and third and fourth fiscal quarters, respectively, will fill the gap in certification coverage that would otherwise occur once the rescission of Form N–Q is effective. As proposed, compliance with the amended certification requirements will be mandatory and responses are not kept confidential. In addition, as discussed above, we are moving the change in independent public accountant attachment proposed on Form N–CEN to Form N–CSR so that an accountant’s letter regarding a change in accountant will become available to the public semi-annually rather than annually.1600 We are also adopting amendments to require closedend funds to report on Form N–CSR certain disclosures regarding securities lending activities.1601 In the Proposing Release, we estimated that the current annual burden associated with Form N–CSR is 14.42 hours per fund 1602 and that the current total annual time burden for Form N–CSR is 177,799 hours.1603 We 1598 See supra footnote 521 and accompanying mstockstill on DSK3G9T082PROD with RULES2 text. 1599 See Item 11(b) of Form N–CSR; paragraph 5(b) of certification exhibit of Item 11(a)(2) of Form N–CSR. 1600 See supra section II.D.4.b. 1601 See Item 12 of Form N–CSR; see also supra footnote 1181 and accompanying text. 1602 This estimate accounted for two filings per year. In addition, we noted that the estimate did not separately account for the certifications on Form N– CSR. 1603 This estimate was based on the following calculation: 14.42 hours × 12,330 funds (the VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 noted 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 to the certification requirements of Form N–CSR and that funds likely already have policies and procedures in place to assist officers in their certifications of this information. Accordingly, we estimated that the proposed amendments to the certification requirements of Form N– CSR would not change the annual hour burden associated with Form N–CSR and, thus, we continued 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 estimated 161,937 hours.1604 We noted that this decrease in the current total annual hour burden was a result of the decrease in the number of funds estimated to file Form N–CSR. In addition, in the Proposing Release, we also estimated that the current annual cost of outside services associated with Form N–CSR is approximately $129 per fund. 1605 We noted our belief that external costs would include the cost of goods and services purchased to prepare and update filings on Form N–CSR. We also expressed our belief that those costs would not change as a result of the proposed amendments to the certification requirements of Form N– CSR and, thus, continued to estimate a current external cost burden of $129 per fund to file Form N–CSR. In the Proposing Release, we further estimated that the total annual external cost burden for Form N–CSR would be $2,897,340.1606 We did not receive any comments on the estimated hour and cost burdens associated with our proposed amendments to the certification requirements of Form N–CSR. As estimated number of funds the last time the rule’s information collections were submitted for PRA renewal in 2013)). 1604 This estimate was based on the following calculation: 11,230 funds × 14.42 hours = 161,937. See supra footnote 1548 (calculating the estimate for 11,230 funds). 1605 We estimated that the external costs associated with Form N–CSR would not include the external costs associated with the shareholder report. The external costs associated with the shareholder report are accounted for under the collections of information related to rules 30e–1 and 30e–2 under the Investment Company Act. 1606 This estimate was based on the following calculation: 11,230 funds × $129 = $1,448,670; $1,448,670 × 2 times per year = $2,897,340. We noted that the current total annual cost burden of Form N–CSR at the time of the Proposing Release was $3,189,771, which reflected the higher estimated number of filers for Form N–CSR at the time of the last renewal for the form. See supra footnote 1603. PO 00000 Frm 00137 Fmt 4701 Sfmt 4700 82005 discussed above, we are adopting amendments to modify Form N–CSR so that an accountant’s letter regarding a change in accountant will become available to the public semi-annually pursuant to an exhibit filing on Form N– CSR rather than annually as an attachment to Form N–CEN, as proposed.1607 We believe that this modification from the proposal will increase the hour burden associated with Form N–CSR by one-tenth of an hour 1608 with an additional internal cost burden of $32.40 per fund.1609 In addition, as noted above, we are adopting an amendment to require closed-end funds include in their annual reports on Form N–CSR information concerning securities lending activities. We estimate that this amendment will increase the hour burden associated with Form N–CSR for closed-end funds by an additional 2 burden hours with an additional internal cost burden of $648 per fund in the first year,1610 and an additional 0.5 hours with an additional internal cost burden of $162 per fund for filings in subsequent years.1611 We have modified the estimated increase in annual burden hours and total time costs that will result from amendments to Form N–CSR adopted today in light of these modifications and updated data on industry earnings estimates. For purposes of the PRA analysis, we estimate that the annual burden associated with Form N–CSR is 14.52 hours per fund.1612 For closed-end funds, we estimate that the annual burden associated with Form N–CSR is 16.52 hours per fund in the first year and 15.02 for filings in subsequent 1607 See supra section III.B.3. this modification, we believe that the modification to move the change in independent public accountant exhibit from Form N–CEN as proposed to Form N–CSR will also reduce the hour burden requirement associated with Form N–CEN by one-tenth of an hour. See supra section IV.B.1. 1609 This estimate is based on the following calculation: 0.10 hour × $324 (blended hourly rate for compliance attorney ($340) and senior programmer ($308) = $32.40. 1610 This estimate is based on the following calculation: 2 hours × $324 (blended hourly rate for compliance attorney ($340) and senior programmer ($308) = $648. 1611 This estimate is based on the following calculation: 0.5 hour × $324 (blended hourly rate for compliance attorney ($340) and senior programmer ($308) = $162. 1612 This estimate is based on the following calculation: 14.52 = 14.42 + 0.10. This estimate accounts for two filings per year. We note that this estimate does not separately account for the certifications on Form N–CSR or the securities lending activities information annual reporting requirement for closed-end funds on Form N–CSR. 1608 Paralleling E:\FR\FM\18NOR2.SGM 18NOR2 82006 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations years.1613 Amortized over three years, the average additional annual hour burden will therefore be 1 hour per closed-end fund.1614 Accordingly, we estimate that, for closed-end funds, the total annual average hour burden associated with the amendments to Form N–CSR related to securities lending activities is 750 hours.1615 We have revised our estimate of the total annual hour burden downward from 177,799 hours to 172,899 hours to reflect updates to the industry data figures that were utilized in the Proposing Release as well as the increase in the hour burdens resulting from the amendments.1616 This decrease in the total annual hour burden is a result of the decrease in the number of funds estimated to file Form N–CSR, from our estimate of 12,330 funds in the Proposing Release to our current estimate of 11,856 funds. In addition, as stated in the Proposing Release, we continue to estimate that the annual cost of outside services associated with Form N–CSR is approximately $129 per fund.1617 Based on updated statistics regarding the number of funds, we estimate that the total annual external cost burden for Form N–CSR will be $3,058,848, rather than $2,897,340 as we estimated in the Proposing Release.1618 mstockstill on DSK3G9T082PROD with RULES2 V. Final Regulatory Flexibility Analysis This Final Regulatory Flexibility Analysis (‘‘FRFA’’) has been prepared in accordance with section 4(a) of the Regulatory Flexibility Act (‘‘RFA’’).1619 It relates to new Form N–PORT and new Form N–CEN and amendments to Form N–CSR, amendments to Regulation S–X, the rescission of Forms N–Q and N– SAR, and amendments to Forms N–1A, 1613 This estimate is based on the following calculation: 16.52 = 14.52 + 2. 15.02 = 14.52 + 0.5. 1614 This estimate is based on the following calculation: 2 hours in first year + (0.5 hours per year thereafter × 2 years) = 2 hours + 1 hour = 3 hours total. 3 hours total ÷ 3 years = 1 hour per year. 1615 This estimate is based on the following calculation: 1 hour per fund × 750 closed-end funds per year = 750 hours per year. 1616 This estimate is based on the following calculation: 172,899 = (750 hours (closed-end funds)) + (172,149 hours (14.52 hours × (1,594 exchange-traded funds—eight organized as UITs + 750 closed-end funds + 481 money market funds + 9,039 other mutual funds))). See supra footnote 1259 and accompanying and following text. 1617 We estimate that the external costs associated with Form N–CSR will not include the external costs associated with the shareholder report. The external costs associated with the shareholder report are accounted for under the collections of information related to rules 30e–1 and 30e–2 under the Investment Company Act. 1618 This estimate is based on the following calculation: 11,856 funds × $129 = $1,529,424; $1,529,424 × 2 times per year = $3,058,848. See supra footnote 1603. 1619 5 U.S.C. 603. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 N–2, N–3, N–4, and N–6. An Initial Regulatory Flexibility Analysis (‘‘IRFA’’) was prepared in accordance with the RFA and included in the Proposing Release.1620 A. Need for and Objectives of the Forms and Form Amendments and Rules and Rule Amendments The Commission collects certain information about the funds that it regulates. The Commission is adopting new rules, rule amendments, and new forms and form amendments that will 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 these new rules, rule amendments, and new forms and form amendments will improve the information that funds report to their shareholders and the Commission. In addition, the new forms will 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 will be improved by requiring enhanced information from funds. B. Significant Issues Raised by Public Comments In the Proposing Release, we requested comment on every aspect of the IRFA, including the number of small entities that would be affected by the proposed amendments, the existence or nature of the potential impact of the proposals on small entities discussed in the analysis and how to quantify the impact of the proposed rules. One commenter noted that the rulemaking will place an ‘‘undue work and financial burden’’ on small closedend funds.1621 The commenter also noted that a closed-end fund that is not listed on an exchange, a small number of assets under management, and limited holdings should be required to file reports on Form N–PORT quarterly, 1620 See Proposing Release, supra footnote 7, at section VI. 1621 See Carol Singer Comment Letter. PO 00000 Frm 00138 Fmt 4701 Sfmt 4700 as opposed to monthly.1622 Commenters also generally noted the high cost of the rulemaking.1623 Other commenters generally requested more time in order to comply with the new forms, rules, and rule amendments.1624 As we noted above,1625 we believe that, in order to ensure that the Commission and its staff receive timely information, it is appropriate to require that funds file reports on Form N–PORT within 30 days of month-end. Although reports on Form N–MFP are required to be filed within 5 days of month end, we recognize that preparing reports on Form N–PORT will initially require a significant effort by funds.1626 Therefore, we have determined to require a 30-day filing period for reports on Form N–PORT in order to balance the Commission’s need for timely information with the operational burdens of reporting. Moreover, lag times of more than 30 days would make monthly reporting impractical, as reports would overlap with preparation time.1627 We also note that several commenters noted that reporting on the same basis used to calculate NAV (generally a T+1 basis), which the Form now explicitly requires, as opposed to a T+0 basis, which is used for financial reporting, will reduce the estimated time to gather the information.1628 As a result, we are adopting our requirement for reports on Form N–PORT to be filed with the Commission within 30 days of month-end.1629 Moreover, given the nature and frequency of filings on Form 1622 Id.; see also Schnase Comment Letter (noting that monthly reporting on Form N–PORT would be particularly burdensome on smaller funds). 1623 See, e.g., Schnase Comment Letter (‘‘I am not convinced this is a cost better or more efficiently borne by the fund rather than the data users and sellers, particularly for smaller funds already struggling to meet costly filing requirements.’’); Wahh Comment Letter; Carol Singer Comment Letter. 1624 See, e.g., Simpson Thacher Comment Letter (‘‘With respect to the Commission’s proposed compliance dates for the new reporting requirements, we are concerned that the timeline outlined in the Release is too aggressive for smaller investment company complexes.’’). 1625 See supra section II.A.3. 1626 See supra section III.B.3. 1627 Dreyfus Comment Letter (advocating for bimonthly or quarterly reporting, with 45–60 days to file reports on Form N–PORT). 1628 See Schwab Comment Letter (reporting that converting from T+1 to T+0 accounting would add approximately 6–10 days to the process of compiling data for Form N–PORT). While commenters acknowledged that reporting holdings on a T+1 basis would save time vis a vis compiling data for month-end reporting, they still noted that they would need more than 30 days after monthend to file reports on Form N–PORT. See Invesco Comment Letter; but see SIFMA Comment Letter I (requesting that funds be given the option to report on either a T+0 or T+1 basis). 1629 See General Instruction A of proposed Form N–PORT. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 N–PORT, we are adopting a delayed compliance period for small entities that will file reports on Form N–PORT.1630 Specifically, 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), we are providing for an extra 12 months (or 30 months after the effective date) to comply with the new reporting requirements. Apart from commenter concerns discussed above regarding the costs and financial burdens associated with the overall rulemaking, commenters did not raise specific concerns about the impact of new Form N–CEN or the rescission of Form N–SAR on small entities. One commenter expressed the belief that annual filings on Form N–CEN would be appropriate but that some of the requested information on the form probably would not be applicable to small closed-end funds with certain characteristics.1631 As discussed above, Form N–CEN reporting requirements depend on the type of registrant filing the report.1632 For example, all funds, including small entities, will be required to complete Parts A, B, and G of the form (as applicable), and all management companies, except for SBICs, will be required to complete Part C. On the other hand, only closed-end funds and SBICs will be required to complete Part D and only ETFs and UITs will be required to complete Parts E and F, respectively. Thus, certain reporting requirements on Form N–CEN may or may not be applicable to small entities depending on the type of registrant. 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.1633 Commission staff estimates that, as of December 2015, approximately 129 registered investment companies, including 117 open and closed-end funds (including one SBIC) and 12 UITs are small entities. The Commission staff further estimates that, as of December 2015, approximately 34 BDCs are small entities. Since the new forms and form amendments and new rules and rule amendments, pertain to all registered funds (subject to the limitations 1630 See supra section II.H.1. Carol Singer Comment Letter. 1632 See supra section II.D.2. 1633 17 CFR 270.0–10(a). 1631 See VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 discussed in section V.D, below), all entities, including small entities, will be subject to the adopted rules. Specific reporting, recordkeeping, and other compliance requirements, in addition to the estimated number of small entities subject to the form and form amendments and rule and rule amendments, are discussed below. D. Projected Reporting, Recordkeeping, and Other Compliance Requirements The 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 adopting new Form N–PORT on which funds, other than MMFs, UITs, and SBICs, will be required to report portfolio holdings information and information related to liquidity, derivatives, securities lending, purchases and redemptions, and counterparty exposure each month. Funds will be required to file reports on 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 will 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 will include small entities, we are providing an extra 12 months (or 30 months after the effective date) to comply with the new Form N–PORT reporting requirements. We received no comments on the IRFA analysis of new Form N–PORT or the estimated costs discussed above in sections III.B.3 and IV.A.1. Therefore, based on our experience with other structured data filings, we estimate that funds will 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 Form N–PORT on behalf of the fund. We estimate that approximately 117 open and closed-end funds (other than money market funds and SBICs), are small entities that will file, on a monthly basis, a complete report on PO 00000 Frm 00139 Fmt 4701 Sfmt 4700 82007 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 will cost $56,682 for each fund, including small entities, in its first year of reporting and $47,465 per year for each subsequent year.1634 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 will cost $55,492 for each fund, including small entities, in its first year of reporting, and $39,214 per year for each subsequent year.1635 We received no comments on the IRFA analysis of Form N–PORT, but discuss in detail comments received on our cost estimates in sections III.B.3 and IV.A.1 above. 2. Rescission of Form N–Q Our proposal will rescind Form N–Q in order to eliminate unnecessarily duplicative reporting requirements. The rescission of Form N–Q will affect all management investment companies required to file reports on the form. We expect that approximately 117 open and closed-end funds are small entities that will be affected by the rescission of Form N–Q. We received no comments on the IRFA analysis of the rescission of Form N–Q or the projected costs savings from rescinding Form N–Q. As discussed above, we estimate that the rescission of Form N–Q will save $6,804 per year for each fund, including small entities.1636 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.1637 The 1634 See supra footnotes 1300–1301 and accompanying text. 1635 See supra footnotes 1302–1303 and accompanying text. 1636 The estimated cost is based upon the following calculations: ($6,804 = 21 hours/fund × $324/hour compensation for professionals commonly used in preparation of Form N–Q filings.) $324 = $308 per hour for Senior Programmers + $340 per hour for compliance attorneys/2), as we believe these employees would commonly be responsible for completing reports on Form N–Q. 1637 See rule 30b1–1 and rule 30a–1. E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 82008 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 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 replacing Form N–SAR with new Form N–CEN. This new form will streamline and update the required data items to reflect current Commission staff needs. Where possible, we have endeavored to exclude items from Form N–CEN that are disclosed or reported pursuant to other Commission forms, or are otherwise available; however, in some limited cases, we are collecting information on Form N–CEN that may be similarly disclosed or reported elsewhere because we believe it will be useful to have such information in a structured format to facilitate comparisons across funds. We also believe this format will 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 requiring 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 received no comments on the IRFA analysis of Form N–CEN, but discuss in detail comments received on our cost estimates in sections III.D.2, III.D.3, and IV.B.1, above. Therefore, we estimate that approximately 129 registered investment companies, including 117 open and closed-end funds (including one SBIC) and 12 UITs, are small entities that will 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 will increase because UITs will 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 Commission estimates that Form N–CEN filers, including small entities, would incur additional costs of $14.6 million each year and $20.2 million in one-time costs as a result of the form’s reporting requirements.1638 1638 See supra section III.D.2. However, as discussed below, the annual costs of reporting on Form N–CEN would be offset by the rescission of Form N–SAR. See id. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 4. Rescission of Form N–SAR Our proposal will rescind Form N– SAR in order to eliminate unnecessarily duplicative reporting requirements. We estimate that approximately 129 registered investment companies that are small entities, including 117 open and closed-end funds (including one SBIC) and 12 UITs would be affected by the rescission of Form N–SAR. As discussed above, the Commission estimates that rescinding Form N–SAR will save current Form N–SAR filers, including small entities, about $25.5 million per year.1639 We received no comments on the IRFA analysis of the rescission of Form N–SAR or the projected expense savings from rescinding Form N–SAR. 5. Regulation S–X Amendments The Commission is also amending 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 adopting 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 will benefit from our amendments because increased disclosure and standardization of fund holdings will 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 will benefit the industry, while any additional burdens will be reduced since similar disclosures will be required on Form N–PORT. We received no comments on the IRFA analysis of the Regulation S–X amendments, which included the proposed securities lending activity disclosures, or on the estimated costs discussed above in section III.C.3 We therefore expect that approximately 129 registered investment companies, including 117 open and closed-end funds (including one SBIC) and 12 UITs and, 1639 See supra section III.D.2. However, as discussed above, the annual savings from the rescission of Form N–SAR would be partially offset by the reporting requirements of Form N–CEN. See id. PO 00000 Frm 00140 Fmt 4701 Sfmt 4700 approximately 34 BDCs, are small entities that will be affected by the amendments to Regulation S–X. As discussed above, we estimate that amending Regulation S–X will cost $1,911 for each fund, including small entities, in its first year of reporting, and $683 per year for each subsequent year.1640 As discussed above, we further estimate that amending Regulation S–X will cost $1,911 for each UIT, including small entities, in its first year of reporting, and $683 per year for each subsequent year.1641 6. Amendments to Registration Statement Forms We are amending 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.1642 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 will increase our efficiency in preparing for exams as well as our ability to identify current industry trends and practices and, therefore, are requiring that it be reported on Form N–CEN. We are also adopting amendments to Forms N–1A and N–3 to require certain disclosures in fund Statements of Additional Information regarding securities lending activities.1643 We believe that investors and others will benefit from the additional transparency into the economic effects of fund securities lending activities that these requirements will yield. As discussed above, in sections III.E and IV.D, we did not receive any comments on the estimated hour and cost burdens or quantitatively estimated economic benefits or costs associated with our amendments to fund registration statement forms, or on their IRFA analysis or our IRFA analysis of securities lending disclosures. We expect that approximately 90 registered investment companies, including 78 open-end funds and 12 UITs, and approximately 34 BDCs, are small entities that would be required to file registration statements on the amended forms. As discussed above, the Commission estimates that Form N–1A and N–3 filers, including small entities, would incur additional costs of $1.3 million each year and $3.9 million in 1640 See supra section III.C.3. id. 1642 See supra footnotes 807–809 and accompanying text. 1643 See supra section II.F. 1641 See E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations one-time costs as a result of the amendments to those forms.1644 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 expanding the SOX certification for Form N–CSR to six months to maintain coverage for the entire fiscal year. As discussed above, in section IV.E, we did not receive any comments on the estimated hour and cost burdens associated with our proposed amendments to the certification requirements of Form N– CSR. In addition, we also are moving the change in independent public accountant attachment proposed on Form N–CEN to Form N–CSR so that an accountant’s letter regarding a change in accountant will become available to the public semi-annually rather than annually.1645 As discussed above, in sections III.B.3 and IV.E, we did not receive any comments on the estimated hour and cost burdens associated with our amendments to Form N–CSR or its IRFA analysis. Therefore, we expect that approximately 129 registered investment companies, including 78 open-end funds, 39 closed-end funds (including one SBIC) and 12 UITs, are small entities that will 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 will change for funds, including small entities, as a result of the amendments to the certification requirements associated with Form N–CSR adopted today.1646 We do estimate that the annual burden associated with filing reports on Form N–CSR will increase from 14.42 to 14.52 per registrant in light of moving the change in independent public accountant attachment proposed on Form N–CEN to 1644 See supra section III.E.3. supra section II.D.4.b. 1646 See supra section III.B.3. mstockstill on DSK3G9T082PROD with RULES2 20:36 Nov 17, 2016 E. Agency Action To Minimize Effect on Small Entities 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 forms and form amendments and rules and rule 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 adopting a delayed compliance period for small entities that will file reports on Form N–PORT. VI. Statutory Authority We are adopting 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. 1647 See 1645 See VerDate Sep<11>2014 Form N–CSR.1647 In addition, we estimate that the amendment to require closed-end funds to report on Form N– CSR certain disclosures regarding securities lending activities will increase the hour burden associated with Form N–CSR for closed-end funds by an additional 2 burden hours in the first year and an addition 0.5 hours for filings in subsequent years.1648 supra footnote 1612 and accompanying text. 1648 See Jkt 241001 PO 00000 supra footnote section IV.E. Frm 00141 Fmt 4701 Sfmt 4700 82009 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 Part 232 Administrative practice and procedure, Incorporation by reference, Reporting and recordkeeping requirements, Securities. 17 CFR Part 239 Investment companies, 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. For reasons set forth in the preamble, title 17, chapter II of the Code of Federal Regulations is amended as follows: PART 200—ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND REQUESTS Subpart N—Commission Information Collection Requirements Under the Paperwork Reduction Act: OMB Control Numbers 1. The authority citation for part 200 subpart N continues to read as follows: ■ Authority: 44 U.S.C. 3506; 44 U.S.C. 3507. 2. Effective June 1, 2018, § 200.800 in paragraph (b) is amended 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: ■ § 200.800 OMB control numbers assigned pursuant to the Paperwork Reduction Act. * * * (b) * * * E:\FR\FM\18NOR2.SGM 18NOR2 * * 82010 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 17 CFR part or section where identified and described Information collection requirement * * * * * Form N–CEN ........................................................................................................................................................... * * * * * * Form N–PORT ......................................................................................................................................................... * * * * 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 3. The authority citation for part 210 continues to read as follows: ■ 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, 78l, 78m, 78n, 78o(d), 78q, 78u–5, 78w, 78ll, 78mm, 80a–8, 80a–20, 80a–29, 80a–30, 80a–31, 80a–37(a), 80b–3, 80b–11, 7202 and 7262, unless otherwise noted. 4. Effective January 17, 2017, revise § 210.6–01 and the undesignated heading preceding it to read as follows: ■ Registered Investment Companies and Business Development Companies § 210.6–01 210.6–10. Application of §§ 210.6–01 to Sections 210.6–01 to 210.6–10 shall be applicable to financial statements filed for registered investment companies and business development companies. ■ 5. Effective January 17, 2017, revise § 210.6–03 to read as follows: mstockstill on DSK3G9T082PROD with RULES2 § 210.6–03 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 rules 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 VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 * * 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. PO 00000 Frm 00142 Fmt 4701 Sfmt 4700 Current OMB control No. 274.101 274.150 * * 3235–0729 * 3235–0730 * (d) Valuation of investments. The balance sheets of registered investment companies, other than issuers of faceamount certificates, and business development companies, 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 (15 U.S.C. 77a et seq.) (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 E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 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 exdividend date; interest shall be accrued on a daily basis. Dividends declared on short positions existing on the record date shall be recorded on the exdividend date and included as an expense of the period. (h) Federal income taxes. (1) 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. (2) State the following amounts based on cost for Federal income tax purposes: (i) Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost; (ii) The aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value; (iii) The net unrealized appreciation or depreciation; and (iv) The aggregate cost of investments for Federal income tax purposes. (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 VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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 is 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 PO 00000 Frm 00143 Fmt 4701 Sfmt 4700 82011 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. ■ 6. Effective January 17, 2017, revise § 210.6–04 to read as follows: § 210.6–04 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. E:\FR\FM\18NOR2.SGM 18NOR2 82012 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 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. mstockstill on DSK3G9T082PROD with RULES2 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. 11. Deposits for securities loaned. State the value of securities loaned and indicate the nature of the collateral received as security for the loan, VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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. ■ 7. Effective January 17, 2017, revise § 210.6–05 to read as follows: PO 00000 Frm 00144 Fmt 4701 Sfmt 4700 § 210.6–05 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. ■ 8. Effective January 17, 2017, revise § 210.6–07 to read as follows: § 210.6–07 Statements of operations. Statements of operations filed by registered investment companies, other than issuers of face-amount certificates, subject to the special provisions of § 210.6–08, and business development companies, shall comply with the following provisions: Statements of Operations 1. Investment income. State separately income from: (a) Dividends; (b) interest on securities; and (c) other income. Any other category of income which exceeds five percent of the total shown under this caption (e.g. income from non-cash dividends, income from payment-inkind interest) shall be stated separately. 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 income from non-cash dividends or payment in kind interest are included in income, the bases of recognition and measurement used in E:\FR\FM\18NOR2.SGM 18NOR2 mstockstill on DSK3G9T082PROD with RULES2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations respect to such amounts shall be disclosed. 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 brokerdealers in connection with purchase and sale of investment securities. Openend 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 brokerdealer. (f) State separately all amounts paid in accordance with a plan adopted under 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 VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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 brokerdealer, 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) PO 00000 Frm 00145 Fmt 4701 Sfmt 4700 82013 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. ■ 9. Effective January 17, 2017, revise § 210.6–10 to read as follows: § 210.6–10 What schedules are to be filed. (a) When information is required in schedules for both the person and its subsidiaries consolidated, it may be presented in the form of a single schedule, provided that items pertaining to the registrant are separately shown and that such single schedule affords a properly summarized presentation of the facts. (b) The schedules shall be examined by an independent accountant if the related financial statements are so examined. (c) 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. E:\FR\FM\18NOR2.SGM 18NOR2 82014 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 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. (d) 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 VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 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 series 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. (e) 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. PO 00000 Frm 00146 Fmt 4701 Sfmt 4700 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. ■ 10. Effective January 17, 2017, revise § 210.12–12 to read as follows: For Management Investment Companies § 210.12–12 Investments in securities of unaffiliated issuers. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82015 [For management investment companies only] Col. A Col. B Col. C Name of issuer and title of issue 1 2 3 4 ............... Balance held at close of period. Number of shares—principal amount of bonds and notes 7. Value of each item at close of period.5 6 8 9 10 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 statement, application, or annual report or otherwise made available to the public. If any securities are listed as ‘‘Miscellaneous securities,’’ briefly explain in a footnote what the term represents. 2 Categorize the schedule by (i) the type of investment (such as common stocks, preferred stocks, convertible securities, fixed income securities, government securities, options purchased, warrants, loan participations and assignments, commercial paper, bankers’ acceptances, certificates of deposit, short-term securities, repurchase agreements, other investment companies, and so forth); and (ii) the related industry, country, or geographic region of the investment. Short-term debt instruments (i.e., debt instruments whose maturities or expiration dates at the time of acquisition are one year or less) of the same issuer may be aggregated, in which case the range of interest rates and maturity dates shall be indicated. For issuers of periodic payment plan certificates and unit investment trusts, list separately: (i) Trust shares in trusts created or serviced by the depositor or sponsor of this trust; (ii) trust shares in other trusts; and (iii) securities of other investment companies. Restricted securities shall not be combined with unrestricted securities of the same issuer. Repurchase agreements shall be stated separately showing for each the name of the party or parties to the agreement, the date of the agreement, the total amount to be received upon repurchase, the repurchase date and description of securities subject to the repurchase agreements. 3 For options purchased, all information required by § 210.12–13 for options contracts written should be shown. Options on underlying investments where the underlying investment would otherwise be presented in accordance with §§ 210.12–12, 12–13A, 12–13B, 12–13C, or 12–13D should include the description of the underlying investment as would be required by §§ 210.12–12, 12–13A, 12–13B, 12–13C, or 12–13D as part of the description of the option. 4 Indicate the interest rate or preferential dividend rate and maturity date, as applicable, for preferred stocks, convertible securities, fixed income securities, government securities, loan participations and assignments, commercial paper, bankers’ acceptances, certificates of deposit, short-term securities, repurchase agreements, or other instruments with a stated rate of income. For variable rate securities, indicate a description of the reference rate and spread and: (1) The end of period interest rate or (2) disclose the end of period reference rate for each reference rate described in the Schedule in a note to the Schedule. For securities with payment in kind income, disclose the rate paid in kind. 5 The subtotals for each category of investments, subdivided both by type of investment and industry, country or geographic region, shall be shown together with their percentage value compared to net assets. (§§ 210.6–04.19 or 210.6–05.4.) 6 Column C shall be totaled. The total of Column C shall agree with the correlative amounts shown on the related balance sheet. 7 Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of indebtedness and preferred shares may be deemed to be income producing if, on the respective last interest payment date or date for the declaration of dividends prior to the date of the related balance sheet, there was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the effect that, on the last interest or dividend date, only partial interest was paid or partial dividends declared. If, on such respective last interest or dividend date, no interest was paid or no cash or in kind dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to be income producing unless, during the last year preceding the date of the related balance sheet, there was at least one dividend paid upon such common shares. 8 Indicate by an appropriate symbol each issue of restricted securities. State the following in a footnote: (a) As to each such issue: (1) Acquisition date, (2) carrying value per unit of investment at date of related balance sheet, e.g., a percentage of current market value of unrestricted securities of the same issuer, etc., and (3) the cost of such securities; (b) as to each issue acquired during the year preceding the date of the related balance sheet, the carrying value per unit of investment of unrestricted securities of the same issuer at: (1) The day the purchase price was agreed to; and (2) the day on which an enforceable right to acquire such securities was obtained; and (c) the aggregate value of all restricted securities and the percentage which the aggregate value bears to net assets. 9 Indicate by an appropriate symbol each issue of securities whose value was determined using significant unobservable inputs. 10 Indicate by an appropriate symbol each issue of securities held in connection with open put or call option contracts, loans for short sales, or where any portion of the issue is on loan. 11. Effective January 17, 2017, revise § 210.12–12A to read as follows: ■ § 210.12–12A sold short. Investments—securities [For management investment companies only] Col. A Col. B Col. C Name of issuer and title of issue 1 2 3 ..... Balance of short position at close of period (number of shares). Value of each open short position 4 5 6 1 Each issue shall be listed separately. the schedule as required by instruction 2 of § 210.12–12. the interest rate or preferential dividend rate and maturity date, as applicable, for preferred stocks, convertible securities, fixed income securities, government securities, loan participations and assignments, commercial paper, bankers’ acceptances, certificates of deposit, short-term securities, repurchase agreements, or other instruments with a stated rate of income. For variable rate securities, indicate a description of the reference rate and spread and: (1) The end of period interest rate or (2) disclose the end of period reference rate for each reference rate described in the Schedule in a note to the Schedule. For securities with payment in kind income, disclose the rate paid in kind. 4 The subtotals for each category of investments, subdivided both by type of investment and industry, country, or geographic region, shall be shown together with their percentage value compared to net assets. 5 Column C shall be totaled. The total of Column C shall agree with the correlative amounts shown on the related balance sheet. 6 Indicate by an appropriate symbol each issue of securities whose value was determined using significant unobservable inputs. 2 Categorize mstockstill on DSK3G9T082PROD with RULES2 3 Indicate 12. Effective January 17, 2017, revise § 210.12–12B to read as follows: ■ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 § 210.12–12B Summary schedule of investments in securities of unaffiliated issuers. PO 00000 Frm 00147 Fmt 4701 Sfmt 4700 E:\FR\FM\18NOR2.SGM 18NOR2 82016 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Column A Name of issuer and title of issue 1 3 4 5 6 7 8. Column B Column C Column D Balance held at close of period. Number of shares—principal amount of bonds and notes 10. Value of each item at close of period 2 9 11 12 13. Percentage value compared to net assets. 1 Categorize the schedule by (a) the type of investment (such as common stocks, preferred stocks, convertible securities, fixed income securities, government securities, options purchased, warrants, loan participations and assignments, commercial paper, bankers’ acceptances, certificates of deposit, short-term securities, repurchase agreements, other investment companies, and so forth); and (b) the related industry, country or geographic region of the investment. 2 The subtotals for each category of investments, subdivided both by type of investment and industry, country, or geographic region, shall be shown together with their percentage value compared to net assets. 3 Indicate the interest rate or preferential dividend rate and maturity date, as applicable, for preferred stocks, convertible securities, fixed income securities, government securities, loan participations and assignments, commercial paper, bankers’ acceptances, certificates of deposit, short-term securities, repurchase agreements, or other instruments with a stated rate of income. For variable rate securities, indicate a description of the reference rate and spread and: (1) The end of period interest rate or (2) disclose the end of period reference rate for each reference rate described in the Schedule in a note to the Schedule. For securities with payment in kind income, disclose the rate paid in kind. 4 Except as provided in note 6, list separately the 50 largest issues and any other issue the value of which exceeded one percent of net asset value of the registrant as of the close of the period. For purposes of the list (including, in the case of short-term debt instruments, the first sentence of note 4), aggregate and treat as a single issue, respectively, (a) short-term debt instruments (i.e., debt instruments whose maturities or expiration dates at the time of acquisition are one year or less) of the same issuer (indicating the range of interest rates and maturity dates); and (b) fully collateralized repurchase agreements (indicate in a footnote the range of dates of the repurchase agreements, the total purchase price of the securities, the total amount to be received upon repurchase, the range of repurchase dates, and description of securities subject to the repurchase agreements). Restricted and unrestricted securities of the same issue should be aggregated for purposes of determining whether the issue is among the 50 largest issues, but should not be combined in the schedule. For purposes of determining whether the value of an issue exceeds one percent of net asset value, aggregate and treat as a single issue all securities of any one issuer, except that all fully collateralized repurchase agreements shall be aggregated and treated as a single issue. The U.S. Treasury and each agency, instrumentality, or corporation, including each government-sponsored entity, that issues U.S. government securities is a separate issuer. 5 For options purchased, all information required by § 210.12–13 for options contracts written should be shown. Options on underlying investments where the underlying investment would otherwise be presented in accordance with §§ 210.12–12, 12–13A, 12–13B, 12–13C, or 12–13D should include the description of the underlying investment as would be required by §§ 210.12–12, 12–13A, 12–13B, 12–13C, or 12–13D as part of the description of the option. 6 If multiple securities of an issuer aggregate to greater than one percent of net asset value, list each issue of the issuer separately (including separate listing of restricted and unrestricted securities of the same issue) except that the following may be aggregated and listed as a single issue: (a) Fixed-income securities of the same issuer which are not among the 50 largest issues and whose value does not exceed one percent of net asset value of the registrant as of the close of the period (indicating the range of interest rates and maturity dates); and (b) U.S. government securities of a single agency, instrumentality, or corporation, which are not among the 50 largest issues and whose value does not exceed one percent of net asset value of the registrant as of the close of the period (indicating the range of interest rates and maturity dates). For each category identified pursuant to note 1, group all issues that are neither separately listed nor included in a group of securities that is listed in the aggregate as a single issue in a sub-category labeled ‘‘Other securities,’’ and provide the information for Columns C and D. 7 Any securities that would be required to be listed separately or included in a group of securities that is listed in the aggregate as a single issue may be listed in one amount as ‘‘Miscellaneous securities,’’ provided the securities so listed are eligible to be, and are, categorized as ‘‘Miscellaneous securities’’ in the registrant’s Schedule of Investments in Securities of Unaffiliated Issuers required under § 210.12–12. However, if any security that is included in ‘‘Miscellaneous securities’’ would otherwise be required to be included in a group of securities that is listed in the aggregate as a single issue, the remaining securities of that group must nonetheless be listed as required by notes 4 and 5 even if the remaining securities alone would not otherwise be required to be listed in this manner (e.g., because the combined value of the security listed in ‘‘Miscellaneous securities’’ and the remaining securities of the same issuer exceeds one percent of net asset value, but the value of the remaining securities alone does not exceed one percent of net asset value). 8 If any securities are listed as ‘‘Miscellaneous securities’’ pursuant to note 6 or ‘‘Other securities’’ pursuant to note 5, briefly explain in a footnote what those terms represent. 9 Total Column C. The total of Column C should equal the total shown on the related balance sheet for investments in securities of unaffiliated issuers. 10 Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of indebtedness and preferred shares may be deemed to be income producing if, on the respective last interest payment date or date for the declaration of dividends prior to the date of the related balance sheet, there was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the effect that, on the last interest or dividend date, only partial interest was paid or partial dividends declared. If, on such respective last interest or dividend date, no interest was paid or no cash or in kind dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to be income producing unless, during the last year preceding the date of the related balance sheet, there was at least one dividend paid upon such common shares. 11 Indicate by an appropriate symbol each issue of restricted securities. State the following in a footnote: (a) As to each such issue: (1) Acquisition date, (2) carrying value per unit of investment at date of related balance sheet, e.g., a percentage of current market value of unrestricted securities of the same issuer, etc., and (3) the cost of such securities; (b) as to each issue acquired during the year preceding the date of the related balance sheet, the carrying value per unit of investment of unrestricted securities of the same issuer at: (1) The day the purchase price was agreed to; and (2) the day on which an enforceable right to acquire such securities was obtained; and (c) the aggregate value of all restricted securities and the percentage which the aggregate value bears to net assets. 12 Indicate by an appropriate symbol each issue of securities whose value was determined using significant unobservable inputs. 13 Indicate by an appropriate symbol each issue of securities held in connection with open put or call option contracts, loans for short sales, or where any portion of the issue is on loan. § 210.12–12C [Removed and Reserved]. mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 14. Effective January 17, 2017, revise § 210.12–13 to read as follows: ■ 13. Effective January 17, 2017, remove and reserve § 210.12–12C. ■ PO 00000 Frm 00148 Fmt 4701 Sfmt 4700 § 210.12–13 E:\FR\FM\18NOR2.SGM Open option contracts written. 18NOR2 82017 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations [For management investment companies only] Col. A Col. B Col. C Description 1 2 3 ......... Counterparty 4 ........... Number of contracts 5. Col. D Col. E Notional amount Col. F Exercise price ..... Expiration date .... Col. G Value.6 7 8 1 Information as to put options shall be shown separately from information as to call options. where descriptions, counterparties, exercise prices or expiration dates differ shall be listed separately. 3 Options on underlying investments where the underlying investment would otherwise be presented in accordance with §§ 210.12–12, 12–13A, 12–13B, 12–13C, or 12–13D should include the description of the underlying investment as would be required by §§ 210.12–12, 12–13A, 12– 13B, 12–13C, or 12–13D as part of the description of the option. If the underlying investment is an index or basket of investments, and the components are publicly available on a Web site as of the balance sheet date, identify the index or basket. If the underlying investment is an index or basket of investments, the components are not publicly available on a Web site as of the balance sheet date, and the notional amount of the option contract does not exceed one percent of the net asset value of the registrant as of the close of the period, identify the index or basket. If the underlying investment is an index or basket of investments, the components are not publicly available on a Web site as of the balance sheet date, and the notional amount of the option contract exceeds one percent of the net asset value of the registrant as of the close of the period, provide a description of the index or custom basket and list separately: (i) The 50 largest components in the index or custom basket and (ii) any other components where the notional value for that components exceeds 1% of the notional value of the index or custom basket. For each investment separately listed, include the description of the underlying investment as would be required by §§ 210.12–12, 12–13, 12–13A, 12–13B, or 12–13D as part of the description, the quantity held (e.g. the number of shares for common stocks, principal amount for fixed income securities), the value at the close of the period, and the percentage value when compared to the custom basket’s net assets. 4 Not required for exchange traded or centrally cleared options. 5 If the number of shares subject to option is substituted for number of contracts, the column name shall reflect that change. 6 Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment. 7 Indicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs. 8 Column G shall be totaled and shall agree with the correlative amount shown on the related balance sheet. 2 Options § 210.12–13A 15. Effective January 17, 2017, add § 210.12–13A to read as follows: ■ Open futures contracts. [For management investment companies only] Col. A Col. B Col. C Col. D Col. E Col. F Description 1 2 3 4 5 ....................... Number of contracts. Expiration date Notional amount 6 ...... Value ............... Unrealized ciation. appreciation/depre- 1 Information as to long purchases of futures contracts shall be shown separately from information as to futures contracts sold short. contracts where descriptions or expiration dates differ shall be listed separately. should include the name of the reference asset or index. 4 Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment. 5 Indicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs. 6 Notional amount shall be the current notional amount at close of period. 2 Futures 3 Description 16. Effective January 17, 2017, add § 210.12–13B to read as follows: ■ § 210.12–13B Open forward foreign currency contracts. [For management investment companies only] Col. A Col. B Col. C Col. D Col. E Amount and description of currency to be purchased 1. Amount and description of currency to be sold 1. Counterparty .......... Settlement date Unrealized appreciation/ depreciation.2 3 4 1 Forward foreign currency contracts where description of currency purchased, description of currency sold, counterparty, or settlement dates differ shall be listed separately. 2 Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment. 3 Indicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs. 4 Column E shall be totaled and shall agree with the total of correlative amount(s) shown on the related balance sheet. 17. Effective January 17, 2017, add § 210.12–13C to read as follows: mstockstill on DSK3G9T082PROD with RULES2 ■ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 § 210.12–13C PO 00000 Frm 00149 Open swap contracts. Fmt 4701 Sfmt 4700 E:\FR\FM\18NOR2.SGM 18NOR2 82018 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations [For management investment companies only] Col. A Col. B Col. C Description and terms of payments to be received from another party 1 2 3. Description and terms of payments to be paid to another party 1 2 3. Counterparty 4. Col. D Maturity date. Col. E Col. F Notional Value ...... amount. Col. G Col. H Upfront payments/receipts Unrealized appreciation/ depreciation.5 6 7 1 List each major category of swaps by descriptive title (e.g., credit default swaps, interest rate swaps, total return swaps). Credit default swaps where protection is sold shall be listed separately from credit default swaps where protection is purchased. 2 Swaps where description, counterparty, or maturity dates differ shall be listed separately within each major category. 3 Description should include information sufficient for a user of financial information to understand the terms of payments to be received and paid. (e.g. For a credit default swap, including, among other things, description of reference obligation(s) or index, financing rate to be paid or received, and payment frequency. For an interest rate swap, this may include, among other things, whether floating rate is paid or received, fixed interest rate, floating interest rate, and payment frequency. For a total return swap, this may include, among other things, description of reference asset(s) or index, financing rate, and payment frequency.) If the reference instrument is an index or basket of investments, and the components are publicly available on a Web site as of the balance sheet date, identify the index or basket.If the reference instrument is an index or basket of investments, the components are not publicly available on a Web site as of the balance sheet date, and the notional amount of the swap contract does not exceed one percent of the net asset value of the registrant as of the close of the period, identify the index or basket. If the reference instrument is an index or basket of investments, the components are not publicly available on a Web site as of the balance sheet date, and the notional amount of the swap contract exceeds one percent of the net asset value of the registrant as of the close of the period provide a description of the index or custom basket and list separately: (i) The 50 largest components in the index or custom basket and (ii) any other components where the notional value for that components exceeds 1% of the notional value of the index or custom basket. For each investment separately listed, include the description of the underlying investment as would be required by §§ 210.12–12, 210.12–13, 210.12–13A, 210.12– 13B, or 210.12–13D as part of the description, the quantity held (e.g., the number of shares for common stocks, principal amount for fixed income securities), the value at the close of the period, and the percentage value when compared to the custom basket’s net assets. 4 Not required for exchange-traded or centrally cleared swaps. 5 Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment. 6 Indicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs. 7 Columns G and H shall be totaled and shall agree with the total of correlative amount(s) shown on the related balance sheet. § 210.12–13D Investments other than those presented in §§ 210.12–12, 12–12A, 12–12B, 12–13, 12–13A, 12–13B, and 12– 13C. 18. Effective January 17, 2017, add § 210.12–13D to read as follows: ■ [For management investment companies only] Col. A Col. B Col. C Description 1 2 3 .................................................. Balance held at close of period—quantity 4 5 ... Value of each item at close of period.6 7 8 9 1 Each investment where any portion of the description differs shall be listed separately. the schedule by (i) the type of investment (such as real estate, commodities, and so forth); and, as applicable, (ii) the related industry, country, or geographic region of the investment. 3 Description should include information sufficient for a user of financial information to understand the nature and terms of the investment, which may include, among other things, reference security, asset or index, currency, geographic location, payment terms, payment rates, call or put feature, exercise price, expiration date, and counterparty for non-exchange-traded investments. 4 If practicable, indicate the quantity or measure in appropriate units. 5 Indicate by an appropriate symbol each investment which is non-income producing. 6 Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment. 7 Indicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs. 8 Indicate by an appropriate symbol investment subject to option. State in a footnote: (a) The quantity subject to option, (b) nature of option contract, (c) option price, and (d) dates within which options may be exercised. 9 Column C shall be totaled and shall agree with the correlative amount shown on the related balance sheet. 2 Categorize 19. Effective January 17, 2017, revise § 210.12–14 to read as follows: mstockstill on DSK3G9T082PROD with RULES2 ■ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 § 210.12–14 Investments in and advances to affiliates. PO 00000 Frm 00150 Fmt 4701 Sfmt 4700 E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82019 [For management investment companies only] Col. A Col. B Name of issuer and title of issue or nature of indebtedness 1 2 3. Col. C Number of shares— principal amount of bonds, notes and other indebtedness held at close of period. Col. D Net realized gain or loss for the period 4 6. Col. E Col. F Net increase or decrease in unrealized appreciation or depreciation for the period 4 6. Amount of dividends or interest 4 6. (1) Credited to income. (2) Other ................... Value of each item at close of period.4 5 7 8 9 1 (a) List each issue separately and group (1) Investments in majority-owned subsidiaries; (2) other controlled companies; and (3) other affiliates. (b) If during the period there has been any increase or decrease in the amount of investment in and advance to any affiliate, state in a footnote (or if there have been changes to numerous affiliates, in a supplementary schedule) (1) name of each issuer and title of issue or nature of indebtedness; (2) balance at beginning of period; (3) gross additions; (4) gross reductions; (5) balance at close of period as shown in Column E. Include in the footnote or schedule comparable information as to affiliates in which there was an investment at any time during the period even though there was no investment at the close of the period of report. 2 Categorize the schedule as required by instruction 2 of § 210.12–12. 3 Indicate the interest rate or preferential dividend rate and maturity date, as applicable, for preferred stocks, convertible securities, fixed income securities, government securities, loan participations and assignments, commercial paper, bankers’ acceptances, certificates of deposit, short-term securities, repurchase agreements, or other instruments with a stated rate of income. For variable rate securities, indicate a description of the reference rate and spread and: (1) The end of period interest rate or (2) disclose the end of period reference rate for each reference rate described in the Schedule in a note to the Schedule. For securities with payment in kind income, disclose the rate paid in kind. 4 Columns C, D, E, and F shall be totaled. The totals of Column F shall agree with the correlative amount shown on the related balance sheet. 5 (a) Indicate by an appropriate symbol each issue of restricted securities. The information required by instruction 8 of § 210.12–12 shall be given in a footnote. (b) Indicate by an appropriate symbol each issue of securities subject to option. The information required by § 210.12–13 shall be given in a footnote. 6 (a) Include in Column E (1) as to each issue held at the close of the period, the dividends or interest included in caption 1 of the statement of operations. In addition, show as the final item in Column E (1) the aggregate of dividends and interest included in the statement of operations in respect of investments in affiliates not held at the close of the period. The total of this column shall agree with the correlative amount shown on the related statement of operations. (b) Include in Column E (2) all other dividends and interest. Explain in an appropriate footnote the treatment accorded each item. (c) Indicate by an appropriate symbol all non-cash dividends and interest and explain the circumstances in a footnote. (d) Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of indebtedness and preferred shares may be deemed to be income producing if, on the respective last interest payment date or date for the declaration of dividends prior to the date of the related balance sheet, there was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the effect that, on the last interest or dividend date, only partial interest was paid or partial dividends declared. If, on such respective last interest or dividend date, no interest was paid or no cash or in kind dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to be income producing unless, during the last year preceding the date of the related balance sheet, there was at least one dividend paid upon such common shares. (e) Include in Column C (1) as to each issue held at the close of the period, the realized gain or loss included in § 210.6–07.7 of the statement of operations. In addition, show as the final item in Column C (1) the aggregate of realized gain or loss included in the statement of operations in respect of investments in affiliates not held at the close of the period. The total of this column shall agree with the correlative amount shown on the related statement of operations. (f) Include in Column D (1) as to each issue held at the close of the period, the net increase or decrease in unrealized appreciation or depreciation included in § 210.6–07 .7 of the statement of operations. In addition, show as the final item in Column D (1) the aggregate of increase or decrease in unrealized appreciation or depreciation included in the statement of operations in respect of investments in affiliates not held at the close of the period. The total of this column shall agree with the correlative amount shown on the related statement of operations. 7 The subtotals for each category of investments, subdivided both by type of investment and industry, country, or geographic region, shall be shown together with their percentage value compared to net assets. 8 Indicate by an appropriate symbol each issue of securities whose value was determined using significant unobservable inputs. 9 Indicate by an appropriate symbol each issue of securities held in connection with open put or call option contracts, loans for short sales, or where any portion of the issue is on loan. PART 232—REGULATION S–T— GENERAL RULES AND REGULATIONS FOR ELECTRONIC FILINGS 20. The authority citation for part 232 continues to read, in part, as follows: ■ Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z–3, 77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 80a–29, 80a–30, 80a–37, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted. * * mstockstill on DSK3G9T082PROD with RULES2 § 232.105 * * * [Amended] 21. Effective June 1, 2018, amend § 232.105 by removing and reserving paragraph (a). ■ § 232.301 [Amended] 22. Effective June 1, 2018, amend § 232.301 by removing the fourth sentence ‘‘Additional provisions Jkt 241001 78w(a), 78ll, 78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a–10, 80a–13, 80a–24, 80a–26, 80a– 29, 80a–30, 80a–37, and Sec. 71003 and Sec. 84001, Public Law 114–94, 129 Stat. 1312, unless otherwise noted. * 23. Effective August 1, 2019, amend § 232.401 paragraph (d)(2)(iii) by removing the phrase ‘‘, N–CSR (§ 274.128 of this chapter) or N–Q (§ 274.130 of this chapter)’’ and adding in its place ‘‘or N–CSR (§ 274.128 of this chapter)’’. * * * * ■ PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933 24. The authority citation for part 239 continues to read, in part, as follows: ■ 20:36 Nov 17, 2016 § 232.401 ■ [Amended] VerDate Sep<11>2014 applicable to Form N–SAR filers are set forth in the EDGAR Filer Manual, Volume III: ‘‘N–SAR Supplement,’’ Version 5 (September 2015).’’ Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o–7, 78o–7 note, 78u–5, PO 00000 Frm 00151 Fmt 4701 Sfmt 4700 § 239.23 [Amended] 25. Effective January 17, 2017, amend Form N–14 (referenced in § 239.23) Item 14, subpart 1(ii) by removing the phrase ‘‘the following schedules in support of the most recent balance sheet: (A) Columns C and D of Schedule III [17 CFR 210.12–14]; and (B) Schedule IV [17 CFR 210.12–03];’’ and adding in its place ‘‘columns C and D of Schedule III [17 CFR 210.12–14] in support of the most recent balance sheet’’. ■ E:\FR\FM\18NOR2.SGM 18NOR2 82020 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations § 240.15d–10 PART 240 — GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 26. The authority citation for part 240 continues to read, in part, as follows: ■ Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b– 4, 80b–11, 7201 et seq. and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Public Law 111–203, 939A, 124 Stat. 1376 (2010); and Public Law 112–106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted. * * * § 240.10A–1 * [Amended] 34. Effective June 1, 2018, amend § 240.15d–11 paragraph (b) introductory text by removing ‘‘§ 270.30b1–1’’ and adding in its place ‘‘§ 270.30a–1’’. satisfaction of the requirement of section 30(a) of the Investment Company Act of 1940 (15 U.S.C. 80a– 29(a)) that every registered investment company must file annually with the Commission such information, documents, and reports as investment companies having securities registered on a national securities exchange are required to file annually pursuant to section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and the rules and regulations thereunder. § 240.15d–13 Note: The text of Form N–CEN will not appear in the Code of Federal Regulations. 33. Effective June 1, 2018, amend § 240.15d–10 paragraph (h) by removing the phrase ‘‘Rule 30b1–1 (§ 270.30b1–1 of this chapter)’’ and adding in its place ‘‘Rule 30a–1 (§ 270.30a–1 of this chapter)’’. ■ * [Amended] § 240.15d–11 [Amended] ■ [Amended] 35. Effective June 1, 2018, amend § 240.15d–13 paragraph (b)(1) by removing ‘‘§ 270.30b1–1’’ and adding in its place ‘‘§ 270.30a–1 of this chapter’’. ■ § 240.15d–16 [Amended] 27. Effective June 1, 2018, amend § 240.10A–1 paragraph (a)(4)(i) by removing the phrase ‘‘Form N–SAR, § 274.101’’ and adding in its place ‘‘Form N–CSR, § 274.128’’. ■ § 240.12b–25 PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 ■ 36. Effective June 1, 2018, amend § 240.15d–16 paragraph (a)(1) by removing the phrase ‘‘Rule 30b1–1 [17 CFR 270.30b1–1]’’ and adding in its place ‘‘§ 270.30a–1 of this chapter’’. [Amended] 28. Effective June 1, 2018, amend § 240.12b–25 by: ■ a. In the section heading, removing ‘‘N–SAR’’ and adding in its place ‘‘N– CEN’’; ■ b. In paragraph (a), removing ‘‘Form N–SAR’’ and adding in its place ‘‘Form N–CEN’’; and ■ c. In paragraph (b)(2)(ii), removing ‘‘N–SAR,’’ and adding in its place ‘‘N– CEN,’’. ■ § 240.13a–10 [Amended] 29. Effective June 1, 2018, amend § 240.13a–10 by: ■ a. In paragraph (h), removing the phrase ‘‘Rule 30b1–1 (§ 270.30b1–1 of this chapter)’’ and adding in its place ‘‘Rule 30a–1 (§ 270.30a–1 of this chapter)’’; ■ b. In Note 1, removing ‘‘§ 270.30b1–1’’ and adding in its place ‘‘§ 270.30a–1’’. ■ 37. The general authority citation for part 249 continues to read, and effective January 17, 2017, the sectional authority for § 249.330 is revised to read as follows: ■ Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; and 18 U.S.C. 1350; Sec. 953(b), Public Law 111–203, 124 Stat. 1904; Sec. 102(a)(3), Public Law 112– 106, 126 Stat. 309 (2012); Sec. 107, Public Law 112–106, 126 Stat. 313 (2012), and Sec. 72001, Public Law 114–94, 129 Stat. 1312 (2015), unless otherwise noted. * * * * * Section 249.330 is also issued under 15 U.S.C. 80a–29(a). * * § 249.322 * * * [Amended] 38. Effective June 1, 2018, amend § 249.322 in the first sentence of paragraph (a) by removing the phrase ‘‘a semi-annual, annual, or transition report on Form N–SAR (§§ 249.330; 274.101) or’’ and adding in its place ‘‘an annual report on Form N–CEN (§§ 249.330; 274.101) or a semi-annual or annual report on’’. ■ 39. Effective June 1, 2018, § 249.330 is revised to read as follows: ■ § 240.13a–11 [Amended] 30. Effective June 1, 2018, amend § 240.13a–11 paragraph (b) introductory text by removing ‘‘§ 270.30b1–1’’ and adding in its place ‘‘§ 270.30a–1’’. ■ § 240.13a–13 [Amended] 31. Effective June 1, 2018, amend § 240.13a–13 paragraph (b)(1) by removing ‘‘§ 270.30b1–1’’ and adding in its place ‘‘§ 270.30a–1 of this chapter’’. mstockstill on DSK3G9T082PROD with RULES2 ■ § 240.13a–16 § 249.330 Form N–CEN, annual report of registered investment companies. [Amended] 32. Effective June 1, 2018, amend § 240.13a–16 paragraph (a)(1) by removing the phrase ‘‘Rule 30b1–1 (17 CFR 270.30b1–1)’’ and adding in its place ‘‘§ 270.30a–1 of this chapter’’. ■ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 This form shall be used by registered unit investment trusts and small business investment companies for annual reports to be filed pursuant to § 270.30a–1 of this chapter in PO 00000 Frm 00152 Fmt 4701 Sfmt 4700 § 249.332 [Removed and Reserved] 40. Effective August 1, 2019, § 249.332 is removed and reserved. ■ PART 270—RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940 41. The authority citation for part 270 continues to read, in part, as follows: ■ Authority: 15 U.S.C. 80a–1 et seq., 80a– 34(d), 80a–37, 80a–39, and Public Law 111– 203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted. * * * § 270.8b–16 * * [Amended] 42. Effective June 1, 2018, amend § 270.8b–16 paragraph (a) by removing the phrase ‘‘a semi-annual report on Form N–SAR, as prescribed by rule 30b1–1 (17 CFR 270.30b1–1)’’ and adding in its place ‘‘an annual report on Form N–CEN, as prescribed by § 270.30a–1 of this chapter’’. ■ § 270.8b–33 [Amended] 43. Effective August 1, 2019, amend § 270.8b–33 by: ■ a. In the first sentence, removing the phrase ‘‘, Form N–CSR (§§ 249.331 and 274.128 of this chapter), or Form N–Q (§§ 249.332 and 274.130 of this chapter)’’ and adding in its place the phrase ‘‘or Form N–CSR (§§ 249.331 and 274.128 of this chapter)’’; and ■ b. In the third sentence, removing the phrase ‘‘or Form N–Q’’. ■ § 270.10f–3 [Amended] 44. Effective June 1, 2018, amend § 270.10f–3 by removing and reserving paragraph (c)(9). ■ 45. Effective June 1, 2018, revise § 270.30a–1 to read as follows: ■ § 270.30a–1 Annual report for registered investment companies. Every management investment company must file an annual report on Form N–CEN (§ 274.101 of this chapter) at least every twelve months and not E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations more than seventy-five calendar days after the close of each fiscal year. Every unit investment trust must file an annual report on Form N–CEN (§ 274.101 of this chapter) at least every twelve months and not more than seventy-five calendar days after the close of each calendar year. A registered investment company that has filed a registration statement with the Commission registering its securities for the first time under the Securities Act of 1933 is relieved of this reporting obligation with respect to any reporting period or portion thereof prior to the date on which that registration statement becomes effective or is withdrawn. § 270.30a–2 [Amended] 46. Effective August 1, 2019, amend § 270.30a–2 by: ■ a. In the section heading, removing the phrase ‘‘and Form N–Q’’; and ■ b. In the first sentence of paragraph (a), removing the phrases ‘‘or Form N– Q (§§ 249.332 and 274.130 of this chapter)’’ and ‘‘or Item 3 of Form N–Q, as applicable,’’. ■ § 270.30a–3 [Amended] 47. Effective August 1, 2019, amend § 270.30a–3 by: ■ a. In paragraph (b), removing the phrase ‘‘and Form N–Q (§§ 249.332 and 274.130 of this chapter)’’. ■ b. In the first sentence of paragraph (c), removing the phrase ‘‘and Form N– Q (§§ 249.332 and 274.130 of this chapter)’’. ■ c. In the second sentence of paragraph (c), removing the phrase ‘‘and Form N– Q’’. ■ 48. Effective June 1, 2018, § 270.30a– 4 is added to read as follows: ■ § 270.30a–4 Annual report for whollyowned registered management investment company subsidiary of registered management investment company. mstockstill on DSK3G9T082PROD with RULES2 Notwithstanding the provisions of § 270.30a–1, a registered management investment company that is a whollyowned subsidiary of a registered management investment company need not file an annual report on Form N– CEN if financial information with respect to that subsidiary is reported in the parent’s annual report on Form N– CEN. § 270.30b1–1 [Removed and Reserved] 49. Effective June 1, 2018, § 270.30b1– 1 is removed and reserved. ■ § 270.30b1–2 [Removed and Reserved] 50. Effective June 1, 2018, § 270.30b1– 2 is removed and reserved. ■ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 § 270.30b1–3 [Removed and Reserved] 51. Effective June 1, 2018, § 270.30b1– 3 is removed and reserved. ■ § 270.30b1–5 [Removed and Reserved] 52. Effective August 1, 2019, § 270.30b1–5 is removed and reserved. ■ 53. Effective January 17, 2017, § 270.30b1–9 is added to read as follows: ■ § 270.30b1–9 Monthly report. Each registered management investment company or exchange-traded fund organized as a unit investment trust, or series thereof, other than a registered open-end management investment company that is regulated as a money market fund under § 270.2a–7 or a small business investment company registered on Form N–5 (§§ 239.24 and 274.5 of this chapter), must file a monthly report of portfolio holdings on Form N–PORT (§ 274.150 of this chapter), current as of the last business day, or last calendar day, of the month. A registered investment company that has filed a registration statement with the Commission registering its securities for the first time under the Securities Act of 1933 is relieved of this reporting obligation with respect to any reporting period or portion thereof prior to the date on which that registration statement becomes effective or is withdrawn. Reports on Form N–PORT must be filed with the Commission no later than 30 days after the end of each month. § 270.30d–1 [Amended] 54. Effective August 1, 2019, amend § 270.30d–1 by removing the phrase ‘‘and Form N–Q (§§ 249.332 and 274.130 of this chapter)’’. ■ 55. Effective June 1, 2018, Section 270.30d–1 is further amended by removing the phrase ‘‘Form N–SAR’’ and adding in its place ‘‘Form N–CEN’’. * * * * * ■ PART 274—FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940 56. The general authority citation for part 274 continues to read as follows, and effective January 17, 2017, the sectional authorities for §§ 274.101 and 274.130 are removed: ■ §§ 239.15A and 274.11A 82021 [Amended] 57. Effective August 1, 2019, Form N– 1A (referenced in §§ 239.15A and 274.11A) is amended as follows: ■ a. In Item 16(f), Instruction 3(b), remove the phrase ‘‘N–Q’’ and add in its place ‘‘N–PORT for the last month of the Fund’s first or third fiscal quarters’’; and ■ b. In Item 27(d)(1), revise Instruction 4. The additions and revisions read as follows: NOTE: The text of Form N–1A does not, and this amendment will not, appear in the Code of Federal Regulations. ■ Form N–1A * * * Item 27. * * * Financial Statements * * (d) * * * (1) * * * * * Instructions * * * 4. ‘‘Statement Regarding Availability of Quarterly Portfolio Schedule. A statement that: (i) The Fund files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year as an exhibit to its reports on Form N–PORT; (ii) the Fund’s Form N–PORT reports are available on the Commission’s Web site at https://www.sec.gov; and (iii) if the Fund makes the information on Form N–PORT available to shareholders on its Web site or upon request, a description of how the information may be obtained from the Fund. * * * * * ■ 58. Effective January 17, 2017, Form N–1A (referenced in §§ 239.15A and 274.11A) is further amended as follows: ■ a. In Item 19, add paragraph (i) to Item 19; ■ b. In Item 27(b)(1), Instruction 1, remove the phrase ‘‘Schedule VI’’ and adding in its place ‘‘Schedule IX’’, and remove the phrase ‘‘[17 CFR 210.12– 12C]’’ and adding in its place ‘‘[17 CFR 210.12–12B]’’; ■ c. In Item 27(b)(1), Instruction 2, removing the phrase ‘‘[17 CFR 210.12– 12C]’’ and adding in its place ‘‘17 CFR 210.12–12B]’’; and ■ d. In Item 33, add an instruction. The additions and revisions read as follows: Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24, 80a–26, 80a–29, and Public Law 111–203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted. Note: The text of Form N–1A does not, and this amendment will not, appear in the Code of Federal Regulations. * * PO 00000 * * Frm 00153 * Fmt 4701 * Sfmt 4700 Form N–1A E:\FR\FM\18NOR2.SGM * * 18NOR2 * * 82022 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Item 19. Investment Advisory and Other Services Form N–2 * * * * * * (i) Securities Lending. (1) Provide the following dollar amounts of income and fees/ compensation related to the securities lending activities of each Series during its most recent fiscal year: (i) Gross income from securities lending activities, including income from cash collateral reinvestment; (ii) All fees and/or compensation for each of the following securities lending activities and related services: Any share of revenue generated by the securities lending program paid to the securities lending agent(s) (‘‘revenue split’’); fees paid for cash collateral management services (including fees deducted from a pooled cash collateral reinvestment vehicle) that are not included in the revenue split; administrative fees that are not included in the revenue split; fees for indemnification that are not included in the revenue split; rebates paid to borrowers; and any other fees relating to the securities lending program that are not included in the revenue split, including a description of those other fees; (iii) The aggregate fees/compensation disclosed pursuant to paragraph (ii); and (iv) Net income from securities lending activities (i.e., the dollar amount in paragraph (i) minus the dollar amount in paragraph (iii)). Instruction. If a fee for a service is included in the revenue split, state that the fee is ‘‘included in the revenue split.’’ (2) Describe the services provided to the Series by the securities lending agent in the Series’ most recent fiscal year. * * * * * Item 24. * * * * Financial Statements * * * * * Instructions * * * * * 6. * * * (b) ‘‘Statement Regarding Availability of Quarterly Portfolio Schedule. A statement that: (i) The Registrant files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year as an exhibit to its reports on Form N–PORT; (ii) the Registrant’s Form N–PORT reports are available on the Commission’s Web site at https:// www.sec.gov; (iii) if the Registrant makes the information on Form N– PORT available to shareholders on its Web site or upon request, a description of how the information may be obtained from the Registrant.’’; * * * * * ■ 60. Effective January 17, 2017, Form N–2 (referenced in §§ 239.14 and 274.11a–1) is further amended as follows: ■ a. In Item 24, Instruction 7, remove the phrase ‘‘Schedule VI’’ and add in its place ‘‘Schedule IX’’, and remove the phrase ‘‘[17 CFR 210.12–12C]’’ and add in its place ‘‘17 CFR 210.12–12B]’’; and ■ b. In Item 32, add an instruction. The additions and revisions read as follows: Note: The text of Form N–2 does not, and this amendment will not, appear in the Code of Federal Regulations. * * Item 32. Records * * * Location of Accounts and Instructions. * * * 3. A Fund may omit this information to the extent it is provided in its most recent report on Form N–CEN [17 CFR 274.101]. * * * * * ■ 59. Effective August 1, 2019, Form N– 2 (referenced in §§ 239.14 and 274.11a– 1) is amended by revising paragraph (b) in Item 24, Instruction 6. The additions and revisions read as follows: Note: The text of Form N–2 does not, and this amendment will not, appear in the Code of Federal Regulations. Note: The text of Form N–3 does not, and this amendment will not, appear in the Code of Federal Regulations. * * * VerDate Sep<11>2014 * * 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00154 Fmt 4701 Sfmt 4700 * Item 28. * * Financial Statements * * * * * (a) * * * Instructions. * * * 6. * * * (ii) Statement Regarding Availability of Quarterly Portfolio Schedule. A statement that: (i) The Registrant files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year as an exhibit to its reports on Form N–PORT; (ii) the Registrant’s Form N–PORT reports are available on the Commission’s Web site at https:// www.sec.gov; and (iii) if the Registrant makes the information on Form N– PORT available to contract owners on its Web site or upon request, a description of how the information may be obtained from the Fund; * * * * * ■ 62. Effective January 17, 2017, Form N–3 (referenced in §§ 239.17a and 274.11b) is further amended as follows: ■ a. In Item 21, add paragraph (j); In Item 28(a), Instruction 7(i), remove the phrase ‘‘Schedule VI’’ and add in its place ‘‘Schedule IX’’, and remove the phrase ‘‘[17 CFR 210.12–12C]’’ and add in its place ‘‘[17 CFR 210.12–12B]’’; ■ b. In Item 28(a), Instruction 7(i), remove the phrase ‘‘[17 CFR 210.12– 12C]’’ and add in its place ‘‘17 CFR 210.12–12]’’; and ■ c. In Item 36, add an instruction. The additions and revisions read as follows: Form N–3 * * Location of Accounts and * Note: The text of Form N–3 does not, and this amendment will not, appear in the Code of Federal Regulations. Form N–2 * * * * Instruction. The Registrant may omit this information to the extent it is provided in its most recent report on Form N–CEN [17 CFR 274.101]. * * * * * ■ 61. Effective August 1, 2019, Form N– 3 (referenced in §§ 239.17a and 274.11b) is amended as follows: ■ a. In Item 19(e)(ii), Instruction 3(b), remove the phrase ‘‘N–Q’’ and add in its place ‘‘N–PORT for the Registrant’s first or third fiscal quarters’’; ■ b. In Item 28(a), revise Instruction 6, paragraph (ii). The additions and revisions read as follows: Item 33. Records mstockstill on DSK3G9T082PROD with RULES2 * Form N–3 * * * * Item 21. Investment Advisory and Other Services * * * * * (j) Securities Lending. (i) Provide the following dollar amounts of income and fees/ compensation related to the securities lending activities of each series of the Registrant during its most recent fiscal year: (A) Gross income from securities lending activities; (B) All fees and/or compensation for each of the following securities lending activities and related services: Any share of revenue generated by the securities lending program paid to the securities lending agent(s) (‘‘revenue split’’); fees paid for cash collateral management services (including fees E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 deducted from a pooled cash collateral reinvestment vehicle) that are not included in the revenue split; administrative fees that are not included in the revenue split; fees for indemnification that are not included in the revenue split; rebates paid to borrowers; and any other fees relating to the securities lending program that are not included in the revenue split, including a description of those other fees; (C) The aggregate fees/compensation disclosed pursuant to paragraph (B); and (D) Net income from securities lending activities (i.e., the dollar amount in paragraph (A) minus the dollar amount in paragraph (C)). Instruction. If a fee for a service is included in the revenue split, state that the fee is ‘‘included in the revenue split.’’ (ii) Describe the services provided to the series of the Registrant by the securities lending agent in the series of the Registrant’s most recent fiscal year. * * * * * VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 82023 Item 36. Location of Accounts and Records 274.11d) is amended by adding an instruction to Item 31 to read as follows: * Form N–6 * * * * Instruction. The Registrant may omit this information to the extent it is provided in its most recent report on Form N–CEN [17 CFR 274.101]. * * * * * ■ 63. Effective January 17, 2017, Form N–4 (referenced in §§ 239.17b and 274.11c) is amended by adding an instruction to Item 30 to read as follows: Form N–4 * * * * Item 30. Location of Accounts and Records * * * * Instruction. The Registrant may omit this information to the extent it is provided in its most recent report on Form N–CEN [17 CFR 274.101]. * * * * * ■ 64. Effective January 17, 2017, Form N–6 (referenced in §§ 239.17c and PO 00000 Frm 00155 Fmt 4701 Sfmt 4700 * * * * Item 31. Location of Accounts and Records * * * * * Instruction. The Registrant may omit this information to the extent it is provided in its most recent report on Form N–CEN [17 CFR 274.101]. * * * * * 65. Effective June 1, 2018, § 274.101 is revised to read as follows: ■ * * * § 274.101 Form N–CEN, annual report of registered investment companies. This form shall be used by registered investment companies for annual reports to be filed pursuant to 17 CFR 270.30a–1. Note: The text of Form N–CEN will not appear in the Code of Federal Regulations. BILLING CODE 8011–01–P E:\FR\FM\18NOR2.SGM 18NOR2 82024 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations FORMN-CEN ANNUAL REPORT FOR REGISTERED INVESTMENT COMPANIES Form N-CEN is to be used by all registered investment companies, other than faceamount certificate companies, to file annual reports with the Commission. Such reports should be filed not later than 75 days after the close of the fiscal year for which the report is being prepared, except that unit investment trusts shall file such reports not later than 75 days after the close of the calendar year for which the report is being prepared, pursuant to rule 30a-1 under the Investment Company Act of 1940 ("Act") (17 CFR 270.30a-1). Faceamount certificate companies should continue to file periodic reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act"). The Commission may use the information provided on Form N-CEN in its regulatory, enforcement, examination, disclosure review, inspection, and policymaking roles. GENERAL INSTRUCTIONS A. Rule as to Use of Form N-CEN Form N-CEN is the reporting form that is to be used for annual reports filed pursuant to rule 30a-1 under the Act (17 CFR 270.30a-1) by registered investment companies, other than face-amount certificate companies, under section 30(a) of the Act and, in the case of small business investment companies and registered unit investment trusts, under section 13 or 15(d) of the Exchange Act, if applicable. Registrants must respond to all items in the relevant Parts of Form N-CEN, as listed below in this General Instruction A. If an item within a required Part is inapplicable, the Registrant should respond "N/A" to that item. Registrants are not, however, required to respond to items in Parts of Form N-CEN that they are not required by this General Instruction A to respond to. Management investment companies: Management investment companies other than small business investment companies must complete Parts A, B, C, and G of this Form. Management investment companies that offer multiple series must complete Part C as to each series separately, even if some information is the same for two or more series. Closedend management investment companies also must complete Part D of this Form. Small business investment companies must complete Parts A, B, D, and G of this Form. Management investment companies that are registered on Form N-3 also must complete certain items in Part F of this Form as directed by Item B.6.c.i. Exchange-traded funds or exchange-traded managedfunds: Funds that are exchange-traded Unit investment trusts: Unit investment trusts must complete Parts A, B, F, and G of this Form. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00156 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.016</GPH> mstockstill on DSK3G9T082PROD with RULES2 funds or exchange-traded managed funds, as defined by this Form, must complete PartE of this Form in addition to any other required Parts. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations B. 82025 Application of General Rules and Regulations The General Rules and Regulations under the Act contain certain general requirements that are applicable to reporting on any form under the Act. These general requirements should be carefully read and observed in the preparation and filing of reports on this Form, except that any provision in the Form or in these instructions shall be controlling. C. Filing of Report 1. All registered investment companies with shares outstanding (other than shares issued in connection with an initial investment to satisfy section 14(a) of the Act) must file a report on Form N-CEN at least annually. Management investment companies offering multiple series with different fiscal year ends must file a report as of each fiscal year end that responds to (i) Parts A, B, and G, and (ii) Part C and, if applicable, Part E as to only those series with the fiscal year end covered by the report. If a Registrant changes its fiscal year, a report filed on Form N-CEN may cover a period shorter than 12 months, but in no event may a report filed on Form NCEN cover a period longer than 12 months or a period that overlaps with a period covered by a previously filed report. For example, if in 2017 a Registrant with a September 30 fiscal year end changes its fiscal year end to December 31, the Registrant could file a report on this Form for the fiscal period ending September 30, 2017 and a report for the period ending December 31, 2017. A Registrant could not, however, only file a report for the fiscal period ending December 31, 2017 if its last report was filed for the fiscal period ending September 30, 2016. An extension of time of up to 15 days for filing the form may be obtained by following the procedures specified in rule 12b-25 under the Exchange Act (17 CFR 240.12b-25). A registrant may file an amendment to a previously filed report at any time, including an amendment to correct a mistake or error in a previously filed report. A registrant that files an amendment to a previously filed report must provide information in response to all required items of Form N-CEN, regardless of why the amendment is filed. 3. Reports must be filed electronically using the Commission's Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") system in accordance with Regulation S-T. Consult the EDGAR Filer Manual and Appendices for EDGAR filing instructions. D. Paperwork Reduction Act Information A registrant is required to disclose the information specified by Form N-CEN, and the Commission will make this information public, except for information reported in response VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00157 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.017</GPH> mstockstill on DSK3G9T082PROD with RULES2 2. 82026 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations to Item B.9.h. A registrant is not required to respond to the collection of information contained in Form N-CEN unless the form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S. C. 3507. E. Definitions Except as defined below or where the context clearly indicates the contrary, terms used in Form N-CEN have meanings as defined in the Act and the rules and regulations thereunder. U n1ess otherwise indicated, all references in the form or its instructions to statutory sections or to rules are sections of the Act and the rules and regulations thereunder. In addition, the following definitions apply: "Class" means a class of shares issued by a Fund that has more than one class that represents interest in the same portfolio of securities under rule 18f-3 under the Act (17 CFR 270.18f-3) or under an order exempting the Fund from provisions of section 18 of the Act (15 U.S.C. 80a-18). "CRD number" means a central licensing and registration system number issued by the Financial Industry Regulatory Authority. "Exchange-Traded Fund" means an open-end management investment company (or Series or Class thereof) or unit investment trust (or series thereof), the shares of which are listed and traded on a national securities exchange at market prices, and that has formed and operates under an exemptive order under the Act granted by the Commission or in reliance on an exemptive rule under the Act adopted by the Commission. "Exchange-Traded Managed Fund" means an open-end management investment company (or Series or Class thereof) or unit investment trust (or series thereof), the shares of which are listed and traded on a national securities exchange at net asset value-based prices, and that has formed and operates under an exemptive order under the Act granted by the Commission or in reliance on an exemptive rule under the Act adopted by the Commission. "Fund" means the Registrant or a separate Series of the Registrant. When an item of "LEI" means, with respect to any company, the "legal entity identifier" as assigned by a utility endorsed by the Global LEI Regulatory Oversight Committee or accredited by the Global LEI Foundation. In the case of a financial institution, if a "legal entity identifier" has not been assigned, then provide the RSSD ID, if any, assigned by the National Information Center of the Board of Governors of the Federal Reserve System. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00158 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.018</GPH> mstockstill on DSK3G9T082PROD with RULES2 Form N-CEN specifically applies to a Registrant or Series, those terms will be used. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82027 "Money Market Fund" means an open-end management investment company registered under the Act, or Series thereof, that is regulated as a money market fund pursuant to rule 2a-7 under the Act (17 CFR 270.2a-7). "PCAOB number" means the registration number issued to an independent public accountant registered with the Public Company Accounting Oversight Board. "Registrant" means the investment company filing this report or on whose behalf the report is filed. "SEC File number" means the number assigned to an entity by the Commission when that entity registered with the Commission in the capacity in which it is named in Form NCEN. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00159 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.019</GPH> mstockstill on DSK3G9T082PROD with RULES2 "Series" means shares offered by a Registrant that represent undivided interests in a portfolio of investments and that are preferred over all other Series of shares for assets specifically allocated to that Series in accordance with rule 18f-2(a) (17 CFR 270.18f-2(a)). 82028 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations FORM N-CEN ANNUAL REPORT FOR REGISTERED INVESTMENT COMPANIES Part A: General Information ltemA.1. Reporting period covered. a. Report for period ending: [yyyyjmm/dd] b. Does this report cover a period of less than 12 months? [Y/N] Part 8: Information About the Registrant Item 8.1. Background information. a. Full name of Registrant: __ b. Investment Company Act file number (e.g., 811-): __ c. CIK: d. LEI: Item 8.2. Address and telephone number of Registrant. a. Street: b. City: __ c. State, if applicable: __ d. Foreign country, if applicable: __ e. Zip code and zip code extension, or foreign postal code: __ f. Telephone number (including country code if foreign): __ g. Public website, if any: __ Item 8.3. Location of books and records. a. Name of person (e.g., a custodian of records): __ b. Street: c. City: __ d. State, if applicable: __ f. VerDate Sep<11>2014 Zip code and zip code extension, or foreign postal code: __ 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00160 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.020</GPH> mstockstill on DSK3G9T082PROD with RULES2 e. Foreign country, if applicable: __ Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82029 g. Telephone number (including country code if foreign): __ h. Briefly describe the books and records kept at this location: __ Instruction. Provide the requested information for each person maintaining physical possession of each account, book, or other document required to be maintained by section 3l(a) of the Act (15 U.S.C. 80a-30(a)) and the rules under that section. Item 8.4. Initial or final filings. a. Is this the first filing on this form by the Registrant? [Y/N] b. Is this the last filing on this form by the Registrant? [Y/N] Instruction. Respond "yes" to Item B.4.b only if the Registrant has filed an application to deregister or will file an application to deregister before its next required filing on this form Item 8.5. Family of investment companies. a. Is the Registrant part of a family of investment companies? [Y/N] i. Full name of family of investment companies: __ Instruction. "Family of investment companies" means, except for 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. In responding to this item, all Registrants in the family of investment companies should report the name of the family of investment companies identically. Insurance company separate accounts that may not hold themselves out to investors as related companies (products) for purposes of investment and investor services should consider themselves part of the same family if the operational or accounting or control systems under which these entities function are substantially similar. Item 8.6. Organization. Indicate the classification of the Registrant by checking the applicable item below. a. Open end management investment company registered under the Act on Form N-1A: i. Total number of Series of the Registrant: ii. If a Series of the Registrant with a fiscal year end covered by the report was terminated during the reporting period, provide the following information: 1. Name of the Series: 3. Date of termination (month/year): __ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00161 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.021</GPH> mstockstill on DSK3G9T082PROD with RULES2 2. Series identification number: 82030 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations b. Closed-end management investment company registered under the Act on Form N-2: c. Separate account offering variable annuity contracts which is registered under the Act as a management investment company on Form N-3: __ i. Registrants that indicate they are a management investment company registered under the Act on Form N-3, should respond to Item F.13 through Item F.16 of this Form in addition to the Parts required by General Instruction A of this Form. d. Separate account offering variable annuity contracts which is registered under the Act as a unit investment trust on Form N-4: e. Small business investment company registered under the Act on Form N-5: f. Separate account offering variable life insurance contracts which is registered under the Act as a unit investment trust on Form N-6: g. Unit investment trust registered under the Act on Form N-88-2: Instruction. For Item B.6.a.i, the Registrant should include all Series that have been established by the Registrant and have shares outstanding (other than shares issued in connection with an initial investment to satisfy section 14(a) of the Act). Item 8.7. Securities Act registration. Is the Registrant the issuer of a class of securities registered under the Securities Act of 1933 ("Securities Act")? [Y/N] Item 8.8. Directors: Provide the information requested below about each person serving as director of the Registrant (management investment companies only): a. Full name: b. CRD number, if any: c. Is the person an "interested person" of the Registrant as that term is defined in section 2(a)(19) of the Act (15 U.S.C. 80a-2(a)(19))? [Y/N] d. Investment Company Act file number of any other registered investment company for which the person also serves as a director (e.g., 811-): __ Item 8.9. Chief compliance officer. Provide the information requested below about each person serving as chief compliance officer of the Registrant for purposes of rule 38a-1 (17 CFR 270.38a-1): a. Full name: c. Street: d. City: __ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00162 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.022</GPH> mstockstill on DSK3G9T082PROD with RULES2 b. CRD number, if any: Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82031 e. State, if applicable: __ f. Foreign country, if applicable: g. Zip code and zip code extension, or foreign postal code: h. Telephone number (including country code if foreign): __ i. Has the chief compliance officer changed since the last filing? [Y/N] j. If the chief compliance officer is compensated or employed by any person other than the Registrant, or an affiliated person of the Registrant, for providing chief compliance officer services, provide: i. Name of the person: __ ii. Person's IRS Employer Identification Number: Item 8.10. Matters for security holder vote. Were any matters submitted by the Registrant for its security holders' vote during the reporting period? [Y/N] a. If yes, and to the extent the response relates only to certain series of the Registrant, indicate the series involved: i. Series name: ii. Series identification number: Instruction. Registrants registered on Forms N-3, N-4 or N-6, should respond "yes" to this Item only if security holder votes were solicited on contract-level matters. Item 8.11. Legal proceedings. a. Have there been any material legal proceedings, other than routine litigation incidental to the business, to which the Registrant or any of its subsidiaries was a party or of which any of their property was the subject during the reporting period? [Y/N] If yes, include the attachment required by Item G.1.a.i. i. If yes, and to the extent the response relates only to certain series of the Registrant, indicate the series involved: 1. Series name: 2. Series identification number: b. Has any proceeding previously reported been terminated? [Y/N] If yes, include the attachment required by Item G.1.a.i. If yes, and to the extent the response relates only to certain series of the Registrant, indicate the series involved: 1. Series name: 2. Series identification number: VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00163 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.023</GPH> mstockstill on DSK3G9T082PROD with RULES2 i. 82032 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Instruction. For purposes of this Item, the following proceedings should be described: (1) any bankruptcy, receivership or similar proceeding with respect to the Registrant or any of its significant subsidiaries; (2) any proceeding to which any director, officer or other affiliated person of the Registrant is a party adverse to the Registrant or any of its subsidiaries; and (3) any proceeding involving the revocation or suspension of the right of the Registrant to sell securities. Item 8.12. Fidelity bond and insurance (management investment companies only). a. Were any claims with respect to the Registrant filed under a fidelity bond (including, but not limited to, the fidelity insuring agreement of the bond) during the reporting period? [Y/N] i. Item 8.13. If yes, enter the aggregate dollar amount of claims filed: __ Directors and officers/errors and omissions insurance (management investment companies only). a. Are the Registrant's officers or directors covered in their capacities as officers or directors under any directors and officers/errors and omissions insurance policy owned by the Registrant or anyone else? [Y/N] i. Item 8.14. If yes, were any claims filed under the policy during the reporting period with respect to the Registrant? [Y/N] Provision of financial support. Did an affiliated person, promoter, or principal underwriter of the Registrant, or an affiliated person of such a person, provide any form of financial support to the Registrant during the reporting period? [Y/N] If yes, include the attachment required by Item G.1.a.ii, unless the Registrant is a Money Market Fund. a. If yes and to the extent the response relates only to certain series of the Registrant, indicate the series involved: i. Series name: VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00164 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.024</GPH> mstockstill on DSK3G9T082PROD with RULES2 ii. Series identification number: Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82033 Instruction. For purposes of this Item, a provision of financial support includes any (1) capital contribution, (2) purchase of a security from a Money Market Fund in reliance on rule 17a-9 under the Act (17 CFR 270.17a-9), (3) purchase of any defaulted or devalued security at fair value reasonably intended to increase or stabilize the value or liquidity of the Registrant's portfolio, (4) execution ofletter of credit or letter of indemnity, (5) capital support agreement (whether or not the Registrant ultimately received support), (6) performance guarantee, or (7) other similar action reasonably intended to increase or stabilize the value or liquidity of the Registrant's portfolio. Provision of financial support does not include any (1) routine waiver of fees or reimbursement of Registrant's expenses, (2) routine inter-fund lending, (3) routine inter-fund purchases of Registrant's shares, or (4) action that would qualify as financial support as defined above, that the board of directors has otherwise determined not to be reasonably intended to increase or stabilize the value or liquidity of the Registrant's portfolio. Item 8.15. Exemptive orders. a. During the reporting period, did the Registrant rely on any orders from the Commission granting an exemption from one or more provisions of the Act, Securities Act or Exchange Act? [Y/N] i. Item 8.16. If yes, provide below the release number for each order: __ Principal underwriters. a. Provide the information requested below about each principal underwriter: i. Full name: ii. SEC file number (e.g., 8-): __ iii. CRD number: iv. LEI, if any: __ v. State, if applicable: __ vi. Foreign country, if applicable: __ vii. Is the principal underwriter an affiliated person of the Registrant, or its investment adviser(s) or depositor? [Y/N] b. Have any principal underwriters been hired or terminated during the reporting period? [Y/N] Item 8.17. Independent public accountant. Provide the following information about each independent public accountant: b. PCA08 number: VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00165 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.025</GPH> mstockstill on DSK3G9T082PROD with RULES2 a. Full name: 82034 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations c. LEI, if any: __ d. State, if applicable: e. Foreign country, if applicable: f. Has the independent public accountant changed since the last filing? [Y/N] Item 8.18. Report on internal control (management investment companies only). For the reporting period, did an independent public accountant's report on internal control note any material weaknesses? [Y/N] Instruction. Small business investment companies are not required to respond to this item. Item 8.19. Audit opinion. For the reporting period, did an independent public accountant issue an opinion other than an unqualified opinion with respect to its audit of the Registrant's financial statements? [Y/N] a. If yes, and to the extent the response relates only to certain series of the Registrant, indicate the series involved: i. Series name: ii. Series identification number: Item 8.20. Change in valuation methods. Have there been material changes in the method of valuation (e.g., change from use of bid price to mid price for fixed income securities or change in trigger threshold for use of fair value factors on international equity securities) of the Registrant's assets during the reporting period? [Y/N] If yes, provide the following: a. Date of change: _ b. Explanation of the change: c. Asset type involved: __ d. Type of investments involved: e. Statutory or regulatory basis, if any: __ f. To the extent the response relates only to certain series of the Registrant, indicate the series involved: i. Series name: VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00166 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.026</GPH> mstockstill on DSK3G9T082PROD with RULES2 ii. Series identification number: Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82035 Instruction. Responses to this item need not include changes to valuation techniques used for individual securities (e.g., changing from market approach to income approach for a private equity security). In responding to Item B.20.c., provide the applicable "asset type" category specified in Item C.4.a. of Form N-PORT. In responding to Item B.20.d., provide a brief description of the type of investments involved. If the change in valuation methods applies only to certain sub-asset types included in the response to Item B.20.c., please provide the sub-asset types in the response to Item B.20.d. The responses to Item B.20.c. and Item B.20.d. should be identical only if the change in valuation methods applies to all assets within that category. Item 8.21. Change in accounting principles and practices. Have there been any changes in accounting principles or practices, or any change in the method of applying any such accounting principles or practices, which will materially affect the financial statements filed or to be filed for the current year with the Commission and which has not been previously reported? [Y/N] If yes, include the attachment required by Item G.1.a.iv. Item 8.22. Net asset value error corrections (open-end management investment companies only). a. During the reporting period, were any payments made to shareholders or shareholder accounts reprocessed as a result of an error in calculating the Registrant's net asset value (or net asset value per share)? [Y/N] i. If yes, and to the extent the response relates only to certain Series of the Registrant, indicate the Series involved: 1. Series name: 2. Series identification number: Item 8.23. Rule 19a-1 notice (management investment companies only). During the reporting period, did the Registrant pay any dividend or make any distribution in the nature of a dividend payment, required to be accompanied by a written statement pursuant to section 19(a) of the Act (15 U.S.C. 80a-19(a)) and rule 19a-1 thereunder (17 CFR 270.19a-1)? [Y/N] a. If yes, and to the extent the response relates only to certain Series of the Registrant, indicate the Series involved: i. Series name: VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00167 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.027</GPH> mstockstill on DSK3G9T082PROD with RULES2 ii. Series identification number: 82036 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Part C: Additional Questions for Management Investment Companies Item C.1. Background information. a. Full name of the Fund: b. Series identification number, if any: __ c. LEI: d. Is this the first filing on this form by the Fund? [Y/N] Item C.2. Classes of open-end management investment companies. a. How many Classes of shares of the Fund (if any) are authorized? __ b. How many new Classes of shares of the Fund were added during the reporting period? __ c. How many Classes of shares of the Fund were terminated during the reporting period?_ d. For each Class with shares outstanding, provide the information requested below: i. Full name of Class: ii. Class identification number, if any: __ iii. Ticker symbol, if any: __ Item C.3. Type offund. Indicate if the Fund is any one of the types listed below. Check all that apply. a. Exchange-Traded Fund or Exchange-Traded Managed Fund or offers a Class that itself is an Exchange-Traded Fund or Exchange-Traded Managed Fund: i. Exchange-Traded Fund: __ ii. Exchange-Traded Managed Fund: __ b. Index Fund: i. Is the index whose performance the Fund tracks, constructed: 1. By an affiliated person of the fund? [Y/N] 2. Exclusively for the fund? [Y/N] 1. Before Fund fees and expenses: __ 2. After Fund fees and expenses (i.e., net asset value): __ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00168 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.028</GPH> mstockstill on DSK3G9T082PROD with RULES2 ii. Provide the annualized difference between the Fund's total return during the reporting period and the index's return during the reporting period {i.e., the Fund's total return less the index's return): Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82037 iii. Provide the annualized standard deviation of the daily difference between the Fund's total return and the index's return during the reporting period: 1. Before Fund fees and expenses: __ 2. After Fund fees and expenses (i.e., net asset value): __ c. Seeks to achieve performance results that are a multiple of an index or other benchmark, the inverse of an index or other benchmark, or a multiple of the inverse of an index or other benchmark: d. Interval Fund: e. Fund of Funds: f. Master-Feeder Fund: i. If the Registrant is a master fund, then provide the information requested below with respect to each feeder fund: 1. Full name: 2. For registered feeder funds: A. Investment Company Act file number (e.g., 811-): __ B. Series identification number, if any: __ C. LEI of feeder fund: 3. For unregistered feeder funds: A. SEC file number of the feeder fund's investment adviser (e.g., 801-): __ B. LEI of feeder fund, if any: _ ii. If the Registrant is a feeder fund, then provide the information requested below with respect to a master fund registered under the Act: 1. Full name: 2. Investment Company Act file number (e.g., 811-): __ 3. SEC file number of the master fund's investment adviser (e.g., 801-): _ 4. LEI: g. Money Market Fund: __ h. Target Date Fund: _ VerDate Sep<11>2014 Underlying fund to a variable annuity or variable life insurance contract: __ 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00169 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.029</GPH> mstockstill on DSK3G9T082PROD with RULES2 i. 82038 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Instructions. 1. "Fund ofFunds" means a fund that acquires securities issued by any other investment company in excess of the amounts permitted under paragraph (A) of section 12(d)(1) of the Act (15 U.S.C. 80a-12(d)(l)(A)), but, for purposes of this Item, does not include a fund that acquires securities issued by another investment company solely in reliance on rule 12d1-1 under the Act (CFR 270.12d1-1). 2. "Index Fund" means an investment company, including an Exchange-Traded Fund, that seeks to track the performance of a specified index. 3. "Interval Fund" means a closed-end management investment company that makes periodic repurchases of its shares pursuant to rule 23c-3 under the Act (17 CFR 270.23c-3). 4. "Master-Feeder Fund" means a two-tiered arrangement in which one or more funds (each a feeder fund) holds shares of a single Fund (the master fund) in accordance with section 12(d)(l)(E) of the Act (15 U.S.C. 80a-12(d)(l)(E)) or pursuant to exemptive relief granted by the Commission. 5. "Target Date Fund" means an investment company that has an investment objective or strategy of providing varying degrees oflong-term appreciation and capital preservation through a mix of equity and fixed income exposures that changes over time based on an investor's age, target retirement date, or life expectancy. Item C.4. Item C.5. Diversification. Does the Fund seek to operate as a "non-diversified company" as such term is defined in section 5(b)(2) of the Act (15 U.S.C. 80a-5(b)(2))? [Y/N] Investments in certain foreign corporations. a. Does the fund invest in a controlled foreign corporation for the purpose of investing in certain types of instruments such as, but not limited to, commodities? [Y/N] b. If yes, provide the following information: i. Full name of subsidiary: _ ii. LEI of subsidiary, if any: _ Instruction. "Controlled foreign corporation" has the meaning provided in section 957 of the Internal Revenue Code [26 U.S.C. 957]. Item C.6. Securities lending. a. Is the Fund authorized to engage in securities lending transactions? [Y/N] i. VerDate Sep<11>2014 If yes, during the reporting period, did any borrower fail to return the loaned securities by the contractual deadline with the result that: 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00170 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.030</GPH> mstockstill on DSK3G9T082PROD with RULES2 b. Did the Fund lend any of its securities during the reporting period? [Y/N] Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82039 1. The Fund (or its securities lending agent) liquidated collateral pledged to secure the loaned securities? [Y/N] 2. The Fund was otherwise adversely impacted? [Y/N] Instruction. For purposes of this Item, other adverse impacts would include, for example, (1) a loss to the Fund if collateral and indemnification were not sufficient to replace the loaned securities or their value, (2) the Fund's ineligibility to vote shares in a proxy, or (3) the Fund's ineligibility to receive a direct distribution from the issuer. c. Provide the information requested below about each securities lending agent, if any, retained by the Fund: i. Full name of securities lending agent: __ ii. LEI, if any: __ iii. Is the securities lending agent an affiliated person, or an affiliated person of an affiliated person, of the Fund? [Y/N] iv. Does the securities lending agent or any other entity indemnify the fund against borrower default on loans administered by this agent? [Y/N] v. If the entity providing the indemnification is not the securities lending agent, provide the following information: 1. Name of person providing indemnification: 2. LEI, if any, of person providing indemnification: __ vi. Did the Fund exercise its indemnification rights during the reporting period? [Y/N] d. If a person managing any pooled investment vehicle in which cash collateral is invested in connection with the Fund's securities lending activities (i.e., a cash collateral manager) does not also serve as securities lending agent, provide the following information about each person: i. Full name of cash collateral manager: ii. LEI, if any: __ iii. Is the cash collateral manager an affiliated person, or an affiliated person of an affiliated person, of a securities lending agent retained by the Fund? [Y/N] e. Types of payments made to one or more securities lending agents and cash collateral managers (check all that apply): i. VerDate Sep<11>2014 Revenue sharing split: __ 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00171 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.031</GPH> mstockstill on DSK3G9T082PROD with RULES2 iv. Is the cash collateral manager an affiliated person, or an affiliated person of an affiliated person, of the Fund? [Y/N] 82040 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations ii. Non-revenue sharing split (other than administrative fee): __ iii. Administrative fee: iv. Cash collateral reinvestment fee: v. Indemnification fee: vi. Other: _ _ . If other, describe: _ __ f. Provide the monthly average of the value of portfolio securities on loan during the reporting period. _ g. Provide the net income from securities lending activities. __ Item C.7. Reliance on certain rules. Did the Fund rely on any of the following rules under the Act during the reporting period? (check all that apply) a. Rule 10f-3 (17 CFR 270.10f-3): _ b. Rule 12d1-1 (17 CFR 270.12d1-1): _ c. Rule 15a-4 (17 CFR 270.15a-4): __ d. Rule 17a-6 (17 CFR 270.17a-6): __ e. Rule 17a-7 (17 CFR 270.17a-7): __ f. Rule 17a-8 (17 CFR 270.17a-8): __ g. Rule 17e-1 (17 CFR 270.17e-1): __ h. Rule 22d-1 (17 CFR 270.22d-1): _ i. Rule 23c-1 (17 CFR 270.23c-1): __ j. Rule 32a-4 (17 CFR 270.32a-4): __ Item G.B. Expense limitations. a. Did the Fund have an expense limitation arrangement in place during the reporting period? [Y/N] b. Were any expenses of the Fund reduced or waived pursuant to an expense limitation arrangement during the reporting period? [Y/N] c. Are the fees waived subject to recoupment? [Y/N] Instruction. Provide information concerning any direct or indirect limitations, waivers or reductions, on the level of expenses incurred by the fund during the reporting period. A limitation, for example, may be applied indirectly (such as when an adviser agrees to accept a reduced fee pursuant to a voluntary fee waiver) or it may apply only for a temporary period such as for a new fund in its start-up phase. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00172 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.032</GPH> mstockstill on DSK3G9T082PROD with RULES2 d. Were any expenses previously waived recouped during the period? [Y/N] Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Item C.9. 82041 Investment advisers. a. Provide the following information about each investment adviser (other than a subadviser) of the Fund: i. Full name: ii. SEC file number (e.g., 801-): __ iii. CRD number: iv. LEI, if any: __ v. State, if applicable: __ vi. Foreign country, if applicable: __ vii. Was the investment adviser hired during the reporting period? [Y/N] 1. If the investment adviser was hired during the reporting period, indicate the investment adviser's start date: b. If an investment adviser (other than a sub-adviser) to the Fund was terminated during the reporting period, provide the following with respect to each investment adviser: i. Full name: ii. SEC file number (e.g., 801-): __ iii. CRD number: iv. LEI, if any: __ v. State, if applicable: __ vi. Foreign country, if applicable: __ vii. Termination date: c. For each sub-adviser to the Fund, provide the information requested: i. Full name: ii. SEC file number (e.g., 801-): __ iii. CRD number: iv. LEI, if any: _ _ v. State, if applicable: __ vii. Is the sub-adviser an affiliated person of the Fund's investment adviser(s)? [Y/N] viii. Was the sub-adviser hired during the reporting period? [Y/N] VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00173 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.033</GPH> mstockstill on DSK3G9T082PROD with RULES2 vi. Foreign country, if applicable: __ 82042 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 1. If the sub-adviser was hired during the reporting period, indicate the subadviser's start date: d. If a sub-adviser was terminated during the reporting period, provide the following with respect to each such sub-adviser: i. Full name: ii. SEC file number (e.g., 801-): __ iii. CRD number: iv. LEI, if any: __ v. State, if applicable: __ vi. Foreign country, if applicable: __ vii. Termination date: Item C.10. Transfer agents. a. Provide the following information about each person providing transfer agency services to the Fund: i. Full name: ii. SEC file number (e.g., 84- or 85-): __ iii. LEI, if any: __ iv. State, if applicable: __ v. Foreign country, if applicable: __ vi. Is the transfer agent an affiliated person of the Fund or its investment adviser(s)? [Y/N] vii. Is the transfer agent a sub-transfer agent? [Y/N] b. Has a transfer agent been hired or terminated during the reporting period? [Y/N] Item C.11. Pricing services. a. Provide the following information about each person that provided pricing services to the Fund during the reporting period: i. Full name: ii. LEI, if any, or provide and describe other identifying number: __ iii. State, if applicable: _ _ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00174 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.034</GPH> mstockstill on DSK3G9T082PROD with RULES2 iv. Foreign country, if applicable: __ Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82043 v. Is the pricing service an affiliated person of the Fund or its investment adviser(s)? [Y/N] b. Was a pricing service hired or terminated during the reporting period? [Y/N] Item C.12. Custodians. a. Provide the following information about each person that provided custodial services to the Fund during the reporting period: i. Full name: ii. LEI, if any: __ iii. State, if applicable: __ iv. Foreign country, if applicable: __ v. Is the custodian an affiliated person of the Fund or its investment adviser(s)? [Y/N] vi. Is the custodian a sub-custodian? [Y/N] vii. With respect to the custodian, check below to indicate the type of custody: 1. Bank-section 17(f)(1) (15 U.S.C. 80a-17(f)(1)): _ 2. Member national securities exchange- rule 17f-1 (17 CFR 270.17f-1): __ 3. Self- rule 17f-2 (17 CFR 270.17f-2): __ 4. Securities depository- rule 17f-4 (17 CFR 270.17f-4): __ 5. Foreign custodian- rule 17f-5 (17 CFR 270.17f-5): __ 6. Futures commission merchants and commodity clearing organizations- rule 17f-6 (17 CFR 270.17f-6): _ 7. Foreign securities depository- rule 17f-7 (17 CFR 270.17f-7): __ 8. Insurance company sponsor- rule 26a-2 (17 CFR 270.26a-2): __ 9. Other: __ . If other, describe: _ __ b. Has a custodian been hired or terminated during the reporting period? [Y/N] Item C.13. Shareholder servicing agents. a. Provide the following information about each shareholder servicing agent of the Fund: i. Full name: iii. State, if applicable: _ _ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00175 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.035</GPH> mstockstill on DSK3G9T082PROD with RULES2 ii. LEI, if any, or provide and describe other identifying number: __ 82044 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations iv. Foreign country, if applicable: __ v. Is the shareholder servicing agent an affiliated person of the Fund or its investment adviser(s)? [Y/N] vi. Is the shareholder servicing agent a sub-shareholder servicing agent? [Y/N] b. Has a shareholder servicing agent been hired or terminated during the reporting period? [Y/N] Item C.14. Administrators. a. Provide the following information about each administrator of the Fund: i. Full name: ii. LEI, if any, or provide and describe other identifying number: __ iii. State, if applicable: _ _ iv. Foreign country, if applicable: _ v. Is the administrator an affiliated person of the Fund or its investment adviser(s)? [Y/N] vi. Is the administrator a sub-administrator? [Y/N] b. Has an administrator been hired or terminated during the reporting period? [Y/N] Item C.15. Affiliated broker-dealers. Provide the following information about each affiliated broker-dealer: a. Full name: b. SEC file number: c. CRD number: d. LEI, if any: __ e. State, if applicable: _ _ f. Foreign country, if applicable: __ g. Total commissions paid to the affiliated broker-dealer for the reporting period: __ Item C.16. Brokers. i. Full name of broker: ii. SEC file number: VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00176 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.036</GPH> mstockstill on DSK3G9T082PROD with RULES2 a. For each of the ten brokers that received the largest dollar amount of brokerage commissions (excluding dealer concessions in underwritings) by virtue of direct or indirect participation in the Fund's portfolio transactions, provide the information below: Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82045 iii. CRD number: iv. LEI, if any: __ v. State, if applicable: vi. Foreign country, if applicable: vii. Gross commissions paid by the Fund for the reporting period: b. Aggregate brokerage commissions paid by Fund during the reporting period: Item C.17. Principal transactions. a. For each of the ten entities acting as principals with which the Fund did the largest dollar amount of principal transactions (include all short-term obligations, and U.S. government and tax-free securities) in both the secondary market and in underwritten offerings, provide the information below: i. Full name of dealer: ii. SEC file number: iii. CRD number: iv. LEI, if any: __ v. State, if applicable: vi. Foreign country, if applicable: vii. Total value of purchases and sales (excluding maturing securities) with Fund: b. Aggregate value of principal purchase/sale transactions of Fund during the reporting period: __ Instructions to Item C.16 and Item C.17. To help Registrants distinguish between agency and principal transactions, and to promote consistent reporting of the information required by these items, the following criteria should be used: If a security is purchased or sold in a transaction for which the confirmation specifies only the net amount to be paid or received by the Registrant and such net amount is equal to the market value of the security at the time of the transaction, the transaction should be considered a principal transaction and included in determining the amounts in Item C.17. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00177 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.037</GPH> If a security is purchased or sold in a transaction for which the confirmation specifies the amount of the commission to be paid by the Registrant, the transaction should be considered an agency transaction and included in determining the answers to Item C.16. 2. mstockstill on DSK3G9T082PROD with RULES2 1. 82046 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 3. If a security is purchased by the Registrant in an underwritten offering, the acquisition should be considered a principal transaction and included in answering Item C.l7 even though the Registrant has knowledge of the amount the underwriters are receiving from the issuer. 4. If a security is sold by the Registrant in a tender offer, the sale should be considered a principal transaction and included in answering Item C.17 even though the Registrant has knowledge of the amount the offeror is paying to soliciting brokers or dealers. 5. If a security is purchased directly from the issuer (such as a bank CD), the purchase should be considered a principal transaction and included in answering Item C.17. 6. The value of called or maturing securities should not be counted in either agency or principal transactions and should not be included in determining the amounts shown in Item C.16 and Item C.17. This means that the acquisition of a security may be included, but it is possible that its disposition may not be included. Disposition of a repurchase agreement at its expiration date should not be included. 7. The purchase or sales of securities in transactions not described in paragraphs (1) through (6) above should be evaluated by the Fund based upon the guidelines established in those paragraphs and classified accordingly. The agents considered in Item C.16 may be persons or companies not registered under the Exchange Act as securities brokers. The persons or companies from whom the investment company purchased or to whom it sold portfolio instruments on a principal basis may be persons or entities not registered under the Exchange Act as securities dealers. Item C.18. Payments for brokerage and research. During the reporting period, did the Fund pay commissions to broker-dealers for "brokerage and research services" within the meaning of section 28(e) of the Exchange Act (15 U.S.C. 78bb)? [Y/N] Item C.19. Average net assets. a. Provide the Fund's (other than a money market fund's) monthly average net assets during the reporting period: _ b. Provide the money market fund's daily average net assets during the reporting period:_ Part D:Additional Questions for Closed-End Management Investment Companies and Small Business Investment Companies Securities issued by Registrant. Indicate by checking below which of the following securities have been issued by the Registrant. Indicate all that apply. a. Common stock: i. VerDate Sep<11>2014 Title of class: 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00178 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.038</GPH> mstockstill on DSK3G9T082PROD with RULES2 Item 0.1. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations ii. Exchange where listed: iii. 82047 Ticker symbol: __ b. Preferred stock: i. Title of class: ii. Exchange where listed: iii. Ticker symbol: c. Warrants: i. Title of class: ii. Exchange where listed: iii. Ticker symbol: __ d. Convertible securities: i. Title of class: ii. Exchange where listed: iii. Ticker symbol: e. Bonds: i. ii. Exchange where listed: iii. f. Title of class: Ticker symbol: __ Other: - - If other, describe: i. Title of class: ii. Exchange where listed: iii. Ticker symbol: __ Instruction. For any security issued by the Fund that is not listed on a securities exchange but that has a ticker symbol, provide that ticker symbol. Item 0.2. Rights offerings. a. Did the Fund make a rights offering with respect to any type of security during the reporting period? [Y/N] If yes, answer the following as to each rights offering made by the Fund: i. ii. VerDate Sep<11>2014 Common stock: Preferred stock: 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00179 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.039</GPH> mstockstill on DSK3G9T082PROD with RULES2 b. Type of security. 82048 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations iii. Warrants: iv. Convertible securities: v. Bonds: vi. Other: __ . If other, describe: _ __ c. Percentage of participation in primary rights offering: _ Instruction. For Item D.2.c., the "percentage of participation in primary rights offering" is calculated as the percentage of subscriptions exercised during the primary rights offering relative to the amount of securities available for primary subscription. Item D.3. Secondary offerings. a. Did the Fund make a secondary offering during the reporting period? [Y/N] b. If yes, indicate by checking below the type(s) of security. Indicate all that apply. i. Common stock: ii. Preferred stock: iii. Warrants: iv. Convertible securities: v. Bonds: vi. Other: __ . If other, describe: _ __ Item D.4. Repurchases. a. Did the Fund repurchase any outstanding securities issued by the Fund during the reporting period? [Y/N] b. If yes, indicate by checking below the type(s) of security. Indicate all that apply: i. Common stock: ii. Preferred stock: iii. Warrants: iv. Convertible securities: v. Bonds: vi. Other: __ . If other, describe: _ __ Default on long-term debt. a. Were any issues of the Fund's long-term debt in default at the close of the reporting period with respect to the payment of principal, interest, or amortization? [Y/N] If yes, provide the following: VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00180 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.040</GPH> mstockstill on DSK3G9T082PROD with RULES2 Item D.5. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations i. 82049 Nature of default: ii. Date of default: iii. Amount of default per $1,000 face amount: iv. Total amount of default: Instruction. The term "long-term debt" means debt with a period of time from date of initial issuance to maturity of one year or greater. Item D.6. Dividends in arrears. a. Were any accumulated dividends in arrears on securities issued by the Fund at the close of the reporting period? [Y/N] If yes, provide the following: i. Title of issue: ii. Amount per share in arrears: Instruction. The term "dividends in arrears" means dividends that have not been declared by the board of directors or other governing body of the Fund at the end of each relevant dividend period set forth in the constituent instruments establishing the rights of the stockholders. Item D.7. Modification of securities. Have the terms of any constituent instruments defining the rights of the holders of any class of the Registrant's securities been materially modified? [Y/N] If yes, provide the attachment required by Item G.1.b.ii. Item D.B. Management fee (closed-end companies only). Provide the Fund's advisory fee as of the end of the reporting period as a percentage of net assets: Instruction. Base the percentage on amounts incurred during the reporting period. Item D.9. Net annual operating expenses. Provide 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: __ Item D.10. Market price. Market price per share at end of reporting period: __ Instruction. Respond to this item with respect to common stock issued by the Registrant only. Item D.11. Net asset value. Net asset value per share at end of reporting period: __ Instruction. Respond to this item with respect to common stock issued by the Registrant only. Investment advisers (small business investment companies only). a. Provide the following information about each investment adviser (other than a subadviser) of the Fund: i. VerDate Sep<11>2014 Full name: 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00181 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.041</GPH> mstockstill on DSK3G9T082PROD with RULES2 Item D.12. 82050 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations ii. SEC file number (e.g., 801-): __ iii. CRD number: iv. LEI, if any: _ _ v. State, if applicable: _ _ vi. Foreign country, if applicable: __ vii. Was the investment adviser hired during the reporting period? [Y/N] 1. If the investment adviser was hired during the reporting period, indicate the investment adviser's start date: b. If an investment adviser (other than a sub-adviser) to the Fund was terminated during the reporting period, provide the following with respect to each investment adviser: i. Full name: ii. SEC file number (e.g., 801-): __ iii. CRD number: iv. LEI, if any: __ v. State, if applicable: _ _ vi. Foreign country, if applicable: __ vii. Termination date: c. For each sub-adviser to the Fund, provide the information requested: i. Full name: ii. SEC file number (e.g., 801-): __ iii. CRD number: iv. LEI, if any: _ _ v. State, if applicable: _ _ vi. Foreign country, if applicable: __ vii. Is the sub-adviser an affiliated person of the Fund's investment adviser(s)? [Y/N] viii. Was the sub-adviser hired during the reporting period? [Y/N] VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00182 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.042</GPH> mstockstill on DSK3G9T082PROD with RULES2 1. If the sub-adviser was hired during the reporting period, indicate the subadviser's start date: Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82051 d. If a sub-adviser was terminated during the reporting period, provide the following with respect to each such sub-adviser: i. Full name: ii. SEC file number (e.g., 801-): __ iii. CRD number: iv. LEI, if any: __ v. State, if applicable: _ _ vi. Foreign country, if applicable: __ vii. Termination date: Item 0.13. Transfer agents (small business investment companies only). a. Provide the following information about each person providing transfer agency services to the Fund: i. Full name: ii. SEC file number (e.g., 84- or 85-): __ iii. LEI, if any: __ iv. State, if applicable: __ v. Foreign country, if applicable: __ vi. Is the transfer agent an affiliated person of the Fund or its investment adviser(s)? [Y/N] vii. Is the transfer agent a sub-transfer agent? [Y/N] b. Has a transfer agent been hired or terminated during the reporting period? [Y/N] Item 0.14. Custodians (small business investment companies only). a. Provide the following information about each person that provided custodial services to the Fund during the reporting period: i. Full name: ii. LEI, if any: __ iii. State, if applicable: __ v. Is the custodian an affiliated person of the Fund or its investment adviser(s)? [Y/N] vi. Is the custodian a sub-custodian? [Y/N] VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00183 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.043</GPH> mstockstill on DSK3G9T082PROD with RULES2 iv. Foreign country, if applicable: __ 82052 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations vii. With respect to the custodian, check below to indicate the type of custody: 1. Bank-section 17(f)(1) (15 U.S.C. 80a-17(f)(1)): _ 2. Member national securities exchange- rule 17f-1 (17 CFR 270.17f-1): __ 3. Self- rule 17f-2 (17 CFR 270.17f-2): __ 4. Securities depository- rule 17f-4 (17 CFR 270.17f-4): __ 5. Foreign custodian- rule 17f-5 (17 CFR 270.17f-5): __ 6. Futures commission merchants and commodity clearing organizations- rule 17f-6 (17 CFR 270.17f-6): _ 7. Foreign securities depository- rule 17f-7 (17 CFR 270.17f-7): __ 8. Insurance company sponsor- rule 26a-2 (17 CFR 270.26a-2): __ 9. Other: __ . If other, describe: _ __ b. Has a custodian been hired or terminated during the reporting period? [Y/N] Part E: Additional Questions for Exchange-Traded Funds and Exchange-Traded Managed Funds Item E.1. Exchange. a. Exchange where listed. Provide the name of the national securities exchange on which the Fund's shares are listed: b. Ticker. Provide the Fund's ticker symbol: __ Item E.2. Authorized participants. For each authorized participant of the Fund, provide the following information: a. Full name: b. SEC file number: c. CRD number: d. LEI, if any: __ e. The dollar value of the Fund shares the authorized participant purchased from the Fund during the reporting period: __ The dollar value of the Fund shares the authorized participant redeemed during the reporting period: __ g. Did the Fund require that an authorized participant post collateral to the Fund or any of its designated service providers in connection with the purchase or redemption of Fund shares during the reporting period? [Y/N] VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00184 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.044</GPH> mstockstill on DSK3G9T082PROD with RULES2 f. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82053 Instruction. The term "authorized participant" means a broker-dealer that is also a member of a clearing agency registered with the Commission or a DTC Participant, and which has a written agreement with the Exchange-Traded Fund or Exchange-Traded Managed Fund or one of its designated service providers that allows the authorized participant to place orders to purchase or redeem creation units of the Exchange-Traded Fund or Exchange-Traded Managed Fund. Item E.3. Creation units. a. Number of Fund shares required to form a creation unit as of the last business day of the reporting period: __ b. Based on the dollar value paid for each creation unit purchased by authorized participants during the reporting period, provide: i. The average percentage of that value composed of cash: _% ii. The standard deviation of the percentage of that value composed of cash: _% iii. The average percentage of that value composed of non-cash assets and other positions exchanged on an "in-kind" basis: _% iv. The standard deviation of the percentage of that value composed of non-cash assets and other positions exchanged on an "in-kind" basis: _% c. Based on the dollar value paid for creation units redeemed by authorized participants during the reporting period, provide: i. The average percentage of that value composed of cash: _% ii. The standard deviation of the percentage of that value composed of cash: _% iii. The average percentage of that value composed of non-cash assets and other positions exchanged on an "in-kind" basis: _% iv. The standard deviation of the percentage of that value composed of non-cash assets and other positions exchanged on an "in-kind" basis: _% d. For creation units purchased by authorized participants during the reporting period, provide: i. The average transaction fee charged to an authorized participant for transacting in the creation units, expressed as: 1. Dollars per creation unit, if charged on that basis: $ _ 3. A percentage of the value of each creation unit, if charged on that basis: $ _ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00185 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.045</GPH> mstockstill on DSK3G9T082PROD with RULES2 2. Dollars for one or more creation units purchased on the same day, if charged on that basis: $ _ 82054 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations ii. The average transaction fee charged to an authorized participant for transacting in those creation units the consideration for which was fully or partially composed of cash, expressed as: 1. Dollars per creation unit, if charged on that basis: $_ 2. Dollars for one or more creation units purchased on the same day, if charged on that basis: $_ 3. A percentage of the cash in each creation unit, if charged on that basis: _% e. For creation units redeemed by authorized participants during the reporting period, provide: i. The average transaction fee charged to an authorized participant for transacting in the creation units, expressed as: 1. Dollars per creation unit, if charged on that basis: $_ 2. Dollars for one or more creation units redeemed on the same day, if charged on that basis: $_ 3. A percentage of the value of each creation unit, if charged on that basis: $_ ii. The average transaction fee charged to an authorized participant for transacting in those creation units the consideration for which was fully or partially composed of cash, expressed as: 1. Dollars per creation unit, if charged on that basis: $_ 2. Dollars for one or more creation units redeemed on the same day, if charged on that basis: $_ 3. A percentage of the cash in each creation unit, if charged on that basis: _% Instruction. The term "creation unit" means a specified number of Exchange-Traded Fund or Exchange-Traded Managed Fund shares that the fund will issue to (or redeem from) an authorized participant in exchange for the deposit (or delivery) of specified securities, cash, and other assets or positions. Item E.4. Benchmark return difference (unit investment trusts only). a. If the Fund is an Index Fund as defined in Item C.3 of this Form, provide the following information: i. Is the index whose performance the Fund tracks, constructed: 1. By an affiliated person of the fund? [Y/N] VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00186 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.046</GPH> mstockstill on DSK3G9T082PROD with RULES2 2. Exclusively for the fund? [Y/N] Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82055 ii. The annualized difference between the Fund's total return during the reporting period and the index's return during the reporting period (i.e., the Fund's total return less the index's return): 1. Before Fund fees and expenses: __ 2. After Fund fees and expenses (i.e., net asset value): iii. The annualized standard deviation of the daily difference between the Fund's total return and the index's return during the reporting period: 1. Before Fund fees and expenses: __ 2. After Fund fees and expenses (i.e., net asset value): Part F: Additional Questions for Unit Investment Trusts Item F.1. Depositor. Provide the following information about each depositor: a. Full name: b. CRD number, if any: c. LEI, if any: __ d. State, if applicable: e. Foreign country, if applicable: f. Full name of ultimate parent of depositor: Item F.2. Administrators. a. Provide the following information about each administrator of the Fund: i. Full name: ii. LEI, if any, or provide and describe other identifying number: iii. State, if applicable: __ iv. Foreign country, if applicable: v. Is the administrator an affiliated person of the Fund or depositor? [Y/N] vi. Is the administrator a sub-administrator? [Y/N] b. Has an administrator been hired or terminated during the reporting period? [Y/N] Insurance company separate accounts. Is the Registrant a separate account of an insurance company? [Y/N] Instruction. If the answer to Item F .3 is yes, respond to Item F .12 through Item F .17. If the answer to Item F .3 is no, respond to Item F .4 through Item F .11, and Item F .17. Item F.4. VerDate Sep<11>2014 Sponsor. Provide the following information about each sponsor: 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00187 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.047</GPH> mstockstill on DSK3G9T082PROD with RULES2 Item F.3. 82056 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations a. Full name: b. CRD number, if any: c. LEI, if any: __ d. State, if applicable: e. Foreign country, if applicable: Item F.5. Trustees. Provide the following information about each trustee: a. Full name: b. State, if applicable: c. Foreign country, if applicable: Item F.6. Securities Act registration. a. Provide the number of series existing at the end of the reporting period that had outstanding securities registered under the Securities Act: b. Provide the CIK for each of these existing series: Item F.7. New series. a. Number of new series for which registration statements under the Securities Act became effective during the reporting period: __ b. Total aggregate value of the portfolio securities on the date of deposit for the new series: Item F.S. Series with a current prospectus. Number of series for which a current prospectus was in existence at the end of the reporting period: _ _ Item F.9. Number of existing series for which additional units were registered under the Securities Act. a. Number of existing series for which additional units were registered under the Securities Act during the reporting period: b. Total value of additional units: Assets. Provide the total assets of all series of the Registrant combined as of the end of the reporting period: __ Item F.12. Series ID of separate account. Series identification number: __ VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00188 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.048</GPH> Value of units placed in portfolios of subsequent series. Total value of units of prior series that were placed in the portfolios of subsequent series during the reporting period (the value of these units is to be measured on the date they were placed in the subsequent series): __ Item F.11. mstockstill on DSK3G9T082PROD with RULES2 Item F.10. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Item F.13. 82057 Number of contracts. For each security that has a contract identification number assigned pursuant to rule 313 of Regulation S-T (17 CFR 232.313), provide the number of individual contracts that are in force at the end of the reporting period: __ Instruction. In the case of group contracts, each participant certificate should be counted as an individual contract. Item F.14. Information on the security issued through the separate account. For each security that has a contract identification number assigned pursuant to rule 313 of Regulation S-T (17 CFR 232.313), provide the following information as of the end of the reporting period: a. Full name of the security: __ b. Contract identification number: c. Total assets attributable to the security: __ d. Number of contracts sold during the reporting period: __ e. Gross premiums received during the reporting period: __ f. Gross premiums received pursuant to section 1035 exchanges: __ g. Number of contracts affected in connection with premiums paid in pursuant to section 1035 exchanges: __ h. Amount of contract value redeemed during the reporting period: __ i. Amount of contract value redeemed pursuant to section 1035 exchanges: __ j. Number of contracts affected in connection with contract value redeemed pursuant to section 1035 exchanges: __ Instruction. In the case of group contracts, each participant certificate should be counted as an individual contract. Reliance on rule 6c-7. Did the Registrant rely on rule 6c-7 under the Act (17 CFR 270.6c-7) during the reporting period? [Y/N] Item F.16. Reliance on rule 11a-2. Did the Registrant rely on rule 11a-2 under the Act (17 CFR 270.11a-2) during the reporting period? [Y/N] Item F.17. Divestments under section 13(c) of the Act. a. If the Registrant has divested itself of securities in accordance with section 13(c) of the Act (15 U.S.C. 80a-13(c)) since the end of the reporting period immediately prior to the current reporting period and before filing of the current report, disclose the information requested below for each such divested security: i. VerDate Sep<11>2014 Full name of the issuer: 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00189 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.049</GPH> mstockstill on DSK3G9T082PROD with RULES2 Item F.15. 82058 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations ii. Ticker symbol: __ iii. CUSIP number: iv. Total number of shares or, for debt securities, principal amount divested: v. Date that the securities were divested: vi. Name of the statute that added the provision of section 13(c) in accordance with which the securities were divested: b. If the Registrant holds any securities of the issuer on the date of the filing, provide the information requested below: i. Ticker symbol: __ ii. CUSIP number: iii. Total number of shares or, for debt securities, principal amount held on the date of the filing: Instructions. This item may be used by a unit investment trust that divested itself of securities in accordance with section 13(c). A unit investment trust is not required to include disclosure under this item; however, the limitation on civil, criminal, and administrative actions under section 13(c) does not apply with respect to a divestment that is not disclosed under this item. If a unit investment trust divests itself of securities in accordance with section 13(c) during the period that begins on the fifth business day before the date of filing a report on Form NCEN and ends on the date of filing, the unit investment trust may disclose the divestment in either the report or an amendment thereto that is filed not later than five business days after the date of filing the report. For purposes of determining when a divestment should be reported under this item, if a unit investment trust divests its holdings in a particular security in a related series of transactions, the unit investment trust may deem the divestment to occur at the time of the final transaction in the series. In that case, the unit investment trust should report each transaction in the series on a single report on Form N-CEN, but should separately state each date on which securities were divested and the total number of shares or, for debt securities, principal amount divested, on each such date. Item F .1 7 shall terminate one year after the first date on which all statutory provisions that underlie section 13(c) have terminated. Item G.1. VerDate Sep<11>2014 Attachments. 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00190 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.050</GPH> mstockstill on DSK3G9T082PROD with RULES2 Part G:Attachments Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82059 a. Attachments applicable to all Registrants. All Registrants shall file the following attachments, as applicable, with the current report. Indicate the attachments filed with the current report by checking the applicable items below: i. Legal proceedings: __ ii. Provision of financial support: __ iii. Independent public accountant's report on internal control (management investment companies other than small business investment companies only): iv. Change in accounting principles and practices: __ v. Information required to be filed pursuant to exemptive orders: __ vi. Other information required to be included as an attachment pursuant to Commission rules and regulations: __ Instructions. If the Registrant responded "YES" to Item B.1l.a., provide a brief description of the proceedings. As part of the description, provide the case or docket number (if any), and the full names of the principal parties to the proceeding. (b) If the Registrant responded "YES" to Item B.11. b., identify the proceeding and give its date of termination. 2. Item G.1.a.ii. Provision of financial support. If the Registrant responded "YES" to Item B.14., provide the following information (unless the Registrant is a Money Market Fund): (a) Description ofnature of support. (b) Person providing support. (c) Brief description of relationship between the person providing support and the Registrant. (d) Date support provided. (e) Amount of support. (f) Security supported (if applicable). Disclose the full name ofthe issuer, the title of the issue (including coupon or yield, if applicable) and at least two identifiers, if available (e.g., CIK, CUSIP, ISIN, LEI). (g) Value of security supported on date support was initiated (if applicable). (h) Brief description of reason for support. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00191 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.051</GPH> Item G.l.a.i. Legal proceedings. (a) mstockstill on DSK3G9T082PROD with RULES2 1. 82060 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations (i) Term of support. (j) Brief description of any contractual restrictions relating to support. 3. Item G.l.a.iii. Independent public accountant's report on internal control (management investment companies other than small business investment companies only). Each management investment company shall furnish a report of its independent public accountant on the company's system of internal accounting controls. The accountant's report shall be based on the review, study and evaluation of the accounting system, internal accounting controls, and procedures for safeguarding securities made during the audit of the financial statements for the reporting period. The report should disclose any material weaknesses in: (a) the accounting system; (b) system of internal accounting control; or (c) procedures for safeguarding securities which exist as of the end of the Registrant's fiscal year. The accountant's report shall be furnished as an exhibit to the form and shall: (1) be addressed to the Registrant's shareholders and board of directors; (2) be dated; (3) be signed manually; and (4) indicate the city and state where issued. Attachments that include a report that discloses a material weakness should include an indication by the Registrant of any corrective action taken or proposed. The fact that an accountant's report is attached to this form shall not be regarded as acknowledging any review of this form by the independent public accountant. Item G.l.a.iv. Change in accounting principles and practices. If the Registrant responded "YES" to Item B.21, provide an attachment that describes the change in accounting principles or practices, or the change in the method of applying any such accounting principles or practices. State the date of the change and the reasons therefor. A letter from the Registrant's independent accountants, approving or otherwise commenting on the change, shall accompany the description. 5. Item G.l.a.v. Information required to be filed pursuant to exemptive orders. File as an attachment any information required to be reported on Form N-CEN or any predecessor form to Form N-CEN (e.g., Form N-SAR) pursuant to exemptive orders issued by the Commission and relied on by the Registrant. 6. Item G.l.a.vi. Other information required to be included as an attachment pursuant to Commission rules and regulations. File as an attachment any other information required to be included as an attachment pursuant to Commission rules and regulations. b. Attachments to be filed by closed-end management investment companies and small business investment companies. Registrants shall file the following attachments, as applicable, with the current report. Indicate the attachments filed with the current report by checking the applicable items below. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00192 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.052</GPH> mstockstill on DSK3G9T082PROD with RULES2 4. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations i. 82061 Material amendments to organizational documents: __ ii. Instruments defining the rights of the holders of any new or amended class of securities: iii. New or amended investment advisory contracts: iv. Information called for by Item 405 of Regulation S-K: __ v. Code of ethics (small business investment companies only): Instructions. Item G .1. b .ii. Instruments defining the rights of the holders of any new or amended class of securities. Provide copies of all constituent instruments defining the rights of the holders of any new or amended class of securities for the current reporting period. If the Registrant has issued a new class of securities other than short-term paper, furnish a description of the class called for by the applicable item of Form N-2. If the constituent instruments defining the rights of the holders of any class of the Registrant's securities have been materially modified during the reporting period, give the title of the class involved and state briefly the general effect of the modification upon the rights of the holders of such securities. 9. Item G .1. b .iii. New or amended investment advisory contracts. Provide copies of any new or amended investment advisory contracts that became effective during the reporting period. 10. Item G.l.b.iv. Information called for by Item 405 of Regulation S-K. Provide the information called for by Item 405 of Regulation S-K concerning failure of certain closed-end management investment company and small business investment company shareholders to file certain ownership reports. 11. Item G.l.b.v. Code of ethics (small business investment companies only). (a) (1) Disclose whether, as of the end of the period covered by the report, the Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party. If the Registrant has not adopted such a code of ethics, explain why it has not done so. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00193 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.053</GPH> Item G.l.b.i. Material amendments to organizational documents. Provide copies of all material amendments to the Registrant's charters, by-laws, or other similar organizational documents that occurred during the reporting period. 8. mstockstill on DSK3G9T082PROD with RULES2 7. 82062 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations The Registrant must briefly describe the nature of any amendment, during the period covered by the report, to a provision of its code of ethics that applies to the Registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party, and that relates to any element of the code of ethics definition enumerated in paragraph (a)(2) of this instruction. The Registrant must file a copy of any such amendment as an exhibit to this report on Form N-CEN, unless the Registrant has elected to satisfy paragraph (a)(6) of this instruction by posting its code of ethics on its website pursuant to paragraph (a)(6)(ii) of this Instruction, or by undertaking to provide its code of ethics to any person without charge, upon request, pursuant to paragraph (a)(6)(iii) of this instruction. (4) If the Registrant has, during the period covered by the report, granted a waiver, including an implicit waiver, from a provision of the code of ethics to the Registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party, that relates to one or more of the items set forth in paragraph (a)(2) of this instruction, the Registrant must briefly describe the nature of the waiver, the name of the person to whom the waiver was granted, and the date of the waiver. (5) If the Registrant intends to satisfy the disclosure requirement under paragraph (a)(3) or (4) of this instruction regarding an amendment to, or a waiver from, a provision of its code of ethics that applies to the Registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of the code of ethics definition enumerated in paragraph (a)(2) of this instruction by posting such information on its Internet website, disclose the Registrant's Internet address and such intention. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00194 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.054</GPH> For purposes of this instruction, the term "code of ethics" means written standards that are reasonably designed to deter wrongdoing and to promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely, and understandable disclosure in reports and documents that a Registrant files with, or submits to, the Commission and in other public communications made by the Registrant; (iii) compliance with applicable governmental laws, rules, and regulations; (iv) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the code. (3) mstockstill on DSK3G9T082PROD with RULES2 (2) Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82063 The Registrant must: (i) file with the Commission a copy of its code of ethics that applies to the Registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as an exhibit to its report on this Form N-CEN; (ii) post the text of such code of ethics on its Internet website and disclose, in its most recent report on this Form N-CEN, its Internet address and the fact that it has posted such code of ethics on its Internet website; or (iii) undertake in its most recent report on this Form N-CEN to provide to any person without charge, upon request, a copy of such code of ethics and explain the manner in which such request may be made. (7) A Registrant may have separate codes of ethics for different types of officers. Furthermore, a "code of ethics" within the meaning of paragraph (a)(2) of this instruction may be a portion of a broader document that addresses additional topics or that applies to more persons than those specified in paragraph (a)(l) of this instruction. In satisfying the requirements of paragraph (a)(6) of this instruction, a Registrant need only file, post, or provide the portions of a broader document that constitutes a "code of ethics" as defined in paragraph (a)(2) of this instruction and that apply to the persons specified in paragraph (a)( 1) of this instruction. (8) If a Registrant elects to satisfy paragraph (a)(6) of this instruction by posting its code of ethics on its Internet website pursuant to paragraph (a)(6)(ii), the code of ethics must remain accessible on its website for as long as the Registrant remains subject to the requirements of this instruction and chooses to comply with this instruction by posting its code on its Internet website pursuant to paragraph (a)(6)(ii). (9) The Registrant does not need to provide any information pursuant to paragraphs (a)(3) and (4) of this instruction if it discloses the required information on its Internet website within five business days following the date of the amendment or waiver and the Registrant has disclosed in its most recently filed report on this Form N-CEN its Internet website address and intention to provide disclosure in this manner. If the amendment or waiver occurs on a Saturday, Sunday, or holiday on which the Commission is not open for business, then the five business day period shall begin to run on and include the first business day thereafter. If the Registrant elects to disclose this information through its website, such information must remain available on the website for at least a 12-month period. The Registrant must retain the information for a period of not less than six years following the end of the fiscal year in which the amendment or waiver occurred. Upon request, the Registrant must furnish to the Commission or its staff a copy of any or all information retained pursuant to this requirement. (10) The Registrant does not need to disclose technical, administrative, or other nonsubstantive amendments to its code of ethics. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00195 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.055</GPH> mstockstill on DSK3G9T082PROD with RULES2 (6) 82064 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations (11) For purposes of this instruction: (i) the term "waiver" means the approval by the Registrant of a material departure from a provision of the code of ethics; and (ii) the term "implicit waiver" means the Registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer, as defined in rule 3b-7 under the Exchange Act (17 CFR 240 .3b-7), of the Registrant. If the Registrant provides the disclosure required by paragraph (b)(l)(i) of this instruction, it must disclose the name of the audit committee financial expert and whether that person is "independent." In order to be considered "independent" for purposes of this instruction, a member of an audit committee may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (i) accept directly or indirectly any consulting, advisory, or other compensatory fee from the issuer; or (ii) be an "interested person" of the investment company as defined in Section 2(a)(19) of the Act (15 U.S.C. 80a-2(a)(19)). (3) If the Registrant provides the disclosure required by paragraph (b)(l)(ii) of this instruction, it must explain why it does not have an audit committee financial expert. (4) If the Registrant's board of directors has determined that the Registrant has more than one audit committee financial expert serving on its audit committee, the Registrant may, but is not required to, disclose the names of those additional persons. A Registrant choosing to identify such persons must indicate whether they are independent pursuant to paragraph (b)(2) of this instruction. (5) For purposes of this instruction, an "audit committee financial expert" means a person who has the following attributes: (i) an understanding of generally accepted accounting principles and financial statements; (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves; (iii) experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Registrant's financial statements, or experience actively supervising one or more persons engaged in such activities; (iv) an understanding of internal controls and procedures for financial reporting; and (v) an understanding of audit committee functions. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00196 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.056</GPH> (1) Disclose that the Registrant's board of directors has determined that the Registrant either: (i) has at least one audit committee financial expert serving on its audit committee; or (ii) does not have an audit committee financial expert serving on its audit committee. (2) mstockstill on DSK3G9T082PROD with RULES2 (b) Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82065 (6) A person shall have acquired such attributes through: (i) education and experience as a principal financial officer, principal accounting officer, controller, public accountant, or auditor or experience in one or more positions that involve the performance of similar functions; (ii) experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor, or person performing similar functions; (iii) experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing, or evaluation of financial statements; or (iv) other relevant experience. (7) (i) A person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for purposes of Section 11 of the Securities Act (15 U.S.C. 77k), as a result ofbeing designated or identified as an audit committee financial expert pursuant to this instruction; (ii) the designation or identification of a person as an audit committee financial expert pursuant to this instruction does not impose on such person any duties, obligations, or liability that are greater than the duties, obligations, and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification; (iii) the designation or identification of a person as an audit committee fmancial expert pursuant to this instruction does not affect the duties, obligations, or liability of any other member of the audit committee or board of directors. (8) If a person qualifies as an audit committee financial expert by means of having held a position described in paragraph (b)(6)(iv) of this Instruction, the Registrant shall provide a brieflisting of that person's relevant experience. SIGNATURES Pursuant to the requirements of the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. (Registrant) Date *Print full name and title of the signing officer under his/her signature. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00197 Fmt 4701 Sfmt 4700 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.057</GPH> mstockstill on DSK3G9T082PROD with RULES2 (Signature)* 82066 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations BILLING CODE 8011–01–P 66. Effective January 17, 2017, Form N–CSR (referenced in § 274.128) is amended as follows: ■ a. In Item 2(c) and 2(f), remove the phrase ‘‘Item 12(a)(1)’’ and add in its place ‘‘Item 13(a)(1)’’; ■ b. In Item 11(b), remove the phrase ‘‘the second fiscal quarter of’’; ■ c. Revise the instruction to Item 11(b); ■ d. Redesignate Item 12 as Item 13; ■ e. Add new Item 12; ■ f. In paragraph 4(d) of the certification exhibits listed in Item 13, remove the phrase ‘‘the second fiscal quarter of the’’; ■ g. In Item 13, revise the instruction to paragraph (a)(2); ■ h. In Item 13, add paragraph (a)(4). The additions and revisions read as follows: ■ Note: The text of Form N–CSR does not, and these amendments will not, appear in the Code of Federal Regulations. Form N–CSR * * * * * Item 11. Controls and Procedures. (b) * * * Instruction to paragraph (b). Until the date that the registrant has filed its first report on Form N–PORT [17 CFR 270.150], the registrant’s disclosures required by this Item are limited to any change in the registrant’s internal control over financial reporting that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. * * * * * Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies mstockstill on DSK3G9T082PROD with RULES2 (a) If the registrant is a closed-end management investment company, provide the following dollar amounts of VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 income and fees/compensation related to the securities lending activities of the registrant during its most recent fiscal year: (1) Gross income from securities lending activities; (2) All fees and/or compensation for each of the following securities lending activities and related services: Any share of revenue generated by the securities lending program paid to the securities lending agent(s) (‘‘revenue split’’); fees paid for cash collateral management services (including fees deducted from a pooled cash collateral reinvestment vehicle) that are not included in the revenue split; administrative fees that are not included in the revenue split; fees for indemnification that are not included in the revenue split; rebates paid to borrowers; and any other fees relating to the securities lending program that are not included in the revenue split, including a description of those other fees; (3) The aggregate fees/compensation disclosed pursuant to paragraph (2); and (4) Net income from securities lending activities (i.e., the dollar amount in paragraph (1) minus the dollar amount in paragraph (3)). Instruction to paragraph (a). If a fee for a service is included in the revenue split, state that the fee is ‘‘included in the revenue split.’’ (b) If the registrant is a closed-end management investment company, describe the services provided to the registrant by the securities lending agent in the registrant’s most recent fiscal year. * * * * * Item 13. Exhibits. (a) * * * (2) * * * Instruction to paragraph (a)(2). Until the date that the registrant has filed its first report on Form N–PORT [17 CFR 270.150], in the certification required by PO 00000 Frm 00198 Fmt 4701 Sfmt 4700 Item 13(a)(2), the registrant’s certifying officers must certify that they have disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. * * * * * (4) Change in the registrant’s independent public accountant. Provide the information called for by Item 4 of Form 8–K under the Exchange Act (17 CFR 249.308). Unless otherwise specified by Item 4, or related to and necessary for a complete understanding of information not previously disclosed, the information should relate to events occurring during the reporting period. § 274.130 [Removed and Reserved] 67. Effective August 1, 2019, § 274.130 is removed and reserved. ■ 68. Effective January 17, 2017, § 274.150 is added to read as follows: ■ § 274.150 Form N–PORT, Monthly portfolio holdings report. (a) Except as provided in paragraph (b) of this section, this form shall be used by registered management investment companies or exchangetraded funds organized as unit investment trusts, or series thereof, to file reports pursuant to § 270.30b1–9 of this chapter not later than 30 days after the end of each month. (b) Form N–PORT shall not be filed by a registered open-end management investment company that is regulated as a money market fund under § 270.2a–7 of this chapter or a small business investment company registered on Form N–5 (§§ 239.24 and 274.5 of this chapter), or series thereof. Note: The text of Form N–PORT will not appear in the Code of Federal Regulations. E:\FR\FM\18NOR2.SGM 18NOR2 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82067 FORMN-PORT MONTHLY PORTFOLIO INVESTMENTS REPORT Form N-PORT is to be used by a registered management investment company, or an exchange-traded fund organized as a unit investment trust, or series thereof ("Fund"), other than a Fund that is regulated as a money market fund ("money market fund") under rule 2a-7 under the Investment Company Act of 1940 [15 U .S.C. 80a] ("Act") (17 CFR 270.2a-7) or a small business investment company ("SBIC") registered on Form N-5 (17 CFR 239.24 and 274.5), to file monthly portfolio holdings reports pursuant to rule 30b1-9 under the Act (17 CFR 270.30b1-9). The Commission may use the information provided on Form N-PORT in its regulatory, enforcement, examination, disclosure review, inspection, and policymaking roles. GENERAL INSTRUCTIONS A. Rule as to Use of Form N-PORT Form N-PORT is the reporting form that is to be used for monthly reports of Funds other than money market funds and SBICs under section 30(b) of the Act, as required by rule 30b1-9 under the Act (17 CFR 270.30b1-9). Funds must report information about their portfolios and each of their portfolio holdings as of the last business day, or last calendar day, of the month. A registered investment company that has filed a registration statement with the Commission registering its securities for the first time under the Securities Act of 1933 is relieved of this reporting obligation with respect to any reporting period or portion thereof prior to the date on which that registration statement becomes effective or is withdrawn. If the due date falls on a weekend or holiday, the filing deadline will be the next business day. Reports on Form N-PORT must disclose portfolio information as calculated by the fund for the reporting period's ending net asset value (commonly, and as permitted by rule 2a-4, the first business day following the trade date). Reports on Form N-PORT must be filed with the Commission no later than 30 days after the end of each month. Each Fund is required to file a separate report. A Fund may file an amendment to a previously filed report at any time, including an amendment to correct a mistake or error in a previously filed report. A Fund that files an amendment to a previously filed report must provide information in response to all items of Form N-PORT, regardless of why the amendment is filed. Application of General Rules and Regulations The General Rules and Regulations under the Act contain certain general requirements that are applicable to reporting on any form under the Act. These general requirements shall be carefully read and observed in the preparation and filing of reports on this Form, except that any provision in the Form or in these instructions shall be controlling. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00199 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.059</GPH> mstockstill on DSK3G9T082PROD with RULES2 B. 82068 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations C. Filing of Reports Reports must be filed electronically using the Commission's Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") system in accordance with Regulation S-T. Consult the EDGAR Filer Manual and Appendices for EDGAR filing instructions. D. Paperwork Reduction Act Information A Fund is not required to respond to the collection of information contained in Form NPORT unless the form displays a currently valid Office ofManagement and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, Washington, DC 20549. OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. 3507. E. Def"lnitions References to sections and rules in this Form N-PORT are to the Act, unless otherwise indicated. Terms used in this Form N-PORT have the same meanings as in the Act or related rules, unless otherwise indicated. As used in this Form N-PORT, the terms set out below have the following meanings: "Class" means a class of shares issued by a Fund that has more than one class that represents interests in the same portfolio of securities under rule 18f-3 [17 CFR 270.18f-3] or under an order exempting the Fund from provisions of section 18 of the Act [15 U.S.C. 80a-18]. "Controlled Foreign Corporation" has the meaning provided in section 957 of the Internal Revenue Code [26 U.S.C. 957]. "Exchange-Traded Fund" means an open-end management investment company (or Series or Class thereof) or unit investment trust (or series thereof), the shares of which are listed and traded on a national securities exchange at market prices, and that has formed and operates under an exemptive order under the Act granted by the Commission or in reliance on an exemptive rule under the Act adopted by the Commission. "Fund" means the Registrant or a separate Series of the Registrant. When an item of Form N-PORT specifically applies to a Registrant or a Series, those terms will be used. "LEI" means, with respect to any company, the "legal entity identifier" as assigned by a utility endorsed by the Global LEI Regulatory Oversight Committee or accredited by the Global LEI Foundation. In the case of a financial institution, if a "legal entity identifier" VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00200 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.060</GPH> mstockstill on DSK3G9T082PROD with RULES2 "ISIN" means, with respect to any security, the "international securities identification number" assigned by a national numbering agency, partner, or substitute agency that is coordinated by the Association ofNational Numbering Agencies. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82069 has not been assigned, then provide the RSSD ID, if any, assigned by the National Information Center of the Board of Governors of the Federal Reserve System. "Multiple Class Fund" means a Fund that has more than one Class. "Registrant" means a management investment company, or an Exchange-Traded Fund organized as a unit investment trust, registered under the Act. "Restricted Security" has the meaning defined in rule 144(a)(3) under the Securities Act of1933 [17 CFR230.144(a)(3)]. "Series" means shares offered by a Registrant that represent undivided interests in a portfolio of investments and that are preferred over all other series of shares for assets specifically allocated to that series in accordance with rule 18f-2(a) [17 CFR 270.18f-2(a)]. "Swap" means either a "security-based swap" or a "swap" as defined in sections 3(a)(68) and (69) of the Securities Exchange Act of 1934 [15 U.S.C. 78c(a)(68) and (69)] and any rules, regulations, or interpretations of the Commission with respect to such instruments. F. Public Availability Information reported on Form N-PORT for the third month of each Fund's fiscal quarter will be made publicly available 60 days after the end of the Fund's fiscal quarter. The SEC does not intend to make public the information reported on Form N-PORT for the first and second months of each Fund's fiscal quarter that is identifiable to any particular fund or adviser, or any information reported with regards to country of risk and economic exposure (Item C.S.b of this Form), delta (Items C.9.f.v, C.11.c.vii, or C.11.g.iv), or miscellaneous securities (Part D of this Form), or explanatory notes related to any of those topics (Part E) that is identifiable to any particular fund or adviser. However, the SEC may use information reported on this Form in its regulatory programs, including examinations, investigations, and enforcement actions. G. Responses to Questions In responding to the items on this Form, the following guidelines apply unless otherwise specifically indicated: Funds may respond to this Form using their own internal methodologies and the conventions of their service providers, provided the information is consistent with information that they report internally and to current and prospective investors. However, the methodologies and conventions must be consistently applied and the Fund's responses must be consistent with any instructions or other guidance relating to this Form. A Fund may explain any of its methodologies, including related assumptions, in PartE. • A Fund is not required to respond to an item that is wholly inapplicable (for example, no response would be required for Item C.11 when reporting information about an VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00201 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.061</GPH> mstockstill on DSK3G9T082PROD with RULES2 • 82070 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations investment that is not a derivative). If a sub-item requests information that is not applicable (for example, an LEI for a counterparty that does not have an LEI), respond NIA; If an item requests information expressed as a percentage, enter the response as a percentage (not a decimal), (e.g., 5.27%); • For currencies other than U.S. dollars, also report the applicable three-letter alphabetic currency code pursuant to the International Organization for Standardization ("ISO") 421 7 standard; • If an item requests a unique identifier, 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 users of the information can track the investment from report to report; • If an item requests a date, provide information in yyyy I mml dd format; and • If an item requests information regarding a "holding" or "investment," separately report information as to each holding or investment that is recorded in the Fund's books as part of a larger transaction. For example, two or more partially offsetting legs of a transaction entered into with the same counterparty under a common master agreement shall each be separately reported. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00202 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.062</GPH> If an item requests the name of an entity, provide the full name to the extent known, and do not use abbreviations (other than abbreviations that are part of the full name); • mstockstill on DSK3G9T082PROD with RULES2 • Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82071 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM N-PORT MONTHLY SCHEDULE OF PORTFOLIO INVESTMENTS Part A: General Information ltemA.1. Information about the Registrant. a. Name of Registrant. b. Investment Company Act file number for Registrant: (e.g., 811-_____ }. c. CIK number of Registrant. d. LEI of Registrant. e. Address and telephone number of Registrant. ltemA.2. Information about the Series. a. Name of Series. b. EDGAR series identifier (if any). c. LEI of Series. ltemA.3. Reporting period. a. Date of fiscal year-end. b. Date as of which information is reported. Item A.4. Does the Fund anticipate that this will be its final filing on Form N-PORT? [Y/N] Part B: Information About the Fund Report the following information for the Fund and its consolidated subsidiaries. Item 8.1. Assets and liabilities. Report amounts in U.S. dollars. a. Total assets, including assets attributable to miscellaneous securities reported in Part D. c. Net assets. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00203 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.063</GPH> mstockstill on DSK3G9T082PROD with RULES2 b. Total liabilities. 82072 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Item 8.2. Certain assets and liabilities. Report amounts in U.S. dollars. a. Assets attributable to miscellaneous securities reported in Part D. b. Assets invested in a Controlled Foreign Corporation for the purpose of investing in certain types of instruments such as, but not limited to, commodities. c. 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 210.604(13)(a)]. d. Payables for investments purchased either (i) on a delayed delivery, when-issued, or other firm commitment basis, or (ii) on a standby commitment basis. e. Liquidation preference of outstanding preferred stock issued by the Fund. Item 8.3. Portfolio level risk metrics. If the average value of the Fund's debt securities positions for the previous three months, in the aggregate, exceeds 25% or more of the Fund's net asset value, provide: a. Interest Rate Risk (DV01). For each currency for which the Fund had a value of 1% or more of the Fund's net asset value, provide the change in value of the portfolio resulting from a 1 basis point change in interest rates, for each of the following maturities: 3 month, 1 year, 5 years, 10 years, and 30 years. b. Interest Rate Risk (DV100). For each currency for which the Fund had a value of 1% or more of the Fund's net asset value, provide the change in value of the portfolio resulting from a 100 basis point change in interest rates, for each of the following maturities: 3 month, 1 year, 5 years, 10 years, and 30 years. For purposes of Item 8.3., calculate value as the sum of the absolute values of: (i) the value of each debt security, (ii) the notional value of each swap, including, but not limited to, total return swaps, interest rate swaps, and credit default swaps, for which the underlying reference asset or assets are debt securities or an interest rate; (iii) the notional value of each futures contract for which the underlying reference asset or assets are debt securities or an interest rate; and (iv) the delta-adjusted notional value of any option for which the underlying reference asset is an asset described in clause (i),(ii), or (iii). Report zero for maturities to which the Fund has no exposure. For exposures that fall between any of the listed maturities in (a) and (b), use linear interpolation to approximate exposure to each maturity listed above. For exposures outside of the range of maturities listed above, include those exposures in the nearest maturity. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00204 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.064</GPH> mstockstill on DSK3G9T082PROD with RULES2 c. Credit Spread Risk (SDV01, CR01 or CS01). Provide the change in value of the portfolio resulting from a 1 basis point change in credit spreads where the shift is applied to the option adjusted spread, aggregated by investment grade and noninvestment grade exposures, for each of the following maturities: 3 month, 1 year, 5 years, 10 years, and 30 years. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Item 8.4. 82073 Securities lending. a. For each borrower in any securities lending transaction, provide the following information: i. Name of borrower. ii. LEI (if any) of borrower. iii. Aggregate value of all securities on loan to the borrower. b. Did any securities lending counterparty provide any non-cash collateral? [Y/N] If yes, unless the non-cash collateral is included in the Schedule of Portfolio Investments in Part C, provide the following information for each category of non-cash collateral received for loaned securities: i. Aggregate principal amount. ii. Aggregate value of collateral. iii. Category of investments that most closely represents the collateral, selected from among the following (asset-backed securities; agency collateralized mortgage obligations; agency debentures and agency strips; agency mortgage-backed securities; U.S. Treasuries (including strips); other instrument). If "other instrument," include a brief description, including, if applicable, whether it is an irrevocable letter of credit. Item 8.5. Return information. a. Monthly total returns of the Fund for each of the preceding three months. If the Fund is a Multiple Class Fund, report returns for each Class. Such returns shall be calculated in accordance with the methodologies outlined in Item 26(b)(1) of Form N1A, Instruction 13 to sub-Item 1 of Item 4 of Form N-2, or Item 26(b)(i) of Form N-3, as applicable. b. Class identification number(s) (if any) of the Class(es) for which returns are reported. d. For each of the preceding three months, monthly net realized gain (loss) and net change in unrealized appreciation (or depreciation) attributable to investments other VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00205 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.065</GPH> mstockstill on DSK3G9T082PROD with RULES2 c. For each of the preceding three months, monthly net realized gain (loss) and net change in unrealized appreciation (or depreciation) attributable to derivatives for each of the following asset categories: commodity contracts, credit contracts, equity contracts, foreign exchange contracts, interest rate contracts, and other contracts. Within each such asset category, further report the same information for each of the following types of derivatives instrument: forward, future, option, swaption, swap, warrant, and other. Report in U.S. dollars. Losses and depreciation shall be reported as negative numbers. 82074 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations than derivatives. Report in U.S. dollars. Losses and depreciation shall be reported as negative numbers. Item 8.6. Flow information. Provide the aggregate dollar amounts for sales and redemptions/repurchases of Fund shares during each of the preceding three months. If shares of the Fund are held in omnibus accounts, for purposes of calculating the Fund's sales, redemptions, and repurchases, use net sales or redemptions/repurchases from such omnibus accounts. The amounts to be reported under this Item should be after any front-end sales load has been deducted and before any deferred or contingent deferred sales load or charge has been deducted. Shares sold shall include shares sold by the Fund to a registered unit investment trust. For mergers and other acquisitions, include in the value of shares sold any transaction in which the Fund acquired the assets of another investment company or of a personal holding company in exchange for its own shares. For liquidations, include in the value of shares redeemed any transaction in which the Fund liquidated all or part of its assets. Exchanges are defined as the redemption or repurchase of shares of one Fund or series and the investment of all or part of the proceeds in shares of another Fund or series in the same family of investment companies. a. Total net asset value of shares sold (including exchanges but excluding reinvestment of dividends and distributions). b. Total net asset value of shares sold in connection with reinvestments of dividends and distributions. c. Total net asset value of shares redeemed or repurchased, including exchanges. Item 8.7. [Reserved] Part C: Schedule of Portfolio Investments VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00206 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.066</GPH> mstockstill on DSK3G9T082PROD with RULES2 For each investment held by the Fund and its consolidated subsidiaries, disclose the information requested in Part C. A Fund may report information for securities in an aggregate amount not exceeding five percent of its total assets as miscellaneous securities in Part D in lieu of reporting those securities in Part C, provided that the securities so listed are not restricted, have been held for not more than one year prior to the end of the reporting period covered by this report, and have not been previously reported by name to the shareholders of the Fund or to any exchange, or set forth in any registration statement, application, or report to shareholders or otherwise made available to the public. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Item C.1. 82075 Identification of investment. a. Name of issuer (if any). b. LEI (if any) of issuer. In the case of a holding in a fund that is a series of a series trust, report the LEI of the series. c. Title of the issue or description of the investment. d. CUSIP (if any). e. At least one of the following other identifiers: i. ISIN. ii. Ticker (if ISIN is not available). iii. Other unique identifier (if ticker and IS IN are not available). Indicate the type of identifier used. Item C.2. Amount of each investment. a. Balance. Indicate whether amount is expressed in number of shares, principal amount, or other units. For derivatives contracts, as applicable, provide the number of contracts. b. Currency. Indicate the currency in which the investment is denominated. c. Value. Report values in U.S. dollars. If currency of investment is not denominated in U.S. dollars, provide the exchange rate used to calculate value. d. Percentage value compared to net assets of the Fund. Item C.3. Indicate payoff profile among the following categories (long, short, N/A). For derivatives, respond N/A to this Item and respond to the relevant payoff profile question in Item C.11. Item C.4. Asset and issuer type. Select the category that most closely identifies the instrument among each of the following: b. 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). If "other," provide a brief description. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00207 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.067</GPH> mstockstill on DSK3G9T082PROD with RULES2 a. Asset type (short-term investment vehicle (e.g., money market fund, liquidity pool, or other cash management vehicle), repurchase agreement, equity-common, equitypreferred, debt, derivative-commodity, derivative-credit, derivative-equity, derivativeforeign exchange, derivative-interest rate, derivatives-other, structured note, loan, ASS-mortgage backed security, ASS-asset backed commercial paper, ASScollateralized bond/debt obligation, ASS-other, commodity, real estate, other). If "other," provide a brief description. 82076 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Item C.5. Country of investment or issuer. a. Report the ISO country code that corresponds to the country where the issuer is organized. b. If different from the country where the issuer is organized, also report the ISO country code that corresponds to the country of investment or issuer based on the concentrations of the risk and economic exposure of the investments. Item C.6. Is the investment a Restricted Security? [Y/N] Item C.7. [Reserved] Item C.S. Indicate the level within the fair value hierarchy in which the fair value measurements fall pursuant to U.S. Generally Accepted Accounting Principles (ASC 820, Fair Value Measurement). [1/2/3] Report "N/A" if the investment does not have a level associated with it (i.e., net asset value used as the practical expedient). Item C.9. For debt securities, also provide: a. Maturity date. b. Coupon. i. Select the category that most closely reflects the coupon type among the following (fixed, floating, variable, none). ii. Annualized rate. c. Currently in default? [Y/N] d. Are there any interest payments in arrears or have any coupon payments been legally deferred by the issuer? [Y/N] e. Is any portion of the interest paid in kind? [Y/N] Enter "N" if the interest may be paid in kind but is not actually paid in kind or if the Fund has the option of electing in-kind payment and has elected to be paid in-kind. f. For convertible securities, also provide: i. Mandatory convertible? [Y/N] iii. Description of the reference instrument, including the name of issuer, title of issue, and currency in which denominated, as well as CUSIP of reference instrument, ISIN (if CUSIP is not available), ticker (if CUSIP and ISIN are not available), or other identifier (if CUSIP, ISIN, and ticker are not available). If other identifier provided, indicate the type of identifier used. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00208 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.068</GPH> mstockstill on DSK3G9T082PROD with RULES2 ii. Contingent convertible? [Y/N] Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82077 iv. Conversion ratio per US$1000 notional, or, if bond currency is not in U.S. dollars, per 1000 units of the relevant currency, indicating the relevant currency. If there is more than one conversion ratio, provide each conversion ratio. v. Delta (if applicable). Item C.10. For repurchase and reverse repurchase agreements, also provide: a. Select the category that reflects the transaction (repurchase, reverse repurchase). Select "repurchase agreement" if the Fund is the cash lender and receives collateral. Select "reverse repurchase agreement" if the Fund is the cash borrower and posts collateral. b. Counterparty. i. Cleared by central counterparty? [Y/N] If Y, provide the name of the central counterparty. ii. If N, provide the name and LEI (if any) of counterparty. c. Tri-party? [Y/N] d. Repurchase rate. e. Maturity date. f. Provide the following information concerning the securities subject to the repurchase agreement (i.e., collateral). If multiple securities of an issuer are subject to the repurchase agreement, those securities may be aggregated in responding to Items C.10.f.i-iii. i. Principal amount. ii. Value of collateral. iii. Category of investments that most closely represents the collateral, selected from among the following (asset-backed securities; agency collateralized mortgage obligations; agency debentures and agency strips; agency mortgage-backed securities; private label collateralized mortgage obligations; corporate debt securities; equities; money market; U.S. Treasuries (including strips); other instrument). If "other instrument," include a brief description, including, if applicable, whether it is a collateralized debt obligation, municipal debt, whole loan, or international debt. For derivatives, also provide: a. Type of derivative instrument that most closely represents the investment, selected from among the following (forward, future, option, swaption, swap (including but not limited to total return swaps, credit default swaps, and interest rate swaps), warrant, other). If "other," provide a brief description. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00209 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.069</GPH> mstockstill on DSK3G9T082PROD with RULES2 Item C.11. 82078 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations b. Counterparty. i. Provide the name and LEI (if any) of counterparty (including a central counterparty). c. For options and warrants, including options on a derivative (e.g., swaptions) provide: i. Type, selected from among the following (put, call). Respond call for warrants. ii. Payoff profile, selected from among the following (written, purchased). Respond purchased for warrants. iii. Description of reference instrument. 1. If the reference instrument is a derivative, indicate the category of derivative from among the categories listed in sub-Item C.11.a. and provide all information required to be reported on this Form for that category. 2. If the reference instrument is an index or custom basket, and if the index's or custom basket's components are publicly available on a website and are updated on that website no less frequently than quarterly, identify the index and provide the index identifier, if any. If the index's or custom basket's components are not publicly available in that manner, and the notional amount of the derivative represents 1% or less of the net asset value of the Fund, provide a narrative description of the index. If the index's or custom basket's components are not publicly available in that manner, and the notional amount of the derivative represents more than 5% of the net asset value of the Fund, provide the (i) name, (ii) identifier, (iii) 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), and (iv) value of every component in the index or custom basket. The identifier shall include CUSIP of the index's or custom basket's components, ISIN (if CUSIP is not available), ticker (if CUSIP and ISIN are not available), or other identifier (if CUSIP, ISIN, and ticker are not available). If other identifier provided, indicate the type of identifier used. 3. If the reference instrument is neither a derivative, an index, or a custom basket, the description of the reference instrument shall include the name of issuer and title of issue, as well as CUSIP of reference instrument, ISIN (if VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00210 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.070</GPH> mstockstill on DSK3G9T082PROD with RULES2 If the index's or custom basket's components are not publicly available in that manner, and the notional amount of the derivative represents greater than 1%, but 5% or less, of the net asset value of the Fund, Funds shall report the required component information described above, but may limit reporting to the (i) 50 largest components in the index and (ii) any other components where the notional value for that components is over 1% of the notional value of the index or custom basket. Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations 82079 CUSIP is not available), ticker (if CUSIP and ISIN are not available), or other identifier (if CUSIP, ISIN, and ticker are not available). If other identifier provided, indicate the type of identifier used. iv. Number of shares or principal amount of underlying reference instrument per contract. v. Exercise price or rate. vi. Expiration date. vii. Delta. viii. Unrealized appreciation or depreciation. Depreciation shall be reported as a negative number. d. For futures and forwards (other than forward foreign currency contracts), provide: i. Payoff profile, selected from among the following (long, short). ii. Description of reference instrument, as required by sub-Item C.11.c.iii. iii. Expiration date. iv. Aggregate notional amount or contract value on trade date. v. Unrealized appreciation or depreciation. Depreciation shall be reported as a negative number. e. For forward foreign currency contracts and foreign currency swaps, provide: i. Amount and description of currency sold. ii. Amount and description of currency purchased. iii. Settlement date. iv. Unrealized appreciation or depreciation. Depreciation shall be reported as a negative number. f. For swaps (other than foreign exchange swaps), provide: i. Description and terms of payments necessary for a user of financial information to understand the terms of payments to be paid and received, including, as applicable, description of the reference instrument, obligation, or index (including the information required by sub-Item C.11.c.iii), financing rate, floating coupon rate, fixed coupon rate, and payment frequency. 1. Description and terms of payments to be received from another party. ii. Termination or maturity date. iii. Upfront payments or receipts. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00211 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.071</GPH> mstockstill on DSK3G9T082PROD with RULES2 2. Description and terms of payments to be paid to another party. 82080 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations iv. Notional amount. v. Unrealized appreciation or depreciation. Depreciation shall be reported as a negative number. g. For other derivatives, provide: i. Description of information sufficient for a user of financial information to understand the nature and terms of the investment, including as applicable, among other things, currency, payment terms, payment rates, call or put feature, exercise price, and information required by sub-Item C.11.c.iii. ii. Termination or maturity (if any). iii. Notional amount(s). iv. Delta (if applicable). v. Unrealized appreciation or depreciation. Depreciation shall be reported as a negative number. Item C.12. Securities lending. a. Does any amount of this investment represent reinvestment of cash collateral received for loaned securities? [Y/N] If Yes, provide the value of the investment representing cash collateral. b. Does any portion of this investment represent non-cash collateral that is treated as a Fund asset and received for loaned securities? [Y/N] If yes, provide the value of the securities representing non-cash collateral. c. Is any portion of this investment on loan by the Fund? [Y/N] If Yes, provide the value of the securities on loan. Part D: Miscellaneous Securities For reports filed for the last month of each fiscal quarter, report miscellaneous securities, if any, using the same Item numbers and reporting the same information that would be reported for each investment in Part C if it were not a miscellaneous security. Information reported in this Item will be non public. The Fund may provide any information it believes would be helpful in understanding the information reported in response to any Item of this Form. The Fund may also explain any assumptions that it made in responding to any Item of this Form. To the extent responses relate to a particular Item, provide the Item number(s), as applicable. VerDate Sep<11>2014 20:36 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00212 Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.072</GPH> mstockstill on DSK3G9T082PROD with RULES2 Part E: Explanatory Notes (if any) Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations Form N–8F mstockstill on DSK3G9T082PROD with RULES2 * * * VerDate Sep<11>2014 * * 20:36 Nov 17, 2016 Jkt 241001 Instructions for using Form N–8F * * * * * 6. Funds are reminded of the requirement to timely file a final Form N–CEN with the Commission. See rule 30a1–1 under the Act [17 CFR 270.30a1–1]; Form N–CEN [17 CFR 274.101]. PO 00000 Frm 00213 Fmt 4701 Sfmt 9990 By the Commission. Dated: October 13, 2016. Brent J. Fields, Secretary. [FR Doc. 2016–25349 Filed 11–17–16; 8:45 am] BILLING CODE 8011–01–C E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.073</GPH> 69. Effective June 1, 2018, Form N–8F (referenced in § 274.218) is amended by revising Instruction 6 to read as follows: ■ 82081

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 223 (Friday, November 18, 2016)]
[Rules and Regulations]
[Pages 81870-82081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25349]



[[Page 81869]]

Vol. 81

Friday,

No. 223

November 18, 2016

Part II





Securities and Exchange Commission





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17 CFR Parts 200, 210, 232, et al.





 Investment Company Reporting Modernization; Final Rule

Federal Register / Vol. 81 , No. 223 / Friday, November 18, 2016 / 
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

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

[Release Nos. 33-10231; 34-79095; IC-32314; File No. S7-08-15]
RIN 3235-AL42


Investment Company Reporting Modernization

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting new rules 
and forms as well as amendments to its rules and forms to modernize the 
reporting and disclosure of information by registered investment 
companies. The Commission is adopting new Form N-PORT, which will 
require certain registered investment companies to report information 
about their monthly portfolio holdings to the Commission in a 
structured data format. In addition, the Commission is adopting 
amendments to Regulation S-X, which will require standardized, enhanced 
disclosure about derivatives in investment company financial 
statements, as well as other amendments. The Commission is adopting new 
Form N-CEN, which will require registered investment companies, other 
than face-amount certificate companies, to annually report certain 
census-type information to the Commission in a structured data format. 
The Commission is adopting amendments to Forms N-1A, N-3, and N-CSR to 
require certain disclosures regarding securities lending activities. 
Finally, the Commission is rescinding current Forms N-Q and N-SAR and 
amending certain other rules and forms. Collectively, these amendments 
will, among other things, improve the information that the Commission 
receives from investment companies and assist the Commission, in its 
role as primary regulator of investment companies, to better fulfill 
its mission of protecting investors, maintaining fair, orderly and 
efficient markets, and facilitating capital formation. Investors and 
other potential users can also utilize this information to help 
investors make more informed investment decisions.

DATES: Effective Dates: This rule is effective January 17, 2017, except 
for the following:
     The amendments to 17 CFR 200.800, 232.105, 232.301, 
240.10A-1, 240.12b-25, 240.13a-10, 240.13a-11, 240.13a-13, 240.13a-16, 
240.15d-10, 240.15d-11, 240.15d-13, 240.15d-16, 249.322, 249.330, 
270.8b-16, 270.10f-3, 270.30a-1, 270.30a-4, 270.30b1-1, 270.30b1-2, 
270.30b1-3, 274.101, and 274.218, and in Instruction 55 amending Sec.  
270.30d-1 are effective June 1, 2018; and
     The amendments to 17 CFR 232.401, 249.332, 270.8b-33, 
270.30a-2, 270.30a-3, 270.30b1-5, and 274.130, and in Instruction 54 
amending Sec.  270.30d-1, Instruction 57 amending Form N-1A (referenced 
in Sec. Sec.  239.15A and 274.11A), Instruction 59 amending Form N-2 
(referenced in Sec. Sec.  239.14 and 274.11a-1), and Instruction 61 
amending Form N-3 (referenced in Sec. Sec.  239.17a and 274.11b) are 
effective August 1, 2019.
    Compliance Dates: The applicable compliance dates are discussed in 
section II.H. of this final rule.

FOR FURTHER INFORMATION CONTACT: Daniel K. Chang, Senior Counsel, J. 
Matthew DeLesDernier, Senior Counsel, Jacob D. Krawitz, Senior Counsel, 
Andrea Ottomanelli Magovern, Senior Counsel, Naseem Nixon, Senior 
Counsel, Michael C. Pawluk, Senior Special Counsel, or Sara Cortes, 
Assistant Director, at (202) 551-6792, Investment Company Rulemaking 
Office, Matt Giordano, Chief Accountant, or Kristy Von Ohlen, Assistant 
Chief Accountant, Chief Accountant's Office, at (202) 551-6918, 
Division of Investment Management, Securities and Exchange Commission, 
100 F Street, NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the 
``Commission'') is adopting new Form N-PORT [referenced in 17 CFR 
274.150] and new Form N-CEN [referenced in 17 CFR 274.101] under the 
Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] (``Investment 
Company Act''); new rules 30a-4 [17 CFR 270.30a-4] and 30b1-9 [17 CFR 
270.30b1-9] under the Investment Company Act; rescinding rules 30b1-1 
[17 CFR 270.30b1-1], 30b1-2 [17 CFR 270.30b1-2], 30b1-3 [17 CFR 
270.30b1-3], and 30b1-5 [17 CFR 270.30b1-5] under the Investment 
Company Act; adopting amendments to rules 8b-16 [17 CFR 270.8b-16], 8b-
33 [17 CFR 270.8b-33], 10f-3 [17 CFR 270.10f-3], 30a-1 [17 CFR 270.30a-
1], 30a-2 [17 CFR 270.30a-2], 30a-3 [17 CFR 270.30a-3], and 30d-1 [17 
CFR 270.30d-1], and Form N-8F [referenced in 17 CFR 274.218] under the 
Investment Company Act; adopting amendments to Forms N-1A [referenced 
in 17 CFR 274.11A], N-2 [referenced in 274.11a-1], N-3 [referenced in 
274.11b], N-4 [referenced in 17 CFR 274.11c], and N-6 [referenced in 17 
CFR 274.11d] under the Investment Company Act and the Securities Act of 
1933 [15 U.S.C. 77a et seq.] (``Securities Act''); adopting amendments 
to Form N-14 [referenced in 17 CFR 239.23] under the Securities Act; 
rescinding Form N-SAR [referenced in 17 CFR 274.101 and Form N-Q 
[referenced in 17 CFR 274.130] and adopting amendments to Form N-CSR 
[referenced in 17 CFR 274.128] under the Investment Company Act and 
Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (``Exchange 
Act''); adopting amendments to rules 10A-1 [17 CFR 240.10A-1], 12b-25 
[17 CFR 240.12b-25], 13a-10 [17 CFR 240.13a-10], 13a-11 [17 CFR 
240.13a-11], 13a-13 [17 CFR 240.13a-13], 13a-16 [17 CFR 240.13a-16], 
15d-10 [17 CFR 240.15d-10], 15d-11 [17 CFR 240.15d-11], 15d-13 [17 CFR 
240.15d-13], and 15d-16 [17 CFR 240.15d-16] under the Exchange Act; 
rescinding section 332 [17 CFR 249.332] and adopting amendments to 
sections 322 [17 CFR 249.322] and 330 [17 CFR 249.330] of 17 CFR part 
249; adopting amendments to Article 6 [17 CFR 210.6-01 et seq.] and 
Article 12 [17 CFR 210.12-01 et seq.] of Regulation S-X [17 CFR 210]; 
adopting amendments to section 800 of 17 CFR part 200 [17 CFR 200.800]; 
and adopting amendments to rules 105 [17 CFR 232.105], 301 [17 CFR 
232.301], and 401 [17 CFR 232.401] of Regulation S-T [17 CFR 232].

Table of Contents

I. Background
    A. Changes in the Industry and Technology
    B. Summary of Changes to Current Reporting Regime
    1. Form N-PORT and Amendments to Regulation S-X
    2. Form N-CEN
II. Discussion
    A. Form N-PORT
    1. Who Must File Reports on Form N-PORT
    2. Information Required on Form N-PORT
    3. Reporting of Information on Form N-PORT
    4. Disclosure of Information Reported on Form N-PORT
    B. Rescission of Form N-Q and Amendments to Certification 
Requirements of Form N-CSR
    1. Rescission of Form N-Q
    2. Amendments to Certification Requirements of Form N-CSR
    C. Amendments to Regulation S-X
    1. Overview
    2. Enhanced Derivatives Disclosures
    3. Amendments to Current Rules 12-12 through 12-12C
    4. Instructions Common to Rules 12-12 through 12-12B and 12-13 
through 12-13D
    5. Investments In and Advances to Affiliates--Rule 12-14

[[Page 81871]]

    6. Form and Content of Financial Statements
    D. Form N-CEN and Rescission of Form N-SAR
    1. Overview
    2. Who Must File Reports on Form N-CEN
    3. Frequency of Reporting and Filing Deadline
    4. Information Required on Form N-CEN
    5. Items Required by Form N-SAR That Will be Eliminated by Form 
N-CEN
    E. Option for Web site Transmission of Shareholder Reports
    F. Amendments to Forms Regarding Securities Lending Activities
    1. Determination to Adopt Requirements as Amendments to 
Registration Statement and Annual Report Forms
    2. Requirement to Disclose Securities Lending Income, Expenses, 
and Services
    3. Required Disclosures of Monthly Average Value on Loan
    G. Technical and Conforming Amendments
    H. Compliance Dates
    1. Form N-PORT, Rescission of Form N-Q, and Amendments to the 
Certification Requirements of Form N-CSR
    2. Form N-CEN, Rescission of Form N-SAR, and Amendments to the 
Exhibit Requirements of Form N-CSR
    3. Regulation S-X, Statement of Additional Information, and 
Related Amendments
III. Economic Analysis
    A. Introduction
    B. Form N-PORT, Rescission of Form N-Q, and Amendments to Form 
N-CSR
    1. Introduction and Economic Baseline
    2. Benefits
    3. Costs
    4. Alternatives
    C. Amendments to Regulation S-X
    1. Introduction and Economic Baseline
    2. Benefits
    3. Costs
    4. Alternatives
    D. Form N-CEN and Rescission of Form N-SAR
    1. Introduction and Economic Baseline
    2. Benefits
    3. Costs
    4. Alternatives
    E. Amendments to Forms Regarding Securities Lending Activities
    1. Introduction and Economic Baseline
    2. Benefits
    3. Costs
    4. Alternatives
    F. Other Alternatives to the Reporting Requirements
IV. Paperwork Reduction Act
    A. Portfolio Reporting
    1. Form N-PORT
    2. Rescission of Form N-Q
    B. Census Reporting
    1. Form N-CEN
    2. Rescission of Form N-SAR
    C. Amendments to Regulation S-X
    1. Rule 30e-1
    2. Rule 30e-2
    D. Amendments to Registration Statement Forms
    E. Amendments to Form N-CSR
V. Final Regulatory Flexibility Analysis
    A. Need for and Objectives of the Forms and Form Amendments and 
Rules and Rule Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Rule
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    1. Form N-PORT
    2. Rescission of Form N-Q
    3. Form N-CEN
    4. Rescission of Form N-SAR
    5. Regulation S-X Amendments
    6. Amendments to Registration Statement Forms
    7. Amendments to Form N-CSR
    E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Authority

I. Background

A. Changes in the Industry and Technology

    As the primary regulator of the asset management industry, the 
Commission relies on information included in reports filed by 
registered investment companies (``funds'') \1\ and investment advisers 
for a number of purposes, including monitoring industry trends, 
informing policy and rulemaking, identifying risks, and assisting 
Commission staff in examination and enforcement efforts. Over the 
years, however, as assets under management and complexity in the 
industry have grown, so too has the volume and complexity of 
information that the Commission must analyze to carry out its 
regulatory duties.
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    \1\ For purposes of the preamble of this release, we use 
``funds'' to mean registered investment companies other than face-
amount certificate companies and any separate series thereof--i.e., 
management companies and unit investment trusts. In addition, we use 
the term ``management companies'' or ``management investment 
companies'' to refer to registered management investment companies 
and any separate series thereof. We note that ``fund'' may be 
separately and differently defined in each of the new or amended 
forms or rules.
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    Commission staff estimates that there were approximately 17,052 
funds registered with the Commission, as of December 2015.\2\ 
Commission staff further estimates that there were nearly 12,000 
investment advisers registered with the Commission, along with another 
3,138 advisers that file reports with the Commission as exempt 
reporting advisers, as of January 2016.\3\ At year-end 2015, assets of 
registered investment companies exceeded $18 trillion, having grown 
from about $5.8 trillion at the end of 1998.\4\ At the same time, the 
industry has developed new product structures, such as ETFs,\5\ new 
fund types, such as target date funds with asset allocation 
strategies,\6\ and increased its use of derivatives and other 
alternative strategies.\7\ These products and strategies can offer 
greater opportunities for investors to achieve their investment goals, 
but they can also add complexity to funds' investment strategies, 
amplify investment risk, or have other risks, such as counterparty 
credit risk.
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    \2\ Based on data obtained from the Investment Company Institute 
(``ICI'') and reports filed by registrants on Form N-SAR. The 17,052 
funds include mutual funds (including funds of funds and money 
market funds), closed-end funds, exchange-traded funds (``ETFs''), 
and unit investment trusts (``UITs''). See ICI, 2016 Investment 
Company Fact Book (56th ed., 2016) (``2016 ICI Fact Book'') at 22, 
available at https://www.ici.org/pdf/2016_factbook.pdf; see also 
infra footnote 1259 and accompanying and following text.
    \3\ Based on Investment Adviser Registration Depository 
(``IARD'') system data. In 2010 Congress charged the Commission with 
implementing new reporting and registration requirements for certain 
investment advisers to private funds (known as ``exempt reporting 
advisers''). See Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Pub. L. 111-203, 124 Stat. 1376, 1570-80 (2010).
     Form ADV is used by registered investment advisers to register 
with the Commission and with the states and by exempt reporting 
advisers to report information to the Commission. Information on 
Form ADV is available to the public through the Investment Adviser 
Public Disclosure System, which allows the public to access the most 
recent Form ADV filing made by an investment adviser and is 
available at https://www.adviserinfo.sec.gov. The Commission recently 
adopted amendments to Form ADV. See Form ADV and Investment Adviser 
Act Rules, Investment Advisers Act Release No. 4509 (August 25, 
2016) [81 FR 60417 (September 1, 2016)] (``Form ADV Release'').
    \4\ See 2016 ICI Fact Book, supra footnote 2, at 9.
    \5\ See generally Exchange-Traded Funds, Securities Act Release 
No. 8901 (Mar. 11, 2008) [73 FR 14618 (Mar. 18, 2008)] (``ETF 
Proposing Release'') at 14619; Request for Comment on Exchange-
Traded Products, Securities Exchange Act Rel. No. 34-75165 (June 12, 
2015); see also ICI, Exchange-Traded Funds April 2016 (May 27, 
2016), available at https://www.ici.org/research/stats/etf/etfs_04_16 (discussing April 2016 statistics on ETFs). As of April 
2016, there were 1,630 ETFs with over $2 trillion in assets. Over 
the twelve-month period ending April 2016, assets of ETFs increased 
$89.63 billion. See id.
    \6\ See generally Investment Company Advertising: Target Date 
Retirement Fund Names and Marketing, Securities Act Release No. 9126 
(June 16, 2010) [75 FR 35920 (June 23, 2010)] (``Investment Company 
Advertising Release'').
    \7\ See Use of Derivatives by Registered Investment Companies 
and Business Development Companies, Investment Company Act Release 
No. 31933 (Dec. 11, 2015) [80 FR 80884 (Dec. 28, 2015)] 
(``Derivatives Proposing Release'') (noting ``dramatic growth in the 
volume and complexity of the derivatives markets over the past two 
decades, and the increased use of derivatives by certain funds''); 
see also Investment Company Reporting Modernization, Investment 
Company Act Release No. 31610 (May 20, 2015) [80 FR 33590 (June 12, 
2015)] (``Proposing Release'') at n. 7.
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    While these changes have been taking place in the fund industry, 
there have also been significant advances in the technology that can be 
used to report and analyze information. We have started to use 
structured data formats to collect, aggregate, and analyze data 
reported by registrants and other filers.\8\

[[Page 81872]]

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.
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    \8\ See Proposing Release, supra footnote 7, at nn. 12-16 and 
accompanying text (discussing the use of eXtensible Business 
Reporting Language (``XBRL'') with open-end fund risk/return 
summaries and the use of Extensible Markup Language (``XML'') with 
Forms N-MFP, PF and 13F, as well as in other contexts).
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    As we noted in the Proposing Release, we have historically acted to 
modernize our forms and the manner in which information is filed with 
the Commission and disclosed to the public in order to keep up with 
changes in the industry and technology.\9\ In May 2015, we again acted 
to modernize our forms and the manner in which information is filed and 
disclosed by proposing a number of reforms for investment company 
reporting.\10\ Our proposal included four sets of reforms: (1) The 
creation of a new portfolio holdings reporting form, Form N-PORT, and 
the rescission of Form N-Q; (2) the creation of a new census reporting 
form, Form N-CEN, and the rescission of Form N-SAR; (3) amendments to 
Regulation S-X, largely designed to improve derivatives disclosure; and 
(4) a proposed new rule, rule 30e-3, which would provide funds with an 
optional method to satisfy shareholder report transmission requirements 
by posting their reports online if they met certain conditions.
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    \9\ See supra footnote 8 and accompanying text; see also 
Proposing Release, supra footnote 7, at nn. 8-9 and accompanying 
text (discussing the adoption of Form N-SAR and the adoption of 
rules requiring the use of the IARD for investment adviser filings); 
see also Derivatives Proposing Release, supra footnote 7 (proposing, 
among other things, reporting requirements in Forms N-PORT and N-CEN 
related to derivatives); Investment Company Liquidity Risk 
Management Programs; Investment Company Act Release No [x] (October 
13, 2016) (``Liquidity Adopting Release''); Investment Company Swing 
Pricing; Investment Company Release No. [x] (October 13, 2016) 
(``Swing Pricing Adopting Release'').
    We also note that in December 2014, the Financial Stability 
Oversight Council (``FSOC'') issued a notice requesting comment on 
aspects of the asset management industry, including on additional 
data or information that would be helpful to regulators and market 
participants. See FSOC, Notice Seeking Comment on Asset Management 
Products and Activities, Docket No. FSOC-2014-0001 (Dec. 24, 2014) 
(``FSOC Notice''), available at https://www.treasury.gov/initiatives/fsoc/rulemaking/Documents/Notice%20Seeking%20Comment%20on%20Asset%20Management%20Products%20and%20Activities.pdf. Although our proposal was independent of FSOC, 
several commenters responding to the notice discussed issues 
concerning data that were relevant to our proposal and those 
comments were discussed in the Proposing Release, as relevant. See 
Proposing Release, supra footnote 7, at nn. 17-18 and accompanying 
text.
    \10\ See Proposing Release, supra footnote 7.
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    The proposed reforms were designed to help the Commission, 
investors, and other market participants better assess different fund 
products and to assist us in carrying out our mission to protect 
investors, maintain fair, orderly, and efficient markets, and 
facilitate capital formation. These reforms also sought to (1) increase 
the transparency of fund portfolios and investment practices both to 
the Commission and to investors, (2) take advantage of technological 
advances both in terms of the manner in which information is reported 
to the Commission and how it is provided to investors and other 
potential users, and (3) where appropriate, reduce duplicative or 
otherwise unnecessary reporting burdens on the industry.

B. Summary of Changes to Current Reporting Regime

    We received 1,003 comments \11\ on our proposed reforms from a 
variety of interested parties, including investment companies, industry 
groups, investors, academics and others. As discussed in greater detail 
below in the relevant sections of this release, commenters generally 
supported our efforts to modernize the investment company reporting 
regime, but had varying comments on a number of specific items in each 
of the respective sets of reforms. Commenters were generally supportive 
of proposed new Form N-PORT; \12\ however, we received many comments 
relating to the data to be collected by the form, the frequency of 
filing reports on the form, and whether reports on the form or certain 
information in the reports should be made public. Commenters were also 
generally supportive of proposed new Form N-CEN,\13\ agreeing that Form 
N-CEN will provide both the Commission and the public with enhanced and 
updated census-type information. Similar to Form N-PORT, however, 
commenters also provided many comments on the data to be collected by 
the form and whether certain information in reports on the form should 
be made public. In addition, commenters were largely supportive of our 
efforts to improve the information that funds report to shareholders 
and the Commission through the proposed amendments to Regulation S-
X,\14\ but had specific comments on certain disclosures. Comments on 
proposed rule 30e-3, which would allow funds to transmit reports to 
shareholders via the internet subject to a number of conditions, were 
mixed, with some commenters supporting the rule and others opposing 
it.\15\
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    \11\ Of these, about 574 were individualized letters, and the 
rest were one of a number of types of form letters. See Comments on 
Investment Company Reporting Modernization, File No. S7-08-15, 
available at https://www.sec.gov/comments/s7-08-15/s70815.shtml. The 
comment period for the proposal closed on August 11, 2015, but was 
re-opened until January 13, 2016 when the Commission proposed 
liquidity risk management programs for open-end funds. See Open-End 
Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening 
of Comment Period for Investment Company Reporting Modernization 
Release, Investment Company Act Release No. 31835 (Sept. 22, 2015) 
[80 FR 62274 (Oct. 15, 2015)] (``Liquidity Proposing Release'').
    \12\ See infra footnotes 46, 64, 100, 115, 123, 145, 193, 197, 
198, 245, 275, 283, 293, 330, 350, 379, 423, 432, 443, 455 and 475.
    \13\ See infra footnotes 745, 759, 769, 779, 819, 832, 857, 870, 
883, 907, 940, 989, 1008, 1045, 1061, 1070, 1080, 1101 and 1107.
    \14\ See infra footnotes 527, 537, 556, 558, 566, 648, 665, 701 
and 711.
    \15\ See infra footnotes 1178-1179.
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    Today, after consideration of the comments we received, we are 
adopting new Forms N-PORT and N-CEN, as well as amendments to 
Regulation S-X. We continue to believe that with the industry changes 
and technological advances that have occurred over the years, we need 
to improve the type and format of the information that funds provide to 
us and to investors, and the information that the Commission receives 
from funds in order to improve the Commission's monitoring of the fund 
industry in its role as the primary regulator of funds and investment 
advisers. We are not adopting proposed rule 30e-3 at this time as we 
believe, in light of the comments received, that additional 
consideration regarding the rule is appropriate. We are adopting 
amendments to Forms N-1A, N-3, and N-CSR to require certain disclosures 
regarding securities lending activities.\16\
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    \16\ If any provision of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such 
invalidity shall not affect other provisions or application of such 
provisions to other persons or circumstances that can be given 
effect without the invalid provision or application.
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1. Form N-PORT and Amendments to Regulation S-X
    We are adopting Form N-PORT, largely as proposed, with certain 
modifications in response to commenters. We are also rescinding, as 
proposed, Form N-Q. Form N-PORT is a new portfolio holdings reporting 
form that will be filed by all registered management investment 
companies, other than money market funds and small business investment 
companies (``SBICs''),\17\ and by UITs that operate as

[[Page 81873]]

ETFs.\18\ Currently, management investment companies (other than SBICs) 
are required to report their complete portfolio holdings to the 
Commission on a quarterly basis on Forms N-Q \19\ and N-CSR.\20\
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    \17\ See infra footnote 49 (discussing why money market funds 
and SBICs will not be required to file reports on Form N-PORT).
    \18\ ETFs will be required to file reports on Form N-PORT, 
regardless of whether they are organized as management companies or 
UITs. UITs are a type of investment company which (a) are organized 
under a trust indenture contract of custodianship or agency or 
similar instrument, (b) do not have a board of directors, and (c) 
issue only redeemable securities. See section 4(2) of the Investment 
Company Act.
    \19\ Rule 30b1-5 under the Investment Company Act [17 CFR 
270.30b1-5]. While SBICs file reports on Form N-CSR, SBICs are not 
required to file reports on Form N-Q.
    \20\ See rule 30b2-1 under the Investment Company Act [17 CFR 
270.30b2-1].
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    Form N-PORT requires reporting of a fund's complete portfolio 
holdings. The form also requires additional information concerning fund 
portfolio holdings that is not currently required by Forms N-Q and N-
CSR, and that will facilitate risk analyses and other Commission 
oversight. For example, Form N-PORT requires reporting of additional 
information relating to derivative investments. The form also includes 
certain risk metric calculations that measure a fund's exposure and 
sensitivity to changing market conditions, such as changes in asset 
prices, interest rates, or credit spreads. As was proposed, reports on 
Form N-PORT will be filed in a structured data format with the 
Commission on a monthly basis, with every third month available to the 
public 60 days after the end of the fund's fiscal quarter.
    We continue to believe that more timely and frequent reporting of 
portfolio holdings information to the Commission, as well as the 
additional information Form N-PORT requires, will enable us to further 
our mission to protect investors by assisting the Commission and its 
staff in carrying out its regulatory responsibilities related to the 
asset management industry. These responsibilities include its 
examination, enforcement, and monitoring of funds, its formulation of 
policy, and the staff's review of fund registration statements and 
disclosures.
    While Form N-PORT is primarily designed to assist the Commission 
and its staff, we also continue to believe that information in Form N-
PORT will be beneficial to investors and other potential users. In 
particular, we believe that both sophisticated institutional investors 
and third-party users that provide services to investors may find the 
information required on Form N-PORT useful. For example, Form N-PORT's 
structured format will allow the Commission, investors, and other 
potential users to better collect and analyze portfolio holdings 
information.\21\ While we do not anticipate that many individual 
investors will analyze data using Form N-PORT, although some may, we 
believe that individual investors will benefit indirectly from the 
information collected on reports on Form N-PORT, through enhanced 
Commission monitoring and oversight of the fund industry and through 
analyses prepared by third-party service providers and other parties, 
such as industry observers and academics.
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    \21\ As we noted in the Proposing Release, portfolio holdings 
information currently filed on Form N-Q is filed in a plain text or 
hypertext format, which often requires labor-intensive manual 
reformatting by Commission staff and other potential users in order 
to prepare the reported data for analysis. See Proposing Release, 
supra footnote 7.
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    In addition, we are adopting, largely as proposed, amendments to 
Regulation S-X with certain modifications in response to comments. 
These amendments in large part require standardized enhanced 
derivatives disclosures in fund financial statements. Currently, 
Regulation S-X does not prescribe specific information for most types 
of derivatives, including swaps, futures, and forwards. While many fund 
groups provide disclosures regarding the terms of their derivatives 
contracts, the lack of standard disclosure requirements has resulted in 
inconsistent disclosures in fund financial statements.
    We continue to believe that the amendments to Regulation S-X to 
enhance and standardize derivatives disclosures in financial statements 
will allow comparability among funds and help all investors better 
assess funds' use of derivatives. Reports on Form N-PORT will contain 
similar derivatives disclosures to facilitate analysis of derivatives 
investments across funds. Because Form N-PORT is not primarily designed 
for individual investors, the amendments to Regulation S-X require 
disclosures concerning the fund's investments in derivatives in the 
financial statements that are provided to investors. We also have 
endeavored to mitigate burdens on the industry by conforming the 
derivatives disclosures that are required by both Regulation S-X and 
Form N-PORT.
2. Form N-CEN
    We are adopting, substantially as proposed and with certain 
modifications in response to comments, Form N-CEN, a new form on which 
funds will report census-type information to the Commission. We are 
also rescinding, as proposed, Form N-SAR, the current form on which the 
Commission collects census-type information on management investment 
companies and UITs.\22\ As we discussed in the Proposing Release, Form 
N-SAR was adopted in 1985 and, while Commission staff has indicated 
that the census-type information reported on Form N-SAR is useful in 
its support of the Commission's regulatory functions, staff has also 
indicated that in the thirty plus years since Form N-SAR's adoption, 
changes in the industry have reduced the utility of some of the 
currently required data elements.\23\ Commission staff believes that 
obtaining certain additional census-type information not currently 
collected by Form N-SAR will improve the staff's ability to carry out 
regulatory functions, including risk monitoring and analysis of the 
industry.
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    \22\ See rules 30a-1 and 30b1-1 under the Investment Company Act 
[17 CFR 270.30a-1 and 17 CFR 270.30b1-1].
    \23\ See Proposing Release, supra footnote 7 (noting that when 
adopted, Form N-SAR was intended to reduce reporting burdens and 
better align the information that was required to be reported with 
the characteristics of the fund industry). Also as noted in the 
Proposing Release, the filing format that is required for reports on 
Form N-SAR limits our ability to use the reported information for 
analysis.
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    Form N-CEN includes many of the same data elements as Form N-SAR, 
but, in order to improve the quality and utility of information 
reported, replaces those items that are outdated or of limited 
usefulness with items that we believe to be of greater relevance today. 
Where possible, we are also eliminating items that are reported on 
other Commission forms, or are available elsewhere. In addition, 
reports on Form N-CEN will be filed in a structured XML format, which, 
we believe, will reduce reporting burdens for current Form N-SAR filers 
and yield data that can be used more effectively by the Commission and 
other potential users.\24\ Finally, reports on new Form N-CEN will be 
filed annually, rather than semi-annually as is required for reports on 
Form N-SAR by management companies, which will further reduce current 
burdens on funds.
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    \24\ See infra footnotes 750-752 and accompanying text.
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II. Discussion

A. Form N-PORT

    As discussed above, we are adopting a new monthly portfolio 
reporting form, Form N-PORT. Form N-PORT requires registered management 
investment companies and ETFs organized as UITs, other than money 
market funds and SBICs, to electronically file with the

[[Page 81874]]

Commission monthly portfolio investments information on reports in an 
XML format no later than 30 days after the close of each month.\25\ 
Except as discussed below in section II.A.4, only information reported 
for the third month of each fund's fiscal quarter on Form N-PORT will 
be publicly available, and that information will not be made public 
until 60 days after the end of the fiscal quarter.\26\
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    \25\ See new rule 30b1-9.
    \26\ As used throughout this section, the term ``fund'' 
generally refers to investment companies that will file reports on 
Form N-PORT.
    As discussed further in section II.A.4, the Commission does not 
intend to make public the information reported on Form N-PORT for 
the first and second months of each fund's fiscal quarter that is 
identifiable to any particular fund or adviser or any information 
reported with regard to country of risk and economic exposure, 
delta, or miscellaneous securities, or explanatory notes related to 
any of those topics that is identifiable to any particular fund or 
adviser. However, the Commission may use such information in its 
regulatory programs, including examinations, investigations, and 
enforcement actions. See infra footnote 500; see also General 
Instruction F of Form N-PORT.
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    As the primary regulator of the asset management industry, the 
Commission relies on information that funds file with us, including 
their registration statements, shareholder reports, and various 
reporting forms such as Form N-CSR. The Commission and its staff use 
this information to understand trends in the fund industry and carry 
out regulatory responsibilities, including formulating policy and 
guidance, reviewing fund registration statements, and assessing and 
examining a fund's regulatory compliance with the federal securities 
laws and Commission rules thereunder.
    Information on fund portfolios is currently filed with the 
Commission quarterly with up to a 70-day delay.\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, and commenters generally agreed, that 
more frequent and timely information concerning fund portfolios than we 
currently receive, will assist the Commission in its role as the 
primary regulator of funds, as discussed further below.\28\
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    \27\ Funds currently file with the Commission portfolio 
schedules for the fund's first and third fiscal quarters on Form N-
Q, and shareholder reports, including portfolio schedules for the 
fund's second and fourth fiscal quarters, on Form N-CSR. These 
reports are available to the public and the Commission with either a 
60- or 70-day delay. See rule 30b1-5 (requiring management 
companies, other than SBICs, to file reports on Form N-Q no more 
than 60 days after the close of the first and third quarters of each 
fiscal year); rule 30b2-1 (requiring management companies to file 
reports on Form N-CSR no later than 10 days after the transmission 
to stockholders of any report required to be transmitted to 
stockholders under rule 30e-1). See also rules 30e-1 and 30e-2 under 
the Investment Company Act [17 CFR 270.30e-1 and 17 CFR 270.30e-2] 
(requiring management companies and certain UITs to transmit to 
stockholders semi-annual reports containing, among other things, the 
fund's portfolio schedules, no more than 60 days after the close of 
the second and fourth quarters of each fiscal year). These reports 
include portfolio holdings information as required by Regulation S-
X. See rule 12-12 of Regulation S-X [17 CFR 210.12-12], et seq.
    \28\ See, e.g., Comment Letter of Morningstar, Inc. (Aug. 21, 
2015) (``Morningstar Comment Letter'') (expressing belief that 
timelier information to investors through monthly public disclosures 
of portfolios would assist the Commission in monitoring the 
financial system, while also providing suggested revisions to 
enhance the proposal.); Comment Letter of Vanguard (Aug. 11, 2015) 
(``Vanguard Comment Letter'') (stating that the proposal strikes the 
appropriate balance between disclosures to the Commission and 
protecting funds and their investors from front-running, and 
providing suggested modifications to the proposal).
---------------------------------------------------------------------------

    The information we will collect on Form N-PORT will be important to 
the Commission and its staff in analyzing and understanding the various 
risks in a particular fund, as well as risks across specific types of 
funds and the fund industry as a whole. These risks can include the 
investment risk that the fund is undertaking as part of its investment 
strategy, such as interest rate risk, credit risk, volatility risk, 
other market risks, or risks associated with specific types of 
investments, such as emerging market debt or commodities. Additionally, 
as we discuss in the Liquidity Adopting Release that we are adopting 
concurrently Form N-PORT will help the Commission better understand 
liquidity risks through additional Form N-PORT disclosure requirements 
discussed in that release.\29\ The information collected on Form N-PORT 
will also assist with understanding whether and to what extent a fund's 
exposure to price movements is leveraged, either through borrowings or 
the use of derivatives.
---------------------------------------------------------------------------

    \29\ See generally Liquidity Adopting Release, supra footnote 9.
---------------------------------------------------------------------------

    Many commenters generally agreed with us that the information 
required on Form N-PORT will assist the Commission in better 
understanding each of these risks in the fund industry.\30\ These 
commenters also generally agreed with us that the ability to understand 
the risks that funds face will help Commission staff better understand 
and monitor risks and trends in the fund industry as a whole, 
facilitating the Commission's informed regulation of the fund 
industry.\31\ We also believe, and some commenters agreed, that 
information obtained from Form N-PORT filings will facilitate the 
Commission's oversight of funds and assist Commission staff in 
examination, enforcement, and monitoring, as well as in formulating 
policy and in its review of fund registration statements and 
disclosures.\32\ In this regard, we expect that Commission staff will 
use the data reported on Form N-PORT for many of the same purposes as 
Commission staff has used data reported on Form N-MFP by money market 
funds. The data received on Form N-MFP has been used extensively by 
Commission staff, including for purposes of assessing regulatory 
compliance, identifying funds for examination, and risk monitoring. 
Form N-MFP data has also informed Commission policy; for example, staff 
used Form N-MFP data in analyses that informed the Commission's 
considerations when it proposed and adopted money market fund reform 
rules in 2013 and 2014.\33\
---------------------------------------------------------------------------

    \30\ See, e.g., Comment Letter of BlackRock (Aug. 11, 2015) 
(``BlackRock Comment Letter'') (``Importantly, the greater depth and 
frequency of information requested by the Commission will help the 
Commission better identify and monitor emerging risks associated 
with specific RICs or categories of RICs as well as asset management 
activities.''); Comment Letter of Wells Fargo Funds Management, LLC 
(Aug. 11, 2015) (``Wells Fargo Comment Letter'') (``we believe that 
the enhanced disclosure requirements of the Proposals represent 
appropriate valuable information for the Commission to have in order 
to assess trends in risks, for example, across the mutual fund 
industry.''); but see, e.g., Comment Letter of Federated Investors, 
Inc. (January 13, 2016) (``Federated Comment Letter) (``A majority 
of the Commission's proposed amendments to Form N-1A, N-PORT, and N-
CEN would require a large effort from funds while offering data that 
is, at best, of little utility, and, at worst, misleading. Many of 
these deficiencies relate to flaws inherent in a security-level 
disclosure scheme.''). We disagree with the commenter that a 
security-level disclosure scheme is of little utility. See infra 
footnote 1283 and accompanying and following text (discussing the 
utility of the security-level information that will be reported on 
Form N-PORT).
    \31\ Id.
    \32\ Id.
    \33\ See, e.g., Money Market Fund Reform; Amendments to Form PF, 
Investment Company Act Release No. 30551 (June 5, 2013) [78 FR 36834 
(June 19, 2013)]; Money Market Fund Reform; Amendments to Form PF, 
Investment Company Act Release No. 31166 (July, 23 2014) [79 FR 
44076 (July 29, 2014)] (``Money Market Fund Reform 2014 Release'') 
at n. 502 and accompanying text (citing use of Form N-MFP data in 
discussing the Commission's decision to require basis point 
rounding) and at n. 651 and accompanying text (citing use of Form N-
MFP data in discussing the Commission's decision regarding the size 
of the non-government securities basket for government money market 
funds).
---------------------------------------------------------------------------

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

[[Page 81875]]

periodic public disclosure of the information reported on Form N-
PORT.\34\ Form N-PORT is primarily designed for use by the Commission 
and its staff, and not for disclosing information directly to 
individual investors. The information we are requiring on Form N-PORT 
is more voluminous than on a schedule of investments. We believe, and 
some commenters agreed, however, that some investors, particularly 
institutional investors, could directly use the data from the 
information on Form N-PORT for their own quantitative analysis of 
funds, including to better understand the funds' investment strategies 
and risks, and to better compare funds with similar strategies.\35\ 
Additionally, we believe, and some commenters agreed, that entities 
providing services to investors, such as investment advisers, broker-
dealers, and entities that provide information and analysis for fund 
investors, will also utilize and analyze the information that will be 
required by Form N-PORT to help all investors make more informed 
investment decisions.\36\ Accordingly, whether directly or through 
third parties, we believe, and some commenters agree, that the periodic 
public disclosure of the information on Form N-PORT will benefit all 
fund investors.\37\ As discussed further below, in order to mitigate 
the risk that the information on Form N-PORT will be used in ways that 
might ultimately result in investor harm, we are limiting the public 
availability of Form N-PORT to reports filed as of quarter-end, as well 
as delaying public availability of those reports by 60 days and keep 
certain discrete information items nonpublic.
---------------------------------------------------------------------------

    \34\ See, e.g., Comment Letter of Joseph A. Franco (Aug. 11, 
2015) (``Franco Comment Letter''); Morningstar Comment Letter; but 
see, e.g., Comment Letter of the Investment Company Institute (Aug. 
11, 2015) (``ICI Comment Letter'').
    \35\ Id.
    \36\ See id.
    \37\ See id.
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    We intend to increase transparency of fund investments through Form 
N-PORT in several ways. First, Form N-PORT will improve reporting of 
fund derivative usage. As the Commission has previously noted, we have 
observed a dramatic growth in the volume and complexity of the 
derivatives markets over the past two decades.\38\ Additionally, funds 
that are considered ``alternative'' funds, which often use derivatives 
for implementing their investment strategy, are becoming increasingly 
popular among investors.\39\ Although Regulation S-X establishes 
general disclosure requirements for financial statements in fund 
registration statements and shareholder reports, based on staff review 
of fund filings, the lack of standardized requirements as to the terms 
of derivatives that must be reported has sometimes led to inconsistent 
approaches to reporting derivatives information and, in some cases, 
insufficient information concerning the terms and underlying reference 
assets of derivatives to allow the Commission or investors to better 
understand the investment.\40\ This hinders both an analysis of a 
particular fund's investments, as well as comparability among 
funds.\41\
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    \38\ See Derivatives Proposing Release, supra footnote 7, at n. 
6 and accompanying text; see also Use of Derivatives by Investment 
Companies under the Investment Company Act of 1940, Investment 
Company Act Release No. 29776 (Aug. 31, 2011) [76 FR 55237 (Sept. 7, 
2011)] (``Derivatives Concept Release'') at n. 7 and accompanying 
text.
    \39\ While there is no clear definition of ``alternative'' in 
the fund industry, an alternative fund is generally understood to be 
a fund whose primary investment strategy falls into one or more of 
the three following categories: (1) Non-traditional asset classes 
(for example, currencies); (2) non-traditional strategies (such as 
long/short equity positions); and/or (3) less liquid assets (such as 
private debt).
     At the end of December 2015, alternative mutual funds and 
exchange-traded funds had more than $200 billion in assets. Although 
alternative mutual funds only accounted for 1.23% of the mutual fund 
market as of December 2015, the almost $17.3 billion of inflows into 
these funds in 2015 represented 7% of the inflows for the entire 
mutual fund industry in that year. These statistics were obtained 
from staff analysis of Morningstar Direct data, and are based on 
fund categories as defined by Morningstar.
    \40\ For example, we understand that some funds provide a 
description of all of the holdings in an index or custom basket 
underlying a swap contract, while others only provide a short 
description. See also Proposing Release, supra footnote 7, at n. 31 
and accompanying text.
    \41\ See, e.g., current rule 12-13 of Regulation S-X [17 CFR 
210.12-13] (requiring funds to disclose ``other'' investments, which 
includes derivatives); rule 6-03 of Regulation S-X [17 CFR 210.6-03] 
(applying articles 1-4 of Regulation S-X to investment companies, 
but not specifying where derivative disclosures should be made for 
funds); FASB ASC 815, Disclosures about Derivative Instruments and 
Hedging Activities (``ASC 815'') (discussing general derivative 
disclosure); FASB ASC 820, Fair Value Measurements (``ASC 820'') 
(requiring disclosure of valuation information for major categories 
of investments). See also infra section II.C.
---------------------------------------------------------------------------

    The information and reporting format required by Form N-PORT will 
create a more detailed, uniform, and structured reporting regime. We 
believe and several commenters agreed that this will allow the 
Commission and investors to better analyze and compare funds' 
derivatives investments and the exposures they create, which can be 
important to understanding funds' investment strategies, use of 
leverage, and potential for risk of loss.\42\
---------------------------------------------------------------------------

    \42\ See, e.g., Comment Letter of Fidelity Investments (Aug. 10, 
2015) (``Fidelity Comment Letter'') (generally supporting 
Commission's focus on modernizing the way data is collected from 
funds and reported to shareholders and providing suggestions for 
modifications to the final rule); Comment Letter of Capital Research 
and Management Company (Aug. 11, 2015) (``CRMC Comment Letter'') 
(supporting Commission's efforts to take advantage of technology in 
order to assist the staff, investors, and other market participants 
to better assess different fund products and assist the Commission 
in carrying out its mission; and providing suggestions for 
modifications to the final rule).
---------------------------------------------------------------------------

    Furthermore, as discussed further below, Form N-PORT requires funds 
to report certain risk metrics that would provide measurements of a 
fund's exposure to changes in interest rates, credit spreads and asset 
prices, whether through investments in debt securities or in 
derivatives. Financial statement information provides historical 
information over a particular time period (e.g., a statement of 
operations), or information about values of assets at a particular 
point in time (e.g., a balance sheet including, for funds, a schedule 
of investments). Risk metrics, on the other hand, measure the change in 
value of an investment in response to small changes in the underlying 
reference asset of an investment, whether the underlying reference 
asset is a security (or index of securities), commodity, interest rate, 
or credit spread over an interest rate. Based on staff experience, as 
well as staff outreach to asset managers and entities that provide risk 
management services to asset managers (prior to the Commission issuing 
the Proposing Release), discussed further below, we believe that fund 
portfolio managers and risk managers commonly calculate risk metrics to 
analyze the exposures in their portfolios.\43\ 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.
---------------------------------------------------------------------------

    \43\ See generally John C. Hull, Options, Futures, and Other 
Derivatives (9th ed., 2015) (discussing, for example, the function 
of duration, convexity, delta, and other calculations used for 
measuring changes in the value of bonds or derivatives as a result 
of changes in underlying asset prices or interest rates); Sheldon 
Natenberg, Option Volatility and Pricing (1994) (same).
---------------------------------------------------------------------------

    Form N-PORT will also require information about certain fund 
transactions and activities such as securities lending, repurchase 
agreements, and reverse repurchase agreements, including information 
regarding the counterparties to which the fund is exposed in those 
transactions, as well as in over-the-counter derivatives transactions. 
We believe and several commenters agreed that such information will 
increase transparency concerning these transactions and activities and 
will

[[Page 81876]]

provide better information regarding counterparties, which will be 
useful in assessing both individual and multiple fund exposures to a 
single counterparty.\44\ This will allow the Commission to better 
assess and monitor counterparty risk for individual funds, as well as 
across the industry.
---------------------------------------------------------------------------

    \44\ See, e.g., Morningstar Comment Letter (``By collecting and 
making available additional information about counterparty risk and 
other important factors, the SEC will make it easier for investors 
and financial advisors to monitor portfolio risks.'').
---------------------------------------------------------------------------

    As discussed further below, Form N-PORT will be filed 
electronically in a structured, XML format. This format will enhance 
the ability of the Commission, as well as investors and other potential 
users, to analyze portfolio data both on a fund-by-fund basis and also 
across funds.\45\ As a result, although we will collect certain 
information on Form N-PORT that may be similarly disclosed or reported 
elsewhere (e.g., portfolio investments would continue to be included as 
part of the schedules of investments contained in shareholder reports, 
and filed on a semi-annual basis with the Commission on Form N-CSR), we 
believe that it is appropriate to also collect this information in a 
structured format for analysis by our staff as well as investors and 
other potential users.
---------------------------------------------------------------------------

    \45\ See, e.g., Fidelity Comment Letter (``Collecting data in a 
structured format should allow the Commission to use information 
from market participants in rigorous empirical examinations of the 
industry in furtherance of the SEC's goals.''); ICI Comment Letter 
(``Obtaining that information in a structured data format will help 
the SEC to better analyze information and improve its ability to 
carry out its regulatory mission.'').
---------------------------------------------------------------------------

    Many commenters were generally supportive of our proposal.\46\ 
However, we received many comments relating to the structure of the 
proposed form, data to be collected, frequency of filings, and whether 
reports on the form should be made public. We address these comments 
below and discuss modifications we made from the proposal in response 
to comments.
---------------------------------------------------------------------------

    \46\ See, e.g., Comment Letter of Charles Schwab Investment 
Management, Inc. (Aug. 11, 2015) (``Schwab Comment Letter'') (``Form 
N-Port [sic] will provide substantial additional information to the 
Commission and strengthen its ability to oversee and carry out its 
regulatory responsibilities for the asset management industry.''); 
Vanguard Comment Letter (``Vanguard generally supports the proposed 
reporting initiatives because we believe these reporting obligations 
will provide the Commission with the tools necessary to monitor 
portfolio composition and risk exposure among funds, without 
exposing fund investors to potentially harmful front-running 
activities.''); Comment Letter of Pioneer Investments (Aug. 11, 
2015) (``Pioneer Comment Letter'') (``Pioneer supports the 
Commission's effort to modernize the regime whereby funds report 
information about their portfolio holdings to the Commission.''); 
Comment Letter of the Securities Industry and Financial Markets 
Association Asset Management Group (Aug. 11, 2015) (``SIFMA Comment 
Letter I'') (``We support the Commission's initiative in proposing 
monthly reports on Form N-PORT in order to strengthen its regulatory 
oversight of the asset management industry and protect investors by 
obtaining more frequent and substantially expanded information about 
funds, in a structured format.''); ICI Comment Letter (``ICI broadly 
supports the Commission's efforts to update fund reporting.'').
---------------------------------------------------------------------------

1. Who Must File Reports on Form N-PORT
    We are adopting, as proposed, the requirement that each registered 
management investment company and each ETF organized as a UIT file a 
report on Form N-PORT.\47\ Registrants offering multiple series will be 
required to file a report for each series separately, even if some 
information is the same for two or more series.\48\ Money market funds 
and SBICs will not be required to file reports on Form N-PORT.\49\
---------------------------------------------------------------------------

    \47\ See new rule 30b1-9.
    \48\ As further discussed below, in part to harmonize 
definitions between Forms N-PORT and N-CEN, and in part to parallel 
identical changes to the definition of ``exchange-traded fund'' in 
Form N-CEN, we have revised Form N-PORT's proposed definition of 
``exchange-traded product'' to refer instead to ``exchange-traded 
fund,'' which as revised includes each series of a UIT that meets 
that definition. See General Instruction E of Form N-PORT; infra 
footnote 896 (discussing changes to definitions in Form N-CEN).
    \49\ Money market funds already file their monthly portfolio 
investments with the Commission. See Form N-MFP. SBICs are unique 
investment companies that operate differently and are subject to a 
different regulatory regime than other management investment 
companies. They are ``privately owned and managed investment funds, 
licensed and regulated by [the Small Business Administration 
(``SBA'')], that use their own capital plus funds borrowed with an 
SBA guarantee to make equity and debt investments in qualifying 
small businesses.'' See SBA, SBIC Program Overview, available at 
https://www.sba.gov/content/sbic-program-overview. As a result of 
these differences, SBICs are not required to file reports on Form N-
Q. As of December 31, 2015, only one SBIC had publicly offered 
securities outstanding.
---------------------------------------------------------------------------

    We are adopting, as proposed, the requirement that all ETFs file 
reports on Form N-PORT, regardless of their form of organization. 
Although most ETFs today are structured as open-end management 
investment companies, there are several ETFs that are organized as 
UITs.\50\ ETFs organized as UITs have significant numbers of investors 
who we believe can benefit from the disclosures required in Form N-
PORT.\51\ We received no comments on this aspect of the proposal.
---------------------------------------------------------------------------

    \50\ There are currently eight ETFs organized as UITs that have 
registered with the Commission.
    \51\ Commission staff estimates that as of December 2015, ETFs 
organized as UITs represented 12% of all assets invested in 
registered ETFs. This analysis is based on data from Morningstar 
Direct.
---------------------------------------------------------------------------

    One commenter suggested that reports on Form N-PORT should be filed 
by all registered investment companies, including UITs, in order to 
have comparable filing information across registered investment 
products, although the commenter did suggest that less frequent filing 
requirements might be appropriate based on the structure of the 
investment company.\52\ We note that UITs have fixed portfolios that do 
not change over time, and thus, unlike most other investment companies 
which are required to file quarterly reports with their current 
portfolio holdings, UITs are not currently required to file periodic 
reports other than on an annual basis.\53\ Based on these differences, 
as reflected in the current reporting regime, we have determined not to 
extend Form N-PORT filing requirements to UITs that are not ETFs at 
this time.
---------------------------------------------------------------------------

    \52\ See Morningstar Comment Letter.
    \53\ UITs currently file annual reports on Form N-SAR. In 
contrast, management investment companies currently file reports for 
their first and third fiscal quarters on Forms N-Q and reports for 
their second and fourth fiscal quarters on Form N-CSR, as well as 
semi-annual reports on Form N-SAR. See supra footnotes 19-20 and 
accompanying text.
---------------------------------------------------------------------------

    The same commenter also recommended that reports on Form N-PORT be 
filed by business development companies (``BDCs'').\54\ BDCs are a 
category of closed-end funds that are operated for the purpose of 
investing in, and providing managerial assistance to, small and 
developing businesses, and financially troubled businesses. BDCs are 
not required to register as investment companies under the Investment 
Company Act although they do elect to be subject to certain specialized 
provisions, and they are subject to a different reporting regime than 
registered investment companies.\55\ Based on these differences, and as 
reflected in the current reporting and registration regime, we have 
determined not to extend Form N-PORT filing requirements to BDCs at 
this time.\56\
---------------------------------------------------------------------------

    \54\ See Morningstar Comment Letter (recommending that 
``business development companies . . . and other [registered 
investment companies]'' should be required to file reports on Form 
N-PORT).
    \55\ See Adoption of Permanent Notification Forms for Business 
Development Companies; Statement of Staff Position, Investment 
Company Act Release No. 12274 (Mar. 5, 1982) [47 FR 10518-02 (Mar. 
11, 1982)]; and Interim Notification Forms for Business Development 
Companies, Investment Company Act Release No. 11703 (Mar. 26, 1981) 
[46 FR 19459 (Mar. 31, 1981)] for a discussion of the regulatory 
system applicable to BDCs.
    \56\ Although BDCs will not be subject to Form N-PORT filing 
requirements, the amendments being adopted to Regulation S-X will 
apply to both registered investment companies and BDCs. See infra 
footnote 700.
---------------------------------------------------------------------------

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

[[Page 81877]]

compliance regime.\57\ Although we recognize that there are various 
alternative reporting requirements imposed in other contexts and by 
other regulators, the reporting requirements imposed by Form N-PORT 
have been designed specifically to meet the Commission's regulatory 
needs with regards to monitoring and oversight of registered funds.
---------------------------------------------------------------------------

    \57\ See SIFMA Comment Letter I (``Under our suggested approach, 
funds required to report on new Form N-PORT would be excused from 
reporting on Form CPO-PQR.'').
---------------------------------------------------------------------------

    Finally, one commenter stated that we should not require funds to 
directly report information on their own behalf, but instead require 
other entities such as transfer agents and custodians to report 
information on behalf of funds.\58\ Given our expertise and experience 
in regulating, examining, and overseeing funds, including fund 
reporting, recordkeeping, and compliance, we continue to believe that 
obtaining such information directly from funds is appropriate.
---------------------------------------------------------------------------

    \58\ See Federated Comment Letter (``It would also reduce the 
reporting burden on funds for the Commission to acquire information 
directly from custodians and transfer agents, which are proficient 
in maintaining and reporting portfolio holdings and other 
information.'').
---------------------------------------------------------------------------

2. Information Required on Form N-PORT
    We are adopting, substantially as proposed, the requirements in 
Form N-PORT to report certain information about the fund and the fund's 
portfolio investments as of the close of the preceding month, 
including: (a) General information about the fund; (b) assets and 
liabilities; (c) certain portfolio-level metrics, including certain 
risk metrics; (d) information regarding securities lending 
counterparties; (e) information regarding monthly returns; (f) flow 
information; (g) certain information regarding each investment in the 
portfolio; (h) miscellaneous securities (if any); (i) explanatory notes 
(if any), and (j) exhibits. We are adopting these information 
requirements substantially as proposed, although we are making some 
modifications from the proposal in response to comments. Each of these 
is discussed in more detail below.
a. General Information and Instructions
    Part A of Form N-PORT requires, as proposed, general identifying 
information about the fund. This information includes the name of the 
registrant, name of the series, and relevant file numbers.\59\ Funds 
will also report the date of their fiscal year end, the date as of 
which information is reported on the form, and indicate if they 
anticipate that this will be their final filing on Form N-PORT.\60\ 
This information will be used to identify the registrant and series 
filing the report, track the reporting period, and identify final 
filings. No comments were received on this aspect of our proposal. We 
are adopting these elements as proposed.
---------------------------------------------------------------------------

    \59\ See Item A.1 and Item A.2 of Form N-PORT. Funds will 
provide the name of the registrant, the Investment Company Act and 
CIK file numbers for the registrant, and the address and telephone 
number of the registrant. Funds will also provide the name of and 
EDGAR identifier (if any) for the series.
    \60\ See Item A.3 and Item A.4 of Form N-PORT.
---------------------------------------------------------------------------

    As proposed, funds will also provide the Legal Entity Identifier 
(``LEI'') number of the registrant and series.\61\ The LEI is a unique 
identifier generally associated with a single corporate entity and is 
intended to provide a uniform international standard for identifying 
counterparties to a transaction.\62\ Fees are not imposed for the usage 
of or access to LEIs, and all of the associated reference data needed 
to understand, process, and utilize the LEIs is widely and freely 
available and not subject to any usage restrictions. Funds or 
registrants that have not yet obtained an LEI will be required to 
obtain one, which currently entails a one-time fee of $219 plus $119 
per year in annual maintenance costs and fees.\63\
---------------------------------------------------------------------------

    \61\ See Item A.1.d and Item A.2.c of Form N-PORT. The 
Commission has begun to require disclosure of the LEI in other 
contexts. See, e.g., Form PF, Reporting Form for Investment Advisers 
to Private Funds and Certain Commodity Pool Operators and Commodity 
Trading Advisors, available at https://www.sec.gov/rules/final/2011/ia-3308-formpf.pdf; Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Securities Exchange Act Release No. 
74244 (Feb. 11, 2015) [80 FR 14564 (Mar. 19, 2015)] (``Regulation 
SBSR Adopting Release'').
    \62\ The global LEI system operates under an LEI Regulatory 
Oversight Committee (``ROC'') that currently includes members that 
are official bodies from over 40 jurisdictions. The Commission is a 
member of the ROC and currently serves on its Executive Committee. 
The Commission notes that it would expect to revisit the requirement 
to report LEIs if the operation of the LEI system were to change 
significantly.
    \63\ As of June 30, 2016, the cost of obtaining an LEI from the 
Global Markets Entity Identifier (``GMEI'') Utility in the United 
States was $200, plus a $19 surcharge for the LEI Central Operating 
Unit. The annual cost of maintaining an LEI from the GMEI Utility 
was $100, plus a $19 surcharge for the LEI Central Operating Unit. 
See GMEI Utility, Frequently Asked Questions, available at https://www.gmeiutility.org/frequentlyAskedQuestions.jsp.
---------------------------------------------------------------------------

    Commenters were generally supportive of this aspect of our 
proposal, with most endorsing the use of LEI for identification of 
funds, as well as for fund counterparties.\64\ However, one commenter 
suggested that certain funds should be permanently exempted from such 
requirements as such funds would not need an LEI for any other 
purpose.\65\ Lastly, another commenter suggested that, to better assist 
academic researchers with identification of entities, every filing by a 
mutual fund should require an exhaustive list of the tickers and CUSIPs 
associated with that mutual fund.\66\
---------------------------------------------------------------------------

    \64\ See, e.g., Comment Letter of State Street Corporation (Aug. 
11, 2015) (``State Street Comment Letter''); Comment Letter of 
Depository Trust & Clearing Corporation (Aug. 11, 2015); Comment 
Letter of Interactive Data Pricing and Reference Data LLC (Aug. 10, 
2015) (``Interactive Data Comment Letter''); Comment Letter of 
Global Legal Entity Identifier Foundation (Aug. 5, 2015).
    \65\ See Comment Letter of Carol Singer (June 24, 2015) (``Carol 
Singer Comment Letter'') (suggesting that a small closed-end fund 
that is not listed on an exchange should not be required to obtain 
an LEI identifier).
    \66\ See Comment Letter of Russ Wermers (Aug. 4, 2015) (``Russ 
Wermers Comment Letter'') (arguing that this information could help 
with the identification of entities. The commenter did not discuss 
the utility of the LEI specifically).
---------------------------------------------------------------------------

    We are adopting the requirement that funds report LEI information 
for the registrant and for each series, as proposed. We acknowledge 
that funds will incur some costs to obtain and maintain an LEI, 
although we believe the cost to obtain and maintain an LEI identifier 
is modest.\67\ Uniform reporting of LEIs by funds, however, will help 
provide a consistent means of identification that will facilitate the 
linkage of data reported on Form N-PORT with data from other filings 
and sources that is or will be reported elsewhere as LEIs become more 
widely used by regulators and the financial industry.\68\ Using 
alternate means of identification or providing exemptions to this 
requirement could hinder the ability of Commission staff as well as 
investors and other potential users of this information to use the data 
on Form N-PORT as discussed above. For these

[[Page 81878]]

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

    \67\ See supra footnote 63.
    \68\ See, e.g., Commodities Futures Trading Commission 
(``CFTC''), CFTC Announces Mutual Acceptance of Approved Legal 
Entity Identifiers, Press Release: PR6758-13 (Oct. 30, 2013), 
available at https://www.cftc.gov/PressRoom/PressReleases/pr6758-13; 
Letter from Kenneth Bentsen, President & CEO of SIFMA to Jacob Lew, 
Chairman of FSOC, re: Adoption of the Legal Entity Identifier (Apr. 
11, 2014), available at https://www.sifma.org/comment-letters/2014/sifma-submits-comments-to-fsoc-encouraging-us-regulators-to-adopt-and-use-the-legal-entity-identifiers; Regulation SBSR Adopting 
Release, supra footnote 61.
    Commenters to the FSOC Notice expressed support for regulatory 
acceptance of LEI identifiers. See, e.g., Joint Comment Letter of 
SIFMA/Investment Adviser Association to FSOC Notice (Mar. 25, 2015) 
(``SIFMA/IAA FSOC Notice Comment Letter'') (expressing support for 
the LEI initiative, and noting that the use of LEIs has already 
enhanced the industry's ability to identify and monitor global 
market participants); Comment Letter of Fidelity to FSOC Notice 
(Mar. 25, 2015) (expressing the need to develop analytics to make 
data intelligible, such as the ability to map exposures across the 
financial system, such as through the use of LEIs).
---------------------------------------------------------------------------

    Furthermore, in response to the request that an exhaustive list of 
the tickers and CUSIPs associated with the fund be reported to help 
with the identification of entities, we note that Form N-PORT requires 
funds to report various identifying information, including name of the 
registrant, Investment Company Act file number of the registrant, CIK 
number of the registrant, LEI of the registrant, name of each series, 
EDGAR identifier (if any) for each series, and LEI for each series.\69\ 
We believe this information is sufficient for Commission staff, as the 
primary user of the form, to identify funds filing reports on Form N-
PORT, and could also be useful for investors and other potential users. 
As discussed further below, funds will also be reporting additional 
identifying information on Form N-CEN in a structured format that can 
be used to identify those funds and link information reported by them 
on Forms N-PORT and N-CEN with information available in other 
Commission filings and sources that is similarly structured.\70\
---------------------------------------------------------------------------

    \69\ See Item A.1 and Item A.2 of Form N-PORT.
    \70\ Form N-CEN requires funds to report additional information 
for each share class outstanding, including name of the class, class 
identification number, and ticker symbol. See Item C.2.d of Form N-
CEN.
---------------------------------------------------------------------------

    Form N-PORT also includes general filing and reporting 
instructions, as well as definitions of specific terms referenced in 
the form.\71\ These instructions and definitions are intended to 
provide clarity to funds and to assist them in filing reports on Form 
N-PORT.\72\
---------------------------------------------------------------------------

    \71\ See General Instruction A (Rule as to Use of Form N-PORT), 
B (Application of General Rules and Regulations), C (Filing of 
Reports), D (Paperwork Reduction Act Information), E (Definitions), 
F (Public Availability) and G (Responses to Questions) of Form N-
PORT.
    \72\ See id. For example, General Instructions A, B, C and G 
provide specific filing and reporting instructions (including how to 
report entity names, percentages, and dates), General Instructions D 
and F provide information about the Paperwork Reduction Act and the 
public availability of information reported on Form N-PORT, and 
General Instruction E provides definitions for specific terms 
referenced in Form N-PORT.
---------------------------------------------------------------------------

    Proposed Form N-PORT would have required funds to report 
information about their portfolios as of the last business day, or 
calendar day, of the month, but did not provide specific instructions 
on the appropriate basis for reporting such information, such as 
whether the information should be reported as of the trade date 
(``T+0''), which is required for financial reporting purposes, or the 
trade date plus one day (``T+1''), which is currently permitted under 
rule 2a-4 for the calculation of funds' net asset values (``NAV''). 
Several commenters requested clarification on this issue and 
specifically requested that Form N-PORT allow reporting on a T+1 
basis.\73\
---------------------------------------------------------------------------

    \73\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
Schwab Comment Letter; Comment Letter of OppenheimerFunds (Aug. 10, 
2015) (``Oppenheimer Comment Letter'').
---------------------------------------------------------------------------

    Many commenters noted that most funds use T+1 accounting to record 
their day-to-day transactions, and only convert their records to T+0 
for quarterly portfolio holdings reporting purposes on Forms N-CSR and 
N-Q.\74\ These commenters further noted that our proposal would require 
funds to file monthly reports 30 days after each reporting period, 
whereas funds currently have at least 60 days after the end of each 
fiscal quarter to report similar information on a T+0 basis on Forms N-
CSR and N-Q. Accordingly, commenters suggested that allowing funds to 
file on a T+1 basis would reduce filing burdens relative to requiring 
reporting on a T+0 basis, while not meaningfully changing the substance 
of the information reported. One commenter explicitly recommended that 
funds be allowed to choose whether to file on a T+0 or T+1 basis, so 
that funds that prefer to align their Form N-PORT reporting with their 
reporting on Forms N-Q and/or N-CSR could do so, while other commenters 
that suggested this modification did not specify whether all funds 
should be required to report on a T+1 basis uniformly.\75\
---------------------------------------------------------------------------

    \74\ See, e.g., Pioneer Comment Letter; Comment Letter of 
Invesco Advisers (Aug. 11, 2015) (``Invesco Comment Letter''); 
Schwab Comment Letter; ICI Comment Letter; Comment Letter of the 
Securities Industry and Financial Markets Association Asset 
Management Group (Jan. 13, 2016) (``SIFMA Comment Letter II'').
    \75\ See SIFMA Comment Letter I.
---------------------------------------------------------------------------

    As discussed above, the Commission did not specify the appropriate 
basis for reporting, and we agree with commenters that an explicit 
instruction on the basis on which to report is appropriate. We are 
persuaded by commenters that explicitly instructing funds file on the 
same basis for which they calculate their NAV (generally a T+1 basis) 
would not be as burdensome as instructing all funds to file on a T+0 
basis, and would still maintain the utility of the information 
reported. As noted by commenters, we acknowledge that reporting monthly 
information on Form N-PORT on a T+1 basis may result in differences 
between quarterly portfolio holdings information currently reported on 
a T+0 basis on Forms N-CSR and N-Q. However, any such differences are 
unlikely to affect the utility of the information for the Commission 
and other potential users, because our primary purpose for using the 
information is to analyze and assess the various risks in a particular 
fund and monitoring risks and trends in the fund industry as a whole, 
rather than to align the information reported with the fund's financial 
statements.
    Nonetheless, we do not agree that funds should be permitted to file 
either on the basis of calculating its NAV (generally T+1) or on the 
basis of how they prepare financial reports (T+0) at the fund's option, 
as having funds report their portfolio holdings on different bases 
would reduce the comparability of the data reported on Form N-PORT 
among funds and across the industry. Accordingly, we have modified the 
proposal to add an instruction to Form N-PORT instructing funds that 
they must report portfolio information on Form N-PORT on the same basis 
they use to calculate their NAV, which we understand is generally 
T+1.\76\
---------------------------------------------------------------------------

    \76\ See General Instruction A of Form N-PORT (``Reports on Form 
N-PORT must disclose portfolio information as calculated by the fund 
for the reporting period's ending net asset value (commonly, and as 
permitted by rule 2a-4, the first business day following the trade 
date).''). We understand that funds generally calculate their NAV on 
a T+1 basis pursuant to rule 2a-4, although under certain 
circumstances funds might record particular transactions on a T+0 
basis, such as when correcting a pricing error. The instructions in 
Form N-PORT are intended to be flexible enough to allow funds to 
report information on Form N-PORT on the same basis used in 
calculating NAV.
---------------------------------------------------------------------------

    Commenters also requested confirmation that different internal 
methodologies could be applied in responding to certain items on Form 
N-PORT, such as those that may require subjective judgments on the part 
of funds.\77\ Furthermore, two commenters urged the Commission to 
explicitly state that funds may make and rely on reasonable assumptions 
in providing responses to information items on Form N-PORT.\78\ In 
response to these comments, we have modified the proposal by adding an 
instruction clarifying that in reporting information on Form N-PORT, 
the fund may

[[Page 81879]]

respond using its own methodology and the conventions of its service 
provider, so long as the methodology and conventions are consistent 
with the way the fund reports internally and to current and prospective 
investors.\79\ This approach, which we have modeled after a similar 
instruction in Form PF, is intended to strike an appropriate balance 
between easing the reporting burden on funds by allowing them to rely 
on their existing practices, while still providing useful information 
to the Commission, investors, and other potential users.\80\ The new 
instruction also explains that funds may explain any of their 
methodologies, including related assumptions, in Part E of Form N-
PORT.\81\
---------------------------------------------------------------------------

    \77\ See, e.g., SIFMA Comment Letter I (requesting confirmation 
that funds may use classifications generated by existing 
methodologies or available service providers in reporting country of 
risk for portfolio holdings); ICI Comment Letter (asserting that 
funds should have the flexibility to make country of risk 
determinations using their own good faith judgment).
    \78\ See ICI Comment Letter; Oppenheimer Comment Letter.
    \79\ See General Instruction G of Form N-PORT (``Funds may 
respond to this Form using their own internal methodologies and the 
conventions of their service providers, provided the information is 
consistent with information that they report internally and to 
current and prospective investors. However, the methodologies and 
conventions must be consistently applied and the Fund's responses 
must be consistent with any instructions or other guidance relating 
to this Form.'').
    \80\ See General Instruction 15 of Form PF. Periodic reports on 
Form PF must be filed by registered investment advisers with at 
least $150 million in private fund assets under management. Form PF 
is designed, among other things, to assist the Financial Stability 
Oversight Council in its assessment of systemic risk in the U.S. 
financial system. See generally Reporting by Investment Advisers to 
Private Funds and Certain Commodity Pool Operators and Commodity 
Trading Advisors on Form PF, Investment Advisers Act Release No. 
3308 (Oct. 31, 2011) [76 FR 71228 (Nov. 16, 2011)] (``Form PF 
Adopting Release'').
    \81\ See General Instruction G of Form N-PORT (``A Fund may 
explain any of its methodologies, including related assumptions, in 
Part E.'').
---------------------------------------------------------------------------

    One commenter recommended that we include a definition of ``forward 
contract,'' that references the settlement time of a contract, noting 
that from their experience, there are several interpretations of what 
constitutes a forward contract and without a standard definition, funds 
might categorize products inconsistently.\82\ We disagree that we 
should define forward contracts with regard to the settlement time, and 
believe that adopting a specific definition like the one that the 
commenter suggested could be overbroad or under-inclusive based on the 
settlement time selected. Also, based on staff experience reviewing 
fund disclosures, we note that funds have generally been able to 
classify forwards in their current disclosures even though there is not 
a specific definition that references the settlement date of the 
contract. Finally, the approach we are adopting allows flexibility as 
forward products evolve.
---------------------------------------------------------------------------

    \82\ See Comment Letter of T. Rowe Price (Aug. 21, 2015) (``T. 
Rowe Price Comment Letter'').
---------------------------------------------------------------------------

    Similarly, one commenter noted that it is unclear if a credit 
default swap should be reported as an option or a swap on Form N-PORT 
since it has the characteristics of both types of investments.\83\ As 
discussed further below, we are revising Form N-PORT to include a 
clarification that specifically identifies that total return swaps, 
credit default swaps, and interest rate swaps should all be categorized 
under the ``swap'' instrument type.\84\
---------------------------------------------------------------------------

    \83\ See Morningstar Comment Letter.
    \84\ See infra footnote 340 and accompanying text.
---------------------------------------------------------------------------

    A few commenters also asked for guidance as to what investments 
would fall within the category of ``other derivatives'' in Item 
C.11.g.\85\ The commenters noted that funds already rely upon the 
definition of ``derivatives'' provided in U.S. Generally Accepted 
Accounting Principles (``GAAP'') for financial statement reporting 
purposes and recommended that funds be allowed to rely upon the same 
definition for determining what to report as ``other derivatives'' on 
Form N-PORT (i.e., investments reported as derivatives for financial 
statement reporting purposes, but that do not fall within the 
categories of derivatives enumerated in Form N-PORT such as futures, 
forwards, etc.).\86\ We agree that this approach will generally promote 
consistency in how such information is reported and will provide more 
certainty to funds reporting ``other derivatives'' on Form N-PORT, and 
we understand that funds may choose to utilize this approach. However, 
we are not requiring that funds do so since we anticipate most 
derivative investments held by funds will fall within one of the 
categories of derivatives previously enumerated in Form N-PORT, and 
thus we expect few investments to be reported within the ``other 
derivatives'' category. Moreover, this ``other derivatives'' category 
is intentionally designed to be flexible enough to allow funds to 
capture and categorize investments in the future that are not currently 
traded by funds, and for these reasons we are not requiring funds to 
adhere to any specific process in determining what should fall within 
this category, provided that none of the previously enumerated 
categories apply.
---------------------------------------------------------------------------

    \85\ See ICI Comment Letter; T. Rowe Price Comment Letter.
    \86\ See generally ASC 815 (Derivatives and Hedging).
     We note that definitions related to derivatives have been 
proposed in other contexts, for example ``derivatives transaction'' 
in our recent proposal regarding the use of derivatives by 
registered investment companies and BDCs. See Derivatives Proposing 
Release, supra footnote 7 (defining the term ``derivatives 
transaction'' to mean ``any swap, security-based swap, futures 
contract, forward contract, option, any combination of the 
foregoing, or any similar instrument (`derivatives instrument') 
under which a fund is or may be required to make any payment or 
delivery of cash or other assets during the life of the instrument 
or at maturity or early termination.'' However, that proposed 
definition is limited to derivatives transactions where the fund may 
be required to make a payment or delivery of cash or other assets. 
In contrast, for purposes of Form N-PORT, we seek to obtain 
information about all of a fund's derivative investments, regardless 
of whether the fund has a payment or delivery obligation. As a 
result of these differences, we continue to believe that it is 
preferable for Form N-PORT to not incorporate a specific definition, 
but rather to retain the flexibility to encompass the changing types 
of products that may evolve and emerge.
---------------------------------------------------------------------------

    Several commenters also asked that the definition of ``investment 
grade'' be revised to follow standards generally used by the industry 
by replacing references to liquidity with references to credit 
quality.\87\ In response to these comments, we are removing the 
definition of ``investment grade'' that we proposed to be included in 
Form N-PORT. Consistent with our other changes discussed herein that 
permit funds to rely on their existing practices and methodologies, 
Form N-PORT provides funds with the flexibility, in determining what 
constitutes ``investment grade,'' to generally use their own 
methodology and the conventions of their service providers, as provided 
in General Instruction G. Given this clarification in the adopted form, 
we do not believe any definition of investment grade is necessary.\88\
---------------------------------------------------------------------------

    \87\ See ICI Comment Letter; Oppenheimer Comment Letter; Pioneer 
Comment Letter; Comment Letter of MFS Investment Management (Aug. 
11, 2015) (``MFS Comment Letter''); Comment Letter of the Dreyfus 
Corporation (Aug. 11, 2015) (``Dreyfus Comment Letter'').
    \88\ See supra footnote 79 and accompanying text.
---------------------------------------------------------------------------

    We have also made several changes to certain definitions and 
instructions related to the way in which funds will provide information 
on Form N-PORT, largely relating to the formatting of the information 
reported. Among other things, we have revised the instruction in the 
proposal that directed funds to respond to every item of the form.\89\ 
As proposed, the instruction would have required funds to respond to 
each sub-item and item on Form N-PORT even if the item was 
inapplicable. The revised instruction indicates that funds are not 
required to respond to items that are wholly inapplicable.\90\ For 
example, no

[[Page 81880]]

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

    \89\ See General Instruction G of proposed Form N-PORT (``A Fund 
is required to respond to every item of this form. If an item 
requests information that is not applicable (for example, an LEI for 
a counterparty that does not have an LEI), respond N/A'').
    \90\ See General Instruction G of Form N-PORT (``A Fund is not 
required to respond to an item that is wholly inapplicable (for 
example, no response would be required for Item C.11 when reporting 
information about an investment that is not a derivative). If a sub-
item requests information that is not applicable, for example, an 
LEI for a counterparty that does not have an LEI, respond N/A'').
---------------------------------------------------------------------------

    We have also eliminated certain instructions from proposed Form N-
PORT relating to the formatting of information reported on the form 
that, upon further consideration, we believe are unnecessary in Form N-
PORT. In particular, we have eliminated instructions requiring the 
rounding of percentages, monetary values, and other numeric values.\91\ 
Elimination of the instructions regarding the rounding of such figures 
should allow funds to report such information in the same way such 
information is currently recorded in their books and records. We also 
have eliminated instructions regarding the signature and filing of 
reports, because we believe that the general rules and regulations 
applicable under the Act provide sufficient guidance with regard to 
those issues.\92\
---------------------------------------------------------------------------

    \91\ See General Instruction G of proposed Form N-PORT 
(instructions regarding rounding of percentages, monetary values, 
and other numerical values).
    \92\ See General Instruction B of Form N-PORT (``The General 
Rules and Regulations under the Act contain certain general 
requirements that are applicable to reporting on any form under the 
Act. These general requirements shall be carefully read and observed 
in the preparation and filing of reports on this Form, except that 
any provision in the Form or in these instructions shall be 
controlling.'') See also General Instruction H of proposed Form N-
PORT (instructions regarding signature and filing of reports).
---------------------------------------------------------------------------

    We have also made clarifying revisions to certain definitions. As 
discussed above, we have revised the proposed definition of ``exchange-
traded product'' to refer instead to ``exchange-traded fund'' to 
harmonize the definitions used in Forms N-PORT and N-CEN.\93\ The 
revision also clarifies that a separate report on Form N-PORT must be 
filed by each series of a UIT organized as an ETF, and parallels 
similar revisions to the definition of ETF in Form N-CEN.\94\ We have 
also revised the definition of ``LEI'' to reflect new terminology 
regarding LEIs.\95\
---------------------------------------------------------------------------

    \93\ See supra footnote 48 and accompanying text. Although the 
definition of ``exchange-traded fund'' being adopted on Form N-PORT 
is narrower than the definition of ``exchange-traded product'' as 
proposed on Form N-PORT, the universe of filers on Form N-PORT is 
not changing because exchange-traded managed funds that would have 
been encompassed in the proposed definition of ``exchange-traded 
product'' will be encompassed in the adoption through references to 
managed investment companies. See rule 30b1-9 (requiring certain 
funds to file reports on Form N-PORT); Form N-PORT (``Form N-PORT is 
to be used by a registered management investment company, or an 
exchange-traded fund organized as a unit investment trust, or series 
thereof (`Fund'). . . .'').
    \94\ See infra footnote 896.
    \95\ Form N-PORT's revised definition of ``LEI'' refers to the 
legal entity identifier ``endorsed'' by the Regulatory Oversight 
Committee Of The Global Legal Entity Identifier System (``LEI ROC'') 
or ``accredited'' by the Global Legal Entity Identifier Foundation 
(``GLEIF''), as opposed to ``assigned or recognized'' by those two 
entities.
---------------------------------------------------------------------------

    Finally, regarding General Instruction F, which provides 
information regarding the public availability of the information in 
Form N-PORT, the final Instruction clarifies, similar to language that 
is contained in current Form PF, that we do not intend to make public 
certain information reported on Form N-PORT ``that is identifiable to 
any particular fund or adviser.'' \96\ This modification makes clear, 
for example, that the Commission or Commission staff could issue 
analyses and reports that are based on aggregated, non-identifying Form 
N-PORT data, which would otherwise be nonpublic, such as information 
reported on Form N-PORT for the first and second months of each fund's 
fiscal quarter.
---------------------------------------------------------------------------

    \96\ See supra footnote 26.
---------------------------------------------------------------------------

b. Information Regarding Assets and Liabilities
    Part B of Form N-PORT seeks certain portfolio level information 
about the fund. As we proposed, Part B includes questions requiring 
funds to report their total assets, total liabilities, and net 
assets.\97\ Funds will also separately report certain assets and 
liabilities, as follows. First, as we proposed, funds will report the 
aggregate value of any ``miscellaneous securities'' held in their 
portfolios.\98\ As currently permitted by Regulation S-X, and as 
further discussed below, Form N-PORT permits funds to report an 
aggregate amount not exceeding 5 percent of the total value of their 
portfolio investments in one amount as ``Miscellaneous securities,'' 
provided that securities so listed are not restricted, have been held 
for not more than one year prior to the date of the related balance 
sheet, and have not previously been reported by name to the 
shareholders, or set forth in any registration statement, application, 
or report to shareholders or otherwise made available to the 
public.\99\ We received only one comment on this aspect of our 
proposal, which supported the reporting of aggregate information for 
miscellaneous securities.\100\
---------------------------------------------------------------------------

    \97\ See Item B.1 of Form N-PORT.
    \98\ See Item B.1.a and Item B.2.a of Form N-PORT. As discussed 
further below, Form N-PORT will require funds to also report 
information about miscellaneous securities on an investment-by-
investment basis, although such information will be nonpublic and 
will be used for Commission use only. See infra footnote 420 and 
accompanying text.
    \99\ See rule 12-12 of Regulation S-X; see also Parts C and D of 
Form N-PORT.
    \100\ See SIFMA Comment Letter I.
---------------------------------------------------------------------------

    Second, as we proposed, funds will also report any assets invested 
in a controlled foreign corporation for the purpose of investing in 
certain types of investments (``controlled foreign corporation'' or 
``CFC'').\101\ We received no comments on this aspect of the proposal. 
Some funds use CFCs for making certain types of investments, 
particularly commodities and commodity-linked derivatives, often for 
tax purposes. Form N-PORT requires funds to disclose each underlying 
investment in a CFC, rather than just the investment in the CFC itself, 
which will increase transparency on fund investments through CFCs.\102\ 
These disclosures will allow investors to look through CFCs and 
understand the specific underlying holdings that they are investing in, 
which will in turn allow investors to better analyze their fund 
holdings and risk, and hence enable investors to make more informed 
investment decisions.
---------------------------------------------------------------------------

    \101\ See General Instruction E (providing that ``Controlled 
Foreign Corporation'' has the meaning provided in section 957 of the 
Internal Revenue Code [26 U.S.C. 957]) and Item B.2.b (requiring 
funds to report assets invested in controlled foreign corporations) 
of Form N-PORT.
    \102\ See Instruction to Part B of Form N-PORT (``Report the 
following information for the Fund and its consolidated 
subsidiaries.'').
---------------------------------------------------------------------------

    In addition, as discussed further below in section II.D.4, we 
believe it will be beneficial for the Commission to have certain 
information about funds' use of CFCs. The information we will be 
obtaining in Form N-PORT, combined with additional information we are 
requiring on Form N-CEN regarding CFCs, discussed below, will help the 
Commission better monitor funds' compliance with the Investment Company 
Act and assess funds' use of CFCs, including the extent of their use by 
reporting of total assets in CFCs.
    Third, as we proposed, we are requiring that funds report the 
amounts of certain liabilities, in particular: (1) Borrowings 
attributable to amounts payable for notes payable, bonds, and similar 
debt, as reported pursuant to rule 6-04(13)(a) of Regulation S-X [17 
CFR 210.6-04(13)(a)]; (2) payables for investments purchased either (i) 
on a delayed delivery, when-delivered, or other firm commitment basis, 
or (ii) on a standby commitment basis; and (3) liquidation preference 
of outstanding

[[Page 81881]]

preferred stock issued by the fund.\103\ We received no comments on 
this aspect of the proposal. This information will allow Commission 
staff, as well as investors and other potential users, to better 
understand a fund's borrowing activities and payment obligations 
associated with these transactions. This in turn will facilitate 
analysis of the fund's use of financial leverage, as well as the fund's 
liquidity profile and ability to meet redemptions or share repurchases, 
which are important to understanding the risks such borrowings might 
create.
---------------------------------------------------------------------------

    \103\ See Item B.2.c-Item B.2.e of Form N-PORT.
---------------------------------------------------------------------------

    One commenter suggested that certain fee and expense information 
currently reported on Form N-SAR, and Item 75 of Form N-SAR in 
particular--which relates to average net assets during the current 
reporting period--be reported on Form N-PORT.\104\ The commenter 
acknowledged that much of this information is already publicly reported 
in or can be derived from information reported in other fund documents 
filed with the Commission, but argued that this information should also 
be reported on Form N-PORT because the structured format of Form N-PORT 
would make information reported on Form N-PORT easier to aggregate and 
analyze.\105\ We are not making this suggested change because similar 
and complementary information will be reported on Form N-PORT in a 
structured format going forward (i.e., monthly net assets for funds 
more generally) and is currently available in a structured format for 
mutual funds in their risk/return summaries (certain fee and expense 
data).\106\ Also, as discussed further below, we are revising Form N-
CEN to require funds to report average net assets on an annual 
basis.\107\
---------------------------------------------------------------------------

    \104\ See Morningstar Comment Letter.
    \105\ Id.
    \106\ See SEC, Interactive Data and Mutual Fund Risk/Return 
Summaries, available at https://www.sec.gov/spotlight/xbrl/mutual-funds.shtml; Item B.6 of Form N-PORT (requiring funds to report 
monthly flow information).
    \107\ See infra footnotes 1016-1017 and accompanying text.
---------------------------------------------------------------------------

    For these reasons, we are adopting this aspect of Form N-PORT as 
proposed.
c. Portfolio Level Risk Metrics
    One of the purposes of Form N-PORT is to provide the Commission 
with information regarding fund portfolios to help us better monitor 
trends in the fund industry, including investment strategies funds are 
pursuing, the investment risks that funds undertake, and how different 
funds might be affected by changes in market conditions. As discussed 
above, the Commission uses information from fund filings, including a 
fund's registration statement and reports on Form N-CSR (which includes 
the fund's shareholder report) and Form N-Q, to inform its 
understanding and regulation of the fund industry. Additionally our 
staff reviews fund disclosures--including registration statements, 
shareholder reports, and other documents--both on an ongoing basis as 
well as retroactively every three years.\108\
---------------------------------------------------------------------------

    \108\ See, e.g., section 408 of the Sarbanes-Oxley Act of 2002, 
Public Law 107-204, 116 Stat. 745, 790-791 (2002) (requiring the 
Commission to engage in enhanced review of periodic disclosures by 
certain issuers every three years).
---------------------------------------------------------------------------

    The disclosures in a fund's registration statement about its 
investment objective, investment strategies, and risks of investing in 
the fund, as well as the fund's financial statements, are fundamental 
to understanding a fund's implementation of its investment strategies 
and the risks in the fund. However, the financial statements and 
narrative disclosures in fund disclosure documents do not always 
provide a complete picture of a fund's exposure to changes in asset 
prices, particularly as fund strategies and fund investments become 
more complex.\109\ The financial statements, including a fund's 
schedule of portfolio investments, provide data regarding investments' 
values as of the end of the reporting period--a ``snapshot'' of data at 
a particular point in time--or, in the case of the statement of 
operations, for example, historical data over a specified time period. 
By contrast, based on staff experience and the staff's outreach to 
funds prior to our proposal, we understand that funds commonly 
internally use multiple risk metrics that provide calculations that 
measure the change in the value of fund investments assuming a 
specified change in the value of underlying assets or, in the case of 
debt instruments and derivatives that provide exposure to interest 
rates and debt instruments, changes in interest rates or in credit 
spreads above the risk-free rate.\110\
---------------------------------------------------------------------------

    \109\ See Morningstar Comment Letter.
    \110\ See Proposing Release, supra footnote 7, at 33598.
---------------------------------------------------------------------------

    Accordingly, we believe, and some commenters agreed, that it is 
appropriate to require funds to report quantitative measurements of 
certain risk metrics that will provide information beyond the 
narrative, often qualitative disclosures about investment strategies 
and risks in the fund's registration statement.\111\ Monthly reporting 
on these risk measures, in particular, will help provide the Commission 
with more current information on how funds are implementing their 
investment strategies through particular exposures. Receiving this 
information on a monthly basis could help the Commission, for example, 
more efficiently analyze the potential effects of a market event on 
funds.\112\
---------------------------------------------------------------------------

    \111\ See Morningstar Comment Letter (noting a range of fund 
disclosures relating to fund synthetic disclosures, with some more 
helpful to investors than others); Franco Comment Letter (supporting 
the Commission's proposal relating to disclosures of risk metrics).
    \112\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    Specifically, we proposed to require certain funds to report 
portfolio-level measures on Form N-PORT that will help Commission staff 
better understand and monitor funds' exposures to changes in interest 
rates and credit spreads across the yield curve.\113\ As discussed in 
section II.A.2.g below, we proposed to require risk measures at the 
investment level for options and convertible bonds. We continue to 
believe that the staff can use these measures, for example, to 
determine whether additional guidance or policy measures are 
appropriate to improve disclosures in order to help investors better 
understand how changes in interest rate or credit spreads might affect 
their investment in a fund. As a result, we are adopting these risk 
measures substantially as proposed, subject to the modifications 
discussed below.\114\
---------------------------------------------------------------------------

    \113\ See Item B.3 of proposed Form N-PORT.
    \114\ See Item B.3 of Form N-PORT.
---------------------------------------------------------------------------

    While we received some comments generally supporting our proposal 
to require portfolio-level risk metrics,\115\ some suggested 
alternative methods for collecting risk metrics,\116\ or opposed

[[Page 81882]]

our proposal to make certain of the risk metrics public.\117\ These 
comments are discussed in more detail below.
---------------------------------------------------------------------------

    \115\ See, e.g., SIFMA Comment Letter I (``We support the 
Commission's proposal to require funds to provide the Commission 
with portfolio level risk metrics, and generally would defer to the 
Commission as to the information the Commission would consider 
useful for its regulatory purposes.''); State Street Comment Letter; 
Wells Fargo Comment Letter (``We are in agreement with the 
Commission's request for risk metrics as it relates to duration and 
spread duration; however, we suggest that the calculation for 
providing such risk metrics are defined differently than 
proposed.'').
    \116\ See, e.g., BlackRock Comment Letter (Commission should use 
the same interest rate and credit risk questions as is required in 
Form PF; Commission should consider implementing a reporting 
requirement to obtain a comprehensive measure of fund's use of 
leverage); Morningstar Comment Letter (but also urging the 
Commission to collect more position level information which will 
enable the Commission, investors, and service providers to 
independently calculate risk); see also Interactive Data Comment 
Letter (``[P]osition level reporting aligns with what is standard 
practice in the industry and so would not be burdensome. Position 
level reporting would provide the Commission with greater insight 
into sources of risk within a portfolio.''); Comment Letter of 
Simpson Thacher & Bartlett LLP (Aug. 11, 2015) (``Simpson Thacher 
Comment Letter'') (derivatives reporting should focus on portfolio-
level risk metrics, such as ``value at risk'' models)
    \117\ See, e.g., Comment Letter of the Independent Directors 
Council (Aug. 11, 2015) (``IDC Comment Letter''); SIFMA Comment 
Letter I; Simpson Thacher Comment Letter; Invesco Comment Letter; 
Schwab Comment Letter; ICI Comment Letter; Comment Letter of Dechert 
LLP (Aug. 11, 2015) (``Dechert Comment Letter'') (or, in the 
alternative, include a disclaimer that risk metrics are an 
estimate); T. Rowe Price Comment Letter; BlackRock Comment Letter; 
Oppenheimer Comment Letter. Our decision to make [certain] Items in 
Parts C, D, and E of the Form non-public is discussed in more detail 
below. See infra section II.A.4.
---------------------------------------------------------------------------

    We believe, and some commenters agreed, that institutional 
investors, as well as entities that provide services to both 
institutional and individual investors, could use these risk metrics to 
conduct their own analyses in order to help them better understand fund 
composition, investment strategy, and interest rate and credit spread 
risk the fund is undertaking. As discussed further below, however, 
other commenters, were mixed as to whether this information would be 
useful for investors and if this information should be made 
public.\118\ These measures can complement the risk disclosures that 
are contained in the registration statement, thereby potentially 
helping investors to make more informed investment choices. 
Accordingly, we disagree with commenters that argued this information 
has no utility for investors. We also continue to believe that 
requiring funds to publicly disclose these measures quarterly, like 
other information in the schedule of investments will also help provide 
investors with more specific, quantitative information regarding the 
nature of a fund's exposure to debt than they currently have.\119\ As 
discussed further in Section II.A.4 below, we are adopting, largely as 
proposed, the requirement that funds provide public disclosure of 
portfolio-level risk metrics on a quarterly basis.\120\ For these 
reasons, and as discussed further below in section II.A.4, we were not 
persuaded by commenters that such information should be nonpublic.
---------------------------------------------------------------------------

    \118\ See Franco Comment Letter (Noting that the information on 
Form N-PORT is relevant to information intermediaries and market 
professionals and would assist them in assessing individual fund 
performance or comparing among funds); see also Morningstar Comment 
Letter (same); but see Invesco Comment Letter (stating that Form N-
PORT's disclosures would not complement fund registration 
statements, nor be useful in helping investors make more informed 
investing decisions); SIFMA Comment Letter I (same); Federated 
Comment Letter.
    \119\ See Franco Comment Letter (``The rule proposal's various 
disclosure and reporting requirements, especially those requirements 
relating to portfolio disclosure, risk metrics and fund use of 
derivatives, serve the public interest and/or the protection of 
investors.'').
    \120\ See Item B.3 of Form N-PORT; see also generally Proposing 
Release, supra footnote 7, at n. 56 and accompanying text.
---------------------------------------------------------------------------

    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 can help them analyze how 
portfolio values might change in response to changes in interest rates 
or credit spreads.\121\ 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 
proposed that a fund that invests in debt instruments, or derivatives 
that provide notional exposure to debt instruments or interest rates, 
representing at least 20% of the fund's net asset value as of the 
reporting date, provide a portfolio level calculation of duration and 
spread duration across the applicable maturities in the fund's 
portfolio.\122\
---------------------------------------------------------------------------

    \121\ As discussed further below, the Commission also believes 
that there would be a benefit to collecting risk measures for 
derivatives that provide exposure to certain assets, such as 
equities and commodities. Due to the nature of these instruments, 
however, we believe that such information should be provided on an 
instrument-by-instrument basis, instead of as a portfolio level 
calculation.
    \122\ Specifically, as proposed, funds would have calculated 
notional value as the sum of the absolute values of: (i) The value 
of each debt security, (ii) the notional amount of each swap, 
including, but not limited to, total return swaps, interest rate 
swaps, and credit default swaps, for which the underlying reference 
asset or assets are debt securities or an interest rate; and (iii) 
the delta-adjusted notional amount of any option for which the 
underlying reference asset is an asset described in clause (i) or 
(ii). See proposed Instruction to Item B.3 of Form N-PORT.
    The delta-adjusted notional value of options is needed to have 
an accurate measurement of the exposure that the option creates to 
the underlying reference asset. See, e.g., Comment Letter of 
Morningstar to Derivatives Concept Release (Nov. 7, 2011) 
(``Morningstar Derivatives Concept Release Comment Letter'') 
(submitted in response to the Derivatives Concept Release, supra 
footnote 38, which sought comment regarding the use of derivatives 
by management investment companies).
---------------------------------------------------------------------------

    Commenters were generally supportive of our proposal to include a 
threshold.\123\ However, several commenters requested that we increase 
the threshold for risk reporting from 20% and that the calculation of 
debt investments be made based on the fund's three-month average 
notional value of debt investments as a percentage of NAV.\124\ Some 
commenters requested an increase in the threshold in order to make the 
risk metric threshold more consistent with the Commission's threshold 
for requiring funds to disclose industry concentration in their 
prospectus.\125\ Additionally, some commenters argued that the three-
month average would better reflect a fund's true investment strategy 
and mitigate short-term market fluctuations that could cause a fund to 
temporarily exceed the threshold.\126\ We agree with both 
recommendations.
---------------------------------------------------------------------------

    \123\ See, e.g., Interactive Data Comment Letter (supporting 20% 
level as reasonable and stating belief that threshold should be 
measured by considering notional value for derivatives and market 
values for bonds); State Street Comment Letter (supporting 20% 
threshold and recommending that the Commission provide clarity on 
the threshold calculation); Fidelity Comment Letter; Franco Comment 
Letter; Simpson Thacher Comment Letter (20% threshold and holds more 
than 100 debt securities); Wells Fargo Comment Letter (supporting 
20% threshold).
    \124\ See, e.g., Oppenheimer Comment Letter (25% threshold 
consistent with prospectus disclosure of industry concentration); 
ICI Comment Letter (same); MFS Comment Letter (25% threshold); 
Pioneer Comment Letter (same); Dreyfus Comment Letter (``we believe 
the Commission should consider a 25% threshold because, at least, it 
would define a subset of `balanced' and `asset allocation' funds 
that would, by prospectus or name test mandate, for example, have to 
maintain a minimum fixed income exposure.''); SIFMA Comment Letter I 
(recommending a 30% threshold); Invesco Comment Letter (same); but 
see Morningstar Comment Letter (supporting 20% threshold).
    \125\ See, e.g., ICI Comment Letter; Oppenheimer Comment Letter; 
MFS Comment Letter; Pioneer Comment Letter; Dreyfus Comment Letter; 
see also Instruction 4 to Item 9(b)(1) of Form N-1A (``Disclose any 
policy to concentrate in securities of issuers in a particular 
industry or group of industries (i.e. investing more than 25% of a 
Fund's net assets in a particular industry or group of 
industries).''); Registration Form Used by Open-End Management 
Investment Companies, Investment Company Act Release No. 23064 (Mar. 
13, 1998) [63 FR 13916 (Mar. 23, 1998)] at nn. 100-101 and 
accompanying text (``. . . the Commission continues to believe that 
25% is an appropriate benchmark to gauge the level of investment 
concentration that could expose investors to additional risk.'').
    \126\ See, e.g., ICI Comment Letter; MFS Comment Letter; Dreyfus 
Comment Letter.
---------------------------------------------------------------------------

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

[[Page 81883]]

invested in debt instruments for cash management or other 
purposes.\127\ Thus raising the threshold from 20% to 25% will relieve 
more funds of having to monitor each month whether they trigger the 
requirement for making such calculations, while still achieving the 
goal the Commission stated in the Proposing Release of requiring funds 
that make investments in debt instruments as a significant part of 
their investment strategy to report such metrics.\128\
---------------------------------------------------------------------------

    \127\ See, e.g. Pioneer Comment Letter.
    \128\ See, e.g., State Street Comment Letter.
---------------------------------------------------------------------------

    We agree with commenters that using the same thresholds we use for 
discussing industry concentration in current prospectuses is 
appropriate as it will achieve an objective that is similar to the one 
in Form N-1A of requiring funds to disclose only where such investments 
are a central part of the fund's investment objectives. We are 
therefore adopting a 25% threshold for reporting portfolio-level risk 
metrics.\129\
---------------------------------------------------------------------------

    \129\ See supra footnote 125.
---------------------------------------------------------------------------

    We are also modifying the rule from the proposal to require funds 
to calculate this threshold on the three-month average of a fund's 
value as percentage of NAV (rather than, as proposed, value as 
percentage of NAV at the reporting date (i.e. month-end)) because we 
agree with commenters who pointed out that this should mitigate the 
chance that short-term market fluctuations could cause a fund that does 
not typically use such instruments as part of its investment strategy 
to temporarily exceed the threshold and be required to report the 
metrics.\130\
---------------------------------------------------------------------------

    \130\ See Item B.3 of Form N-PORT; see, e.g. Pioneer Comment 
Letter; Oppenheimer Comment Letter. One commenter requested that the 
threshold be based on the fund's net asset value and not notional 
value. See MFS Comment Letter. We continue to believe that basing 
the threshold on notional amount, especially for derivatives, is a 
better measure of a fund's exposure than the just the investment's 
value because some derivatives may have a negligible net asset 
value, but represent significant exposures to the fund. We have, 
however, made a clarifying change to the terminology from the 
proposal, and instruction B.3 now refer to ``value'' rather than 
``notional value.'' See infra footnote 165.
---------------------------------------------------------------------------

    Finally, another commenter opposed requiring risk metrics data for 
index funds because it believed that this requirement would be 
unnecessarily burdensome for those funds.\131\ However, index funds 
incorporate a wide variety of funds--some of which are primarily 
invested in debt securities, including derivatives based on debt 
securities. It is our view that if a fund is exposed to debt 
instruments or interest rates in amounts that trigger the reporting of 
risk metrics, they have an exposure large enough to warrant reporting. 
Moreover, some index funds have indexes that change weekly or daily. 
Accordingly, because we believe it is important to monitor the risk 
metrics for all funds with exposures to debt instruments exceeding the 
threshold, we do not believe it would be appropriate to exempt index 
funds from Form N-PORT's requirements for risk metric reporting.
---------------------------------------------------------------------------

    \131\ See ICI Comment Letter.
---------------------------------------------------------------------------

    For duration, we proposed to require that a fund calculate, the 
change in value in the fund's portfolio from a 1 basis point change in 
interest rates (commonly known as DV01) for each applicable key rate 
along the risk-free interest rate curve, i.e., 1-month, 3-month, 6-
month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 
30-year interest rate, for each applicable currency in the fund.\132\ 
We realized that funds might not have exposures for every applicable 
key rate. For example, a short-term bond fund is unlikely to have debt 
exposures with longer maturities. Accordingly, we proposed that a fund 
only report the key rates that are applicable to the fund. We proposed 
that funds report zero for maturities to which they have no 
exposure.\133\ For exposures outside of the range of listed maturities 
listed on Form N-PORT, we proposed that funds include those exposures 
in the nearest maturity.
---------------------------------------------------------------------------

    \132\ See Item B.3.aof proposed Form N-PORT.
    \133\ For funds with exposures that fall between any of the 
listed maturities in the form, we proposed in the Instructions to 
Item B.3 that funds use linear interpolation to approximate exposure 
to each maturity listed above.
---------------------------------------------------------------------------

    One commenter stated that calculating DV01 along key rates of the 
Treasury curve is ``common and intuitive'' to analyzing shifts of the 
yield curve.\134\ However, some commenters suggested that calculating 
the DV01 and SDV01 for 11 proposed key rates could be burdensome, and 
requested that we limit the number of applicable key rates along the 
risk-free curve.\135\ For example, commenters recommended that the 
Commission limit the calculations to the key rates to those most 
representative of bond fund overall exposures by limiting the 
calculation to the 1-, 2-, 5-, 10-, 20-, and 30-year rates.\136\ 
Another commenter recommended collapsing the 1-, 3-, and 6-month 
exposures into the 1-year exposure, as a detailed breakout inside 1-
year is not informative for most instruments.\137\ Commenters argued 
that reducing the number of key rates will reduce burdens for fund 
companies while providing the Commission with sufficient information on 
yield curve exposures for staff analysis.\138\ Finally, one commenter 
suggested that we only require a single measure of duration (i.e., 
total portfolio duration) that is the weighted average of the top 5 
currencies (including the base currency) rather than providing duration 
calculations for key rates along the Treasury curve, arguing that a 
single measure would capture the majority of a fund's portfolio 
risk.\139\
---------------------------------------------------------------------------

    \134\ See Wells Fargo Comment Letter.
    \135\ See, e.g., Fidelity Comment Letter; Dreyfus Comment 
Letter; Simpson Thacher Comment Letter.
    \136\ See Dreyfus Comment Letter; Simpson Thacher Comment 
Letter.
    \137\ See Fidelity Comment Letter.
    \138\ See id.; Dreyfus Comment Letter.
    \139\ See, e.g., ICI Comment Letter (suggesting as an 
alternative, a single duration measurement that is the weighted 
average of the top 5 currencies (including the base currency)); 
SIFMA Comment Letter I (duration disclosure should be limited to top 
5 exposures); ICI Comment Letter (report only total portfolio 
duration and credit spread duration--i.e., single measures--rather 
than multiple points along the yield curve).
---------------------------------------------------------------------------

    We continue to believe that requiring funds to provide further 
detail about their exposures to interest rate changes along the risk-
free rate curve will provide the Commission with a better understanding 
of the risk profiles of funds with different strategies for achieving 
debt exposures. For example, funds targeting an effective duration of 5 
years could achieve that objective in different ways--one fund could 
invest predominantly in intermediate-term debt; another fund could 
create a long position in longer-term bonds, matched with a short 
position in shorter-term bonds. While both funds would have 
intermediate-term duration, the risk profiles of these two funds, that 
is, their exposures to changes in long-term and short-term interest 
rates, are different. Having DV01 calculations along the risk-free 
interest rate curve, as opposed to a single measure of duration 
suggested by one commenter, will clarify this difference. Moreover, as 
one commenter noted, ``DV01 and SD01 [spread duration] are likely the 
measures that will be least subject to differences based on assumptions 
within risk models employed by fund companies'' and therefore minimizes 
variation based on the disparate risk metrics models used by 
funds.\140\ The Commission staff will use this information to better 
understand how funds are achieving their exposures to interest rates, 
and to perform analysis across funds with similar strategies to 
identify outliers for potential further inquiry, as appropriate.
---------------------------------------------------------------------------

    \140\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

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

[[Page 81884]]

providing the staff with sufficient information and flexibility to 
analyze how debt portfolios will react to different interest rates and 
credit spreads along the Treasury curve. We are therefore modifying 
this requirement from the proposal to require fewer key rates--
specifically 3-month, 1-year, 5-year, 10-year, and 30-year--which will 
provide, as commenters suggested, the rates most representative to bond 
funds' overall exposures. The key rates Form N-PORT will require, as 
adopted, are substantially similar to the key rates suggested by 
commenters; \141\ however, we believe that some granularity for short 
term debt is important, especially in the context of short and ultra-
short duration funds, and therefore, unlike the commenters' suggestions 
for collapsing all short-term exposures to one-year, Form N-PORT will 
require reporting for the 3-month maturity.\142\
---------------------------------------------------------------------------

    \141\ See Dreyfus Comment Letter; Simpson Thacher Comment 
Letter; Fidelity Comment Letter.
    \142\ See Item B.3.a and Item B.3.bof Form N-PORT; see also Item 
B.3.c of Form N-PORT; see also Fidelity Comment Letter (collapse the 
1-, 3-, and 6-month exposures into the 1-year exposure, as a 
detailed breakout inside 1-year is not informative for most 
instruments); Dreyfus Comment Letter (focus should be on portfolio 
level statistics; alternative six key rates 1-, 2-, 5-, 10-, 20, and 
30-years).
---------------------------------------------------------------------------

    Form N-PORT will also require, as proposed, funds to provide the 
key rate duration for each applicable currency in a fund. One commenter 
recommended that we limit the duration to the top 5 currencies.\143\ 
Some commenters requested that we not include currency in the reporting 
of duration for funds because currency risk is not relevant to 
duration.\144\ Others supported a de minimis reporting threshold for 
exposure to different currencies that would be based on the notional 
value of the instruments, relative to NAV.\145\ These commenters noted 
that including all currency exposures, regardless of size, would result 
in a long list of exposures that would have little impact on a 
fund.\146\ As a result, the commenters believed that the Commission 
would receive data that would add little to the staff's ability to 
understand a fund's portfolio risk, but would add significant reporting 
and compliance burdens to funds.\147\
---------------------------------------------------------------------------

    \143\ See, e.g., SIFMA Comment Letter I.
    \144\ See, e.g., Dreyfus Comment Letter.
    \145\ See CRMC Comment Letter (supporting a 5% de minimis 
threshold for currencies); MFS Comment Letter (same); SIFMA Comment 
Letter I (same); ICI Comment Letter (5% or top 5 currencies or those 
currencies representing at least 50% of the portfolio's exposure); 
Morningstar Comment Letter (same); Oppenheimer Comment Letter (one 
percent).
    \146\ Id.
    \147\ Id.
---------------------------------------------------------------------------

    We continue to believe that funds should generally be required to 
provide the key rate duration for each applicable currency in the fund 
in order to understand interest rate risk to funds with significant 
currency risk. Nonetheless, we were persuaded by commenters that a de 
minimis threshold is appropriate. Based on staff experience analyzing 
similar data, however, we believe that a 5% de minimis, as suggested by 
some commenters, could hinder the staff's ability to measure smaller 
fund exposures that could have large effects across the fund industry 
as a whole. We agree with one comment that Form N-PORT should provide 
for a 1% de minimis threshold, calculated as the notional value of 
relevant investments in each currency relative to the fund's NAV.\148\ 
We believe that setting the de minimis at this level will balance the 
need for the staff to identify and monitor not only a fund's currency 
risk, but also the risks of small fund positions that could aggregate 
into large positions across the industry, as the Commission will still 
be receiving information about the majority of a fund's currency 
exposures with this threshold.
---------------------------------------------------------------------------

    \148\ SIFMA Comment Letter I.
---------------------------------------------------------------------------

    For both duration and spread duration, we proposed to require that 
funds provide the change in value in the fund's portfolio from a 1 
basis point change in interest rates or credit spreads, rather than a 
larger change, such as 5 basis points or 25 basis points. As we noted 
in the Proposing Release, based on staff outreach, we believed that a 1 
basis point change is the methodology that many funds currently use to 
calculate these risk measures at the position level for internal risk 
monitoring and would provide sufficient information to assist the 
Commission in analyzing fund exposures to changes in interest rate or 
credit spreads.\149\ We requested comment on whether we should require 
or permit funds to report a larger change in interest rates or credit 
spreads, such as 5 or 25 basis points.
---------------------------------------------------------------------------

    \149\ See Proposing Release, supra footnote 7, at 33600. See 
also Morningstar Comment Letter (``The use of a bottom-up approach 
and the limited movement of 1 basis point are likely to provide 
standardization.'').
---------------------------------------------------------------------------

    Additionally, while we did not propose requiring convexity, the 
Commission also considered and requested comment on whether funds 
should be required to report convexity, which facilitates more precise 
measurement of the change in a bond price with larger changes in 
interest rates because this measure captures changes in the shape of 
the yield curve.\150\
---------------------------------------------------------------------------

    \150\ See Proposing Release, supra footnote 7, at 33600. More 
specifically, convexity measures the non-linearities in a bond's 
price with respect to changes in interest rates. See Frank J. 
Fabozzi, The Handbook of Fixed Income Securities (8th ed., 2012) at 
149-152.
---------------------------------------------------------------------------

    Commenters suggested that we adopt risk metrics that would provide 
a better measure of risk over time than just DV01.\151\ For example, 
one commenter, noting that, while DV01 and SDV01 are typically used as 
daily risk measures, larger shifts in the curve, such as DV25 or DV50, 
may be appropriate for measures with a significant lag, such as 
reporting on Form N-PORT.\152\
---------------------------------------------------------------------------

    \151\ See Morningstar Comment Letter; see also Interactive Data 
Comment Letter (noting that fund managers often consider moves 
greater than 1 basis point when managing interest rate risks in 
their portfolios, particularly for funds with exposure to bonds with 
call or prepayment risk.).
    \152\ See Morningstar Comment Letter (also noting that DV01 and 
SDV01 are less likely to be subject to model risk).
---------------------------------------------------------------------------

    We also received several comment letters recommending that we 
include a measure of convexity as it is a valuable method of measuring 
the change of the shifting yield curve, as well as a comment to require 
stress tests of the portfolio of small and large changes in spreads, 
interest rates, and volatility.\153\ We agree with commenters that a 
measurement that captures larger changes in the yield curve will be 
useful. We additionally agree with commenters that argued that a 
measure for changes in the shape of the yield curve such as convexity 
would be useful, but are sensitive to the burdens that requiring a 
measurement of convexity may impose on filers that do not currently 
calculate convexity internally.
---------------------------------------------------------------------------

    \153\ Interactive Data Comment Letter (``portfolio managers 
consider convexity to be critical when measuring the interest rate 
risk of their funds''); Dreyfus Comment Letter (``Convexity is 
valuable as a risk measure because it captures the change in the 
curvature (the `flattening' or `steepening') of the shifting yield 
curve.'').
---------------------------------------------------------------------------

    Accordingly we believe that requiring a risk measure that shows the 
effect of a larger change in interest rates, coupled with DV01 as we 
proposed, both provides information that commenters said would be 
useful (i.e., how the exposure changes with different changes in 
interest rate), while not requiring filers that do not calculate 
convexity internally to begin to do so. We are therefore adopting a 
requirement that funds provide both DV01 \154\ (a one basis point 
change in interest rate) and DV100 (a 100 basis point change in 
interest rates).\155\ Based on staff experience, we believe that DV100 
is among the most

[[Page 81885]]

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

    \154\ See B.3.a of Form N-PORT.
    \155\ See B.3.b of Form N-PORT.
---------------------------------------------------------------------------

    We also proposed to require that funds provide a measure of spread 
duration (commonly known as SDV01) at the portfolio level for each of 
the same maturities listed above, aggregated by non-investment grade 
and investment grade exposures.\156\ This would measure the fund's 
sensitivity to changes in credit spreads (i.e., a measure of spread 
above the risk-free interest rate). Again, similar to the example above 
regarding the potential use of the DV01 metric, SDV01 can provide more 
precise information regarding funds' exposures to credit spreads when 
they engage in a strategy investing in investment-grade or non-
investment grade debt.
---------------------------------------------------------------------------

    \156\ As proposed, Form N-PORT would have included instructions 
stating that ``Investment Grade'' refers to an investment that is 
sufficiently liquid that it can be sold at or near its carrying 
value within a reasonably short period of time and is subject to no 
greater than moderate credit risk, and ``Non-Investment Grade'' 
refers to an investment that is not Investment Grade. See proposed 
General Instruction E of Form N-PORT. As discussed above in section 
H.A.2.a, we received comments relating to our proposed definition of 
``Investment Grade''. For the reasons discussed above, we have 
determined to remove these definitions from the Form.
---------------------------------------------------------------------------

    One commenter stated that spread duration is a more representative 
measure of bond fund portfolio risk than duration alone because it 
``captures both interest rate risk and credit risk'' and that staff 
should therefore use spread duration when analyzing funds.\157\ 
However, that commenter and others recommended that we require funds to 
report a single spread duration for the portfolio, as spread rates are 
generally calculated as a parallel shift, making calculations at key 
rates less useful than they are for analyzing shifts in interest 
rates.\158\ Because credit spreads can vary based on the maturity of 
the bonds, we continue to believe that providing credit spread measures 
for the key rates along the yield curve, as with DV01, will help the 
Commission and its staff better analyze credit spreads of investments 
in funds than a single measure for the entire portfolio. For example, 
this data could be helpful for analyzing shifts in credit spreads for 
non-investment grade and investment grade debt, respectively, over the 
yield curve, as credit spreads for investment grade and non-investment 
grade debt do not always shift in parallel or in lock step, 
particularly during times of market stress.\159\
---------------------------------------------------------------------------

    \157\ See Dreyfus Comment Letter.
    \158\ See supra footnotes 134-137; see, e.g., Wells Fargo 
Comment Letter (noting that, unlike interest rate spreads, credit 
spreads are not typically calculated at all key rates); Fidelity 
Comment Letter (``A single CR01 without reference to maturity is a 
standard risk metric and should be familiar to market 
participants.''); Dreyfus Comment Letter (recommending a single 
measure for spread duration); ICI Comment Letter (same).
    \159\ The delineation between non-investment grade and 
investment grade debt is similar to information regarding private 
fund exposures gathered on Form PF, which could be helpful for 
comparing and analyzing credit spreads between public and private 
funds. See, e.g., Item 26 of Form PF.
---------------------------------------------------------------------------

    For the same reasons discussed above for interest rate risk, 
however, we are limiting the required key rates for credit spread risk 
to 3-month, 1-year, 5-year, 10-year, and 30-year.\160\ Commenters also 
suggested either only requiring spread duration (as opposed to both 
credit and spread duration) or further refining the measure of credit 
spreads, for example, by breaking out government related spreads from 
other investment-grade spreads.\161\ However, we continue to believe 
that our current measure of spread risk provides adequate information 
to the staff, investors, and other potential users to better understand 
industry and fund credit spreads, and the risk associated with credit 
spreads, while appropriately balancing the costs of calculating such 
measures. We are therefore adopting the credit spread risk as proposed, 
subject to the previously discussed key rate refinements discussed 
above.\162\
---------------------------------------------------------------------------

    \160\ See B.3.c of Form N-PORT.
    \161\ See, e.g., Fidelity Comment Letter (Suggesting breaking 
out government-related credit spreads from other investment-grade 
credit spreads because it would be more useful for monitoring fund 
credit risk); Dreyfus Comment Letter (``Spread duration is a more 
important measure of overall bond fund portfolio risk than duration 
alone because it captures both interest rate risk and credit 
risk.'').
    \162\ See Item B.3.c of Form N-PORT.
---------------------------------------------------------------------------

    We also proposed to include an instruction to Item B.3 to assist 
funds with calculating the threshold and to allow better comparability 
among funds. One commenter recommended that our proposed calculation 
for the threshold, which the proposal defined as ``notional value,'' 
include the ``contract value of each futures contract for which the 
underlying reference asset or assets are debt securities or an interest 
rate.'' \163\ The commenter noted that funds may use fixed income 
futures for similar purposes as fixed income swaps, for example, to 
adjust duration, and including futures in the calculation would give 
the Commission more accurate reporting and is consistent with how the 
industry typically does these types of calculations.\164\ We agree and 
are modifying our instructions to require that funds include futures in 
the calculation of notional value.\165\
---------------------------------------------------------------------------

    \163\ See CRMC Comment Letter.
    \164\ Id.
    \165\ We have also decided to make a clarifying change by using 
the term ``value'' as opposed to the proposal's ``notional value.'' 
We believe that this could reduce confusion in the reporting of 
these measures. Since our proposed calculation of ``notional value'' 
requires the sum of ``absolute'' values, which may be different than 
how funds currently define ``notional value,'' we are changing the 
instructions from requiring notional value to requiring ``value,'' 
which is defined to include the notional value of certain 
derivatives instruments. See Instruction to Item B.3 of Form N-PORT. 
Moreover, this is consistent with Form PF which describes ``value'' 
in General Instruction 15. See General Instruction 15 of Form PF.
---------------------------------------------------------------------------

    Another commenter noted that non-investment grade portfolios often 
hold ``equity-like securities,'' such as convertible bonds and 
preferred stocks.\166\ The commenter argued that DV01 is not 
appropriate for these types of portfolios and requested that Form N-
PORT clarify how funds should calculate interest-rates in such 
situations.\167\ Other commenters suggested that we further refine our 
proposed methodology by providing more details relating to the relevant 
interest rate and credit spread calculations such as whether the credit 
spread to be shifted is the nominal or option adjusted spread 
(OAS).\168\ In determining the proposed methodology for the measures of 
duration and spread duration, staff engaged in outreach to asset 
managers and risk service providers that provide risk management and 
other services to asset managers and

[[Page 81886]]

institutional investors. The proposed methodology was based on staff 
experience in using duration and spread duration, as well as this 
outreach to better understand common fund practices for calculating 
such measures.
---------------------------------------------------------------------------

    \166\ See Fidelity Comment Letter.
    \167\ Id.
    \168\ See, e.g., Interactive Data Comment Letter (Clarify 
whether interest rate shifts should be applied to a par yield curve 
or a spot yield curve and specify that the measurement procedure 
should include shifting rates both upward and downward. Clarify 
whether the curve segments should be defined based on maturity or 
average life, particularly for amortizing assets such as MBS and 
consider excluding certain issues, such as US treasuries; clarify 
whether the credit spread to be shifted is the nominal or option 
adjusted spread (OAS) and recommending OAS.); State Street Comment 
Letter (requesting clarity whether the Commission wants notional 
value versus delta adjusted or duration equivalent value, but also 
suggesting that the SEC should not be too prescriptive and give 
managers discretion within guidelines, so long as they can validate 
and justify their approach.).
---------------------------------------------------------------------------

    While the Commission continues to believe that the methodologies 
for reporting duration and spread duration will allow for better 
comparability across funds, as discussed above, we are adopting a new 
instruction to Form N-PORT, subject to the specific instruction in Item 
B.3 to calculate value, that funds may use their own internal 
methodologies and the conventions of their service providers, which 
should help minimize reporting burdens.\169\ As in Form PF, we believe 
that this approach strikes an appropriate balance between easing the 
burdens on funds by allowing them to rely on their existing practices 
while still providing the Commission's staff with comparable data 
across the industry.\170\ However, we agree with the commenter that 
requested that we clarify whether the shift is the nominal or option-
adjusted spread. We believe that measuring credit risk by shifting 
option adjusted spread provides a more robust measure of credit risk 
for investments with embedded optionality because it captures how 
embedded options alter the payment obligations of counterparties.\171\ 
Thus measuring credit risk by shifting the option adjusted spread will 
allow the Commission and other interested parties to more accurately 
monitor this effect. We are therefore adding one clarification to Item 
B.3.c., Credit Spread Risk, to clarify that funds should provide the 
change in value of the portfolio from a 1 basis point change in credit 
spreads where the shift is applied to the option adjusted spread.\172\
---------------------------------------------------------------------------

    \169\ See General Instruction G of Form N-PORT.
    \170\ See Form PF Adopting Release, supra footnote 80, at n. 187 
and accompanying text Based on staff experience, we believe that we 
will still find the data useful even when funds use different 
methodologies, despite the fact that varying methodologies could 
reduce the comparability of data across funds because this data will 
still provide information that can be compared to a fund's previous 
filings, as well as a baseline measurement for the industry that can 
be monitored for changes from one month to the next.
    \171\ See also Interactive Data Comment Letter.
    \172\ See Item B.3.c of Form N-PORT.
---------------------------------------------------------------------------

    While we proposed that funds provide a calculation of each of these 
measures at a portfolio level, we also considered whether to require, 
and requested comment on the alternative that, instead, funds report 
these risk metrics for each debt instrument or derivative that has an 
interest rate or credit exposure.\173\ We had asked what the benefits 
would be to having more precise data for analysis of various movements 
in interest rates and credit spreads.
---------------------------------------------------------------------------

    \173\ See Proposing Release, supra footnote 7, at 33601.
---------------------------------------------------------------------------

    Several commenters supported reporting at the portfolio-level 
rather than at the position-level.\174\ One commenter suggested that, 
rather than report risk measures at the portfolio-level, funds should 
report risk exposures at the position-level, as this is current 
industry practice and would therefore not be burdensome.\175\ Other 
commenters generally noted that providing position specific details 
would better enable investors and service providers to calculate risk, 
without relying on the reporting fund's models or assumptions.\176\ 
Finally, another commenter recommended that the Commission, with 
respect to derivatives, focus on metrics based on a portfolio-level 
analysis, as such an analysis would more accurately reflect a fund's 
use of, and net exposure to, derivatives.\177\
---------------------------------------------------------------------------

    \174\ See, e.g., SIFMA Comment Letter I (supporting the 
Commission's proposal to require funds to provide the Commission 
with portfolio level risk metrics and requesting that the 
information not be made public); Wells Fargo Comment letter 
(supporting the Commission's request for duration and spread 
duration, but suggesting that the calculation for providing risk 
metrics be defined differently).
    \175\ See Interactive Data Comment Letter (recommending that the 
Commission consider several alternatives, including requiring funds 
to report aggregate risk metrics at the asset class level and 
composite portfolio-level, and to require risk metric calculations 
to account for the ``interactions among the investments being 
aggregated.'').
    \176\ See Morningstar Comment Letter; Vanguard Comment Letter.
    \177\ See Simpson Thacher Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we believe that most funds 
likely calculate these risk metrics at a position-level. However, we 
recognize that even if such calculations are available at a position-
level, reporting these metrics could cause funds to make additional 
systems changes to collect such position-level data for reporting, as 
well as potential burdens related to increased review time and quality 
control in submitting the reports. Therefore, on balance, we continue 
to believe that requiring funds to provide this information for each 
maturity at the portfolio level would provide a sufficient level of 
granularity for purposes of Commission staff analysis. We also believe 
that there are certain efficiencies for the Commission, its staff, 
investors, and other potential users to having funds report the 
portfolio-level calculations relative to reporting position-level 
calculations, as this could allow for more timely and efficient 
analysis of the data by not requiring users of the information to 
calculate the portfolio-level measures from the position-level 
measures.\178\
---------------------------------------------------------------------------

    \178\ Commenters also requested that we clarify that the fixed 
income exposure as calculated by a top tier in a fund-of-fund 
investment structure would not include the top tier fund's exposure 
to the underlying fund's exposure to debt. See ICI Comment Letter; 
MFS Comment Letter. Since Item B.3 requires aggregated portfolio-
level risk metrics, we generally would not expect funds to look 
through to the underlying funds' holdings. Rather, funds only will 
need to look to the top level fund investments in calculating their 
exposure to risk measures.
---------------------------------------------------------------------------

    In order to allow better comparability among funds, some commenters 
recommended that the Commission omit risk metrics in favor of more data 
on the specific investments, stating that raw data would allow the 
staff, investors, and other potential users to perform their own risk 
calculations. \179\ According to the commenters, providing position 
specific details would better enable investors and service providers to 
calculate risk, without relying on the reporting fund's models or 
assumptions.\180\ While we agree that reporting raw data on specific 
investments would provide users of the data with more flexibility in 
calculating risk, we do not believe that the benefits of reporting this 
information sufficiently justify the burdens of requiring funds to 
report substantially more detailed information on Form N-PORT at this 
time. Moreover, as discussed above, we believe that requiring funds to 
report the portfolio-level risk measures required on Form N-PORT, as 
well as delta for options, warrants, and convertible securities, which 
is discussed further below in section II.A.2.g.iv, provides the 
Commission, investors, and other potential users with a sufficient 
level of granularity for purposes of analysis at this time.
---------------------------------------------------------------------------

    \179\ See, e.g., Vanguard Comment Letter; Morningstar Comment 
Letter (``Rather than collecting model assumptions or additional 
standardization of the calculations, we believe providing additional 
detail with position information, specifically for bespoke 
derivatives and syndicated loans, will enable investors and service 
providers to independently calculate risk measures based on a model 
of the investor's choice.'').
    \180\ Id.
---------------------------------------------------------------------------

    Finally, commenters requested that we collect alternative risk 
metrics, such as the same interest rate and credit risk questions as 
are required by Form PF in order to improve the interoperability of the 
data collected for private funds and registered investment 
companies.\181\

[[Page 81887]]

However, while some of our Form N-PORT risk metric disclosures are 
based on Form PF, for the reasons stated above, the position-level 
information that we will receive in reports on Form N-PORT make more 
detailed reporting unnecessary for registered funds.\182\ Another 
commenter suggested that we focus on alternative portfolio-level risk 
metrics, such as Value at Risk (``VaR'').\183\ Based on staff 
experience, for purposes of monitoring a fund's sensitivity to changes 
in interest rates and credits spreads, we believe that requiring funds 
to calculate duration and spread duration along key rates will provide 
the Commission with more sensitive information than would be provided 
by an overall portfolio-level risk metric such as VaR. Accordingly, we 
are not adopting these suggested alternative risk metrics.
---------------------------------------------------------------------------

    \181\ See, e.g., BlackRock Comment Letter (Commission should use 
the same interest rate and credit risk questions as is required in 
Item 42 of Form PF; Commission should consider implementing a 
reporting requirement to obtain a comprehensive measure of fund's 
use of leverage); Simpson Thacher Comment Letter. Item 42 of Form PF 
requires an adviser to report the impact on the fund's portfolio 
from specified changes to certain identified market factors, if 
regularly considered in formal testing in the fund's risk 
management, broken down by the long and short components of the 
qualifying fund's portfolio. See Item 42 of Form PF; see also Form 
PF Adopting Release, supra footnote 80, at nn. 270-272 and 
accompanying text.
    \182\ Unlike with Form PF, which does not require position-level 
reporting, with Form N-PORT the staff will be able to calculate 
alternative risk measures using the detailed position-level 
information provided in reports on Form N-PORT.
    \183\ See Simpson Thacher Comment Letter (derivatives reporting 
should focus on portfolio-level risk metrics, such as ``value-at-
risk'' models).
---------------------------------------------------------------------------

d. Securities Lending
    To increase the rate of return on their portfolios, some funds 
engage in securities lending activities whereby a fund lends certain of 
its portfolio securities to other financial institutions such as 
broker-dealers. To protect the fund from the risk of borrower default 
(i.e., the borrower failing to return the borrowed security or 
returning it late), the borrower posts collateral with the fund in an 
amount at least equal to the value of the borrowed securities, and this 
amount of collateral is adjusted daily as the value of the borrowed 
securities is marked to market.\184\ Funds generally demand cash as 
collateral. A fund will typically invest cash collateral that it 
receives in short-term, highly liquid instruments, such as money market 
funds or similar pooled investment vehicles, or directly in money 
market instruments.
---------------------------------------------------------------------------

    \184\ See SIFMA, Master Securities Loan Agreement, Sec. Sec.  4 
(Collateral), 9 (Mark to Market) (2000) (``Master Securities Loan 
Agreement''), available at https://www.sifma.org/Services/Standard-Forms-and-Documentation/MRA,-GMRA,-MSLA-and-MSFTAs/MSLA_Master-Securities-Loan-Agreement-(2000-Version). See also Division of 
Investment Management, SEC, Securities Lending by U.S. Open-End and 
Closed-End Investment Companies (2014) (``Securities Lending 
Summary''), available at https://www.sec.gov/divisions/investment/securities-lending-open-closed-end-investment-companies.htm.
---------------------------------------------------------------------------

    A fund's income from these activities may come from fees paid by 
the borrowers to the fund and/or from the reinvestment of 
collateral.\185\ Many funds engage an external service provider--
commonly called a ``securities lending agent''--to administer the 
securities lending program. The securities lending agent is typically 
compensated by being paid a share of the fund's securities lending 
revenue after the borrower has been paid any rebate owed to it.\186\
---------------------------------------------------------------------------

    \185\ If a security is not in high demand, a lender typically 
pays the borrower a cash collateral fee, commonly called a 
``rebate.'' The rebate is negotiated and can be negative (i.e., a 
fee paid from the borrower to the lender) when demand for the loan 
of a particular security is especially great or its supply 
especially constrained. See Master Securities Loan Agreement, supra 
footnote 184, at Sec.  5 (Fees for Loan).
    \186\ See Securities Lending Summary, supra footnote 184.
---------------------------------------------------------------------------

    Securities lending may implicate certain provisions of the 
Investment Company Act, and funds that engage in securities lending do 
so in reliance on Commission staff no-action letters, and in some 
circumstances, exemptive orders.\187\ Funds that rely on these letters 
and orders are subject to conditions on a number of aspects of their 
securities lending activities, including loan collateralization and 
termination, fees and compensation, board approval and oversight, and 
voting of proxies.
---------------------------------------------------------------------------

    \187\ For example, the transfer of a fund's portfolio securities 
to a borrower implicates section 17(f) of the Investment Company 
Act, which generally requires that a fund's portfolio securities be 
held by an eligible custodian. A fund's obligation to return 
collateral at the termination of a loan implicates section 18 of the 
Investment Company Act, which governs the extent to which a fund may 
incur indebtedness. See id.
---------------------------------------------------------------------------

    Currently, the information that funds are required to report about 
securities lending activity, whether in a structured format or 
otherwise, is limited. For example, funds disclose on Form N-SAR 
whether they are permitted under their investment policies to, and 
whether they did engage during the reporting period in, securities 
lending activities.\188\ Funds generally also disclose additional 
information regarding their securities lending programs in their 
registration statements.\189\ In addition, consistent with current 
industry practices, many funds identify particular securities that are 
on loan in their schedules of portfolio investments prepared pursuant 
to Regulation S-X. These disclosures do not address other pertinent 
considerations, such as the extent to which a fund lends its portfolio 
securities, the borrower to which the fund is exposed, the fees and 
revenues associated with those activities, and the significance of 
securities lending revenue to the investment performance of the fund.
---------------------------------------------------------------------------

    \188\ Item 70.N of Form N-SAR.
    \189\ See, e.g., Item 9(c) (disclosures regarding risks), Item 
16(b) (disclosures of investment strategies and risks), Item 17(f) 
(disclosures of proxy voting policy), and Item 28(h) (exhibits of 
other material contracts) of Form N-1A.
---------------------------------------------------------------------------

    As proposed, to address these data gaps and provide additional 
information to the Commission, investors, and other potential users 
regarding a fund's securities lending activities, we are requiring 
funds to report certain borrower information and position-level 
information monthly on Form N-PORT.\190\ Also, as to other securities 
lending information for which annual reporting would be sufficient 
because it is unlikely to change on a frequent basis (e.g., name and 
other identifying information for a fund's securities lending agent), 
funds will report such information annually on Form N-CEN, as proposed 
and as discussed below in section II.D. In addition, as discussed below 
in section II.C.6, we have made a modification from the proposal to 
require certain information about the income from and fees paid in 
connection with securities lending activities, and the monthly average 
of the value of portfolio securities on loan, be disclosed as part of 
the fund's Statement of Additional Information (or, for closed-end 
funds, reports on Form N-CSR) or in Form N-CEN, instead of a fund's 
financial statements as we had originally proposed.\191\
---------------------------------------------------------------------------

    \190\ See infra text following footnote 195 (discussing the 
reporting of counterparty information); section II.A.2.g (discussing 
the proposed requirements regarding position-level information). 
Commenters to the FSOC Notice also suggested that enhanced 
securities lending disclosures could be beneficial to investors and 
counterparties. See, e.g., SIFMA/IAA FSOC Notice Comment Letter 
(``Disclosures related to securities lending practices, if 
appropriately tailored, could potentially assist investors and 
counterparties in making informed choices about where they deploy 
their assets and how they engage in lending practices.''); Comment 
Letter of the Vanguard Group, Inc. to FSOC Notice (Mar. 25, 2015) 
(``Vanguard FSOC Notice Comment Letter'') (asserting that securities 
lending as a whole suffers from a lack of readily available data, 
and supporting further efforts to gather data and study the practice 
of securities lending).
    \191\ See infra footnotes 724-725 and accompanying text 
(discussing new required disclosures in funds' Statement of 
Additional Information (or, for closed-end funds, funds' reports on 
Form N-CSR) that will allow investors to better understand the 
income generated from, as well as the expenses associated with, 
securities lending activities) and 1224-1225 and accompanying text 
(discussing new required disclosures of monthly average value of 
portfolio securities on loan in Form N-CEN).

---------------------------------------------------------------------------

[[Page 81888]]

    The new reporting requirements we are adopting are intended, in 
part, to increase the transparency of information available related to 
the lending of securities by funds as a subset of the universe of 
market participants engaged in securities lending activities.\192\ 
Commenters were generally supportive of increased reporting about 
securities lending activities, although they suggested modifications to 
certain aspects of the proposal and expressed concerns with some of the 
specific proposed reporting.\193\ These comments, and the modifications 
we are making in response to comments, are discussed in more detail 
below.
---------------------------------------------------------------------------

    \192\ See, e.g., section 984(b) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 
1376, 1933 (2010) (directing the Commission to promulgate rules 
designed to increase the transparency of information available to 
brokers, dealers, and investors, with respect to the loan or 
borrowing of securities).
    \193\ See, e.g., infra footnotes 199-201 and accompanying and 
following text (recommending that the collection of securities 
lending information should be limited to the top 5 or 10 securities 
lending borrowers with the greatest exposure) and footnotes 205-208 
and accompanying and following text (suggestions regarding how to 
report non-cash collateral posted by securities lending borrowers).
---------------------------------------------------------------------------

    Borrower Information.\194\ One risk that funds engaging in 
securities lending are exposed to is counterparty risk because 
borrowers could fail to return the loaned securities. In this event, 
the lender would keep the collateral. In the U.S., cash collateral is 
more typical than non-cash collateral and loans are often over-
collateralized. The collateral requirements thereby mitigate the extent 
of a fund's counterparty risk. This risk is further mitigated for the 
fund if the fund's securities lending agent indemnifies the fund 
against default by the borrower.
---------------------------------------------------------------------------

    \194\ In the Proposing Release, we referred to ``securities 
lending counterparties,'' but have made a clarifying change to 
``securities lending borrowers'' in the form. As discussed above, 
when funds are engaged in securities lending transactions, they are 
securities lenders because they lend their portfolio securities to 
other financial institutions, such as broker-dealers, who are 
securities borrowers. The change in terminology is not intended to 
alter the substance of reporting from what we proposed.
---------------------------------------------------------------------------

    As we explained in the Proposing Release, while we believe there is 
value to having information on borrowers of fund securities to monitor 
risk, as well as information with which to evaluate compliance with 
conditions set forth in staff no-action letters and exemptive 
orders,\195\ we proposed to require that funds report the full name and 
LEI (if any) of each borrower, as well as the aggregate value of all 
securities on loan to the particular borrower, rather than at the loan 
level.\196\ We believe that reporting of borrower information at an 
aggregate portfolio level will provide the Commission, investors, and 
other potential users with information to better understand the level 
of potential counterparty risk assumed as part of the fund's securities 
lending program, with a lower relative burden on funds than requesting 
such information on a per loan level.
---------------------------------------------------------------------------

    \195\ See generally Securities Lending Summary, supra footnote 
184.
    \196\ Item B.4 of proposed Form N-PORT.
---------------------------------------------------------------------------

    Commenters generally supported our proposal to increase reporting 
relating to securities lending borrowers, although one commenter 
questioned the usefulness of borrower information given that securities 
lending agreements are generally indemnified by securities lending 
agents.\197\ Most commenters also specifically supported our approach 
of assessing the counterparty risk of securities lending transactions 
on an aggregate basis for each borrower, as opposed to a loan-by-loan 
or security-by-security basis.\198\
---------------------------------------------------------------------------

    \197\ See, e.g., Comment Letter of Independent Directors of the 
BlackRock Equity-Liquidity Funds (Oct. 2, 2015) (``Blackrock 
Directors Comment Letter'') (supporting this aspect of our 
proposal); BlackRock Comment Letter (same); Fidelity Comment Letter 
(same); Comment Letter of the Risk Management Association (Aug. 11, 
2015) (``RMA Comment Letter'') (same); SIFMA Comment Letter I 
(same); Comment Letter of CFA Institute (Aug. 10, 2015) (``CFA 
Comment Letter'') (same). But see MFS Comment Letter (arguing that 
disclosure of borrower information may not be relevant in 
understanding a fund's counterparty exposure, because if the fund 
has been indemnified then the counterparty exposure rests with the 
lending agent).
    \198\ See, e.g., BlackRock Comment Letter; Morningstar Comment 
Letter.
---------------------------------------------------------------------------

    However, many commenters recommended limiting the collection of 
securities lending information to the top 5 or 10 securities lending 
borrowers presenting the greatest exposure.\199\ These commenters 
argued that the top 5 securities lending borrowers generally represent 
the majority of a fund's securities lending exposure and that further 
disclosure would impose unnecessary costs on funds and shareholders to 
the extent it would be capturing borrowers to which the fund does not 
have material exposure.\200\ Likewise, several commenters suggested 
that borrower information for securities lending transactions should 
only be reported by funds whose securities lending exposure exceeded a 
certain minimum threshold.\201\
---------------------------------------------------------------------------

    \199\ See, e.g., ICI Comment Letter (limit to the top 5 
securities lending borrowers); RMA Comment Letter (top 5 or 10 
borrowers); Fidelity Comment Letter (top 5 borrowers; broader 
securities lending disclosures would not provide a meaningful 
indicator of risk in securities lending because security loans are 
fully collateralized and also funds may be indemnified by lending 
agents); State Street Comment Letter (top 5 or ten borrowers). But 
see Morningstar Comment Letter (applauding the Commission's proposal 
to require counterparty information for all securities lending 
borrowers).
    \200\ See, e.g., Invesco Comment Letter (the top 5 securities 
lending borrowers generally represent 68% of a fund's securities 
lending exposure); ICI Comment Letter (additional disclosures beyond 
the top 5 borrowers would impose unnecessary costs on funds and 
shareholders).
    \201\ See Wells Fargo Comment Letter (portfolio level reporting 
of aggregate securities lending activity should only be required for 
funds with a minimum threshold of 10% of assets on loan); 
Oppenheimer Comment Letter (funds should report only the top 5 
borrowers and not disclose anything if outstanding securities loans 
do not exceed 1% of net assets).
---------------------------------------------------------------------------

    We continue to believe that funds that engage in securities lending 
should be required to report information for all of its securities 
lending borrowers. In response to commenters' observations that many 
funds are indemnified for their securities lending transactions, we 
note that not all funds are so indemnified. Separately, we believe that 
information on borrowers is useful even if there is an indemnification 
by the agent. For example, such information is helpful in generally 
monitoring the degree to which funds are involved in securities lending 
transactions and the identities of borrowers engaged in such 
transactions. Allowing funds to exclude certain borrower information 
would limit the applicability and completeness of the information 
reported on Form N-PORT regarding counterparty risk, both to an 
individual fund and to the fund industry. We are not persuaded by 
commenters' arguments that reporting of all borrowers would be unduly 
burdensome or costly, as we believe funds would need to collect this 
information both to understand its own counterparty risk and for its 
own oversight of securities lending. For these reasons, we are 
requiring funds to report aggregate borrower exposure for all 
securities lending borrowers, as proposed.
    Several commenters also suggested that borrower information for 
securities lending information should be nonpublic. In particular, 
these commenters expressed concerns that securities lending 
counterparties (i.e., borrowers) may wish to avoid having details of 
their exposures being made public, including to competitors.\202\ We 
are not persuaded by these arguments. First, we note that the new 
reporting requirements we are adopting today are intended, in part, to 
increase the transparency of information available related to the 
lending and borrowing of

[[Page 81889]]

securities.\203\ Making borrower information for the securities lending 
information reported on Form N-PORT nonpublic would defeat this 
objective.
---------------------------------------------------------------------------

    \202\ See BlackRock Comment Letter; SIFMA Comment Letter I; RMA 
Comment Letter.
    \203\ See supra footnote 192 and accompanying text.
---------------------------------------------------------------------------

    Second, based on our experience with securities lending, we are not 
persuaded by commenters claiming that a fund's activities in securities 
lending would be harmed because certain securities borrowers do not 
want to be identified. We note that we are not requiring identification 
of securities borrowers by loan, but rather on an aggregated basis. We 
also note that certain funds currently publicly identify securities 
lending borrowers twice per year in the notes to their annual and semi-
annual financial statements, as permitted by GAAP.\204\ We are unaware 
of any evidence that these disclosures have had any effects on 
borrowers' decisions to borrow from registered investment companies in 
the manner those commenters suggest, and thus we continue to believe 
that requiring funds to make such information publicly available is 
appropriate because these disclosures will improve transparency to 
investors and other users.
---------------------------------------------------------------------------

    \204\ See, e.g., SIFMA Comment Letter I.
---------------------------------------------------------------------------

    As discussed in greater detail below, we also received various 
suggestions regarding how to report non-cash collateral posted by 
securities lending borrowers.\205\ One commenter pointed out that funds 
typically do not account for non-cash collateral as a fund asset 
because funds generally do not ``control'' the non-cash collateral and 
thus do not bear any investment risk for it.\206\ For this reason, the 
commenter asserted that it would be inconsistent with accounting and 
reporting standards for funds to report non-cash collateral received 
for loaned securities as portfolio investments on Form N-PORT, as we 
proposed.\207\ We agree with the commenter and are modifying Form N-
PORT from the proposal to add a new Item requiring funds to report the 
aggregate principal amount and aggregate value of each type of non-cash 
collateral received for loaned securities that is not treated as a fund 
asset.\208\
---------------------------------------------------------------------------

    \205\ See infra footnote 413 and accompanying and following 
text.
    \206\ See ICI Comment Letter.
    \207\ See Item C.12.b of proposed Form N-PORT.
    \208\ See Item B.4.b of Form N-PORT. Funds will report the 
category of instrument that most closely represents the collateral, 
selected from among the following (asset-backed securities; agency 
collateralized mortgage obligations; agency debentures and agency 
strips; agency mortgage-backed securities; U.S. Treasuries 
(including strips); other instrument). If ``other instrument,'' 
funds will also include a brief description, including, if 
applicable, whether it is an irrevocable letter of credit.
---------------------------------------------------------------------------

    Several commenters also requested that Form N-PORT collect 
additional information regarding securities lending activities. One 
commenter recommended that funds report average monthly aggregate 
dollar amounts on loan and fee split information, as well as a brief 
summary of the fund's securities lending program, including risk and 
strategy.\209\ Another commenter suggested that the aggregate value of 
securities lent should be accompanied by the aggregate value of 
collateral pledged.\210\ One commenter requested that funds report the 
average daily value of securities lending collateral over the reporting 
period, rather than a snapshot as of the last day of the reporting 
period, and asserted that securities lending collateral can be used as 
a proxy for the percentage of the portfolio that is on loan, which is 
the true quantity of interest.\211\
---------------------------------------------------------------------------

    \209\ See Comment Letter of John C. Adams (July 8, 2015) (``John 
Adams Comment Letter'').
    \210\ See Morningstar Comment Letter.
    \211\ See Comment Letter of Richard B. Evans (Oct. 20, 2015).
---------------------------------------------------------------------------

    We are not adopting such additional reporting requirements on Form 
N-PORT. As discussed further below, the amendments to the Statement of 
Additional Information (and, for closed-end funds, Form N-CSR) that we 
are adopting today will require funds to make certain disclosures in 
connection with their securities lending activities and cash collateral 
management, and Form N-CEN also requires information about a fund's 
securities lending program, including the average monthly value of 
securities on loan. Although the additional information requested by 
commenters may be useful to certain investors or other users, we are 
sensitive to the burdens on funds of additional reporting requirements. 
Some of the information requested by commenters, such as a brief 
summary of the fund's securities lending program, including risk and 
strategy, is already disclosed in fund registration statements.\212\ 
Certain other information requested by commenters, such as the 
aggregate value of securities lent and the aggregate value of 
collateral pledged, can be calculated by adding up the structured 
information reported for each individual securities lending 
transaction.\213\ Furthermore, other information requested by 
commenters, such as the percentage of the portfolio securities on loan 
over the reporting period, can be derived from information that will be 
reported in a structured format as part of this rulemaking.\214\ 
Although we understand that requiring funds to report additional 
information may be useful to certain users of such information, Form N-
PORT is primarily designed to meet the data needs of the Commission and 
its staff. As such, the securities lending information we are requiring 
to be reported on Form N-PORT is designed to balance what we anticipate 
would be useful for our regulatory oversight purposes, namely obtaining 
more information specifically regarding counterparties, amounts on 
loan, and how collateral is reinvested, against the expected burdens of 
reporting such information. Accordingly, we decline to modify Form N-
PORT to require the additional securities lending disclosures requested 
by commenters.
---------------------------------------------------------------------------

    \212\ See supra footnote 189 and accompanying text.
    \213\ See Item C.12.a (value of the investment representing cash 
collateral), Item C.12.b (value of the securities representing non-
cash collateral), and Item C.12.c (value of the securities on loan) 
of Form N-PORT.
    \214\ See Item B.1 of Form N-PORT (net assets); Item C.6.f of 
Form N-CEN (monthly average value of securities on loan).
---------------------------------------------------------------------------

    We also received several comments requesting that we revise Form N-
PORT to phase in reporting of securities lending borrowers' LEIs. 
Commenters urged that this requirement be delayed until LEIs have been 
fully integrated into the global financial system and lending agents 
and funds have implemented the necessary systems enhancements to 
facilitate LEI reporting.\215\ Commenters also expressed concerns that 
reporting LEI information for securities lending counterparties (i.e., 
borrowers) may cause borrowers to become less likely to borrow from 
registered funds and more likely to borrow from lenders who are not 
required to make similar disclosures, in order to avoid having details 
of the borrowers' exposures being made public.\216\
---------------------------------------------------------------------------

    \215\ See State Street Comment Letter; BlackRock Comment Letter; 
RMA Comment Letter.
    \216\ See State Street Comment Letter; RMA Comment Letter.
---------------------------------------------------------------------------

    For the same reasons discussed above regarding commenters' 
suggestions not to require disclosure of securities borrowers, we are 
not persuaded by such arguments. While the Commission is the primary 
user of the form, the new reporting requirements we are adopting today 
are intended, in part, to increase the transparency of information 
available related to the lending and borrowing of securities.\217\ In 
particular, the uniform public reporting of borrowers' LEIs will 
facilitate the identification of such borrowers, which is part of the 
purpose of such reporting. As discussed above, providing exemptions or 
deferring implementation

[[Page 81890]]

of this requirement would hinder the ability of Commission staff as 
well as investors and other potential users of this information to use 
the data on Form N-PORT as discussed above.\218\ Furthermore, as 
indicated above, Form N-PORT instructs funds to report LEIs ``if any'' 
for borrowers, and thus already acknowledges and makes accommodations 
for the fact that LEI identifiers may not be available in some contexts 
as LEIs are continuing to be integrated into the global financial 
system.
---------------------------------------------------------------------------

    \217\ See supra footnote 192 and accompanying text.
    \218\ See supra footnote 68 and accompanying and following text.
---------------------------------------------------------------------------

e. Return Information
    As proposed, we are requiring funds to provide monthly total 
returns for each of the preceding three months.\219\ If the fund is a 
multiple class fund, it will report returns for each class.\220\ Funds 
with multiple classes will also report their class identification 
numbers.\221\ Funds will 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.\222\
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    \219\ See Item B.5.a of Form N-PORT.
    \220\ See id.
    \221\ See Item B.5.b of Form N-PORT.
    \222\ See Item 26(b)(1) of Form N-1A; Instruction 13 to Item 4 
of Form N-2; Item 26(b)(i) of Form N-3. Return information reported 
on Form N-PORT will reflect swing pricing for funds that elect to 
swing price pursuant to the contemporaneous release we are adopting 
today regarding swing pricing for open-end funds. See Swing Pricing 
Adopting Release, supra footnote 9., at section II.A.3.g.
---------------------------------------------------------------------------

    We are requiring this information on Form N-PORT because we believe 
it will 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, and this type of 
analysis can be done much more efficiently and timely when the 
information is reported in a structured format. Additionally, 
performance that appears to be inconsistent with a fund's investment 
strategy or other benchmarks can form a basis for further inquiry and 
monitoring.\223\ Although mutual funds currently report certain return 
information in a structured format periodically as part of their risk/
return summaries, we believe that having return information reported on 
a monthly basis by all registered funds will allow the Commission staff 
to more easily and effectively monitor the fund industry as a whole, as 
described above.\224\
---------------------------------------------------------------------------

    \223\ Similar risk analytics were used in the Commission's 
Aberrational Performance Inquiry, an initiative by the Division of 
Enforcement's Asset Management Unit to identify hedge funds with 
suspicious returns. See, e.g., SEC, SEC Charges Hedge Fund Adviser 
and Two Executives with Fraud in Continuing Probe of Suspicious Fund 
Performance, Press Release: 2012-209 (Oct. 17, 2012), available at 
https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171485332.
    \224\ See generally Interactive Data for Mutual Fund Risk/Return 
Summary, Investment Company Act Release No. 28617 (Feb. 11, 2009) 
[74 FR 7748 (Feb. 19, 2009)] (requiring funds to submit to the 
Commission a structured data file for any registration statement or 
post-effective amendment on Form N-1A that includes or amends 
information in Form N-1A's risk/return summary); SEC, Interactive 
Data and Mutual Fund Risk/Return Summaries, available at https://www.sec.gov/spotlight/xbrl/mutual-funds.shtml.
---------------------------------------------------------------------------

    Because only quarter-end reports on Form N-PORT will be made 
public, we are requiring, as proposed, that funds provide return 
information for each of the preceding three months.\225\ This rolling 
three month requirement will provide investors and other potential 
users with monthly return information, so that they will 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.
---------------------------------------------------------------------------

    \225\ See Item B.5.a of Form N-PORT. Although generally only 
information reported on Form N-PORT for the third month of each 
fund's fiscal quarter will be publicly available, the concerns 
associated with more frequent public disclosure are related to the 
disclosure of portfolio holdings information and will not apply to 
the disclosure of fund return information. See generally footnote 
1305 and accompanying and following text (discussing the risks of 
predatory trading practices such as front-running and the ability of 
non- investors to reverse engineer and copycat fund's investment 
strategies).
---------------------------------------------------------------------------

    Commenters had mixed reactions regarding the reporting of monthly 
total returns. Several commenters expressed concern that reporting 
three months of returns could cause investors to unduly focus on short-
term results and recommended that returns for longer periods of time be 
reported instead.\226\ One commenter recommended that funds should 
report only a single month of returns in order to lower compliance 
costs and because investors are likely to use other sources (such as 
fund or third-party Web sites) to find return information rather than 
Form N-PORT.\227\ Another commenter agreed with our proposed approach 
of requiring funds to report total returns as opposed to gross returns, 
noted that monthly fund performance data is already generally publicly 
available, and concluded that the quarterly public release of monthly 
performance data reported on Form N-PORT would result in the release of 
information that had already been made available to the public.\228\
---------------------------------------------------------------------------

    \226\ See CRMC Comment Letter (monthly return information could 
cause investors to focus on short-term results and therefore should 
not be publicly reported or, in the alternative, should be reported 
together with fund level long-term results); Wells Fargo Comment 
Letter (funds should provide returns for a rolling 12-month period 
as of the end of each month); Dreyfus Comment Letter (short-term 
performance can mislead investors); SIFMA Comment Letter I (monthly 
return information should not be made public or, in the alternative, 
should be disclosed annually on Form N-CEN).
    \227\ See Comment Letter of Confluence Technologies, Inc. (Aug. 
11, 2015) (``Confluence Comment Letter'').
    \228\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    We are adopting this requirement as proposed. As acknowledged by 
commenters, many funds and market data providers already generally 
disclose monthly performance data to investors, and daily performance 
data is often available as well.\229\ The greater granularity provided 
by monthly data will enhance the ability of Commission staff to use 
return information to reveal outliers and detect performance that 
appears to be inconsistent with a fund's investment strategy or other 
benchmarks, as discussed above. More generally, frequent disclosure of 
performance data over shorter time periods can better capture 
variations in performance that would not be apparent with returns 
reported over longer time periods.
---------------------------------------------------------------------------

    \229\ See, e.g., Morningstar Comment Letter (Morningstar's 
monthly performance data, as well as most of the industry's data, is 
generally made available on investor-facing Web sites by the third 
business day after month end. Daily performance data is also 
provided for 99.6% of open-end investment companies by 9 p.m. EST.); 
SIFMA Comment Letter I (certain funds make monthly returns available 
on their Web sites).
---------------------------------------------------------------------------

    Accordingly, we are not persuaded by commenters' recommendations to 
require funds to report return information on Form N-PORT over longer 
time horizons, as opposed to on a monthly basis. We are similarly not 
persuaded by arguments that reporting fund performance data for three 
months will ``[provide no] direct or indirect value to [fund] 
investors'' as opposed to reporting one month of fund performance 
information.\230\ As discussed above, although Form N-PORT is primarily 
designed to assist the Commission and its staff, we believe that 
investors and other potential users may benefit from the information 
reported on Form N-PORT as well, either by analyzing Form N-PORT 
directly or through analyses prepared by third-party service providers. 
Because Form N-PORT will be available on a quarterly basis but will 
provide month-end return information, we remain

[[Page 81891]]

concerned that investors might potentially confuse one month's returns 
as representing the fund's returns for the full quarter. For each of 
these reasons, we are requiring funds to report monthly return 
information for each of the preceding three months, as proposed.
---------------------------------------------------------------------------

    \230\ See Confluence Comment Letter.
---------------------------------------------------------------------------

    We are also requiring, substantially as proposed, 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 certain categories. We 
proposed that this information would be reported by asset category 
(i.e., commodity contracts, credit contracts, equity contracts, etc.). 
We are modifying the proposal to require funds to report this 
information by both asset category and also by type of derivative 
instrument (i.e., forward, future, option, swap, etc.).\231\ This 
information will 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, and as 
proposed, we are also requiring 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.\232\
---------------------------------------------------------------------------

    \231\ See Item B.5.c of Form N-PORT.
    \232\ See Item B.5.d of Form N-PORT.
---------------------------------------------------------------------------

    Comments on this aspect of the proposal were mixed. Some commenters 
opposed the reporting requirement, stating that it would not provide a 
valuable reference point from which to assess whether the derivatives 
included in a fund's portfolio have contributed to returns, especially 
when derivatives are used for hedging purposes.\233\ One commenter 
expressed general support for the derivatives reporting requirements in 
N-PORT, including this proposed requirement, stating that this 
information would, among other things, allow the Commission to better 
assess trends, given the potential risks associated with certain uses 
of derivatives.\234\
---------------------------------------------------------------------------

    \233\ See Wells Fargo Comment Letter; Dreyfus Comment Letter.
    \234\ See CFA Comment Letter (additionally supporting disclosure 
of derivatives reporting on N-PORT to investors).
---------------------------------------------------------------------------

    Several commenters, in response to a request for comment, 
recommended that the Commission require funds to report the monthly net 
realized gain (or loss) and net change in unrealized appreciation (or 
depreciation) attributable to derivatives by type of derivative 
instrument (i.e., forward, future, option, swap, etc.), rather than by 
asset category (i.e., commodity contracts, credit contracts, equity 
contracts, etc.). This is because funds typically report derivatives in 
their financial statements by type of derivative instrument rather than 
asset category. As a result, according to commenters, systems are 
currently aligned to capture and report this information by instrument 
type, whereas reporting information by asset category would require 
large changes to the existing accounting systems, which these 
commenters believed would involve costs that would not be justified by 
the resulting benefits.\235\ Finally, some commenters believed that 
gains (or losses) and appreciation (or depreciation) attributable to 
derivatives should not be made public because such information would 
not be meaningful to investors and could potentially convey proprietary 
information about the fund's trading strategies that could be used for 
predatory trading or to reverse engineer the fund's investment 
strategy.\236\
---------------------------------------------------------------------------

    \235\ See SIFMA Comment Letter I; ICI Comment Letter; MFA 
Comment Letter.
    \236\ See SIFMA Comment Letter I; MFA Comment Letter.
---------------------------------------------------------------------------

    We disagree with commenters questioning the utility of reporting 
gains (or losses) and appreciation (or depreciation) attributable to 
derivatives. We continue to believe that this information will help 
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. We recognize that providing this information by asset category 
is not how funds currently maintain this data in their systems and 
therefore will involve more systems changes and costs relative to 
providing this information by type of derivative instrument alone; 
however, we disagree that such information does not have a benefit that 
justifies this burden. Providing this information by asset category 
will be helpful in understanding the relationship between derivatives--
and, as discussed further below, the types of derivative instruments--
that provide exposure to a particular asset category and direct 
investments in the same asset category. For example, information 
attributable to equity derivatives contracts could be compared to 
returns attributable to direct investments in equities. Further, 
reporting returns by derivative instrument alone would not provide any 
information about the market risk factors that had caused the gain or 
loss.
    Although we recognize that there will be some initial burden in 
modifying systems to provide information by asset category, we note 
that funds are currently already required to compile this information 
by asset category twice a year, pursuant to FASB Topic ASC 815.\237\ 
While we understand from the comments that many funds currently compile 
this manually, we believe, based on staff experience, that such 
processes could be automated over time to facilitate the more frequent 
reporting. In particular, we note that Form N-PORT, as proposed and 
adopted, will separately require funds to categorize each derivative 
investment by asset category, which should reduce the incremental 
burden of providing return information by asset category.\238\
---------------------------------------------------------------------------

    \237\ See ASC 815 (Derivatives and Hedging).
    \238\ See Item C.4.a of Form N-PORT (requiring reporting of 
asset category of each investment among enumerated categories, 
including derivative-commodity, derivative-credit, derivative-
equity, derivative-foreign exchange, derivative-interest rate, 
derivatives-other).
---------------------------------------------------------------------------

    Additionally, after consideration of the comments, we are modifying 
this item from the proposal to require funds to report this information 
by type of derivative instrument within each asset category. We believe 
that providing both elements--asset category and derivative instrument 
type--will make this information more informative than by reporting by 
either asset category or instrument type in isolation. For example, 
consider a fund that uses derivatives in two asset categories (e.g., 
equities and commodities) and two types of derivative instruments 
(e.g., futures and options). If the asset category or instrument type 
were reported alone, users of the information would be unable to 
discern if the fund is deriving its returns by using equity options and 
commodity futures or equity futures and commodity options--or in what 
proportion. Reporting both pieces of information together allows the 
Commission, investors, and other users to determine from which 
category-type combination the fund is drawing (or hedging) its 
exposure. Further, knowing the instrument type in combination with 
asset category can be important for understanding the risks associated 
with obtaining exposure to a particular asset category because 
different derivative instruments can have different risks associated 
with them, such as different counterparty risk, or a linear risk 
profile (e.g. futures) versus a non-linear risk profile (e.g., 
options). Additionally, having such information by instrument and asset 
category will be useful in understanding situations ranging from a 
market

[[Page 81892]]

disruption for a particular type of derivative instrument (e.g., a 
market disruption affecting a futures market) to a price shock 
impacting a particular asset category (e.g., commodities). 
Consequently, we believe that requiring such information by both 
derivative instrument type and asset category will provide more 
complete information relative to providing either type in isolation to 
Commission staff, investors, and other potential users seeking to 
better understand how a fund is using derivatives in accomplishing its 
investment strategy and the impact of derivatives on the fund's 
returns.
    Moreover, based on staff review of fund financial statements, we 
have observed that in compliance with the requirements of FASB Topic 
ASC 815, upon which this reporting requirement was based, funds 
generally show gains (losses) and appreciation (depreciation) in 
tabular format by both asset category and type of derivative 
instrument. Because, as noted by commenters, many funds already have 
systems in place to classify derivatives by instrument type, we believe 
that requiring such information to be reported on Form N-PORT along 
with asset category will not add a significant incremental burden 
relative to providing, as proposed, such information by asset category 
alone.\239\
---------------------------------------------------------------------------

    \239\ See SIFMA Comment Letter I; ICI Comment Letter.
---------------------------------------------------------------------------

    Regarding comments concerning public disclosure of the information, 
we disagree with the commenter that argued such disclosures could 
reveal information that could be used for reverse engineering or 
predatory trading.\240\ We are not aware of this information being used 
for such purposes, nor did the commenter explain how the disclosure of 
such information could reveal information about the fund's trading 
strategies that would allow traders to ``front-run'' or ``copycat'' the 
fund. Separately, we note that the information will be delayed in terms 
of public disclosure and that the return information will be 
aggregated, which should mitigate the possibility that such information 
could be used by predatory traders to the detriment of the fund.
---------------------------------------------------------------------------

    \240\ See SIFMA Comment Letter I.
---------------------------------------------------------------------------

    Likewise, we disagree with the commenter that asserted such 
information would not be meaningful to investors.\241\ The Commission 
believes, and one commenter agreed, that this information will be 
useful for identifying funds in which a significant amount of gains and 
losses came from exposures to derivative contracts, and will allow 
Commission staff, investors, and other potential users to better 
understand the relationship between the type of derivative instrument 
and asset category in terms of the impact on the fund's returns. 
Furthermore, we are not persuaded by commenters' arguments that such 
information would be misleading to investors if made publicly 
available. As discussed above, funds will also be reporting similar 
information attributable to investments other than derivatives, which 
we believe could help investors compare returns attributable to 
derivatives with returns attributable to a fund's other investments. 
Furthermore, although gains (or losses) and appreciation (or 
depreciation) from derivatives may have different implications 
depending on whether derivatives are being used for investment purposes 
or as a hedge for other positions in the portfolio, disclosure of such 
information should help improve the ability of investors to understand 
and assess the use of derivatives in funds' investment strategies.
---------------------------------------------------------------------------

    \241\ Id.
---------------------------------------------------------------------------

f. Flow Information
    As proposed, Form N-PORT will 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).\242\ This information is similar 
to what is currently reported on Form N-SAR, and is generally to be 
reported subject to the same instructions that currently govern 
reporting of flow information on that form.\243\ We are requiring this 
information on Form N-PORT because we believe that this information 
will be more helpful if reported on a monthly basis rather than 
retrospectively on an annual basis on Form N-CEN.
---------------------------------------------------------------------------

    \242\ See Item B.6 of Form N-PORT.
    \243\ Similar to Form N-SAR, Form N-PORT will instruct funds to 
report amounts after any front-end sales loads had been deducted and 
before any deferred or contingent deferred sales loads or charges 
had been deducted. Shares sold will include shares sold by the fund 
to a registered UIT. Funds will also include as shares sold any 
transaction in which the fund acquired the assets of another 
investment company or of a personal holding company in exchange for 
its own shares. Funds will include as shares redeemed any 
transaction in which the fund liquidated all or part of its assets. 
Exchanges will be defined as the redemption or repurchase of shares 
of one fund or series and the investment of all or part of the 
proceeds in shares of another fund or series in the same family of 
investment companies. Form N-PORT will also include a new clarifying 
instruction, providing that if shares of the fund are held in 
omnibus accounts, funds will use net sales or redemptions/
repurchases from such omnibus accounts for purposes of calculating 
the fund's sales, redemptions, and repurchases. Cf. Item B.6 of Form 
N-PORT and Item 28 of Form N-SAR (requiring reporting of monthly 
sales and repurchases of the Registrant's/Series' shares for the 
past six months).
---------------------------------------------------------------------------

    We believe that having flow information reported to us monthly will 
help us better monitor trends in the fund industry. For example, it 
could help us analyze types of funds that are becoming more popular 
among investors and areas of high growth in the industry. It could help 
us better examine investor behavior in response to market events. 
Finally, in combination with other information that will be reported on 
Form N-PORT regarding liquidity of fund positions pursuant to changes 
to Form N-PORT set forth in the Liquidity Adopting Release, which we 
are adopting today, flow information could also help us identify funds 
that might be at risk of experiencing liquidity stress due to increased 
redemptions.\244\
---------------------------------------------------------------------------

    \244\ See Liquidity Adopting Release, supra footnote 9.
---------------------------------------------------------------------------

    Commenters generally supported our proposed reporting requirements 
for monthly flow information.\245\ However, many commenters noted that 
funds are generally unable to look through omnibus accounts to the 
underlying investors, and thus requested confirmation that flow 
information be reported on a net basis for shares of the fund held in 
omnibus accounts.\246\ We agree with these commenters, and in response 
to these comments, Form N-PORT now includes a clarifying instruction to 
this effect.\247\
---------------------------------------------------------------------------

    \245\ See ICI Comment Letter; SIFMA Comment Letter I; Wells 
Fargo Comment Letter; BlackRock Comment Letter.
    \246\ See State Street Comment Letter; MFS Comment Letter; Wells 
Fargo Comment Letter; SIFMA Comment Letter I; ICI Comment Letter; 
Morningstar Comment Letter. But see BlackRock Comment Letter 
(recommending that the Commission mandate that transfer agents, 
distributors, or some other entity aggregate information by investor 
types redeeming from and subscribing to funds so that funds could 
look through omnibus accounts and report more detailed flow 
information).
    \247\ See supra footnote 243.
---------------------------------------------------------------------------

    One commenter asked the Commission to mandate that transfer agents, 
distributors, or some other entity (e.g., a central data repository) 
track omnibus flow information by type of underlying investor (i.e., 
401(k) plans/individual retirement accounts, pension funds, insurance 
companies, other institutional investors, and retail investors).\248\ 
The commenter suggested that this information be provided to fund 
managers, who would then report

[[Page 81893]]

this information on Form N-PORT. The commenter concluded that this 
information would help funds and others to create predictive models to 
better understand potential future redemptions, which in turn would 
help funds with liquidity risk management.
---------------------------------------------------------------------------

    \248\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    We acknowledge the merits of helping funds better manage potential 
redemption risks, and further note that better transparency into 
intermediary omnibus accounts by each type of underlying investor would 
help the Commission better understand subscription and redemption 
activity and how it varies across distribution platforms and market 
environments. However, the commenter's suggestion is beyond the scope 
of this rulemaking, although we note that the Commission is currently 
seeking a range of input with respect to omnibus intermediary account 
relationships, including through the recently issued advance notice of 
proposed rulemaking and concept release with respect to transfer agent 
regulations, which seeks comment in various areas including the 
processing of book entry securities, broker-dealer recordkeeping for 
beneficial owners, and the role of transfer agents to mutual 
funds.\249\
---------------------------------------------------------------------------

    \249\ See Transfer Agent Regulations Concept Release, Securities 
Exchange Act Release No. 76743 (Dec. 22, 2015) [80 FR 81948 (Dec. 
31, 2015)].
---------------------------------------------------------------------------

    Another commenter recommended that monthly flow information be 
reported for only the last month of the reporting period, rather than 
for the three prior months, on the grounds that reporting this 
information for the three prior months would have ``no direct value to 
investors.'' \250\ We are not persuaded by this suggestion. As 
discussed above, although Form N-PORT is primarily designed to assist 
the Commission and its staff, we believe that investors and other 
potential users may benefit from the information reported on Form N-
PORT as well, either by analyzing Form N-PORT directly or through 
analyses prepared by third-party service providers. Unlike other 
information reported on Form N-PORT, which generally represents a 
snapshot ``as of'' a certain date, flows are calculated over a period 
of time. Because information reported on Form N-PORT will be publicly 
available on a quarterly basis but will provide monthly flow 
information, we are concerned that investors might potentially believe 
that one month's flows represent the fund's flows for the full quarter. 
For that reason, we are requiring funds to report monthly flow 
information for each of the preceding three months, as proposed.
---------------------------------------------------------------------------

    \250\ See Confluence Comment Letter.
---------------------------------------------------------------------------

g. Schedule of Portfolio Investments
    Part C of Form N-PORT will require, as proposed, 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. As proposed, funds will respond to 
certain questions that will apply to all investments (i.e., the 
investment's identification, amount, payoff profile, asset and issuer 
type, country of investment or issuer, fair value level, and whether 
the investment was a restricted security). As proposed, funds will also 
respond, as applicable, to additional questions related to specific 
types of investments (i.e., debt securities, repurchase and reverse 
repurchase agreements, derivatives, and securities lending).
    Also, as proposed, funds will have the option of identifying any 
investments that are ``miscellaneous securities.'' \251\ Unless 
otherwise indicated, funds will not report information related to those 
investments in Part C, but will instead report such information in Part 
D.\252\
---------------------------------------------------------------------------

    \251\ See Part D of Form N-PORT. See also supra footnote 99 and 
accompanying text.
    \252\ See infra footnote 419 and accompanying and following 
text.
---------------------------------------------------------------------------

i. Information for All Investments
    Form N-PORT will require, as proposed, funds to report certain 
basic information about each investment held by the fund and its 
consolidated subsidiaries. In particular, funds will 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.\253\ 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.
---------------------------------------------------------------------------

    \253\ See Item C.1 of Form N-PORT.
---------------------------------------------------------------------------

    To address this issue, and as proposed, we are requiring that funds 
report additional information about the issuer and the security. Funds 
will report certain securities identifiers, if available.\254\ For 
example, for security-based swaps, funds may report the product ID if a 
product ID for that contract is used by one or more security-based swap 
data repositories.\255\ Identifiers for other types of derivatives may 
also be used, if available.\256\ If a unique identifier is reported, 
funds will also indicate the type of identifier used.\257\ Such an 
identifier might be assigned by a security-based swap data repository 
or 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.
---------------------------------------------------------------------------

    \254\ See Item C.1.b, Item C.1.d, and Item C.1.e of Form N-PORT 
(requiring reporting of identifiers such as LEI of the issuer, 
CUSIP, ISIN, ticker or other unique identifier).
    \255\ See 17 CFR 242.900(aa) and (bb) (defining ``product'' and 
``product ID,'' respectively). See also Regulation SBSR Adopting 
Release, supra footnote 61 (discussing use of product IDs under 
Regulation SBSR).
    \256\ See, e.g., CFTC, Q&A--Swap Data Recordkeeping and 
Reporting Requirements, available at https://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/sdrr_qa.pdf (discussing product 
identifiers for swaps).
    \257\ See Item C.1.e.iii of Form N-PORT.
---------------------------------------------------------------------------

    We received comments regarding the use of unique identifiers 
generally, and LEI in particular. As discussed above, many commenters 
expressed support for the use of LEI for identification of funds, 
registrants, and counterparties.\258\ However, one commenter asserted 
that a portfolio-based approach, including data on counterparties to 
whom funds have greatest exposures, would enable adequate monitoring of 
potential threats better than obtaining counterparty LEI and specific 
information for each bilateral transaction.\259\ Other commenters 
expressed concerns regarding the ability of funds to verify the 
accuracy of LEIs provided by third-parties.\260\ Another commenter 
suggested that each security held by a fund should be identified by 
ticker and CUSIP, or ISIN and SEDOL for foreign securities, together 
with the primary exchange where the security is traded at the date of 
the filing.\261\ Another commenter urged the Commission not to mandate 
the use of certain unique identifiers for public and nonpublic funds, 
such as the Financial

[[Page 81894]]

Instrumental Global Identifier (``FIGI'').\262\
---------------------------------------------------------------------------

    \258\ See footnote 64 and accompanying text.
    \259\ See CFA Comment Letter.
    \260\ See Oppenheimer Comment Letter; MFS Comment Letter; ICI 
Comment Letter.
    \261\ See Russ Wermers Comment Letter.
    \262\ See State Street Comment Letter (asserting that there are 
few third-party providers who currently use such unique identifiers 
and concluding that requiring the usage of such unique identifiers 
would give those providers an unfair competitive advantage relative 
to the rest of the industry). Information about the FIGI is 
available on the Object Management Group's Web site, a not-for-
profit technology standards consortium. See generally Object 
Management Group, Documents Associated with Financial Industry 
Global Identifier (FIGI) Version 1.0--Beta 1 (Sept. 2014), available 
at https://www.omg.org/spec/FIGI/1.0/Beta1/.
---------------------------------------------------------------------------

    As discussed above, we are adopting a portfolio-based approach in 
the securities lending context, including data on counterparties to 
whom funds have greatest exposures. However, we believe that the 
uniform reporting of LEIs by fund series and registrants, as well as 
securities issuers and fund counterparties, will further enhance our 
monitoring and analytical capabilities by providing a consistent means 
of identification that will facilitate the linkage of data reported on 
Form N-PORT with data from other filings and sources that is or will be 
reported elsewhere. We acknowledge that LEIs have not yet been fully 
integrated into the global financial system, and accordingly the form 
contains a qualifier that an LEI be reported, ``if any.'' We believe, 
however, that LEIs will become more widely used by regulators and the 
financial industry and note that our rulemaking will not require funds 
to report LEIs, if any, until 18 months following the effective date.
    However, we understand that funds will in some instances be relying 
upon service providers and other third-parties who will be providing 
funds with LEI information to be reported to the Commission and 
publicly disclosed to investors and other possible users, and we 
understand that funds may find it difficult to verify such information 
other than to confirm that it has been generated and reported 
consistently with the methodologies of the fund's service providers. As 
discussed above, the fund may generally use its own methodology or the 
methodology of its service provider, so long as the methodology is 
consistently applied and is consistent with the way the fund reports 
internally and to current and prospective investors.\263\ We do not 
believe, as some commenters suggested, that it is necessary to require 
specific alternative unique identifiers for securities or entities at 
this time, other than those identified in Form N-PORT, because we 
believe that allowing funds to select another identifier in the absence 
of an ISIN, CUSIP, or ticker gives funds appropriate flexibility in 
identifying such investments.
---------------------------------------------------------------------------

    \263\ See General Instruction G of Form N-PORT (``Funds may 
respond to this Form using their own internal methodologies and the 
conventions of their service providers, provided the information is 
consistent with information that they report internally and to 
current and prospective investors. However, the methodologies and 
conventions must be consistently applied and the Fund's responses 
must be consistent with any instructions or other guidance relating 
to this Form.'').
---------------------------------------------------------------------------

    We are also requiring, as proposed, funds to report the amount of 
each investment as of the end of the reporting period, as is currently 
required under Regulation S-X.\264\ Funds will 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.\265\ Funds 
will 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.\266\ We received no comments on this aspect of our 
proposal.
---------------------------------------------------------------------------

    \264\ See Item C.2 of Form N-PORT. See rule 12-12 of Regulation 
S-X.
    \265\ See Item C.2.a-Item C.2.d of Form N-PORT. For derivatives, 
as appropriate, funds will provide the number of contracts.
    \266\ See Item C.2.b and Item C.2.c of Form N-PORT.
---------------------------------------------------------------------------

    Also as proposed, we are requiring funds to report the payoff 
profile of the investment, indicating whether the investment is held 
long, short, or N/A, which will serve the same purpose as the current 
requirement in Regulation S-X to disclose investments sold short.\267\ 
Funds will respond N/A for derivatives and will respond to relevant 
questions that indicate the payoff profile of each derivative in the 
derivatives portion of the form. These disclosures will identify short 
positions in investments held by funds. We received no comments on 
these disclosure requirements.
---------------------------------------------------------------------------

    \267\ See Item C.3 of Form N-PORT. See rule 12-12A of Regulation 
S-X [17 CFR 210.12-12A].
---------------------------------------------------------------------------

    As proposed, funds will 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).\268\ We are also adopting a modification from 
the proposal to add a ``derivatives-other'' category to encompass 
derivatives that do not fall into the other categories of derivatives 
enumerated in this Item, so as to allow Commission staff, investors, 
and other users of the information reported on Form N-PORT to more 
easily aggregate the fund's derivative investments. 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 to be reported by private funds on 
Form PF.\269\ These disclosures will allow the Commission, investors, 
and other potential users to assess the composition of fund portfolios 
in terms of asset and issuer types and also facilitate comparisons 
among similar types of investments.
---------------------------------------------------------------------------

    \268\ See Item C.4.a and Item C.4.b of Form N-PORT.
    \269\ See, e.g., Item 26 of Form PF (requiring filers to report 
exposures by asset type); Item 1 of Form N-Q (requiring filers to 
report the schedules of investments required by sections 210.12-12 
to 12-14 of Regulation S-X); Item 1 of Form N-CSR (requiring filers 
to attach a copy of the report transmitted to stockholders pursuant 
to rule 30e-1 under the Act).
---------------------------------------------------------------------------

    One commenter recommended the use of a well-defined taxonomy for 
asset and issuer type, such as ISO 10962, or some truncation of the 
six-character ISO Classification of Financial Instruments code.\270\ 
Although we acknowledge there could be benefits for data aggregation 
and analysis to using an existing standardized taxonomy for users of 
the form, Form N-PORT is primarily designed to meet the data needs of 
the Commission and its staff. We have drafted the asset categories in 
Form N-PORT specifically to address the Commission staff's data needs, 
whereas many of the existing taxonomies include extraneous information 
in some areas or insufficient information in other areas. For these 
reasons, we are adopting the asset categories on Form N-PORT largely as 
proposed.
---------------------------------------------------------------------------

    \270\ See Morningstar Comment Letter. See generally 
International Standards Organization, Securities and related 
financial instruments--Classification of financial instruments, ISO 
10962:2015 (July 17, 2015), available at https://www.iso.org/iso/catalogue_detail.htm?csnumber=44799.
---------------------------------------------------------------------------

    Funds will also report, as proposed, for each investment, whether 
the investment is a restricted security.\271\

[[Page 81895]]

This disclosure will provide investors and the Commission staff with 
more information about liquidity risks associated with the fund's 
investments.
---------------------------------------------------------------------------

    \271\ See Item C.6 of Form N-PORT. ``Restricted security'' will 
have the definition provided in rule 144(a)(3) under the Securities 
Act [17 CFR 230.144(a)(3)]. See General Instruction E of Form N-
PORT. See also amended rule 12-13, nn. 6 and 8 of Regulation S-X, 
which will require similar disclosures in funds' schedules of 
investments to identify securities that are restricted. Cf. footnote 
290 and accompanying and following text.
---------------------------------------------------------------------------

    Also as proposed, each fund will 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 GAAP.\272\ 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.\273\ 
In addition, Commission staff will be better able to identify anomalies 
in reported data by aggregating all fund investments industry-wide into 
the various level categories. These disclosures will also provide 
investors and the Commission staff with more information about which of 
the fund's investments are more actively traded, and which investments 
are less actively traded and thus potentially less liquid. Currently, 
funds are required to categorize the fair value measurement of each 
investment in the fair value hierarchy in their financial 
statements.\274\ 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.
---------------------------------------------------------------------------

    \272\ See ASC 820. An investment is categorized in the same 
level of the fair value hierarchy as the lowest level input that is 
significant to its fair value measurement. Level 1 inputs include 
quoted prices (unadjusted) for identical investments in an active 
market (e.g., active exchange-traded equity securities). Level 2 
inputs include other observable inputs, such as: (i) Quoted prices 
for similar securities in active markets; (ii) quoted prices for 
identical or similar securities in non-active markets; and (iii) 
pricing models whose inputs are observable or derived principally 
from or corroborated by observable market data through correlation 
or other means for substantially the full term of the security. 
Level 3 inputs are unobservable inputs. We are amending Regulation 
S-X to require that funds identify those investments whose value was 
determined using significant unobservable inputs. See infra section 
II.C.3.
    \273\ For a discussion of some of the challenges regulators may 
face with respect to Level 3 accounting, see, e.g., Konstantin 
Milbradt, Level 3 Assets: Booking Profits and Concealing Losses, 25 
Rev. Fin. Stud. 55-95 (2011).
    \274\ ASC 820-10-50-2 (Fair Value Measurement-Disclosure-
General) requires for each class of assets and liabilities measured 
at fair value, the level of the fair value hierarchy within which 
the fair value measurements are categorized in their entirety (Level 
1, 2, or 3).
---------------------------------------------------------------------------

    Several commenters supported this aspect of our proposal, noting it 
would enhance portfolio transparency and allow investors, plans, and 
fund fiduciaries to more accurately evaluate liquidity and valuation 
risks in funds.\275\ Another commenter asserted that our proposal to 
report the fair value level measurement for each individual investment 
held by the fund would represent no incremental burden relative to the 
current burden of reporting the total value of each fair value level 
category, because reporting systems should already contain the 
necessary information at the individual security level.\276\
---------------------------------------------------------------------------

    \275\ See Morningstar Comment Letter; Comment Letter of Harvest 
Investments, Ltd. (Aug. 11, 2015) (``Harvest Comment Letter'').
    \276\ See State Street Comment Letter.
---------------------------------------------------------------------------

    However, one commenter cautioned that different fund families 
currently employ different accounting practices when classifying 
similar investments into fair value level hierarchies, and warned that 
the Commission staff should reconsider expectations that disclosure of 
these fair value levels would create comparability among different 
funds with regards to fair value level hierarchy classifications.\277\ 
Another commenter echoed the sentiment that fair value level 
determinations reported by funds would likely differ from one fund 
group to another, and concluded that these determinations should be 
disclosed in aggregate by fair value level hierarchy classification as 
opposed to on an individual security basis.\278\
---------------------------------------------------------------------------

    \277\ See Interactive Data Comment Letter.
    \278\ See Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    Several commenters also recommended that additional related 
information be reported, such as the uncertainty of valuation for 
thinly-traded securities and identification of the primary pricing 
sources used in determining the fair value level hierarchy of the 
investments.\279\ Lastly, one commenter noted that certain funds of 
funds' investments may not have fair value level hierarchies assigned 
to them pursuant to FASB Accounting Standards Update 2015-07, and 
requested that Form N-PORT be revised to allow funds to report ``null'' 
to account for such investments.\280\
---------------------------------------------------------------------------

    \279\ See Comment Letter of Markit (Aug. 11, 2015) (``Markit 
Comment Letter'') (for thinly-traded securities or investments in 
assets with thinly-traded underlying assets, consider a disclosure 
indicating the uncertainty of valuation); Harvest Comment Letter 
(information about primary pricing sources should be made available, 
and third-party pricing services used should be disclosed on an 
individual security basis).
    \280\ See State Street Comment Letter.
---------------------------------------------------------------------------

    In response to the last comment, we are revising Form N-PORT to 
allow funds to report ``N/A'' to this item if an investment does not 
have a fair value level hierarchy assigned to it pursuant to FASB 
Accounting Standards Update 2015-07. This revision will allow funds to 
report fair value hierarchy information consistently across Form N-PORT 
and their shareholder reports.\281\
---------------------------------------------------------------------------

    \281\ See Item C.8 of Form N-PORT.
---------------------------------------------------------------------------

    More generally, we acknowledge that there may be differences among 
fair value level hierarchy classifications between funds, even for the 
same investments, but believe that reporting of this information could 
still help Commission staff, investors, and other potential users to 
identify and monitor investments that may be more susceptible to 
increased valuation risk and identify potential outliers that warrant 
additional monitoring or inquiry.
    We decline to add the additional information suggested by 
commenters related to valuation, such as more information regarding 
thinly-traded securities or position-level information on price 
sources. We believe that, unlike fair value hierarchy information, 
which funds already need to track for reporting purposes, this 
information is not currently reported by funds in any form and could be 
burdensome to begin reporting relative to the additional value it may 
provide. Accordingly, we decline to revise Form N-PORT to require funds 
to report this additional information.
    As proposed, Form N-PORT would have required funds to report the 
country that corresponds to the country of investment or issuer based 
on the concentrations of the investment's risk and economic exposure, 
and, if different, the country in which the issuer is organized. As 
adopted, Form N-PORT will switch the sequence of those disclosures, 
thus requiring funds to report the country in which the issuer is 
organized and, if different, the country that corresponds to the 
country of investment or issuer based on the concentrations of the 
investment's risk and economic exposure.\282\ These disclosures will 
provide the Commission staff with more information about country-
specific exposures associated with the fund's investments. 
Specifically, the Commission believes that providing both the country 
based

[[Page 81896]]

on concentrations of risk and economic exposure and also the country in 
which the issuer is organized will assist the Commission in 
understanding the country-specific risks associated with such 
investments. For example, knowing the country of risk and economic 
exposure, including the country in which an issuer is organized, is 
important for understanding the effect of such investments in a 
portfolio when that country might be going through times of economic 
stress (e.g., monetary controls or sanctions) or political unrest or 
other emergency circumstances.
---------------------------------------------------------------------------

    \282\ See Item C.5 of Form N-PORT. Also, as discussed further 
below, we are making the country of risk and economic exposure a 
nonpublic field in all Form N-PORT filings. Under the proposal, this 
would have meant that funds would be publicly reporting nothing if 
the country of risk and economic exposure were the same as the 
country in which the issuer is organized, because in that situation 
funds would only be reporting the country of risk and economic 
exposure, which will be nonpublic in Form N-PORT. Accordingly, we 
are requiring funds to report the country in which the issuer is 
organized as the default, and, only if different, to also report the 
country of risk and economic exposure.
---------------------------------------------------------------------------

    We received mixed comments on this aspect of our proposal. 
Commenters generally supported the requirement to report the country in 
which the issuer is organized.\283\ Commenters generally viewed the 
determination of country of risk as inherently subjective, but differed 
in terms of whether the Commission should provide a particular standard 
for determining the country of risk or whether the Commission should 
permit funds to report differing information for the same securities as 
a result of the existing diversity of approaches currently used by 
funds and service providers.\284\ Commenters also disagreed regarding 
whether this information should be publicly reported or even reported 
at all.\285\
---------------------------------------------------------------------------

    \283\ See, e.g., SIFMA Comment Letter I; Dreyfus Comment Letter; 
Morningstar Comment Letter.
    \284\ See, e.g., Wells Fargo Comment Letter (the Commission 
should include guidance and instructions for determining the country 
with the greatest concentration of risks and economic exposure in 
order to achieve consistent reporting across funds); Interactive 
Data Comment Letter (the Commission should support the prevailing 
diversity of approaches towards identifying country of risk as a 
necessary consequence of such reporting); SIFMA Comment Letter I 
(the Commission should either limit the disclosure requirement to 
country of issuer organization or else clarify that funds may use 
classifications generated by existing methodologies or available 
service providers); ICI Comment Letter (it is important for funds to 
have the flexibility to make these determinations using their own 
good faith judgment).
    \285\ See, e.g., Interactive Data Comment Letter (supporting the 
disclosure of country of risk); Schwab Comment Letter (public 
disclosure may lead to investor confusion); Fidelity Comment Letter 
(the Commission should require non-public disclosure of this 
information until it is standardized); Morningstar Comment Letter 
(opposing the reporting of country of risk to the extent this 
information is proprietary and subjective, but supporting country of 
issuance on the grounds that it is more objective).
---------------------------------------------------------------------------

    Partly in response to these concerns, and as discussed above, we 
are revising Form N-PORT to include instructions clarifying that in 
reporting information on Form N-PORT, funds may generally use their own 
internal methodologies and the conventions of their service providers, 
provided that the information they report is consistent with 
information that they report elsewhere (e.g., the fund's schedule of 
portfolio holdings as prepared pursuant to Regulation S-X).\286\ For 
example, we understand that for issuers with operations in multiple 
countries, some funds commonly use the issuer's country of domicile for 
purposes of internal recordkeeping and analysis and may choose to do 
the same for reporting country of risk on Form N-PORT, whereas funds 
that utilize other methodologies may prefer to rely upon their own 
chosen methodologies instead. Additionally, as discussed further below 
in section II.A.4, we are making the country of risk and economic 
exposure a nonpublic field in all Form N-PORT filings.\287\
---------------------------------------------------------------------------

    \286\ See General Instruction G of Form N-PORT (``Funds may 
respond to this Form using their own internal methodologies and the 
conventions of their service providers, provided the information is 
consistent with information that they report internally and to 
current and prospective investors. However, the methodologies and 
conventions must be consistently applied and the Fund's responses 
must be consistent with any instructions or other guidance relating 
to this Form.''). See also supra footnote 77 and accompanying and 
following text.
    \287\ See infra footnote 515 and accompanying and following 
text.
---------------------------------------------------------------------------

    More generally, several commenters sought confirmation that funds 
would not be required to look through any entities in its portfolio 
holdings except as specifically instructed in Form N-PORT.\288\ As 
discussed above, Form N-PORT requires funds to disclose information 
about ``each investment held by the Fund and its consolidated 
subsidiaries.'' \289\ Thus, Form N-PORT requires funds to report 
information about each underlying investment in a CFC, because CFCs are 
consolidated subsidiaries in funds' financial statements for reporting 
purposes.
---------------------------------------------------------------------------

    \288\ See Invesco Comment Letter; Schwab Comment Letter; CRMC 
Comment Letter; SIFMA Comment Letter I.
    \289\ See Part C of Form N-PORT (``For each investment held by 
the Fund and its consolidated subsidiaries, disclose the information 
requested in Part C.'').
---------------------------------------------------------------------------

    The proposed form also would have required funds to identify each 
investment that is ``illiquid.'' \290\ We note that the Liquidity 
Adopting Release, which we are adopting today, addresses liquidity risk 
management programs for open-end funds, which, among other things, 
requires information about the liquidity of fund investments to be 
reported on Form N-PORT.\291\
---------------------------------------------------------------------------

    \290\ As proposed, Form N-PORT would have defined ``illiquid 
asset'' as ``an asset that cannot be sold or disposed of by the Fund 
in the ordinary course of business within seven calendar days, at 
approximately the value ascribed to it by the Fund.'' This 
definition is the same definition used in the liquidity guidance 
issued by the Commission for open-end funds. See Revisions of 
Guidelines to Form N-1A, Investment Company Act Release No. 18612 
(Mar. 12, 1992) [57 FR 9829 (Mar. 20, 1992)] (``1992 Release'').
    \291\ See Liquidity Adopting Release, supra footnote 9.
---------------------------------------------------------------------------

ii. Debt Securities
    In addition to the information required above, as proposed, 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 
potential 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 the annualized interest rate and 
indicating whether fixed, floating, variable, or none).\292\
---------------------------------------------------------------------------

    \292\ See Item C.9.a and Item C.9.b of proposed Form N-PORT.
---------------------------------------------------------------------------

    While commenters were generally supportive of this requirement, 
they requested that we provide clear standards for reporting or more 
granular classifications.\293\ For example, commenters noted that a 
more granular classification scheme for debt instruments is useful for 
investors in understanding the nature of the obligation supporting the 
instrument, such as issuers, security type, guarantors, and the 
investment's structure.\294\ However, while more granular 
classifications could be useful to investors, we do not believe that 
the additional information would be justified in light of the burdens 
imposed because we believe that the classification being adopted 
provides sufficient detail to allow the staff, investors, and other 
potential users, to understand the nature of the fund investments. As a 
result, we are adopting this requirement as proposed.\295\ Another 
commenter recommended that we consider a minimum reporting threshold of 
10% of

[[Page 81897]]

exposure to each security type for additional security-specific 
reporting for debt securities, convertible securities, repurchase and 
reverse repurchase agreements, and derivatives.\296\ However, as we 
discuss below in section II.A.2.g.iv, we believe that it is important 
that the Commission and investors have transparency in a fund's 
investments and do not believe that a reporting threshold for such 
instruments is appropriate, as it would not allow the Commission and 
investors to fully understand a fund's risks. Moreover, security-level 
reporting of a fund's underlying investments in such securities are 
currently reported in a fund's financial statements.\297\
---------------------------------------------------------------------------

    \293\ See SIFMA Comment Letter I (supporting all required 
information with the exception of the disclosures relating to 
securities in defaults and arrears); Wells Fargo Comment Letter; 
Interactive Data Comment Letter (``In general, we believe that a 
more granular classification scheme for debt instruments is useful 
for investors in understanding the nature of the obligation 
supporting the instrument''); State Street Comment Letter; 
Morningstar Comment Letter.
    \294\ See Interactive Data Comment Letter (additional 
disclosures should include classification of debt securities (e.g., 
corporate bonds, municipal securities), bond insurance, conduit 
municipal filings, letters of credit, and identification of debt 
ranking); State Street Comment Letter (additional disclosures should 
include issuer, security type, security structure, guarantor, 
country, sector, and rating).
    \295\ See Item C.9.a and Item C.9.b of Form N-PORT.
    \296\ See Wells Fargo Comment Letter.
    \297\ See generally Article 12 of Regulation S-X.
---------------------------------------------------------------------------

    As proposed, 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.\298\ Several commenters raised concerns regarding these 
disclosures. For example, one commenter argued that the public 
disclosure on default, arrears, or deferred coupon payments raises 
competitive concerns when a debt security is issued by a borrower that 
is a private company, as private borrowers may avoid registered funds 
in order to limit public disclosure if the company becomes 
distressed.\299\ The commenter noted that public disclosure that a 
borrower is or may be financially distressed could increase prepayment 
risk and be disruptive to the fund's or adviser's relationship with the 
borrower.\300\ Moreover, this disclosure could also harm private 
issuers by disclosing their financial distress to vendors and key 
employees and customers.\301\ While we recognize that the disclosure of 
a private issuer in distress could have a negative impact on the 
issuer, we believe that it is important that Commission staff have 
access to information relating to fund investments that are in default 
or arrears in order to monitor individual fund and industry risk. It is 
similarly important that fund's investors have access to this 
information so that they can make fully informed decisions regarding 
their investment. Moreover, default or arrears relating to a fund's 
investments in private issuer debt are already publicly available on a 
fund's quarterly financial statements.\302\
---------------------------------------------------------------------------

    \298\ See Item C.9.c through Item C.9.e of proposed Form N-PORT.
    \299\ See Simpson Thacher Comment Letter.
    \300\ See id.
    \301\ See id.
    \302\ See rule 12-12, n. 5 of Regulation S-X.
---------------------------------------------------------------------------

    Another commenter recommended eliminating the requirements relating 
to whether a debt security is currently in default or any of the 
interest payments are in arrears or have been deferred.\303\ The 
commenter noted that these items require a subjective legal analysis on 
an instrument-by-instrument basis, on which conclusions among funds may 
vary and thus would not provide meaningful comparable information.\304\ 
For similar reasons, another commenter supported the proposal, but 
recommended that the Commission should establish a clear standard for 
designating when a security is deemed to be in arrears.\305\ As we 
previously discussed, this type of analysis and public reporting is not 
new to funds, as they are required to report results in their financial 
statements and on their schedules of investments.\306\ Rather than 
provide funds with a definition that may not be applicable in all 
situations, or inconsistent with their financial statement reporting, 
we believe that it is more appropriate to allow funds to continue to 
use their own methodology in responding to these items on Form N-PORT, 
subject to the limitations of General Instruction G.\307\
---------------------------------------------------------------------------

    \303\ SIFMA Comment Letter I.
    \304\ Id.
    \305\ See Wells Fargo Comment Letter.
    \306\ See rule 12-12, n. 5 of Regulation S-X.
    \307\ See General Instruction G of Form N-PORT; see also supra 
footnote 79 and accompanying test.
---------------------------------------------------------------------------

    As we discuss in more detail in section II.C.3 below, commenters 
noted that in-kind payments where the fund elects to receive payments-
in-kind (as opposed to cash) do not raise the same risks as an issuer 
that only makes in-kind payments, because such a scenario does not 
represent an issuer who may be in financial difficulties and cannot pay 
cash dividends, as opposed to an investor who merely chooses to receive 
in-kind dividends rather than cash.\308\ We agree and are adding an 
additional clarifying clause to Item C.9.e that a fund should not 
designate interest as paid-in-kind if the fund has the option to elect 
an in-kind payment and has elected to be paid-in-kind \309\
---------------------------------------------------------------------------

    \308\ See Comment Letter of American Institute of CPAs (Aug. 17, 
2015) (``AICPA Comment Letter''); Comment Letter of 
PricewaterhouseCoopers LLP (Aug. 7, 2016) (``PwC Comment Letter''); 
see also infra footnote 651 and accompanying text.
    \309\ See Item C.9.e of Form N-PORT.
---------------------------------------------------------------------------

    Finally, we proposed to require additional information for 
convertible securities, to indicate whether the conversion is mandatory 
or contingent.\310\ We also proposed 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. For example, based upon staff 
experience, we believe that the risk and reward profiles for mandatory 
and contingent conversions vary considerably and, thus we proposed to 
require disclosure of the type of conversion in order to better 
understand these risks. Similarly, we proposed to require disclosure of 
the conversion ratio and information about the asset into which the 
debt is convertible. Furthermore, the proposed requirement to provide 
the delta was also proposed to be required for options, as discussed 
further below, because convertible securities have optionality.\311\ 
For similar reasons discussed below regarding options, we expressed our 
belief 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.
---------------------------------------------------------------------------

    \310\ See Item C.9.f of proposed Form N-PORT.
    \311\ See text accompanying and following footnote 384 
(discussing information required for options, including delta).
---------------------------------------------------------------------------

    We received several comments relating to the disclosures of 
convertible securities. One commenter requested that the securities be 
consistently reported across funds and include additional instructions 
for calculating delta.\312\ Another commenter noted that calculating 
delta for convertible bonds using the Black-Scholes model, which is 
commonly used for calculating the delta for options would be 
impractical and therefore requested further clarification for 
calculating delta for convertible bonds.\313\ As discussed above, while 
we believe that it is important to receive consistent reporting between 
funds, we have endeavored to limit burdens on funds, when possible. 
Thus, rather than provide prescriptive instructions for funds to 
calculate delta, General Instruction G to Form N-PORT now clarifies 
that funds may use their own

[[Page 81898]]

current methodology.\314\ For example, based on staff experience, we 
understand that delta for some instruments could be calculated using 
certain formulas, such as Black-Scholes, while funds might calculate 
the delta for convertible bonds using a different calculation.\315\ 
Such variations in calculation among funds, or even by the same funds 
with different types of investments, are permissible so long as the 
calculations are consistent with how the fund reports information 
internally and to its current and prospective investors.\316\ However, 
we agree with the commenter that calculating delta for certain 
convertible securities, such as contingent convertible bonds, may not 
be possible. We are therefore adding the clarifying instruction to Item 
C.9.f.v to only provide delta if it is applicable to that 
security.\317\
---------------------------------------------------------------------------

    \312\ See State Street Comment Letter (reporting delta should be 
consistent, but should include the following attributes to define 
the approach, such as: Volatility used, actual volatility used in 
the calculation, and attributes such as mandatory convertible.).
    \313\ See Morningstar Comment Letter.
    \314\ See General Instruction G of Form N-PORT; see also supra 
section II.A.2.a.
    \315\ See Morningstar Comment Letter.
    \316\ See General Instruction G of Form N-PORT.
    \317\ See Item C.9.f.v of Form N-PORT.
---------------------------------------------------------------------------

    Another commenter suggested that we eliminate the additional 
information proposed in Form N-PORT for convertible securities as they 
do not represent significant data points from which to assess 
risk.\318\ We, however, believe that the proposed information will not 
only assist staff with understanding the risks to a fund or the fund 
industry, it will also be used to better understand fund investments, 
industry trends, and new and emerging risks. We continue to believe 
that the items required for convertible securities will be valuable 
information for the staff, investors, and other potential users. As a 
result, we are adopting Item C.9 as proposed, subject to the 
clarifications in Item C.9.e and C.9.f.v. discussed above.\319\
---------------------------------------------------------------------------

    \318\ Wells Fargo Comment Letter (eliminate requirements such as 
whether the conversion is mandatory or contingent, the conversion 
ratio, information about the asset into which the debt is 
convertible, and the delta).
    \319\ See Item C.9 of Form N-PORT.
---------------------------------------------------------------------------

iii. Repurchase and Reverse Repurchase Agreements
    As we proposed, and in addition to the information required above 
for all investments, Form N-PORT requires each fund to report 
additional information for each repurchase and reverse repurchase 
agreement held by the fund. The fund will 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.\320\ 
Funds will also report the principal amount and value of collateral, as 
well as the category of investments that most closely represents the 
collateral.\321\
---------------------------------------------------------------------------

    \320\ See Item C.10.a-Item C.10.e of Form N-PORT. For example, 
if the fund is engaged in a repurchase transaction in which it is 
the cash borrower and is transferring securities to the 
counterparty, the fund will report the transaction as a ``reverse 
repurchase agreement.''
    \321\ See Item C.10.f of Form N-PORT. Funds will report the 
category of investments that most closely represents the collateral, 
selected from among the following (asset-backed securities; agency 
collateralized mortgage obligations; agency debentures and agency 
strips; agency mortgage-backed securities; private label 
collateralized mortgage obligations; corporate debt securities; 
equities; money market; U.S. Treasuries (including strips); other 
instrument). If ``other instrument,'' funds will also include a 
brief description, including, if applicable, whether it is a 
collateralized debt obligation, municipal debt, whole loan, or 
international debt.
---------------------------------------------------------------------------

    These disclosures will enhance the information currently reported 
regarding funds' use of repurchase agreements and reverse repurchase 
agreements. Information regarding repurchase agreements will be 
comparable to similar disclosures currently required to be made by 
money market funds on Form N-MFP. The categories used for reporting 
collateral will 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 will be used in 
Form N-PORT to categories used in other reporting contexts will ease 
reporting burdens and enhance comparability.\322\
---------------------------------------------------------------------------

    \322\ See Money Market Fund Reform 2014 Release, supra footnote 
33, at nn. 1515-1518 and accompanying text (discussing comment 
letter stating that the categories used to report collateral for 
tri-party repurchase agreements to the Federal Reserve Bank of New 
York would allow for regular and efficient comparison of current and 
historical risk factors regarding repurchase agreements on a 
standardized basis).
---------------------------------------------------------------------------

    One commenter agreed with our proposed reporting, but recommended, 
without further elaboration, that reporting of collateral be done on 
the basis of aggregate security type rather than at the individual 
security level.\323\ Another commenter noted that our proposed 
reporting would align not only with information reported on Form N-MFP 
and collected by the Federal Reserve, but also with information 
reported by fund companies operating globally and offering managed 
products within Europe.\324\
---------------------------------------------------------------------------

    \323\ See Wells Fargo Comment Letter.
    \324\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    In contrast, another commenter asserted that funds should apply the 
same taxonomy when reporting collateral that would be used when 
reporting the fund's portfolio investments on Form N-PORT, which would 
result in a more granular disclosure of collateral.\325\ Other 
commenters expressed concerns about public disclosure of this 
information on a transaction-by-transaction basis and suggested that 
this information be collected on a firm-by-firm basis instead or be 
nonpublic, due in part to counterparties' concerns about the disclosure 
of such information to the public, including their competitors.\326\
---------------------------------------------------------------------------

    \325\ See Interactive Data Comment Letter.
    \326\ See SIFMA Comment Letter I; CFA Comment Letter.
---------------------------------------------------------------------------

    After considering these comments, we are adopting this requirement 
as proposed. As mentioned above, the information that funds will report 
is aligned with similar information publicly reported on Form N-MFP by 
money market funds, reported to the Federal Reserve by banks, and 
publicly reported by fund companies operating globally and offering 
managed products in Europe. Uniform reporting of this information under 
the common taxonomy that has already been developed and is being used 
by other financial institutions will help facilitate the linkage of 
data reported on Form N-PORT with data from other filings and sources. 
For these reasons, we are not persuaded by the suggestions of one 
commenter to require collateral to be reported on an aggregate 
level,\327\ nor are we persuaded by the commenter who suggested that 
funds should apply the same taxonomy when reporting collateral that 
would be required when reporting the fund's portfolio investments on 
Form N-PORT,\328\ which would result in data that would be incompatible 
with collateral data reported more broadly elsewhere.
---------------------------------------------------------------------------

    \327\ See Wells Fargo Comment Letter.
    \328\ See Interactive Data Comment Letter.
---------------------------------------------------------------------------

    We are also not persuaded by assertions by commenters that this 
type of information could reveal any strategies competitors could use 
to their advantage. As indicated above, such information is currently 
routinely publicly disclosed in other contexts, and commenters did not 
specify how additional disclosure on Form N-PORT could result in harm. 
More generally, using a different taxonomy for funds with regards to 
repurchase and reverse repurchase agreements or keeping such 
information nonpublic or making it available on only an aggregated 
basis would hinder the ability of Commission

[[Page 81899]]

staff as well as investors and other potential users of this 
information to use the data on Form N-PORT as discussed above.
iv. Derivatives
    As discussed above and in the Proposing Release, 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, 
warrants, and certain convertible bonds, the Commission believes that 
it is 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, warrants, and certain convertible bonds 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 potential risk of loss.
    With this rulemaking, we will 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 will 
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.\329\
---------------------------------------------------------------------------

    \329\ See infra section II.C.2.
---------------------------------------------------------------------------

    While we received comments supporting our proposal to include 
specific information about position-level derivatives,\330\ some 
commenters believed that portfolio-level reporting (as opposed to 
position-level reporting) would be more appropriate for understanding 
how funds use derivatives and funds' derivative-based risks.\331\ Other 
commenters requested that certain position-level disclosures relating 
to derivatives not be publicly reported noting that this information 
could be confusing to investors, proprietary, or potentially used by 
competitors to harm fund investors through front-running or reverse 
engineering of fund investing strategies.\332\ Another requested that 
derivatives disclosure be subject to certain de minimis 
thresholds.\333\
---------------------------------------------------------------------------

    \330\ See, e.g., CFA Comment Letter (``Given the potential risks 
associated with certain uses of derivatives, we support the new 
reporting requirements.''); Wells Fargo Comment Letter.
    \331\ See, e.g., Dreyfus Comment Letter (explaining that an 
investment-by-investment approach to reporting does not adequately 
explain how derivatives are being used); Simpson Thacher Comment 
Letter (derivatives reporting should focus on metrics based on a 
portfolio-level analysis).
    \332\ See, e.g., State Street Comment Letter (details relating 
to nonpublic indexes or custom baskets underlying options and swaps 
contracts); MFS Comment Letter (financing rates for OTC 
derivatives); Pioneer Comment Letter; Wells Fargo Comment Letter; 
SIFMA Comment Letter I (all derivatives information should be 
nonpublic); Invesco Comment Letter (reference assets, specific 
terms, financing rates and contracts terms and conditions); ICI 
Comment Letter (delta for convertible securities, options, and 
warrants and derivative financing rates); Oppenheimer Comment Letter 
(derivatives payment terms, including financing rates); Simpson 
Thacher Comment Letter (position-level reporting for derivatives); 
SIFMA Comment Letter II.
    \333\ See Pioneer Comment Letter.
---------------------------------------------------------------------------

    As we discuss more fully below in section II.A.4, we continue to 
believe that it is important that, in addition to the Commission, 
investors receive enough information in order to evaluate an investment 
and make appropriate investing decisions. Moreover, much of the 
information required in Form N-PORT is already reported in fund 
financial statements, or will be with our amendments to Regulation S-X, 
albeit in an unstructured format. As we describe more fully in section 
II.A.4 below, we generally believe that the reporting requirements of 
Form N-PORT are appropriate given the filer's status as a registered 
investment company with the Commission. Moreover, we generally believe 
that investors, directly and indirectly, should have access to 
portfolio information in a structured data format, to assist them with 
making more informed investing decisions. We thus believe that certain 
position-level information should be reported publicly on a quarterly 
basis.\334\
---------------------------------------------------------------------------

    \334\ See infra section II.A.4.
---------------------------------------------------------------------------

    Consequently, in addition to the information required above for all 
investments, we proposed to require additional information about each 
derivative contract in the fund's portfolio. As proposed, funds would 
report the type of derivative instrument that most closely represents 
the investment (e.g., forward, future, option, etc.).\335\ As discussed 
above in section II.A.2.a, commenters requested that we provide 
definitions of certain items in the form, such as ``derivatives'' and 
``forwards.'' \336\ For the reasons discussed above, we are not 
adopting definitions for these items. Finally, a commenter suggested 
that we organize the disclosure of derivatives as reflected in the 
recently adopted amendments to Form ADV or Item 30 of Form PF arguing 
that these items would standardize the organization and reporting of 
derivatives across different Commission forms.\337\
---------------------------------------------------------------------------

    \335\ See Item C.11.a of proposed Form N-PORT. Funds would 
report the category of derivative that most closely represents the 
investment, selected from among the following (forward, future, 
option, swaption, swap, warrant, other). If ``other,'' funds would 
provide a brief description.
    \336\ See, e.g., T. Rowe Price Comment Letter (``derivatives'' 
and ``forwards''); ICI Comment Letter (``derivatives'').
    \337\ See BlackRock Comment Letter. See also Form ADV Release, 
supra footnote 3.
---------------------------------------------------------------------------

    As discussed below in section II.C.2, the derivative instrument 
type categories identified in Form N-PORT are similar to the categories 
disclosed by funds in amended Regulation S-X. We designed these 
categories to enable funds to report position-level information on 
their investments in derivatives, while leaving enough flexibility to 
allow funds to categorize investments in the future that are not 
currently traded by funds.\338\ In contrast, the categories used in the 
Form ADV Release and Item 30 of Form PF are designed to collect 
aggregated information at the portfolio level for investment advisers 
advising separately managed accounts and private funds, respectively. 
As a result, the categories for Forms PF and ADV must be more specific, 
as the Commission does not receive more detailed position-level 
information for these types of filers. However, in the case of 
registered funds, the current disclosure regime requires funds to 
disclose position-level information to the Commission and investors; 
thus it is not necessary for more standardization across funds 
regarding definitions, as the Commission and investors could always 
review the fund's specific holdings.\339\
---------------------------------------------------------------------------

    \338\ See infra section II.C.2.
    \339\ See generally, Form N-CSR and Form N-Q.
---------------------------------------------------------------------------

    In the case of Form N-PORT, in addition to the categories, the 
Commission will receive additional position-specific data, which will 
allow the user of the information to better understand each position, 
without solely relying on the instrument type. However, we acknowledge 
the potential for confusion regarding the categorization of different 
types of

[[Page 81900]]

swaps and are therefore adopting the derivatives instrument type 
categorizes that we proposed, but subject to a modification in Item 
C.11.a to include a clarification that specifically identifies that 
total return swaps, credit default swaps, and interest rate swaps 
should all be categorized under the ``swap'' instrument type.\340\ We 
are adopting the derivatives instrument categories subject to this 
modification.\341\
---------------------------------------------------------------------------

    \340\ See Item C.11.a of Form N-PORT.
    \341\ See id.
---------------------------------------------------------------------------

    As proposed, funds would also report the name and LEI (if any) of 
the counterparty (including a central counterparty).\342\ We believe, 
and some commenters agreed, that this identifying information should 
assist the Commission, investors, and other potential users in better 
identifying and monitoring derivatives held by funds and the associated 
counterparty risks.\343\ Other than requests to keep counterparty 
information nonpublic \344\ and requests to phase in the disclosure of 
counterparty LEI's,\345\ which are discussed above, we generally 
received positive comments on our proposed counterparty and LEI 
disclosures and are adopting them, as proposed.\346\
---------------------------------------------------------------------------

    \342\ See Item C.11.b of proposed Form N-PORT.
    \343\ See generally Morningstar Comment Letter (``More-frequent 
portfolio disclosures will improve the counterparty information 
available to market participants. As a result, market participants 
could assist the SEC in identifying emerging risks--and they would 
likely direct assets away from counterparties perceived as 
excessively risky.''); CFA Comment Letter (supporting aspects of the 
proposal that would require derivative counterparty information); 
Wells Fargo Comment Letter (same). Commenters to the FSOC Notice 
indicated that counterparty data for derivative disclosures is not 
often available and discussed the need to have more transparency in 
this regard. See, e.g., Comment Letter of Americans for Financial 
Reform to FSOC Notice (Mar. 27, 2015) (``Americans For Financial 
Reform FSOC Notice Comment Letter'') (asserting that counterparty 
data in derivative disclosures is not often available); Comment 
Letter of the Systemic Risk Council to FSOC Notice (Mar. 25, 2015) 
(discussing the need to have information about investment vehicles 
that hold bank liabilities).
    \344\ See, e.g., SIFMA Comment Letter I.
    \345\ See, e.g., State Street Comment Letter; BlackRock Comment 
Letter; see generally supra section II.A.2.a.
    \346\ See Item C.11.b of Form N-PORT; see also Morningstar 
Comment Letter; CFA Comment Letter; Wells Fargo Comment Letter. As 
discussed below in section II.C.2.a, in response to commenters' 
suggestions, for Regulation S-X purposes, we are not requiring funds 
to disclose the counterparty for centrally cleared or exchange 
traded derivatives. See, e.g., rule 12-13, n. 4 of Regulation S-X. 
This is because we believe it may be necessary to have information 
about the central counterparty for a derivative (for example, to 
compare data with other data available to regulators) but such 
information may not be necessary for financial statements, where the 
primary purpose for providing this information to fund investors is 
to make investors aware of the fund's counterparties and any 
associated credit risk.
---------------------------------------------------------------------------

    As proposed, 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.\347\ 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.\348\ Proposed Form N-PORT would require funds to provide a 
description of the reference instrument, including name of issuer, 
title of issue, and relevant securities identifier.\349\ We received 
comments supporting these items \350\ and are adopting them as 
proposed.\351\
---------------------------------------------------------------------------

    \347\ We are requiring similar information on a fund's schedule 
of investments. See infra section II.C.2.
    \348\ See Item C.11.c of proposed Form N-PORT. As discussed 
above, funds would report the number of option contracts in Item 
C.2.a of Form N-PORT. See also supra footnote 265 and accompanying 
text.
    \349\ See Item C.11.c.iii.2 and Item C.11.c.iii.3 of proposed 
Form N-PORT. For the securities identifier, funds would report, if 
available, CUSIP of the reference asset, ISIN (if CUSIP is not 
available), ticker (if CUSIP and ISIN are not available), or other 
unique identifier (if CUSIP, ISIN, and ticker are not available). 
See also supra footnote 254 and accompanying and following text.
    \350\ See Wells Fargo Comment Letter; see also MFS Comment 
Letter.
    \351\ See Item C.11.c.i, Item C.11.c.ii, and Item C.11.c.iii of 
Form N-PORT.
---------------------------------------------------------------------------

    We recognize that some derivatives have underlying assets that are 
indexes of securities or other assets or a ``custom basket'' of assets, 
the components of which are not always publicly available. We proposed 
requirements to ensure that the Commission, investors, and other 
potential users are aware of the components of such indexes or custom 
baskets. As proposed, 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.\352\ We proposed 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 adopted in this release, would continue to be 
required, to disclose their portfolio investments.\353\ We proposed 
that 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.\354\ 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, we proposed that 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.\355\
---------------------------------------------------------------------------

    \352\ See Item C.11.c.iii.2 of proposed Form N-PORT. If the 
reference instrument is a derivative, funds would also indicate the 
category of derivative (e.g., swap) and will provide all information 
required to be reported on Form N-PORT for that type of derivative. 
We received no comments on this requirement and are adopting it as 
proposed.
    \353\ See infra section II.A.4 (discussing proposed rules 
concerning the public disclosure of reports on Form N-PORT).
    \354\ See supra footnote 352.
    \355\ See id. Short positions in the index, if any, would be 
reported as negative numbers. The identifier for each index 
component would include CUSIP, ISIN (if CUSIP is not available), 
ticker (if CUSIP and ISIN are not available), or other identifier 
(if CUSIP, ISIN, and ticker are not available). If other identifier 
is provided, the fund would indicate the type of identifier used.
---------------------------------------------------------------------------

    We received a number of comments on our proposal to publicly 
disclose the components of the underlying index or custom basket. While 
some commenters agreed with our proposal,\356\ others requested that we 
include a higher threshold before requiring reporting.\357\ Some 
commenters, for example, suggested that the threshold for requiring any 
reporting of components be 5% of net asset value of the fund.\358\ 
Others agreed with our proposed 1% threshold but stated that reporting 
should be based on whether the net asset value of the derivative 
instrument that is relying on the index or custom basket exceeds 1% of 
the fund's net asset value, rather than the derivative instrument's 
notional value (as was proposed), as net asset value is a better 
indicator of materiality.\359\
---------------------------------------------------------------------------

    \356\ See, e.g., Morningstar Comment Letter (``Index providers 
are earning revenues from the licensing fees embedded in the 
derivative cost that is born by the fund and therefore its 
shareholders.''); CFA Comment Letter (expressing general support for 
the proposed derivatives reporting requirements).
    \357\ See, e.g., Wells Fargo Comment Letter (additional index 
reporting should only be triggered when a derivative represents 5% 
of NAV); ICI Comment Letter.
    \358\ See id.
    \359\ See, e.g., SIFMA Comment Letter I (``The proposal of 1% 
notional value is entirely different from the predicate requirement 
on which the Commission says the proposal is based. We believe the 
original 1% value requirement is a far better indicator of 
materiality and should be adopted in this connection as well.''); 
Oppenheimer Comment Letter (1% of net (not notional) value of 
derivatives).
---------------------------------------------------------------------------

    We continue to believe that it is important for the Commission,

[[Page 81901]]

investors, and other potential users to have transparency into a fund's 
exposures to assets, regardless of whether the fund directly holds 
investments in those assets or chooses to create those exposures 
through a derivatives contract.\360\ Our proposed one percent threshold 
was 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.\361\ Similar to the 
threshold in the summary schedule of investments, we believe that 
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 nonpublic index for 
instruments that represent a small amount of the fund's overall value.
---------------------------------------------------------------------------

    \360\ We are also modifying Regulation S-X to require similar 
disclosures. See infra section II.C.2.a (discussing proposed rule 
12-13, n. 3 of Regulation S-X).
    \361\ See rule 12-12C, n. 3 of Regulation S-X [17 CFR 210.12-
12C].
---------------------------------------------------------------------------

    Moreover, for purposes of this calculation, we believe that it is 
appropriate to measure whether such derivative instrument exceeds the 
1% threshold based on the derivative's notional value, as opposed to 
the current market value of the derivative, because derivatives with a 
small market value could have a much larger potential impact on a 
fund's performance than the current market value would suggest, and 
thus believe that a derivative's notional value better measures its 
potential contribution to the gains or losses of the fund.\362\
---------------------------------------------------------------------------

    \362\ See Item C.11.c.iii.2 of Form N-PORT. As discussed more 
fully below, we received several comments relating to the 
appropriate calculation of notional amount for derivative 
instruments. See infra footnotes 546-550 and accompanying text. We 
acknowledge that there are multiple ways of calculating notional 
amount for certain investments. See id. While the staff has 
previously provided examples of acceptable notional amount 
calculations, see id., funds may use other methods of calculating 
notional amount so long as the methodology is applied consistently 
and is consistent with the way the fund reports notional amount 
internally and to current and prospective investors. See General 
Instruction G of Form N-PORT.
---------------------------------------------------------------------------

    We also solicited comment on whether we should limit the required 
disclosure of index components to the top 50 components and/or 
components that represent more than 1% of the index. In response to 
this request for comment commenters suggested that once a nonpublic 
index crosses the reporting threshold, we limit disclosure to the top 
50 components and components that represent more than one percent of 
the index based on the notional value of the derivatives, as this 
standard is analogous to the current reporting requirement to identify 
holdings in the summary schedule of investments. Commenters stated that 
this would reduce reporting burdens for funds that invest in indexes 
with a large number of components.\363\
---------------------------------------------------------------------------

    \363\ See current rule 12-12C of Regulation S-X; see, e.g., ICI 
Comment Letter; Oppenheimer Comment Letter; see also SIFMA Comment 
Letter I (top 5 components or the components reflecting 50% of the 
index). Commenters also noted their belief that reporting should be 
based on a percentage of NAV, rather than notional value, as 
percentage of NAV is a better indicator of materiality. See SIFMA 
Comment Letter I; Oppenheimer Comment Letter; contra Morningstar 
Comment Letter (``Arbitrary limits on positions that should be 
disclosed for portfolios or reference indexes can mask the risk of 
an instrument.'').
---------------------------------------------------------------------------

    Some commenters also objected to the public disclosure of the 
components underlying an index as that disclosure could harm the 
intellectual property rights that index providers might assert and, as 
a result, harm investors who may lose the benefit of index products 
that would no longer be available to them, should an index provider 
choose to no longer do business with a fund, rather than have its 
index's components made publicly available.\364\ Other commenters urged 
the Commission to delete this requirement as information on non-public 
indexes or custom baskets may be difficult for funds to obtain.\365\ As 
discussed below in section III.B.3., commenters also noted that 
disclosure of the components of custom baskets underlying swaps are 
considered by some as proprietary information regarding a fund's 
investment strategies and could lead to the indexing strategy being 
imitated, resulting in harm to the fund and its investors through 
reverse engineering and free-riding.\366\
---------------------------------------------------------------------------

    \364\ See, e.g., SIFMA Comment Letter I; Comment Letter of MSCI 
(Aug. 10, 2015) (``MSCI Comment Letter'') (even provision of delayed 
data is a concern).
    \365\ See Simpson Thacher Comment Letter; Dreyfus Comment 
Letter.
    \366\ See, e.g., SIFMA Comment Letter II; MSCI Comment Letter; 
see also infra section III.B.3.
---------------------------------------------------------------------------

    We believe that it is fundamental to the reporting by funds that 
fund shareholders have access to the information necessary to 
understand the exposures of their fund's investments.\367\ Moreover, we 
note that a fund whose investment objective tracks an index or custom 
basket is currently required to publicly disclose its direct holdings 
quarterly in its financial statements.\368\ Likewise, funds should not 
be able to use proprietary indexes to mask exposures to investments 
underlying a custom basket for a swap or options contract.\369\
---------------------------------------------------------------------------

    \367\ See Morningstar Comment Letter.
    \368\ See generally Forms N-CSR and N-Q.
    \369\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    Moreover, while some commenters noted that obtaining information on 
the components of an underlying index may be difficult,\370\ again, we 
believe that fund shareholders need sufficient information to 
understand their fund's exposures, even if such transparency requires 
the fund to renegotiate licensing agreements or, in some cases results 
in the fund having to forego investments in a custom basket or 
nonpublic index.\371\ As discussed further in section II.A.4, below, we 
believe that we have mitigated the potential for harm to fund investors 
that some commenters believed could result from the public reporting of 
non-public indexes and custom baskets by delaying the public reporting 
of reports on Form N-PORT by 60-days.
---------------------------------------------------------------------------

    \370\ See Simpson Thacher Comment Letter; Dreyfus Comment 
Letter.
    \371\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    For the reasons discussed above, we believe that it is important 
that the Commission and investors have full transparency into any index 
or custom basket that significantly contributes to a fund's NAV. 
However, we were also persuaded by commenters that, in cases of indexes 
with a large number of components, and where the index only constitutes 
a small portion of the fund's investments, disclosure of every 
component could yield information on underlying investments that 
constitute only a ``miniscule'' percentage of the fund's NAV.\372\ In 
these cases, requiring complete reporting of all the components could 
be burdensome without providing information that is minimally helpful 
for understanding the role of the investment in the fund. In such 
situations, limiting component reporting to the largest holdings of an 
index or custom basket could appropriately reduce reporting burdens 
while still providing transparency into the investment.
---------------------------------------------------------------------------

    \372\ See ICI Comment Letter.
---------------------------------------------------------------------------

    Accordingly, we are adopting a tiered reporting structure for the 
reporting of the components of an index or custom basket underlying a 
derivative. For investments in a non-public index or custom basket that 
represent more than 1%, but less than 5%, of a fund's net assets, funds 
will be required to report the top 50 components of the basket and, in 
addition, those components that exceed 1% of the notional value of the

[[Page 81902]]

index. For investments in a non-public index or custom basket that 
exceed 5% of a fund's net assets, funds will be required to report all 
components.
    We developed this tiered threshold in response to commenters, 
discussed above, that suggested a higher de minimis threshold of 5% of 
net assets for requiring any reporting of the underlying components. We 
recognize that this approach will be more burdensome for funds holding 
investments that fall within these thresholds than raising the de 
minimis for any reporting of components to 5% of net assets, which was 
suggested by some commenters. We believe, however, that investments 
representing between 1% and 5% of a fund's net assets are sufficiently 
significant to a fund that some reporting of individual components is 
appropriate and will help the Commission staff and investors to 
understand a fund's indirect exposures to investments that are the most 
significant components of the index. Further, limiting reporting for 
such derivative investments to the top 50 components and those 
components that exceed 1% of the notional value of the index, which is 
the same threshold used for the summary schedule of investments, will 
reduce the reporting burdens relative to the proposal for funds with 
such investments.\373\ Conversely, we acknowledge that limiting the 
required reporting for those investments representing between 1% and 5% 
will not provide full transparency into such investments; we believe, 
however, that this approach appropriately balances providing 
information that is sufficient for the Commission and investors to 
understand the composition and risk of such investments, with reducing 
reporting burdens for funds. For investments in non-public indexes or 
custom baskets that exceed 5% of a fund net assets, funds will be 
required to report all components of the index or custom basket, as we 
believe that full transparency is appropriate for such investments 
because, as discussed above, funds should not be able to mask 
significant portions of their investment strategy by using a 
proprietary index or custom basket.
---------------------------------------------------------------------------

    \373\ See Morningstar Comment Letter; SIFMA Comment Letter I.
---------------------------------------------------------------------------

    A commenter also objected to disclosure of unrealized appreciation 
or depreciation for each component of the index or custom basket 
arguing that such information would be costly to maintain as the fund 
would be required to create a record of the value of each underlying 
security in the index at the time the derivatives contract is entered 
into.\374\ We agree. Moreover, we agree with the commenter that Form N-
PORT will already require the fund to provide the unrealized 
appreciation and depreciation for the option or swap contract on a 
monthly basis, making the disclosure of unrealized appreciation and 
depreciation for components of the underlying index unnecessary.\375\
---------------------------------------------------------------------------

    \374\ See, e.g., ICI Comment Letter.
    \375\ See id.; see also Item C.11.c.viii and Item C.11.f.v of 
Form N-PORT.
---------------------------------------------------------------------------

    Thus, if the index's or custom basket's components are not publicly 
available and the notional amount of the derivative represents more 
than 1%, but less than 5%, of the net asset value of the fund, the fund 
will 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), and value, for (i) the 50 largest 
components in the index or custom basket and (ii) any other components 
where the notional value for that component is over 1% of the notional 
value of the index or custom basket.\376\ Likewise, if the index's or 
custom basket's components are not publicly available and the notional 
amount of the derivative represents more than 5% of the net asset value 
of the fund, the fund will 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), and value, 
for all of the index's or custom basket's components.\377\
---------------------------------------------------------------------------

    \376\ See Item C.11.c.viii.2 of Form N-PORT. Short positions in 
the index, if any, will be reported as negative numbers. The 
identifier for each index component would include CUSIP, ISIN (if 
CUSIP is not available), ticker (if CUSIP and ISIN are not 
available), or other identifier (if CUSIP, ISIN, and ticker are not 
available). If other identifier is provided, the fund would indicate 
the type of identifier used.
    \377\ Id.
---------------------------------------------------------------------------

    We also proposed to require funds to report the delta of options 
and warrants, which is the ratio of the change in the value of the 
option or warrant to the change in the value of the reference 
instrument.\378\ This measure reflects the sensitivity of the value of 
the option or warrant to changes in the price of the reference 
instrument.
---------------------------------------------------------------------------

    \378\ See Item C.11.c.vii of proposed Form N-PORT.
---------------------------------------------------------------------------

    We requested comment on our proposal to require funds to report the 
delta for options and warrants. Some commenters supported our proposal 
to require funds to report delta for options and warrants.\379\ Others 
objected to the Commission's proposal to collect delta because they 
believed it would provide little value because of the time delay 
between the end of the period date and the reporting date, and could be 
difficult to calculate.\380\ Others did not specifically object to the 
Commission requiring delta, but requested that delta not be released to 
the public citing concerns of investor confusion regarding the 
subjectivity of delta (i.e. the calculation of delta is necessarily 
based upon inputs and assumptions that could vary between funds).\381\
---------------------------------------------------------------------------

    \379\ See, e.g., Morningstar Comment Letter (requesting clarity 
on specific method to calculate delta); Wells Fargo Comment Letter.
    \380\ See, e.g., Dreyfus Comment Letter (delta statistic may be 
of limited value because of the time lag associated with reporting); 
Simpson Thacher Comment Letter (obtaining information on delta may 
be difficult for funds).
    \381\ See, e.g., ICI Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that the reporting of delta for options and 
warrants will provide the Commission a more accurate measure of a 
fund's full exposure to the fund's investments in options and warrants. 
Accordingly, we believe that having the measurement of delta for 
options is important for the Commission 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 written options as a form of obtaining a leveraged 
position in an underlying reference asset.\382\ Having a measurement of 
exposures created through this type of leverage can help the Commission 
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. Thus, while we acknowledge that the Commission will receive 
delta 30 days after the reporting date, it will still be a useful tool 
for the Commission and its staff to understand the fund's relative 
exposures to changes in the price of the underlying reference asset. 
Moreover, as discussed more fully below in section II.A.4, for the 
reasons discussed in that section, we have determined to make the 
reporting of delta non-public for all three months, which should 
mitigate commenters concerns regarding investor confusion relating to 
the subjectivity of calculating delta. Finally, based upon staff 
experience, we believe that it is general industry practice to 
calculate delta for options, warrants, and swaps.
---------------------------------------------------------------------------

    \382\ See Derivatives Proposing Release, supra footnote 7, at 
80886.
---------------------------------------------------------------------------

    As a result, we are adopting the requirement that funds report 
delta for options and warrants as proposed. While one commenter noted 
that there are a variety of models to calculate delta and requested a 
specific approach to calculating delta, based on staff

[[Page 81903]]

experience analyzing these metrics, we believe that such differences 
are not so large that the results would not be useful to the staff. 
Therefore we are not requiring specific delta formulas be used.\383\ As 
a result, in order to reduce burdens and provide clarity to funds, as 
discussed above, we are adopting an instruction that will allow funds 
to use their own (or their service provider's) methodologies to 
calculate data for reports on Form N-PORT, including delta, subject to 
the instruction and other guidance relating to the Form.\384\
---------------------------------------------------------------------------

    \383\ See Morningstar Comment Letter (``Academic research 
recommends the use of a variety of models to calculate delta 
depending on the instrument: Equity option, swaption, foreign 
exchange option, interest-rate options, and others. The proposal 
could be modified to define a specific approach with specific 
derivations of inputs for the most common type of derivatives.'').
    \384\ See General Instruction G of Form N-PORT.
---------------------------------------------------------------------------

    For futures and forwards (other than foreign exchange forwards, 
which share similarities with foreign exchange swaps and should be 
reported accordingly as discussed below), as proposed, 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.\385\ The description of the 
reference instrument would conform to the same requirements as the 
description of reference instruments for warrants and options.\386\
---------------------------------------------------------------------------

    \385\ See Item C.11.d of proposed Form N-PORT.
    \386\ See Item C.11.d.ii of proposed Form N-PORT. See also supra 
footnote 349.
---------------------------------------------------------------------------

    One commenter noted that the terms ``foreign exchange swaps'' and 
``foreign exchange forwards'' are defined terms under the Commodity 
Exchange Act, as amended by the Dodd-Frank Act and such terms exclude 
non-deliverable forwards, which are included in the Commodity Exchange 
Act's definition of swaps. As the commenter pointed out, such 
distinctions between deliverable and non-deliverable forwards are not 
relevant in the context of reporting of forward contracts on Form N-
PORT.\387\ Accordingly, in order to avoid confusion, we are replacing 
the terms ``foreign exchange swaps'' and ``foreign exchange forwards'' 
with terms used in Regulation S-X, ``forward foreign currency 
contracts'' and ``foreign currency swaps,'' which make no distinction 
between deliverable and non-deliverable foreign exchange 
contracts.\388\ Other than modifying these terms, which should have no 
effect on how information is reported on Form N-PORT, we received no 
other comments to this section of Form N-PORT. We are therefore 
adopting the reporting for futures and forwards as proposed.\389\
---------------------------------------------------------------------------

    \387\ See SIFMA Comment Letter I (the definitions of foreign 
exchange swaps and foreign exchange forwards include a distinction 
between deliverable and non-deliverable foreign exchange contracts). 
See also Department of Treasury, Determination of Foreign Exchange 
Swaps and Foreign Exchange Forwards under the Commodity Exchange Act 
(Nov. 16, 2012) (exempting foreign exchange swaps and foreign 
exchange forwards from the definition of ``swap''); rule 3a69-
2(c)(1) of the Securities Exchange Act [17 CFR 240.3a69-2].
    \388\ See rule 12-13B of Regulation S-X [17 CFR 210.12-13B]; see 
also infra section II.C.2.c.
    \389\ See Item C.11.d of Form N-PORT.
---------------------------------------------------------------------------

    We also received no comments relating to our proposed elements for 
reporting of foreign forward foreign currency contracts and foreign 
currency swaps (other than the above-mentioned term changes) and are 
adopting it substantially as proposed with one clarifying instruction 
with respect to reporting depreciation.\390\ Funds will therefore 
report the amount and description of currency sold, amount and 
description of currency purchased, settlement date, and unrealized 
appreciation or depreciation.\391\
---------------------------------------------------------------------------

    \390\ Throughout, Item C.11, where funds must report unrealized 
appreciation or depreciation, we added the clarifying instruction 
that depreciation should be reported as a negative number. See Item 
C.11.c.viii, Item C.11.d.v, Item C.11.e.iv, Item C.11.f.v, and Item 
C.11.g.v of Form N-PORT.
    \391\ See Item C.11.e of Form N-PORT.
---------------------------------------------------------------------------

    For swaps (other than foreign currency swaps), as proposed, 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.\392\ The description of the reference instrument 
would conform to the same requirements as the description of reference 
instruments for forwards and futures.\393\ Funds would also report 
upfront payments or receipts, unrealized appreciation or depreciation, 
termination or maturity date, and notional amount.\394\
---------------------------------------------------------------------------

    \392\ See Item C.11.f of proposed Form N-PORT. Funds would 
separately report the description and terms of payments to be paid 
and received. The description of the reference instrument, 
obligation, or index would include the information required to be 
reported for the descriptions of reference instruments for warrants, 
options, futures, or forwards.
    \393\ See id.
    \394\ See Item C.11.f.ii-Item C.11.f.v of proposed Form N-PORT.
---------------------------------------------------------------------------

    Commenters expressed concern that publicly disclosing financing 
rates for swaps contracts could harm shareholders as financing rates 
are commercial terms of a deal that are negotiated between the fund and 
the counterparty to the swap.\395\ As several commenters discussed, 
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.\396\ Counterparties could also choose not to 
transact with funds as a consequence of this disclosure, increasing the 
competition for the remaining counterparties resulting in higher fees 
for funds. However, the increased disclosure of a swap's terms may also 
improve the ability of other funds to negotiate more favorable terms 
resulting in more favorable fees and financing terms for funds. 
Further, we designed Form N-PORT to provide information sufficient to 
allow our staff, investors, and other potential users to better 
understand the investments held in a fund's portfolio. Without 
information like the payment terms for derivative instruments, valuing 
the risks and rewards of such an investment could be difficult for 
investors and other potential users. Moreover, in order for the 
Commission to understand such investments, the Commission staff must 
have access to the terms and conditions of such investments, of which 
the financing rates are a critical part.
---------------------------------------------------------------------------

    \395\ See, e.g., MFS Comment Letter; Invesco Comment Letter; ICI 
Comment Letter (public benefit of disclosure does not outweigh 
potential competitive harm). The commenters' concerns regarding the 
public reporting of financing rates is discussed in more detail 
below in section II.A.4.
    \396\ Id.
---------------------------------------------------------------------------

    One commenter noted that proposed Form N-PORT did not include 
certain data elements that relate to the detailed calculations of cash 
flows, such as inflation index based values and lags associated with 
principal resets for over-the-counter swaps and caps and floors 
embedded in swaps.\397\
---------------------------------------------------------------------------

    \397\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    As we discussed above, as proposed, Form N-PORT would require funds 
to provide a description and terms necessary for a user of financial 
information to understand the terms of payments to be paid and 
received.\398\ We recognize that in complying with these instructions 
funds could determine that they should report terms like those 
suggested by the commenter for certain instruments. Given the variety 
of swaps instruments--for example, interest rate swaps, credit defaults 
swaps, total return swaps, each with its own respective terms and 
conditions--however, we do not believe that it is appropriate to 
specify the terms

[[Page 81904]]

of the swap with the level of granularity suggested by the commenter 
beyond what we specified in the instructions to Form N-PORT. As a 
result, we are adopting Form N-PORT's swaps reporting section 
substantially as proposed.\399\
---------------------------------------------------------------------------

    \398\ See supra footnote 392.
    \399\ See Item C.11.f of Form N-PORT.
---------------------------------------------------------------------------

    Finally, for derivatives that do not fall into the categories 
enumerated in Form N-PORT, we proposed that funds would provide a 
description of information sufficient for a user of financial 
information to understand the nature and terms of the investment.\400\ 
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.\401\ As proposed, the 
description of the reference instrument would conform to the same 
requirements as the description of reference instruments for options 
and warrants.\402\ Funds would also report termination or maturity (if 
any), notional amount(s), unrealized appreciation or depreciation, and 
the delta (if applicable).\403\
---------------------------------------------------------------------------

    \400\ See Item C.11.g of proposed Form N-PORT.
    \401\ See Item C.11.g.i of proposed Form N-PORT.
    \402\ See id; see also supra footnote 393 and accompanying text.
    \403\ See Item C.11.g.ii-Item C.11.g.v of proposed Form N-PORT.
---------------------------------------------------------------------------

    We received no comments on this aspect of the proposal other than 
one commenter that noted that the proposed list of derivative 
``categories'' could leave major categories of derivatives to be 
reported as ``other.'' \404\ As we discussed above, we continue to 
recognize that new derivatives products will evolve, and therefore Form 
N-PORT's derivatives reporting requirements are designed to be flexible 
enough to include the reporting of new investment products that may 
emerge. Moreover, funds may only categorize a derivatives as ``other'' 
if none of the identified categories applies, thus limiting the number 
of derivatives that will be categorized as ``other.'' \405\ For these 
reasons, we are adopting the reporting requirements for other 
derivatives as proposed.\406\
---------------------------------------------------------------------------

    \404\ Morningstar Comment Letter.
    \405\ See also Morningstar Comment Letter (noting that the 
current taxonomy for Form N-PORT does not provide sufficient details 
for credit default swaps--including whether credit default swaps 
should be categorized as swaps or options). As discussed above, we 
have modified the swaps section of the form to make clear credit 
default swaps would be reported as a swap.
    \406\ See Item C.11.g of Form N-PORT.
---------------------------------------------------------------------------

v. Securities on Loan and Cash Collateral Reinvestment
    As discussed above, and as we proposed, we will 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.\407\ We are also requiring, substantially 
as proposed, 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 will report: (1) Whether any 
portion of the investment was on loan by the fund, and, if so, the 
value of the investment on loan; \408\ (2) whether any amount of the 
investment represented reinvestment of the cash collateral and, if so, 
the dollar amount of such reinvestment; \409\ and (3) whether any 
portion of the investment represented non-cash collateral treated as 
part of the fund's assets and received to secure loaned securities and, 
if so, the value of such non-cash collateral.\410\
---------------------------------------------------------------------------

    \407\ See supra footnote 196 and preceding, accompanying, and 
following text.
    \408\ See Item C.12.c of Form N-PORT.
    \409\ See Item C.12.a of Form N-PORT.
    \410\ See Item C.12.b of Form N-PORT.
---------------------------------------------------------------------------

    These disclosures will 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 information will also allow us to determine 
whether funds that are relying on exemptive orders or no-action 
assurances to engage in securities lending are complying with any 
associated conditions regarding collateral received for such 
activities. This will 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 risk 
and risk of loss, as well as better understand any potential leverage 
creation through the reinvestment of collateral.\411\ These disclosures 
will also help identify those investments that funds might have to sell 
or redeem in the event of widespread termination or default by 
borrowers. More generally, we expect that this information will help to 
address concerns expressed by industry participants about the lack of 
transparency in funds' securities lending transactions.\412\
---------------------------------------------------------------------------

    \411\ As discussed above, commenters to the FSOC Notice 
suggested that enhanced securities lending disclosures could be 
beneficial to investors and counterparties. See supra footnote 190.
    \412\ See, e.g., SEC, Transcript of Securities Lending and Short 
Sale Roundtable (Sept. 29, 2009), available at https://www.sec.gov/news/openmeetings/2009/roundtable-transcript-092909.pdf (discussing, 
among other things, the lack of publicly available information to 
market participants about securities lending transactions).
---------------------------------------------------------------------------

    One commenter suggested that non-cash collateral information should 
not be publicly disclosed but did not elaborate on why such information 
should be kept nonpublic.\413\ As discussed herein, we believe that 
disclosure of this information can serve many purposes, including 
improving the ability of Commission staff, as well as investors, 
brokers, dealers, and other market participants to better understand 
the collateral received by funds and the associated potential liquidity 
and loss risks, as well as identification of those instruments that one 
or more funds might have to sell in the event of default by borrowers. 
For these reasons, we are requiring, as proposed, that this information 
be publicly reported on Form N-PORT.
---------------------------------------------------------------------------

    \413\ See Schwab Comment Letter.
---------------------------------------------------------------------------

    Several commenters recommended that non-cash collateral be reported 
in aggregate terms rather than as individual portfolio positions.\414\ 
As discussed above in section II.A.2.d, one commenter explained that 
funds typically do not treat non-cash collateral as fund assets and 
consequently do not generally include non-cash collateral in their 
schedule of portfolio investments.\415\ As discussed above, we are 
revising Form N-PORT to add a new Item requiring funds to report the 
aggregate principal amount and aggregate value of each type of non-cash 
collateral received for loaned securities that is not treated as a fund 
asset.\416\ If the fund does treat the non-cash collateral as a fund 
asset and it is therefore included in the fund's schedule of portfolio 
investments, the fund will identify such assets on an investment-by-
investment basis, as proposed.\417\
---------------------------------------------------------------------------

    \414\ See RMA Comment Letter; ICI Comment Letter.
    \415\ See ICI Comment Letter.
    \416\ Id. (the Commission should require an additional item in 
which funds could disclose the details of any non-cash collateral 
received). See Item B.4 of Form N-PORT. See also supra footnote 208 
and accompanying text.
    \417\ See Item C.12.b of Form N-PORT.
---------------------------------------------------------------------------

h. Miscellaneous Securities
    In Part D of Form N-PORT, as we proposed, and as currently 
permitted by Regulation S-X, funds will have the option of identifying 
and reporting certain investments as ``miscellaneous securities.'' 
\418\ Specifically, Form N-PORT permits funds to report an

[[Page 81905]]

aggregate amount not exceeding 5 percent of the total value of their 
portfolio investments in one amount as ``Miscellaneous securities,'' 
provided that securities so listed are not restricted, have been held 
for not more than one year prior to the date of the related balance 
sheet, and have not previously been reported by name to the 
shareholders, or set forth in any registration statement, application, 
or report to shareholders or otherwise made available to the public. 
Funds electing to separately report miscellaneous securities will use 
the same Item numbers and report the same information that would be 
reported for each investment if it were not a miscellaneous 
security.\419\ Consistent with the disclosure regime under Regulation 
S-X, all such responses regarding miscellaneous securities will be 
nonpublic and will 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 will otherwise be publicly 
available.\420\ 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.\421\ The only information publicly 
reported for miscellaneous securities will be their aggregate value, 
which is consistent with current practice as permitted by Regulation S-
X.\422\
---------------------------------------------------------------------------

    \418\ See generally supra footnote 99 and accompanying text.
    \419\ See Part D of Form N-PORT.
    \420\ See rule 12-12 of Regulation S-X.
    \421\ See, e.g., Shareholder Reports And Quarterly Portfolio 
Disclosure Of Registered Management Investment Companies, Investment 
Company Act Release No. 26372 (Feb. 27, 2004) [69 FR 11243 (Mar. 9, 
2004)] (``Quarterly Portfolio Holdings Adopting Release'') at n. 64 
and accompanying text.
    \422\ See supra footnotes 98-99 and accompanying text.
---------------------------------------------------------------------------

    Commenters generally supported the separate nonpublic disclosure of 
individual miscellaneous securities, and noted that the current 
reporting provisions under Regulation S-X regarding miscellaneous 
securities have been effective and not abused.\423\ One commenter 
sought clarification as to whether an investment identified as a 
miscellaneous security in reports filed on Form N-PORT for the third 
month of each fiscal quarter (i.e., reports that would be made public) 
would also need to be identified as a miscellaneous security in reports 
for the first and second months of each fiscal quarter (i.e., reports 
that would be nonpublic).\424\ As discussed further below, all 
information reported on Form N-PORT for the first and second months of 
each fiscal quarter will be nonpublic. Consequently, there is no need 
for funds to designate any of their investments for those reporting 
periods as miscellaneous securities. For additional clarity, however, 
we are adopting a modification from the proposal to instruct funds to 
only identify miscellaneous securities in reports filed for the last 
month of each fiscal quarter.\425\ Another commenter questioned whether 
miscellaneous securities should be measured at fair value or estimated 
exposure, and recommended that miscellaneous securities should be 
measured at notional, or delta-adjusted exposure, rather than book 
value.\426\ As we noted in the proposal, our intent in allowing funds 
to designate certain investments as miscellaneous securities is to 
allow funds to continue to report such information consistent with 
current practice as permitted by Regulation S-X.\427\ Accordingly, we 
continue to believe that value rather than exposure should be used in 
determining which investments qualify as miscellaneous securities 
(i.e., investments totaling 5 percent or less of the total value of the 
fund's portfolio), which is consistent with current practice as 
permitted under Regulation S-X. For these reasons, we are adopting this 
aspect of Form N-PORT as proposed.
---------------------------------------------------------------------------

    \423\ See SIFMA Comment Letter I; Morningstar Comment Letter.
    \424\ See CRMC Comment Letter.
    \425\ See Part D of Form N-PORT (``For reports filed for the 
last month of each fiscal quarter, report miscellaneous securities. 
. . .'').
    \426\ See Morningstar Comment Letter.
    \427\ See Proposing Release, supra footnote 7, at n. 149 and 
accompanying and following text.
---------------------------------------------------------------------------

i. Explanatory Notes
    In Part E of Form N-PORT, as was proposed, funds will have the 
option of providing explanatory notes relating to the filing.\428\ 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) will be 
publicly available, whereas notes provided in nonpublic filings of Form 
N-PORT will remain nonpublic.\429\ Funds will also report, as 
applicable, the Part or Item number(s) to which the notes are 
related.\430\
---------------------------------------------------------------------------

    \428\ See Part E of Form N-PORT. Cf. Item 4 of Form PF 
(providing advisers to private funds the option of explaining any 
assumptions that they made in responding to any questions in the 
form).
    \429\ See infra section II.A.4.
    \430\ See Part E of Form N-PORT.
---------------------------------------------------------------------------

    These notes, which will 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 seemingly anomalous 
responses that may benefit from further explanation or discuss issues 
that could not be adequately addressed elsewhere given the constraints 
of the form. Similar information in other contexts has assisted 
Commission staff in better understanding the information provided by 
funds, and we expect that explanatory notes provided on Form N-PORT 
would do the same.\431\
---------------------------------------------------------------------------

    \431\ See, e.g., Item C.24 of Form N-MFP (``Explanatory notes. 
Disclose any other information that may be material to other 
disclosures related to the portfolio security.'').
---------------------------------------------------------------------------

    One commenter supported the proposal to allow funds to report 
explanatory notes, but requested that the notes remain nonpublic.\432\ 
Likewise, another commenter recommended that funds be allowed to 
designate explanatory notes as nonpublic, on a case-by-case basis.\433\ 
We are partially persuaded by these requests. We believe that to the 
extent the explanatory notes would be helpful to investors, such notes 
ideally should be publicly available. We also note that similar 
explanatory notes are available on Form N-MFP and are publicly 
available.\434\ However, we recognize that certain items on Form N-PORT 
will involve nonpublic information, and thus we believe it is 
appropriate that explanatory notes related to those items should be 
nonpublic as well. As a result, we have determined that explanatory 
notes related to nonpublic items such as miscellaneous securities, 
country of risk and economic exposure, or delta for individual options, 
warrants, and convertible securities will be nonpublic.\435\ However, 
explanatory notes related to other items on Form N-PORT will be 
publicly available.
---------------------------------------------------------------------------

    \432\ See SIFMA Comment Letter I.
    \433\ See Dechert Comment Letter.
    \434\ See Item C.24 of Form N-MFP (``Explanatory notes. Disclose 
any other information that may be material to other disclosures 
related to the portfolio security. If none, leave blank.'').
    \435\ See supra footnotes 282-287 and accompanying and preceding 
text (discussing country of risk and economic exposure) and 
footnotes 378-381 and accompanying text (discussing delta for 
options, warrants, and convertible securities).
---------------------------------------------------------------------------

    As discussed above, funds may generally use their own internal 
methodologies and the conventions of their service providers in 
reporting information on Form N-PORT.\436\ Funds may explain any of 
their methodologies,

[[Page 81906]]

including related assumptions, in Part E of Form N-PORT.\437\
---------------------------------------------------------------------------

    \436\ See supra footnote 79.
    \437\ See Instruction G to Form N-PORT (``A Fund may explain any 
of its methodologies, including related assumptions, in Part E.'').
---------------------------------------------------------------------------

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, as proposed, a fund 
will also attach the fund's complete portfolio holdings as of the close 
of the period covered by the report. These portfolio holdings will be 
presented in accordance with the schedules set forth in Sec. Sec.  
210.12-12 to 12-14 of Regulation S-X, and will not be required to be 
reported in a structured data format.
    As discussed further below in section II.B, we are rescinding Form 
N-Q because reports on Form N-PORT for the first and third fiscal 
quarters will 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 also recognize that some individual investors 
may not want to access the data in an XML format. 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, as 
proposed, we are requiring that, for reports on Form N-PORT for the 
first and third quarters of a fund's fiscal year, the fund will attach 
its complete portfolio holdings for that fiscal quarter, presented in 
accordance with the schedules set forth in Sec. Sec.  210.12-12 to 12-
14 of Regulation S-X.
    Requiring funds to attach these portfolio holdings schedules to 
reports on Form N-PORT will 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. 
This will 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.
    Consistent with current practice and our proposal, funds will 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.\438\ In addition, although we proposed that 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, we have modified this 
requirement from the proposal to allow funds 60 days.
---------------------------------------------------------------------------

    \438\ See supra footnote 27 (discussing current requirements to 
transmit reports to shareholders); infra section II.C (discussing 
our amendments to Regulation S-X).
---------------------------------------------------------------------------

    Several commenters requested that funds be permitted to file 
Regulation S-X compliant portfolio holdings schedules within 60 days 
after the end of the reporting period for the first and third fiscal 
quarters consistent with how Form N-Q is filed today, rather than 
within 30 days after the end of the reporting period, as we 
proposed.\439\ In light of the concerns raised by commenters about the 
time needed to prepare, validate, and file this information, as well as 
the fact that these schedules are designed for the benefit for 
investors rather than the Commission and regardless of when this 
information is filed with us it would not be made public to investors 
until 60 days after the end of the reporting period, we are extending 
the deadline to file such information until 60 days after the end of 
the relevant reporting period for the first and third fiscal 
quarters.\440\
---------------------------------------------------------------------------

    \439\ See Oppenheimer Comment Letter; State Street Comment 
Letter; Vanguard Comment Letter; Pioneer Comment Letter; Invesco 
Comment Letter; SIFMA Comment Letter I; ICI Comment Letter.
    \440\ See Part F of Form N-PORT.
---------------------------------------------------------------------------

3. Reporting of Information on Form N-PORT
    As discussed above, we proposed that funds would report information 
on Form N-PORT in XML, so that Commission staff, investors, and other 
potential users could download structured data for immediate 
aggregation and comparison, for example by creating 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.\441\ 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 manual entry.\442\
---------------------------------------------------------------------------

    \441\ Forms N-CSR and N-Q are required to be filed in HTML or 
ASCII/SGML. See rule 301 of Regulation S-T [17 CFR 232.301]; EDGAR, 
Filer Manual--Volume II, Version 27 (June 2014) at 5-1, available at 
https://www.sec.gov/info/edgar/edgarfm-vol2-v27.pdf.
    \442\ See, e.g., IDC Comment Letter (``We fully support the 
SEC's efforts to collect information in a structured data format to 
enhance its ability to aggregate and analyze the information and 
data.''); but see Comment Letter of John Wahh (May 27, 2015) (``Wahh 
Comment Letter'') (questioning why the Commission needs to require 
structured data for funds); Comment Letter of L.A. Schnase (July 2, 
2015) (``Schnase Comment Letter'') (questioning whether requiring 
structured reporting is appropriate or necessary for fund filings). 
See also Proposing Release, supra footnote 7, at 92-93.
---------------------------------------------------------------------------

    Most commenters generally supported reporting in a structured 
format. Several commenters supported our proposal to require reports on 
Form N-PORT in XML,\443\ while others advocated for the eXtensible 
Business Reporting Language (``XBRL''), a tagged system that is based 
on XML and was created specifically for the purpose of reporting 
financial and business information.\444\ Another commenter noted that 
the Commission should standardize the formatting requirements across 
all fund reporting in order to ease the burden on funds that would have 
to comply with different formatting requirements (i.e., ASCII/TXT, 
HTML, XBRL, XML).\445\ Finally, another commenter noted that much of 
the information that will be reported in reports on Form N-PORT is 
already available in other Commission filings and is duplicative.\446\
---------------------------------------------------------------------------

    \443\ See, e.g., SIFMA Comment Letter I; ICI Comment Letter; 
Morningstar Comment Letter (``We believe a single standard XML 
framework, as either an extension of current schema or an alignment 
with the emerging interoperability of the ISO standard, could ease 
reporting burdens.'').
    \444\ See, e.g., Comment Letter of XBRL US (Aug. 11, 2015) 
(``XBRL US Comment Letter''); Comment Letter of Deloitte & Touche 
LLP (Aug. 11, 2015) (``Deloitte Comment Letter''); but see 
Morningstar Comment Letter (``Extensible Business Reporting Language 
has had very limited success, and certain aspects of the standard 
are too lenient for regular data validation.'').
    \445\ See Schnase Comment Letter (Commission should also ease 
the burdens on funds by allowing funds to input their data through a 
pre-formatted web portal or web form). Based on staff experience 
with XML filings, we believe that it is actually less burdensome for 
most funds to report fund information directly into an XML filing, 
rather than go through the time consuming exercise of manually 
entering fund data into a pre-formatted web form.
    \446\ See Wahh Comment Letter.
---------------------------------------------------------------------------

    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 
is the most appropriate method of structuring this type of data.\447\ 
Moreover, the

[[Page 81907]]

interoperability of data between Forms N-MFP, PF, and N-PORT will aid 
the staff with cross-checking information reported to the Commission 
and in monitoring the fund industry.\448\ As discussed further below in 
the economic analysis, the XML format will also improve the quality of 
the information disclosed by imposing constraints on how the 
information will be provided, by providing a built-in validation 
framework of the data in the reports.\449\ While we acknowledge that 
some of the information we are requiring in Form N-PORT is duplicative 
to information filed in other forms, filing this information in an XML 
format will allow the staff to more efficiently review and analyze data 
for industry trends and risk monitoring purposes. We are therefore 
adopting the requirement that reports on Form N-PORT be filed in an XML 
format as proposed.\450\
---------------------------------------------------------------------------

    \447\ We anticipate that the XML structured data file would be 
compatible with a wide range of open source and proprietary 
information management software applications. Continued advances in 
structured data software, search engines, and other web-based tools 
may further enhance the accessibility and usability of the data. 
See, e.g., Money Market Fund Reform, Investment Company Act Release 
No. 29132 (Feb. 23, 2010) [75 FR 10059 (Mar. 4, 2010)] (``Money 
Market Fund Reform 2010 Release'') at n. 341.
    \448\ See Morningstar Comment Letter.
    \449\ See infra section III.B.2.
    \450\ See also infra section II.D.1.
---------------------------------------------------------------------------

    We considered, as several commenters suggested, alternative formats 
to XML, such as XBRL. However, while XBRL allows issuers to capture the 
rich complexity of financial information presented in accordance with 
GAAP, we believe that XML is more appropriate for the reporting 
requirements that we are adopting. Form N-PORT, as well as Form N-CEN, 
as adopted, will contain a set of relatively simple characteristics of 
the fund's portfolio- and position-level data, such as fund and class 
identifying information, that is more suited for XML than XBRL, as 
explained further in section III.F below.
    We also considered, as one commenter suggested, ways to standardize 
the formatting requirements across all fund reporting. However, based 
on staff experience reviewing fund filings, we believe that different 
filing formats (e.g., PDF, HTML, XML) are appropriate for different 
types of filings, depending on their uses. For example, while PDF and 
HTML filings might be appropriate based on the filer, the content, and 
the end-user of the data, the PDF and HTML formats are not designed for 
conveying large quantities of data that require more robust validations 
to ensure data quality and consistency for aggregation, comparison, and 
analysis purposes.\451\
---------------------------------------------------------------------------

    \451\ See id.
---------------------------------------------------------------------------

    We proposed that funds report information on Form N-PORT on a 
monthly basis, no later than 30 days after the close of each 
month.\452\ For the reasons discussed herein, 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.\453\
---------------------------------------------------------------------------

    \452\ Commission staff understands that certain funds currently 
report their investments to shareholders as of the last business day 
of the reporting period, while other funds report their investments 
as of the last calendar day of the reporting period. In recognition 
of this fact, and in an effort to avoid disruptions to current fund 
operations, the information reported on Form N-PORT may reflect the 
fund's investments as of the last business day, or last calendar 
day, of the month for which the report is filed.
    \453\ As discussed above, portfolio schedules are currently 
available to the public in reports that are mailed to shareholders 
or filed with the Commission either 60 or 70 days following the end 
of each reporting period. See supra footnote 27 and accompanying 
text.
---------------------------------------------------------------------------

    Several commenters requested that we instead require quarterly 
reporting, either permanently or for an initial period, citing to 
either data security concerns (discussed below), the increased filing 
burdens of Form N-PORT, or both.\454\ However, 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 will increase the frequency of portfolio reporting, 
which we believe will be useful to the staff for fund monitoring, 
particularly in times of market stress. This will also triple the 
frequency that data is reported to the Commission in a given year, as 
well as ensure that the Commission has more current information, which 
should in turn enhance the ability of staff to perform analyses of 
funds in the course of monitoring for industry trends, or identifying 
issues for examination or inquiry.
---------------------------------------------------------------------------

    \454\ See, e.g., Comment Letter of Dodge & Cox (Aug. 7, 2015) 
(``Dodge & Cox Comment Letter'') (data security concerns); ICI 
Comment Letter (Commission should ensure that it is prepared to 
protect sensitive fund data before requiring monthly disclosures of 
fund holdings); MFS Comment Letter (same); Oppenheimer Comment 
Letter (data security concerns and burden of monthly filings); Carol 
Singer Comment Letter.
---------------------------------------------------------------------------

    Notwithstanding data security concerns, which are discussed further 
below, commenters generally supported the proposed requirement for 
monthly reporting.\455\ However, some commenters requested that we 
extend the monthly reporting deadline from 30 days to a longer period, 
such as 45 or 60 days.\456\ Commenters noted that the data required by 
Form N-PORT resides on multiple platforms, including with third-party 
service providers, and that the time it will take to compile data, 
verify it, and convert it to an XML filing format is significant.\457\ 
Additionally, one commenter stated that funds that have high volumes of 
as-of trades, such as funds that invest heavily in bonds and 
derivatives, could take longer to complete their month-end 
reconciliations.\458\ Finally, the same commenter noted that retrieving 
information from multiple portfolio managers of sub-advised funds could 
also delay the process of month-end reconciliations.\459\ Other 
commenters requested that we revise the filing periods for closed-end 
funds because closed-end funds may not have approved NAVs for 45-days 
or longer following month-end.\460\
---------------------------------------------------------------------------

    \455\ Vanguard Comment Letter (``We generally support filing the 
new Form N-PORT on a monthly basis with a 30-day lag.''); 
Morningstar Comment Letter; Franco Comment Letter.
    \456\ See, e.g., Vanguard Comment Letter (45 days after month 
end); MFS Comment Letter (same); ICI Comment Letter (same); T. Rowe 
Price Comment Letter (same); BlackRock Comment Letter (same); SIFMA 
Comment Letter I (45-60 day reporting window); SIFMA Comment Letter 
II (same); Dreyfus Comment Letter (45-60 days after month-end and 
move to bi-monthly or quarterly reporting); CRMC Comment Letter (60 
days after close of month); Pioneer Comment Letter (same); Invesco 
Comment Letter (same); Dechert Comment Letter (longer period, 
generally); but see State Street Comment Letter (Supporting 30 day 
deadline, but requesting an additional 15 days for the first-year of 
reporting).
    \457\ See, e.g., Vanguard Comment Letter; MFS Comment Letter.
    \458\ See State Street Comment Letter. The same commenter also 
noted that funds that have high volumes of over-the-counter 
derivatives trading would need more time to file reports on Form N-
PORT because it would take the funds time to collect all of the 
fully executed derivatives contracts from counterparties before 
reporting at month-end.
    \459\ See id.
    \460\ See Comment Letter of UMB Fund Services, Inc. (Aug. 14, 
2015); Carol Singer Comment Letter. Based upon staff experience, it 
is our understanding that most closed-end funds strike their NAV on 
at-least a monthly basis. Those that do not can do so, for Form N-
PORT reporting purposes, by using the internal methodologies 
consistent with how they report internally and to current and 
prospective investors. See General Instruction G of Form N-PORT.
---------------------------------------------------------------------------

    We are requiring that funds file reports on Form N-PORT within 30 
days of month-end. Based on staff experience with funds and fund 
filings, we believe that 30 days is sufficient time to report this 
information. Separately, we believe that requiring funds to file 
reports more than 30 days after month end will result in less timely 
data being submitted to the

[[Page 81908]]

Commission, which will reduce the utility of portfolio information to 
the Commission. Therefore, we believe a 30-day filing period strikes 
the proper balance even though we recognize that preparing reports on 
Form N-PORT will initially require a significant effort by funds.\461\ 
Moreover, as one commenter noted while advocating for bi-monthly or 
quarterly reporting, lag times of more than 30 days would make monthly 
reporting impractical, as reports would overlap with preparation 
time.\462\ We also note that several commenters also noted that 
reporting on the same basis the fund uses to calculate NAV (which is 
generally on a T+1 basis), which the Form, as adopted, explicitly 
requires, will take less time relative to reporting on a T+0 basis, 
which is used for financial reporting.\463\ For each of these reasons, 
we are adopting, as proposed, our requirement for reports on Form N-
PORT to be filed with the Commission within 30 days of month-end.\464\
---------------------------------------------------------------------------

    \461\ See infra section III.B.3.
    \462\ Dreyfus Comment Letter (advocating for bi-monthly or 
quarterly reporting, with 45-60 days to file reports on Form N-
PORT).
    \463\ See Schwab Comment Letter (reporting that converting from 
T+1 to T+0 accounting would add approximately 6-10 days to the 
process of compiling data for Form N-PORT). Commenters acknowledged 
that reporting holdings on a T+1 basis would save time and compiling 
data for month-end reporting. Some commenters stated that 45-days 
would be needed to file reports on Form N-PORT on a T+0 basis, 
however they suggested that 30 days could be sufficient with T+1 
reporting. See Schwab Comment letter (urging the use of T+1 
accounting or ``alternatively'' recommending a minimum of 45 days); 
Wells Fargo Comment Letter (recommending a 45 day reporting period 
if T+0 reporting is required); Others explicitly recommended a 45-
day filing period even if we allow filing on T+1 basis. See ICI 
Comment Letter; Oppenheimer Comment Letter.
    \464\ See General Instruction A of proposed Form N-PORT.
---------------------------------------------------------------------------

    Several commenters discussed the need for appropriate data security 
practices for the data on Form N-PORT that will be kept nonpublic.\465\ 
In many cases, these commenters stated that these data items could be 
competitively sensitive and that a breach could result in harm to the 
reporting funds. Some commenters also highlighted the need for 
appropriate data security safeguards should the Commission determine in 
the future to share any of the nonpublic information with one or more 
other regulatory agencies.\466\ Some of these commenters believed that, 
before requiring nonpublic reports on Form N-PORT, the Commission 
should complete an independent, third-party review and verification of 
its data security practices and recommended that the Commission revisit 
its practices on an ongoing basis.\467\ Some commenters suggested that 
the Commission provide additional information about its data security 
controls or its protocols for responding to an identified breach.\468\ 
As discussed above, several commenters requested that we require 
quarterly, rather than monthly, reports on Form N-PORT, citing to data 
security concerns.\469\
---------------------------------------------------------------------------

    \465\ See CRMC Comment Letter; Dodge & Cox Comment Letter 
(recommending that the reporting requirement be suspended in the 
event of a data security breach); IDC Comment Letter; ICI Comment 
Letter; MFS Comment Letter; Comment Letter of Mutual Fund Directors 
Forum (Aug. 11, 2015) (``Mutual Fund Directors Forum Comment 
Letter'') (recommending that the Commission implement data security 
recommendations of the Government Accountability Office); 
Oppenheimer Comment Letter; SIFMA Comment Letter II; Simpson Thacher 
Comment Letter; State Street Comment Letter; Vanguard Comment Letter 
(recommending that the compliance period be extended to allow more 
time for the Commission to assess the data security of its systems).
    \466\ See CRMC Comment Letter; ICI Comment Letter.
    \467\ See IDC Comment Letter (noting recent report by the 
Government Accountability Office); ICI Comment Letter (noting recent 
reports by the Government Accountability Office and the Commission's 
Office of Inspector General and recommending specific data security 
practices); MFS Comment Letter; Oppenheimer Comment Letter (noting 
recent reports by the Government Accountability Office and the 
Commission's Office of Inspector General).
    \468\ See ICI Comment Letter (recommending that the Commission 
notify affected funds in the event of a breach); MFS Comment Letter; 
SIFMA Comment Letter II; Simpson Thacher Comment Letter 
(recommending that the Commission issue a release addressing data 
security and accepting public comments before adopting new reporting 
requirements).
    \469\ See supra footnote 454 and accompanying text.
---------------------------------------------------------------------------

    The Commission recognizes the importance of sound data security 
practices and protocols for nonpublic information, including 
information that may be competitively sensitive. The Commission has 
substantial experience with the storage and use of nonpublic 
information reported on Form PF, delayed public disclosure of 
information on Form N-MFP (although the Commission no longer delays 
public disclosure of reports on Form N-MFP), as well as other nonpublic 
information that the Commission handles in its course of business. 
Commission staff is carefully evaluating the data security protocols 
that will apply to nonpublic data reported on Form N-PORT in light of 
the specific recommendations and concerns raised by commenters. Drawing 
on its experience, the staff is working to design controls and systems 
for the use and handling of Form N-PORT data in a manner that reflects 
the sensitivity of the data and is consistent with the maintenance of 
its confidentiality.\470\ In advance of the compliance date, we expect 
that the staff will have reviewed the controls and systems in place for 
the use and handling of nonpublic information reported on Form N-PORT.
---------------------------------------------------------------------------

    \470\ See Form PF Adopting Release, supra footnote 80. We 
recognize that there are differences between the N-PORT reporting 
requirements and the Form PF reporting requirements, such as 
frequency, granularity, and registration status, and our recognition 
of these differences guides our evaluation of appropriate measures 
for preservation of data security for reported information.
---------------------------------------------------------------------------

4. Disclosure of Information Reported on Form N-PORT
    As discussed above, we proposed that the information reported on 
Form N-PORT for the third month of each fund's fiscal quarter be made 
publicly available 60 days after the end of the Fund's fiscal 
quarter.\471\ We also proposed that the information reported on Form N-
PORT for the first and second months of each fund's fiscal quarter, and 
any information reported in Part D of the Form, not be made 
public.\472\
---------------------------------------------------------------------------

    \471\ See General Instruction F of proposed Form N-PORT.
    \472\ Id.
---------------------------------------------------------------------------

    Comments were mixed on this aspect of the proposal. We received a 
number of comments objecting to the public disclosure of any 
information on Form N-PORT on a quarterly basis.\473\ Others generally 
supported, or did not oppose, quarterly public disclosure of Form N-
PORT, but requested that certain information items be kept 
nonpublic.\474\ In discussing these alternatives, several commenters 
noted similarity to the data that the Commission collects on a 
nonpublic basis from private funds on Form PF.\475\ Finally, some 
commenters called for more frequent public disclosure of the 
information on Form N-PORT, as the information could assist 
intermediaries and market professionals with evaluating whether funds 
are

[[Page 81909]]

consistently executing their stated portfolio strategies.\476\ These 
comments are addressed below.
---------------------------------------------------------------------------

    \473\ See SIFMA Comment Letter II (``The fund's quarterly data 
could be mined for trading patterns in order to replicate the 
portfolio's underlying strategy (e.g., the underlying analytics or 
equations behind a quantitative strategy.) This could lead to an 
attempt to front-run a fund.''); see also SIFMA Comment Letter I; 
Schwab Comment Letter; Fidelity Comment Letter; T. Rowe Price 
Comment Letter.
    \474\ See, e.g., ICI Comment Letter (portfolio risk metrics, 
delta, liquidity determinations, country of risk and derivatives 
financing rates should be kept non-public.); BlackRock Comment 
Letter (risk metrics); Invesco Comment Letter (portfolio level risk 
metrics, derivatives information, illiquidity determinations, and 
securities lending information should remain non-public); 
Oppenheimer Comment Letter (risk metrics, illiquidity 
determinations, country of risk determinations, derivatives payment 
terms (including financing rates), and securities lending fees and 
revenue sharing splits should be kept non-public) SIFMA Comment 
Letter II (risk metrics; illiquidity determinations; country of 
risk; and derivative financing rates, custom baskets); BlackRock 
Derivatives Comment Letter (derivatives positions).
    \475\ See, e.g., SIFMA Comment Letter I; ICI Comment Letter; 
BlackRock Comment Letter; see also AIMA Comment Letter; Confluence 
Comment Letter.
    \476\ See Franco Comment Letter (requesting that all portfolio 
filings be made public 180 to 360 days after filing); Morningstar 
Comment Letter (requesting public disclosure on a monthly basis 
reasoning that many fund complexes currently make portfolio holdings 
information public on at least a monthly basis).
---------------------------------------------------------------------------

    Most commenters who addressed this issue did not support the public 
reporting of all Form N-PORT filings (i.e., public disclosure on a 
monthly basis).\477\ Such commenters generally believed that disclosure 
of all month-end Form N-PORT filings could increase the risk of front-
running or free-riding, ultimately harming investors.\478\ These 
commenters noted that more frequent disclosures would provide non-
investors with free access to the research and analysis that investors 
pay advisers for through management and other fees.
---------------------------------------------------------------------------

    \477\ See, e.g., Dodge & Cox Comment Letter; ICI Comment Letter; 
MFS Comment Letter.
    \478\ See id.
---------------------------------------------------------------------------

    As discussed further below, commenters that believed that Form N-
PORT should remain nonpublic, or that believed certain information 
items should remain nonpublic, raised two concerns. First, some 
commenters argued that some of the information on Form N-PORT could 
potentially be proprietary, and lead to harm to the fund and its 
investors if publicly released. For example, for derivatives, payment 
terms, including financing rates, are negotiated rates; as a result, 
commenters expressed concern that public disclosure may harm a fund's 
ability to negotiate favorable terms on behalf of its investors.\479\ 
Similarly commenters argued that disclosing detailed information on the 
components of nonpublic indexes could violate the intellectual property 
rights that index providers might assert and, as a result, harm 
investors who may lose the benefit of index products that would no 
longer be available to them, should an index provider choose to no 
longer do business with a fund, rather than have its index's components 
made publicly available.
---------------------------------------------------------------------------

    \479\ See, e.g., Oppenheimer Comment Letter; SIFMA Comment 
Letter I.
---------------------------------------------------------------------------

    Second, some commenters noted that if certain information items, 
such as the proposed risk metrics, monthly return information, and 
country of risk are publicly disclosed, it could potentially confuse 
and mislead investors.\480\ For example, some commenters argued that 
risk metrics are calculated using inputs and assumptions that could 
make them subjective and investors could mistakenly seek to compare 
risk metrics across funds or believe that risk metric data represents a 
fund's overall risk.\481\ Similarly, monthly return data (including 
monthly returns attributable to derivatives) could cause investors to 
mistakenly focus on short-term results or otherwise confuse 
investors.\482\ Likewise, commenters noted that the country of risk 
determination is subjective and open to different determinations among 
funds and advisers which may lead to investor confusion.\483\ Finally, 
some commenters that argued Form N-PORT should remain completely 
nonpublic questioned the utility of the information in Form N-PORT for 
investors.\484\
---------------------------------------------------------------------------

    \480\ See, e.g., SIFMA Comment Letter I; SIFMA Comment Letter 
II; Fidelity Comment Letter; MFS Comment Letter; ICI Comment Letter.
    \481\ See, e.g., ICI Comment Letter; Pioneer Comment Letter; 
SIFMA Comment Letter II.
    \482\ See CRMC Comment Letter; SIFMA Comment Letter I.
    \483\ See, e.g., MFS Comment Letter; Pioneer Comment Letter; 
Schwab Comment Letter; Oppenheimer Comment Letter.
    \484\ See, e.g., SIFMA Comment Letter I; Schwab Comment Letter; 
Fidelity Comment Letter.
---------------------------------------------------------------------------

    Subject to discrete information items discussed further below, the 
Commission is adopting as proposed the public disclosure of funds' 
quarter-end Form N-PORT with a 60-day delay from the reporting period. 
We decline to adopt the suggestion of some commenters that all reports 
filed on Form N-PORT remain nonpublic. The Commission believes that the 
public reporting requirements of Form N-PORT generally are appropriate 
given the filer's status as a registered investment company with the 
Commission, which is based on the tenets of disclosure and transparency 
to fund investors, and not as a private fund.\485\ Moreover, as we 
discuss below, funds currently publicly report holdings information on 
a quarterly basis through Forms N-CSR and N-Q. We also note that 
Section 45(a) of the Investment Company Act requires information in 
reports filed with the Commission pursuant to the Investment Company 
Act be made public unless we find that public disclosure is neither 
necessary nor appropriate in the public interest or for the protection 
of investors.\486\ For the reasons discussed above, we continue to 
believe that public disclosure of information about most of the items 
required on Form N-PORT is appropriate in the public interest, as well 
as for the protection of investors. 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 risks and returns 
of a particular fund.\487\ Accordingly, whether directly or through 
third parties, we believe that the periodic public disclosure of the 
information to be reported on Form N-PORT could benefit fund investors. 
Moreover, we generally believe that investors should have access to 
portfolio information in a structured data format, and be given the 
opportunity to make their own decisions regarding the usefulness of the 
data. We have, however, made several modifications to our proposals, 
discussed above, in response to commenters.
---------------------------------------------------------------------------

    \485\ See, e.g., section 45(a) of the Investment Company Act 
(requiring information in reports filed with the Commission pursuant 
to the Investment Company Act be made public unless we find that 
public disclosure is neither necessary nor appropriate in the public 
interest or for the protection of investors). Regarding those 
commenters that compared the information that Form N-PORT requires 
to that in Form PF, we note that Form PF is filed by private funds 
pursuant to Advisers Act section 204(b), making such data subject to 
the confidentiality protections applicable to data required to be 
filed under that section.
    \486\ See id.
    \487\ See Russ Wermers Comment Letter; see generally Franco 
Comment Letter (``. . . the Commission [should] adopt a more 
expansive view of its disclosure rulemaking mandate and more 
specifically a view that considers layered forms of its disclosure 
(and disclosure documents) that meet the needs of different 
constituent end-users of disclosure.'').
---------------------------------------------------------------------------

    We believe that, on balance, investors would benefit from the 
information that will be reported on Form N-PORT. Likewise, the 
Commission continues to believe that public availability of 
information, including the types of information that will be collected 
on Form N-PORT that may not currently be reported or disclosed by 
funds, can benefit investors and other potential users by assisting 
them in making more informed investment decisions.
    We continue to recognize, however, that more frequent portfolio 
disclosure than is currently required 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.'' \488\ 
Similarly, the Commission is sensitive to concerns that more frequent 
portfolio disclosure may facilitate the ability of non-investors to 
``free ride'' on a mutual fund's investment research, by allowing those 
investors to reverse engineer and

[[Page 81910]]

``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.\489\ Both front-running and copycatting can 
adversely affect funds and their shareholders.\490\ We raised such 
concerns in the Proposing Release, and, many commenters that discussed 
public disclosure of portfolio information agreed with these 
concerns.\491\ However, one commenter argued that such effects were 
unlikely.\492\
---------------------------------------------------------------------------

    \488\ See, e.g., Quarterly Portfolio Holdings Adopting Release, 
supra footnote 421, at n. 128 and accompanying text.
    \489\ See, e.g., id. at n. 129 and accompanying text.
    \490\ See ICI, The Potential Effects of More Frequent Portfolio 
Disclosure on Mutual Fund Performance, Perspective Vol. 7, No. 3 
(June 2001) (``Potential Effects of More Frequent Disclosure''), 
available at https://www.ici.org/pdf/per07-03.pdf.
    \491\ See, e.g., ICI Comment Letter (noting the risk of 
predatory trading with an increase in frequency of public disclosure 
of fund portfolio holdings); SIFMA Comment Letter I (same); Simpson 
Thacher Comment Letter (same); Vanguard Comment Letter (same); see 
also Proposing Release, supra footnote 7, at 33613-33614.
    \492\ See Morningstar Comment Letter (arguing that reverse-
engineering concerns are largely unfounded).
---------------------------------------------------------------------------

    We recognize that some free-riding and front running activity can 
occur even with quarterly disclosure, with the potential for investor 
harm.\493\ Conversely, however, and as we noted in the Proposing 
Release, we previously received petitions 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 more information about how a fund is complying 
with its stated investment objective.\494\ 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.\495\
---------------------------------------------------------------------------

    \493\ See infra section III.B.3
    \494\ See Quarterly Portfolio Holdings Adopting Release, supra 
footnote 421, at n. 32 and accompanying text (discussing prior 
investor petitions for rulemaking). Investors that petitioned for 
quarterly disclosure also argued that increasing the frequency of 
portfolio disclosure would expose ``style drift'' (when the actual 
portfolio holdings of a fund deviate from its stated investment 
objective) and shed light on and prevent several potential forms of 
portfolio manipulation, such as ``window dressing'' (buying or 
selling portfolio securities shortly before the date as of which a 
fund's holdings are publicly disclosed, in order to convey an 
impression that the manager has been investing in companies that 
have had exceptional performance during the reporting period) and 
``portfolio pumping'' (buying shares of stock the fund already owns 
on the last day of the reporting period, in order to drive up the 
price of the stocks and inflate the fund's performance results).
    \495\ See id.
---------------------------------------------------------------------------

    We have considered both 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 will be required on Form N-PORT, as well as 
the potential costs associated with making that information available 
to the public, which could be ultimately borne by investors.\496\ 
Accordingly, in an attempt to minimize these potential costs and 
competitive harms from front-running and reverse engineering, we are 
requiring public disclosure of fund reports on Form N-PORT once each 
quarter, rather than monthly. This maintains the status quo regarding 
the frequency and timing of public portfolio disclosure, while 
providing investors and other potential users with the benefit of 
having more detailed portfolio information in a structured format.
---------------------------------------------------------------------------

    \496\ In doing so, we also considered the various comment 
letters that we received regarding our proposal to make the third 
month's report public, and the costs and benefits of doing so. See, 
e.g., SIFMA Comment Letter II; SIFMA Comment Letter I; Schwab 
Comment Letter; Fidelity Comment Letter; T. Rowe Price Comment 
Letter; see also Franco Comment Letter; Morningstar Comment Letter.
---------------------------------------------------------------------------

    As commenters pointed out, we recognize that we are requiring 
additional data points in Form N-PORT, as well as requiring the data to 
be structured, which represents a change regarding the scope of 
information available to the public. As discussed above, however, we 
believe that generally this additional information can benefit 
investors. Additionally, while we recognize that an increase in the 
amount of publicly available information has the potential to 
facilitate predatory trading, as discussed in section III.B.3 below, we 
do not believe that quarterly public disclosure with a 60-day lag will 
have a significant, additional competitive impact. We discuss 
commenters' concerns about specific data items below.
    Funds are currently required to disclose their portfolio 
investments quarterly, via public filings with the Commission and semi-
annual reports distributed to shareholders, with the exception of 
``miscellaneous securities'' which funds are not required to disclose 
pursuant to Regulation S-X. Consequently, the Commission will not make 
public the information reported for the first and second months of each 
fund's fiscal quarter on Form N-PORT, nor any ``miscellaneous 
securities'' reported for the third month of each fund's fiscal 
quarter.\497\ Only information reported for the third month of each 
fund's fiscal quarter on Form N-PORT will be made publicly available, 
and such information will not be made public until 60 days after the 
end of the third month of the fund's fiscal quarter.\498\
---------------------------------------------------------------------------

    \497\ See General Instruction F of Form N-PORT.
    \498\ We are maintaining 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 will be concurrent with the public 
portfolio disclosures reported on a semi-annual fiscal year basis on 
Form N-CSR. We believe that such overlap will minimize the risks of 
predatory trading, because otherwise funds with fiscal year-ends 
that fall other than on a calendar quarter- or year-end will 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 continue to believe that maintaining the status quo with regard 
to the frequency and the time lag of portfolio reporting will 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.\499\ For the reasons 
discussed above, we find that it is neither necessary nor appropriate 
in the public interest or for the protection of investors to make 
information reported for the first and second months of each fund's 
fiscal quarter on Form N-PORT or ``miscellaneous securities'' reported 
for the third month of each fund's fiscal quarter publicly 
available.\500\
---------------------------------------------------------------------------

    \499\ See also supra footnote 360 and accompanying text (non-
public indexes and custom baskets); supra footnotes 395-399 and 
accompanying text (derivatives financing rates); supra footnote 203 
and accompanying text (securities lending counterparties); supra 
footnote 281 and accompanying text (repurchase and reverse 
repurchase agreements).
    \500\ See section 45(a) of the Investment Company Act. Form N-
PORT has also been modified from the proposal to clarify that the 
Commission does not intend to make public the information reported 
on Form N-PORT for the first and second months of each fund's fiscal 
quarter that that is identifiable to any particular fund or adviser 
or any information reported with regards to country of risk and 
economic exposure, delta, or miscellaneous securities, or 
explanatory notes related to any of those topics that is 
identifiable to any particular fund or adviser. See General 
Instruction F of Form N-PORT. However, the SEC may use information 
reported on Form N-PORT in its regulatory programs, including 
examinations, investigations, and enforcement actions.
---------------------------------------------------------------------------

    As noted above, some commenters, while generally supporting 
quarterly

[[Page 81911]]

disclosure on Form N-PORT, believed that certain information items 
should remain nonpublic. Some commenters believed that some of the 
information in Form N-PORT could contain potentially proprietary 
information, and lead to harm to the fund and its investors if publicly 
released. For example, commenters expressed concern that public 
disclosure of negotiated payment terms for derivatives, such as 
financing rates, could harm a fund's ability to negotiate favorable 
terms.\501\ However, as we discussed above in section II.A.2.g.iv, we 
designed Form N-PORT to provide information sufficient to allow our 
staff, investors, and other potential users to better understand the 
investments held in a fund's portfolio. This necessarily involves 
disclosing the payment terms for derivative instruments a fund invests 
in. Without such information, valuing the risks and rewards of such an 
investment could be difficult for investors and other potential users. 
We therefore do not believe that it would be necessary or appropriate 
in the public interest for the benefit of investors to mask such 
information for all reports on Form N-PORT.
---------------------------------------------------------------------------

    \501\ See, e.g., Oppenheimer Comment Letter; SIFMA Comment 
Letter I.
---------------------------------------------------------------------------

    Similarly, as discussed above, commenters noted that disclosing 
detailed information on the components of nonpublic indexes could 
violate the intellectual property rights that index providers might 
assert. This could result in harm to investors who may lose the benefit 
of index products that would no longer be available to them, should an 
index provider choose to no longer do business with a fund, rather than 
have its index's components made public and open the index to front-
running and reverse engineering.\502\ As we discussed more fully above 
in section II.A.2.g.iv, we continue to believe that it is important for 
the Commission, investors, and other potential users to have 
transparency into a fund's exposures to assets, regardless of whether 
the fund directly holds investments in those assets or chooses to 
create those exposures through a derivatives contract.\503\
---------------------------------------------------------------------------

    \502\ See supra section II.A.2.g.iv.
    \503\ See id.
---------------------------------------------------------------------------

    Commenters also objected to the public disclosure of securities 
lending information, such as the identity of borrowers and the 
aggregate value of securities on loan to a counterparty, as such 
disclosures could cause securities lending counterparties, in an 
attempt to keep their securities lending exposures private, to be less 
willing to borrow securities from funds.\504\ However, as we stated in 
section II.A.2.g.v, above, public disclosure of this information will 
improve the ability of Commission staff, as well as investors, brokers, 
dealers, and other market participants to better understand the 
collateral received by funds and associated potential liquidity and 
market risks, as well as identify those instruments that one or more 
funds might have to sell in the event of default by borrowers. For 
similar reasons, one commenter requested that the identity of 
counterparties to repurchase and reverse repurchase agreements be kept 
nonpublic.\505\ However, as indicated above in section II.A.2.g.iii, 
such information is routinely publicly disclosed in other contexts, and 
we are unaware of any evidence that such disclosures have resulted in 
competitive disadvantages to the entities required to make such 
disclosures.
---------------------------------------------------------------------------

    \504\ See, e.g., SIFMA Comment Letter I; BlackRock Comment 
Letter; SIFMA Comment Letter II; see also supra section II.A.2.g.v.
    \505\ See SIFMA Comment Letter I.
---------------------------------------------------------------------------

    As we discussed in section II.A.2.g.ii, one commenter noted that 
public disclosure on default, arrears, or deferred coupon payments 
raises competitive concerns when a debt security relates to an issuer 
that is a private company, as private borrowers may avoid registered 
funds in order to avoid public disclosure if the company becomes 
distressed. However, as we noted in that section, we believe that it is 
important that a fund's investors have access to this information so 
that they can make fully informed decisions regarding their investment.
    Finally, some commenters believed that certain items could be 
misinterpreted by investors, resulting in investors being misled or 
confused. Specifically, some commenters believed that monthly return 
data (including monthly returns attributable to derivatives) could 
cause investors to mistakenly focus on short-term results or otherwise 
confuse investors.\506\ We disagree. As discussed in section II.A.2.e 
above, we agree with another commenter that believed such disclosures 
could improve information to investors, and noted that many funds 
already disclose monthly returns.\507\
---------------------------------------------------------------------------

    \506\ See CRMC Comment Letter; SIFMA Comment Letter I.
    \507\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    Several commenters also believed that investors would be unduly 
confused by the disclosure of the portfolio-level and position-level 
risk metrics.\508\ We decline to make the portfolio-level risk metrics 
(DV01/DV100 and SDV01/SDV100) nonpublic but have determined to keep the 
position-level risk metrics (delta) nonpublic for all N-PORT 
filings.\509\ We agree with commenters that the calculation of delta 
can require a number of inputs and assumptions.\510\ As a result, 
reported deltas for the same or similar investment products could vary 
because of complex differences in methodologies and assumptions that 
are not reported on the form nor easily explained to investors. 
Moreover, the disclosure of delta could, for some investors, imply a 
false sense of precision about how a particular investment's valuation 
will change in volatile market conditions. However, we continue to 
believe that such information is useful for the Commission's monitoring 
purposes, as the Commission has the ability to contact funds directly, 
when necessary, to better understand a fund's methodologies and 
assumptions. Thus, upon consideration of the comments, we find that it 
is neither necessary nor appropriate in the public interest or for the 
protection of investors to make delta publicly available at this 
time.\511\ We recognize that, like delta, inputs and assumptions are 
used for calculating DV01, DV100, and SDV01. We believe, however, that 
the fact that these metrics will not be reported at the position-level 
sufficiently mitigates the potential risks discussed above. Because 
these measures will not be reported by position-level, investors and 
other potential users will not be comparing different risk metrics for 
the same investment in different funds. Similarly, we believe that 
portfolio level risk metrics are less likely to imply a false sense of 
precision for some investors because such measures are, by design, the 
aggregation of each investment's assumptions and projections.\512\
---------------------------------------------------------------------------

    \508\ See, e.g., SIFMA Comment Letter I; Dechert Comment Letter; 
Invesco Comment Letter.
    \509\ See, e.g., ICI Comment Letter.
    \510\ See id.
    \511\ See section 45(a) of the Investment Company Act which 
requires information in investment company forms to be made 
available to the public, unless we find that public disclosure is 
neither necessary nor appropriate in the public interest or for the 
protection of investors.
    \512\ See also supra footnotes 173-178 and accompanying text.
---------------------------------------------------------------------------

    For similar reasons, we intend to keep information reported for 
country of risk and economic exposure nonpublic.\513\ We are persuaded 
by commenters that this information is evaluated by funds using 
multiple factors, making it subjective, and acknowledge that, while 
useful to the Commission in terms of understanding the country-specific 
risks, may convey a false level of

[[Page 81912]]

precision.\514\ We also acknowledge arguments by commenters that 
disclosure of such information could stifle divergences in 
determinations and incentivize funds to seek homogenized determinations 
from third party firms, potentially rendering the information less 
useful to Commission staff than if it were not publicly disclosed.\515\ 
For these reasons, we find that it is neither necessary nor appropriate 
in the public interest or for the protection of investors to make 
information reported for country of risk and economic exposure publicly 
available at this time.\516\
---------------------------------------------------------------------------

    \513\ See supra footnote 287 and accompanying and following 
text.
    \514\ See, e.g., ICI Comment Letter; Pioneer Comment Letter; 
Schwab Comment Letter; MFS Comment Letter; SIFMA Comment Letter II; 
Morningstar Comment Letter (commenting on the usefulness of this 
information to investors, but not offering an opinion as to whether 
this information should be publicly disclosed).
    \515\ See, e.g., ICI Comment Letter; Oppenheimer Comment Letter.
    \516\ See section 45(a) of the Investment Company Act. We note 
that we are, for similar reasons, determining not to require 
disclosure of a fund's determination of the liquidity classification 
assigned to each investment as required to be reported on Form N-
PORT. Liquidity Adopting Release, supra footnote 9.
---------------------------------------------------------------------------

    Lastly, as discussed above, we recognize that explanatory notes 
related to nonpublic items should be nonpublic as well.\517\ As a 
result, we find that it is neither necessary nor appropriate in the 
public interest or for the protection of investors to make explanatory 
notes reported for delta or country of risk and economic exposure 
publicly available at this time.\518\ However, explanatory notes 
related to other items on Form N-PORT will be publicly available.
---------------------------------------------------------------------------

    \517\ See supra footnote 435 and accompanying text.
    \518\ See section 45(a) of the Investment Company Act.
---------------------------------------------------------------------------

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

1. Rescission of Form N-Q
    Along with our adoption of new Form N-PORT, we are also rescinding 
Form N-Q, as we proposed. 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 Form N-PORT will include the portfolio holdings 
information contained in reports on Form N-Q, we believe that Form N-
PORT will 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, and as proposed, we are requiring that, for reports 
on Form N-PORT for the first and third quarters of a fund's fiscal 
year, the fund will attach its complete portfolio holdings for that 
fiscal quarter, presented in accordance with the schedules set forth in 
Sec. Sec.  210.12-12 to 12-14 of Regulation S-X [17 CFR 210.12-12--12-
14].
    We requested comments on our proposed rescission of Form N-Q. One 
commenter supported our proposed rescission of Form N-Q.\519\ Other 
commenters recommended maintaining Form N-Q, noting that Form N-PORT 
might not serve the interests of investors, while Form N-Q is an 
established channel through which funds currently provide pertinent 
information to shareholders.\520\ We understand these concerns, but as 
noted above because the data reported on Form N-PORT will include the 
portfolio holdings information that would be contained in reports on 
Form N-Q, we believe that Form N-PORT will render reports on Form N-Q 
unnecessarily duplicative. We are also concerned about the possibility 
of investor confusion that may arise in the event of simultaneous 
public disclosure of portfolio reporting information for the same 
reporting periods on Form N-PORT as well as on Form N-Q. For these 
reasons, we are rescinding Form N-Q.
---------------------------------------------------------------------------

    \519\ See Schnase Comment Letter.
    \520\ See Schwab Comment Letter; Fidelity Comment Letter; SIFMA 
Comment Letter I.
---------------------------------------------------------------------------

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 currently 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.\521\ Rescission of Form 
N-Q will eliminate certifications as to the accuracy of the portfolio 
schedules reported for the first and third fiscal quarters.
---------------------------------------------------------------------------

    \521\ See Item 3 of Form N-Q (certification requirement); Form 
N-Q Adopting Release, supra footnote 421; Item 12 of Form N-CSR 
(certification requirement); Certification of Management Investment 
Company Shareholder Reports and Designation of Certified Shareholder 
Reports as Exchange Act Periodic Reporting Forms; Disclosure 
Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, 
Investment Company Act Release No. 24914 (Jan. 27, 2003) [68 FR 5348 
(Feb. 3, 2003)] (adopting release for Form N-CSR).
---------------------------------------------------------------------------

    Under today's amendments, and as we proposed, the certifications as 
to the accuracy of the portfolio schedules reported for the second and 
fourth fiscal quarters on Form N-CSR will remain. However, and as we 
proposed, we are amending 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.\522\ 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 will cover the first and second 
fiscal quarters and third and fourth fiscal quarters, respectively, 
will fill the gap in certification coverage regarding the registrant's 
internal control over financial reporting that will 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. However, we expect such 
effects, if any, to be minimal because certifying officers will 
continue to certify portfolio holdings for the fund's second and fourth 
fiscal quarters and will further provide semi-annual certifications 
concerning disclosure controls and procedures and internal control over 
financial reporting that would cover the entire year.
---------------------------------------------------------------------------

    \522\ Amended Item 11(b) of Form N-CSR; amended paragraph 4(d) 
of certification exhibit of Item 12(a)(2) of Form N-CSR.
---------------------------------------------------------------------------

    Commenters generally agreed with our proposed approach, although 
several commenters suggested maintaining Form N-Q on the grounds that 
Form N-PORT may not serve the interests of investors or because of 
their assertions that reports on Form N-PORT

[[Page 81913]]

should be nonpublic.\523\ For the reasons discussed above, and since we 
have determined not to make all filings of N-PORT nonpublic, we are 
rescinding Form N-Q and amending the certification requirements in Form 
N-CSR, as proposed.
---------------------------------------------------------------------------

    \523\ See, e.g., ICI Comment Letter (agreeing with the proposed 
approach); State Street Comment Letter (same). See also Schwab 
Comment Letter (stating that Form N-PORT might not serve the 
interests of investors); Fidelity Comment Letter (same); SIFMA 
Comment Letter I (stating that reports on Form N-PORT should be 
nonpublic).
---------------------------------------------------------------------------

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, we are adopting amendments to 
Regulation S-X, which prescribes the form and content of financial 
statements required in registration statements and shareholder 
reports.\524\ As discussed above, many of the amendments to Regulation 
S-X, particularly the amendments to the disclosures concerning 
derivative contracts, are similar to the requirements concerning 
disclosures of derivatives that will be required on reports on Form N-
PORT.\525\ The amendments to Regulation S-X will, among other things, 
require similar disclosures in a fund's financial statements in order 
to provide investors, particularly individual investors, with clear and 
consistently presented disclosures across funds concerning fund 
investments in derivatives in an unstructured format.
---------------------------------------------------------------------------

    \524\ See rule 1-01, et seq. of Regulation S-X [17 CFR 210.1-01, 
et seq.]. While ``funds'' are defined in the preamble as registered 
investment companies other than face-amount certificate companies, 
and any separate series thereof--i.e., management companies and 
UITs--we note that our amendments to Regulation S-X apply to both 
registered investment companies and BDCs. See infra section II.C.6. 
Therefore, throughout this section, when discussing fund reporting 
requirements in the context of our amendments to Regulation S-X, we 
are also including changes to the reporting requirements for BDCs.
    \525\ See supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    As outlined below, we are adopting amendments to Articles 6 and 12 
of Regulation S-X that will: (1) Require new, standardized disclosures 
regarding fund holdings in open futures contracts, open forward foreign 
currency contracts, and open swap contracts,\526\ and additional 
disclosures regarding fund holdings of written and purchased option 
contracts; (2) update the disclosures for other investments and 
investments in and advances to affiliates, 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 will require prominent placement of details regarding 
investments in derivatives in a fund's schedule of investments, rather 
than allowing such schedules to be disclosed in the notes to the 
financial statements.
---------------------------------------------------------------------------

    \526\ We recognize that under the federal securities laws, 
certain derivatives fall under the definition of securities, 
notwithstanding, for purposes of our amendments to Regulation S-X, 
we expect funds to adhere to the requirements of the disclosure 
schedules for the relevant derivative investment, regardless of how 
it would be defined under the federal securities laws. See, e.g., 
rule 12-13C of Regulation S-X (Open swap contracts).
---------------------------------------------------------------------------

    The comments that we received relating to our proposal to amend 
Regulation S-X were generally supportive of our efforts to improve the 
information that funds report to shareholders and the Commission.\527\ 
However, commenters did provide comments on many aspects of our 
proposal, which we discuss below.
---------------------------------------------------------------------------

    \527\ See, e.g., Comment Letter of Ernst & Young LLP (Aug. 10, 
2015) (``EY Comment Letter'') (``We agree that many of these 
amendments would improve the transparency and comparability of 
investment company financial statements for their intended 
users.''); Deloitte Comment Letter (``We believe that the proposed 
rule related to the Commission's modernization project is consistent 
with the SEC's stated objective of improving the type and format of 
information regarding fund activities that investment companies 
provide to the Commission and investors . . . .''); SIFMA Comment 
Letter I (``We support the Commission's initiative to enhance and 
standardize the disclosure of derivatives and other portfolio 
investments in fund financial statements and believe that most of 
the proposed amendments to Regulation S-X will achieve that 
goal.''); see also AICPA Comment Letter. One commenter recommended 
that the Commission dispense with any requirement for position-level 
reporting of information regarding derivatives, as this information 
could confuse or mislead investors and could contain confidential 
information relating to a fund's investment strategy. Simpson 
Thacher Comment Letter. However, Article 12 of Regulation S-X 
already requires all position-level derivatives to be reported. 
Moreover, GAAP already requires a minimum level of position-level 
reporting of investments that does not distinguish between 
derivatives and securities. See, e.g., FASB ASC 946-210-50-1 
(Financial Services-Investment Companies-Disclosure--General-
Schedule of Investments-Investment Companies Other than 
Nonregistered investments Partnerships).
---------------------------------------------------------------------------

    The rules that we are adopting will renumber the current schedules 
in Article 12 of Regulation S-X and break out the reporting of 
derivatives currently on Schedule 12-13 into separate schedules.\528\ 
These changes are summarized in Figure 1, below.
---------------------------------------------------------------------------

    \528\ Throughout this release when we refer to a rule as it 
exists prior to any amendments we are making today, it is described 
as a ``current rule,'' while references to a rule as amended (or an 
existing rule that is not being amended today) are described as a 
``rule'' or ``new rule.''

---------------------------------------------------------------------------

[[Page 81914]]

[GRAPHIC] [TIFF OMITTED] TR18NO16.000

    We believe, and commenters agreed, that these amendments will 
assist comparability among funds, and increase transparency for 
investors regarding a fund's use of derivatives.\529\ We have 
endeavored to mitigate burdens on the industry by requiring similar 
disclosures both on Form N-PORT and in a fund's financial 
statements.\530\ As we discussed in the Proposing Release, we continue 
to believe that these amendments are generally consistent with how many 
funds are currently reporting investments (including derivatives).\531\
---------------------------------------------------------------------------

    \529\ See, e.g., EY Comment Letter; SIFMA Comment Letter I.
    \530\ See generally supra section II.C.
    \531\ See Proposing Release, supra footnote 7, at 33616.
---------------------------------------------------------------------------

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.\532\ We received comment 
letters on the concept release from a variety of stakeholders. Several 
commenters noted that holdings of derivative investments are not 
currently reported by funds in a consistent manner.\533\ 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.\534\ Another 
commenter specifically requested that we revise Regulation S-X in order 
to keep ``financial reporting current with developments in the 
financial markets.'' \535\
---------------------------------------------------------------------------

    \532\ Derivatives Concept Release, supra footnote 38.
    \533\ Comments submitted in response to the Derivatives Concept 
Release are available at https://www.sec.gov/comments/s7-33-11/s73311.shtml. See Morningstar Derivatives Concept Release Comment 
Letter (``This is because fund companies are not reporting 
derivative holdings in a consistent manner and are not reporting 
derivative holdings in a manner that identifies the underlying risk 
exposure.''); Comment Letter of Rydex[bond]SGI to Derivatives 
Concept Release (Nov. 7, 2011) (``Rydex[bond] SGI Derivatives 
Concept Release Comment Letter'') (``However, the quality and extent 
of such derivatives disclosure still varies greatly from registrant 
to registrant.'').
    \534\ See Morningstar Derivatives Concept Release Comment Letter 
(``Notional exposure . . . is a better measure of risk''); Comment 
Letter of Oppenheimer Funds to Derivatives Concept Release (Nov. 7, 
2011) (``Instead, counterparty risks incurred through the 
investments in derivatives . . . should be considered in a new SEC 
rulemaking that is primarily disclosure based.''); Rydex[bond]SGI 
Derivatives Concept Release Comment Letter (recommending that funds 
that invest in derivatives should disclose notional exposure for 
non-exchanged traded derivatives and a fund's exposure to 
counterparties). Commenters to the FSOC Notice made similar 
observations relating to counterparty disclosures. See, e.g., 
Americans for Financial Reform FSOC Notice Comment Letter 
(``Counterparty data is also often not available.''); Comment Letter 
of The Systematic Risk Council Comment to FSOC Notice (Mar. 25, 
2015) (discussing the need to have information about investment 
vehicles that hold bank liabilities).
    \535\ Comment Letter of Stephen A. Keen to Derivatives Concept 
Release (Nov. 8, 2011).
---------------------------------------------------------------------------

    We are adopting rules that will standardize the reporting of 
certain derivative investments for fund financial statements. While the 
current 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 other than options. Current 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 current rules 12-12, 12-12A, 12-12B, and 12-14.\536\ 
Thus, currently, 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.
---------------------------------------------------------------------------

    \536\ The current schedule to rule 12-13 requires disclosure of: 
(1) Description; (2) balance held at close of period--quantity; and 
(3) value of each item at close of period. See current rule 12-13 of 
Regulation S-X.
---------------------------------------------------------------------------

    To address issues of inconsistent disclosures and lack of 
transparency as to derivative instruments, we are amending Regulation 
S-X by adopting new schedules for open futures contracts, open forward 
foreign currency contracts, and open swap contracts. We received 
several comments generally supporting the Commission's proposals to 
provide

[[Page 81915]]

more information about derivatives.\537\ Other commenters objected to 
the public reporting of position level derivatives reporting arguing 
instead that we should focus on portfolio-level metrics analysis as it 
would more accurately reflect an investment company's overall use of, 
and, more meaningfully reflect its net exposure to derivatives.\538\ 
Funds are currently required to report their position-level derivatives 
in accordance with Article 12 of Regulation S-X.\539\ We believe that 
it is important for funds to continue to report position-level data for 
all investments in order to allow investors and other interested 
parties to fully understand their fund's holdings.\540\
---------------------------------------------------------------------------

    \537\ See, e.g., CFA Comment Letter; Wells Fargo Comment Letter.
    \538\ See, e.g., Simpson Thacher Comment Letter.
    \539\ See supra footnote 536 and accompanying text.
    \540\ See id.
---------------------------------------------------------------------------

    We are also modifying the current disclosure requirements for 
purchased and written option contracts. Finally, we are adopting 
certain instructions regarding the presentation of derivatives 
contracts that are generally consistent with instructions that are 
currently included, or that we are adding, in either rule 12-12 
(Investments in securities of unaffiliated issuers) or current rule 12-
13 (Investments other than securities).\541\
---------------------------------------------------------------------------

    \541\ See, e.g., rule 12-12, n. 2 of Regulation S-X 
(instructions for categorizing investments).
---------------------------------------------------------------------------

a. Open Option Contracts Written--Rule 12-13 (Current Rule 12-12B) and 
Rule 12-12 (as Applicable to Options Purchased)
    We are amending the current disclosure of written option contracts 
substantially as proposed.\542\ We proposed to add 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,\543\ and the contract's notional 
amount, which we are adopting as proposed.\544\ Thus, for rule 12-13, 
for each open written options contract, funds will be required to 
disclose: (1) Description; (2) counterparty; (3) number of contracts; 
(4) notional amount; (5) exercise price; (6) expiration date; and (7) 
value.\545\
---------------------------------------------------------------------------

    \542\ Under current rule 12-12B, funds are required to report, 
for open option contracts, the name of the issuer, number of 
contracts, exercise price, expiration date, and value. See current 
rule 12-12B of Regulation S-X [17 CFR 210.12-12B].
    \543\ See infra footnote 554-555 and accompanying text.
    \544\ While rule 12-13 is specific to open option contracts 
written, the same disclosures also apply for purchased options as 
required by proposed Instruction 3 to rule 12-12. See also proposed 
rule 12-12B, n. 5 of Regulation S-X.
    \545\ See rule 12-13 of Regulation S-X.
---------------------------------------------------------------------------

    We received several comments relating to the proposed requirement 
to disclose notional amounts for open options contracts. Some 
commenters recommended that the Commission either eliminate the 
proposed notional amount column for certain options contracts as they 
believed it was unnecessary because, unlike the notional amount of 
swaps and futures, which communicates economic exposure, the notional 
amount of an option, without a delta adjustment, may not represent an 
equivalent position in the underlying reference asset \546\ or, in the 
alternative, provide a clear definition of notional amount.\547\ As we 
previously stated in the Derivatives Proposing Release, we believe 
that, although derivatives vary widely in terms of structure, asset 
class, risk and potential uses, for most types of derivatives the 
notional amount generally serves as an important data point for 
investors that seek to determine a fund's economic exposure to an 
underlying reference asset or metric.\548\ We do not believe that it is 
necessary to provide funds with a prescriptive formula for calculating 
notional amount because we understand funds today calculate their 
derivatives' notional amounts for risk management, reporting or other 
purposes, and that funds would be able to use these calculations for 
financial statement reporting. Moreover, the Commission has previously 
discussed different types of derivatives transactions that are commonly 
used by funds, together with the method by which we understood a fund, 
for risk management, reporting or other purposes, could calculate a 
derivatives notional amount.\549\ We believe that Regulation S-X will 
allow a fund to use these calculations methods, as well as other 
reasonable methods, to determine notional amounts of such derivatives 
transactions.\550\
---------------------------------------------------------------------------

    \546\ See ICI Comment Letter (recommending the elimination of 
notional amount for written options because the exercise price 
component of an option contract makes the notional amount less 
relevant than other derivative instruments, such as swaps and 
futures); MFS Comment Letter (recommending that the Commission 
eliminate the proposed notional amount column in the options table).
    \547\ See EY Comment Letter (supporting disclosures of notional 
amounts for open options contracts and notional and value amounts 
for open futures contracts, but noting that such requirements should 
include clear definitions); MFS Comment Letter (suggesting that the 
Commission either eliminate the notional amount column for open 
options contracts or, if the requirement is retained, clarify the 
methodology for calculating the notional amount of an option.); ICI 
Comment Letter (recommending that the Commission eliminate this 
requirement, or, should the Commission require notional amount, 
specify the calculation as: [number of contracts] x [exercise price] 
x [contract multiplier]).
    \548\ See Derivatives Proposing Release, supra footnote 7, at, 
n. 159 and accompanying text. See also Derivatives Concept Release, 
supra footnote 38, at n. 19 and accompanying text.
    \549\ See Derivatives Proposing Release, supra footnote 7, at 
Table 1; see also id.
    \550\ See id.
---------------------------------------------------------------------------

    We also proposed to add an instruction (proposed instruction 3) to 
current rule 12-12, which is the schedule by 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.\551\ One commenter noted that some options contracts allow 
for a range of underlying securities to be delivered and requested that 
funds only be required to identify the security type to be delivered, 
rather than the full description called for in instruction 3 to rules 
12-12 and 12-13.\552\ We believe that providing a description of the 
investment underlying an option is necessary in order to fully 
understand the risks and rewards of such investment. For example, an 
options contract could allow for a range of underlying investments to 
be delivered and at the time the option is exercised, some of the 
investments could be riskier than others. We are therefore adopting the 
instruction as proposed.
---------------------------------------------------------------------------

    \551\ See proposed rule 12-12, n. 3 of Regulation S-X.
    \552\ See AICPA Comment Letter.
---------------------------------------------------------------------------

    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, we also proposed requiring that 
the presentation of that underlying investment must include a 
description, as required by those provisions.\553\ 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). We received no comments on this aspect of the 
proposal, and we are adopting it as proposed.
---------------------------------------------------------------------------

    \553\ See proposed rules 12-12, n. 3; 12-12B, n. 5; and 12-13, 
n. 3 of Regulation S-X. One commenter requested clarification 
whether Regulation S-X would require disclosure of any investment 
with optionality. See AICPA Comment Letter. We did not intend to 
extend this requirement to bonds or other non-derivative instruments 
that contain optionality features.
---------------------------------------------------------------------------

    In order to assist investors in identifying and monitoring the 
counterparty risks associated with a fund's investments in derivatives, 
we proposed to require funds to disclose

[[Page 81916]]

the counterparty to a derivative.\554\ We also acknowledged that 
counterparty risk is mitigated for exchange-traded instruments and 
therefore proposed an instruction for options and swaps that funds need 
not disclose the counterparty for exchange-traded instruments.\555\ 
Commenters agreed, but noted that, like exchange-traded instruments, 
centrally cleared derivatives also do not bear the same type of risks 
(such as counterparty risk), as over-the-counter instruments.\556\ 
Based on the comments that we received, we agree that counterparty risk 
can also be mitigated through central clearance and are therefore 
changing instruction 4 to rule 12-13 (open options contracts) (and 
instruction 4 to rule 12-13C (open swaps contracts)) to not require 
disclosure of the counterparty for both exchange-traded options and 
swaps and centrally cleared options and swaps.\557\
---------------------------------------------------------------------------

    \554\ See proposed rule 12-13, Column B.
    \555\ See proposed rules 12-13, n. 4 and 12-13C, n. 4 of 
Regulation S-X.
    \556\ See State Street Comment Letter (requesting clarification 
on whether funds should report counterparty for exchange-traded 
derivatives); see also Morningstar Comment Letter (``The proposal to 
report counterparties for non-exchange-traded instruments is 
reasonable. Exposures to counterparties should be presented net of 
collateral received or margin posted.'').
    \557\ See rule 12-13, n. 4 of Regulation S-X; see also rule 12-
13C, n. 4 of Regulation S-X; supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    Another commenter suggested that funds should be required to 
present counterparty exposures net of collateral received or margin 
posted.\558\ While we agree that receiving collateral and posting 
margin may mitigate some counterparty risk, in order to simplify the 
disclosures for investors and limit the burden for funds, we continue 
to believe that it is appropriate for funds to limit disclosure to the 
counterparty to the transaction, without the additional burden of 
providing collateral or margin information.\559\
---------------------------------------------------------------------------

    \558\ See Morningstar Comment Letter; see also CFA Comment 
Letter (generally supporting requirements for funds to report 
information relating to counterparty exposure).
    \559\ See rule 12-13, Column B; see also rule 12-13B, Column C; 
rule 12-13C, Column C.
---------------------------------------------------------------------------

    As required in Form N-PORT,\560\ in the case of an option contract 
with an underlying investment that is an index or basket of investments 
for which components are publicly available on a Web site as of the 
fund's balance sheet date,\561\ or if the notional amount of the 
investment does not exceed one percent of the fund's NAV as of the 
close of the period, we proposed that the fund provide information 
sufficient to identify the underlying investment.\562\ 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, as proposed, the fund would list separately each 
of the investments comprising the index or basket of investments.\563\ 
We continue to 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. The 
disclosures will provide investors with more transparency into both the 
terms of the underlying investment and the terms of the option. We also 
proposed to include a similar instruction for swap contracts.\564\
---------------------------------------------------------------------------

    \560\ See Item C.11.c.iii of proposed Form N-PORT; see also 
supra section II.A.2.g.iv.
    \561\ As proposed, the components would be required to be 
publicly available on a Web site as of the fund's balance sheet date 
at the time of transmission to stockholders for any report required 
to be transmitted to stockholders under rule 30e-1. The components 
would be required to remain publicly available on a Web site as of 
the fund's balance sheet date until 70 days after the fund's next 
fiscal year-end. For example, components of an index underlying an 
option contract for a fund's 12/31/14 annual report must be made 
publicly available on a Web site as of 12/31/14 by the time that the 
12/31/14 annual report is transmitted to stockholders. The 
components must remain publicly available until 3/10/16.
    \562\ See proposed rule 12-13, n. 3 of Regulation S-X. See supra 
footnotes 360-362 and accompanying text (discussing the rationale 
for similar proposed requirements in Form N-PORT).
    \563\ See id.
    \564\ See proposed rule 12-13C, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    We received a number of comments on our proposal to publicly 
disclose the components of an underlying index, both with respect to 
Form N-PORT (discussed above) and Regulation S-X.\565\ While one 
commenter agreed with our proposal,\566\ others requested that we 
include a higher threshold before requiring disclosure, such as 5 
percent.\567\ Others agreed with our proposed 1% threshold but stated 
that reporting should be based on a percentage of net asset value, 
rather than notional value, as percentage of net asset value is a 
better indicator of materiality.\568\
---------------------------------------------------------------------------

    \565\ See also supra section II.A.2.g.iv.
    \566\ See, e.g., Morningstar Comment Letter (``Index providers 
are earning revenues from the licensing fees embedded in the 
derivative cost that is born by the fund and therefore its 
shareholders.'').
    \567\ See, e.g., ICI Comment Letter; Wells Fargo Comment Letter 
(additional index reporting should only be triggered when a 
derivative represents 5% of NAV).
    \568\ See, e.g., SIFMA Comment Letter I (``We believe the 
original 1% value requirement is a far better indicator of 
materiality and should be adopted in this connection as well.''); 
Oppenheimer Comment Letter (1% of net asset value).
---------------------------------------------------------------------------

    As stated in the Proposing Release and in the Form N-PORT 
discussion above, we continue to believe that it is important for the 
Commission, investors, and other potential users to have transparency 
into 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.\569\ The 1% threshold 
is 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.\570\ We believe that, 
similar to the 1% threshold in the summary schedule of investments, 
providing a 1% de minimis threshold 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 nonpublic index for 
instruments that represent a smaller risk to the fund's overall 
performance. Separately, as discussed further below, we believe that 
this modification mitigates concerns some commenters had about public 
disclosure of such indexes.\571\
---------------------------------------------------------------------------

    \569\ We are also modifying Form N-PORT to require similar 
disclosures. See generally supra section II.A.2.g.iv.
    \570\ See Instruction 3 to rule 12-12C of Regulation S-X; see 
also PwC Comment Letter.
    \571\ See also supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    We also believe that it is appropriate to measure whether such 
derivative instrument exceeds the 1% threshold based on the 
derivative's notional value, as opposed to the current market value 
because derivatives with a small market value and a large notional 
amount could magnify losses or gains in net assets as compared to 
derivatives with a smaller notional amount, and thus believe that a 
derivative's notional value better measures its potential contribution 
to the gains or losses of the fund. Furthermore, as in Form N-PORT, we 
believe that providing a 1% de minimis for disclosing the components of 
a derivative with nonpublic reference assets considers the need for 
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 nonpublic index for 
instruments that represent a

[[Page 81917]]

small amount of the fund's overall value.
    Commenters also suggested that funds should provide narrative 
disclosures about the components of a referenced index or custom 
basket, including any applicable industry or sector 
concentrations.\572\ The same commenters and others suggested that once 
a nonpublic index crosses the reporting threshold, we limit disclosure 
to the top 50 components and components that represent more than one 
percent of the index based on the notional value of the derivatives, as 
this standard is analogous to the current reporting requirement to 
identify holdings in the summary schedule of investments.\573\ As 
discussed above, we continue to believe that the notional amount 
generally serves as an appropriate measure of the index's economic 
exposure to an underlying reference asset or metric.\574\
---------------------------------------------------------------------------

    \572\ See, e.g., PwC Comment Letter; AICPA Comment Letter.
    \573\ See, e.g., PwC Comment Letter; AICPA Comment Letter; ICI 
Comment Letter; MFS Comment Letter. Commenters also noted their 
belief that reporting should be based on a percentage of NAV, rather 
than notional value, as percentage of NAV is a better indicator of 
materiality. See SIFMA Comment Letter I; Oppenheimer Comment Letter 
(1% based on net, not notional, values); contra Morningstar Comment 
Letter (``Arbitrary limits on positions that should be disclosed for 
portfolios or reference indexes can mask the risk of an 
instrument.'').
    \574\ See id.
---------------------------------------------------------------------------

    While, as we discussed above, we believe that it is appropriate to 
adopt a tiered reporting requirement for reporting on Form N-PORT, we 
are not adopting a tiered reporting requirement for disclosures under 
Regulation S-X. Unlike Form N-PORT, which will be reported in a 
structured XML format, schedules of investments are designed to be 
investor friendly documents. By requiring the reporting in the schedule 
of investments of all components of an underlying index or custom 
basket, we agree with commenters that noted that requiring the 
potential volume of disclosing components in an index in financial 
statements could add considerable length to the schedule of 
investments, rendering them more difficult for investors to review than 
limiting such disclosures to the most significant components.\575\ 
Additionally, such disclosures may minimize the importance to investors 
of direct portfolio holdings and increase reporting costs to 
funds.\576\ Finally, investors or others interested in knowing all 
components of such indexes will still have access to such information 
on Form N-PORT, without adding the volume to the financial statements 
that could occur by requiring complete disclosure in the financial 
statements.\577\
---------------------------------------------------------------------------

    \575\ See AICPA Comment Letter; PwC Comment Letter.
    \576\ See PWC Comment Letter (expressing concern that the cost 
of presenting numerous immaterial notional positions in the 
financial statements will exceed the benefit to the financial 
statement readers); AICPA Comment Letter (expressing concern that 
the cost of identifying and auditing numerous individual notional 
positions which typically are not reflected in the same accounting 
records as investment positions directly held, but instead appear in 
term sheets, counterparty confirmations, and off-line valuation 
spreadsheets--will exceed the benefit to financial statement 
readers).
    \577\ Cf. Franco Comment Letter (supporting more layered forms 
of disclosure ``that meet the needs of different constituent end-
users of disclosure.'')
---------------------------------------------------------------------------

    As a result, we are making a modification from our proposed 
amendments to Regulation S-X to require funds to only report the top 50 
components of the index or custom basket and any components that 
represent more than one percent of the notional value of the index or 
custom basket.\578\ Thus, if the index's or custom basket's components 
are not publicly available and the notional amount of the derivative 
represents more than 1% of the net asset value of the fund, the fund 
will provide a description of the index or custom basket and list 
separately (i) the 50 largest components in the index or custom basket 
and (ii) any other components where the notional value for that 
component exceeds 1% of the notional value of the index or custom 
basket.\579\ For each investment separately listed, the fund will 
include the description of the underlying investment as would be 
required by Article 12 of Regulation S-X as part of the description, 
the quantity held, the value at the close of the period, and the 
percentage value when compared to the custom basket's net assets.\580\
---------------------------------------------------------------------------

    \578\ See Instruction 3 to rule 12-13.
    \579\ See rules 12-13, n.3 and 12-13C, n.3 of Regulation S-X. We 
also modified language from the proposal to delete duplicative 
wording; see rule 12-13, n. 3 (deleting duplicative wording to 
``list separately'') and clarify instructions and conform to similar 
instructions in Form N-PORT; see rules 12-13, n. 3 and 12-13C, n. 3 
(changing ``is over'' to ``exceeds'' and adding ``custom'' to 
``baskets'').
    \580\ See id.; see also supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    As discussed more fully above, commenters also objected to the 
public disclosure of the components underlying an index as that 
disclosure could harm the intellectual property rights that index 
providers might assert and, as a result, harm investors who may lose 
the benefit of index products that would no longer be available to 
them.\581\ However, we believe that it is important that fund investors 
are provided with the information necessary to make informed investing 
decisions.\582\ This necessarily means that investors and other 
potential users have access to relevant information relating to 
investments in derivatives, including the components underlying an 
index.\583\ As discussed further in section II.A.4, above, we believe 
that the potential for harm to fund investors is mitigated through the 
current public reporting delays for fund shareholder reports.\584\ We 
are also adopting, as proposed, but subject to the modifications 
discussed below,\585\ certain instructions for rule 12-13 that are 
generally the same across all of the schedules for derivatives 
contracts.\586\
---------------------------------------------------------------------------

    \581\ See supra section II.A.2.g.iv.
    \582\ Id.
    \583\ Id.
    \584\ See also infra footnote 1271.
    \585\ See supra section II.C.4.
    \586\ Instruction 2 will add ``description'' and 
``counterparty'' to the organizational categories of options 
contracts that must be listed separately. See rule 12-13, n. 2 of 
Regulation S-X. Instruction 4 will clarify that the fund need not 
include counterparty information for exchange-traded or centrally 
cleared options. See rule 12-13, n. 4 of Regulation S-X. Instruction 
6 will require the fund to indicate each investment which cannot be 
sold because of restrictions or conditions applicable to the 
investment. See rule 12-13, n. 6 of Regulation S-X; see also infra 
section II.C.4. Instruction 7 will require the fund to indicate each 
investment whose value was determined using significant unobservable 
inputs. See rule 12-13, n. 7 of Regulation S-X; see also infra 
section II.C.4. Instruction 8 will require Column G (Value) to be 
totaled and agree with the correlative amount shown on the related 
balance sheet. See rule 12-13, n. 8.
---------------------------------------------------------------------------

b. Open Futures Contracts--New Rule 12-13A
    We are adopting as proposed new rule 12-13A, which will require 
standardized reporting of open futures contracts. Under current rule 
12-13, many funds currently report for each open futures contracts 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).\587\ In order to allow investors to better understand the 
economics of a fund's investment in futures contracts, new rule 12-13A 
will require funds to also report notional amount and value.\588\ 
Therefore, under new rule 12-13A, funds with open futures contracts 
will report: (1) Description; (2) number of contracts; (3) expiration 
date; (4) notional amount; (5) value; and (6) unrealized appreciation/
depreciation.\589\
---------------------------------------------------------------------------

    \587\ See current rule 12-13 of Regulation S-X.
    \588\ See rule 12-13A, Columns D and E of Regulation S-X.
    \589\ See rule 12-13A of Regulation S-X; see also Morningstar 
Comment Letter (``The notional of a futures contract is a key 
characteristic that is used to evaluate the impact on the portfolio. 
The disclosure is relevant and informative for investors and for 
fiduciaries acting on the behalf of shareholders and other 
investors.'').

---------------------------------------------------------------------------

[[Page 81918]]

    We proposed a requirement that funds must reconcile the total of 
Column F (unrealized appreciation/depreciation) to the total variation 
margin receivable or payable on the related balance sheet.\590\ 
Although we received no comment on this aspect of the proposal, upon 
further review, we recognize that there may be instances where the 
total unrealized appreciation or depreciation for the fund's futures 
contracts might not reconcile to the variation margin receivable or 
payable on the balance sheet. As a result, we are therefore not 
adopting this proposed instruction.
---------------------------------------------------------------------------

    \590\ See proposed rule 12-13A, n. 7 of Regulation S-X.
---------------------------------------------------------------------------

    We received a comment that suggested that the Commission provide 
specific definitions for the terms ``notional amount'' and ``value'' 
for futures contracts.\591\ According to the commenter, ``notional 
amount'' may reference either the notional amount at the time the 
futures contract was entered into or the current notional value. Since 
we believe, for Regulation S-X purposes, that it would be more useful 
for investors to understand the current notional amount for a futures 
contract, we are adopting rule 12-13A with a new instruction from the 
proposal that instructs funds to report ``current notional amount'' 
pursuant to Column D of new rule 12-13A.\592\ For purposes of Article 
12 of Regulation S-X, we note that section 2(a)(41) of the Investment 
Company Act currently contains a definition of ``value'' which is 
applicable to Regulation S-X.\593\
---------------------------------------------------------------------------

    \591\ See AICPA Comment Letter.
    \592\ See rule 12-13A, n. 6.
    \593\ See section 2(a)(41) of the Investment Company Act.
---------------------------------------------------------------------------

    We are also adopting, as proposed, but subject to the modifications 
discussed below,\594\ certain new instructions to the schedule for rule 
12-13A that are similar to the other derivatives disclosure 
requirements.\595\
---------------------------------------------------------------------------

    \594\ See infra section II.C.4.
    \595\ See infra section II.C.4. Instruction 1 will require funds 
to organize long purchases of futures contracts and futures 
contracts sold short separately. See rule 12-13A, n. 1 of Regulation 
S-X. Instruction 2 will require funds to list separately futures 
contracts where the descriptions or expiration dates differ. See 
rule 12-13A, n. 2 of Regulation S-X. Instruction 3 will clarify that 
the description should include the name of the reference asset or 
index. See rule 12-13A, n. 3 of Regulation S-X. Instruction 4 will 
require the fund to indicate each investment which cannot be sold 
because of restrictions or conditions applicable to the investment. 
See rule 12-13A, n. 4 of Regulation S-X; see also infra section 
II.C.4. Instruction 5 will require the fund to indicate each 
investment whose value was determined using significant unobservable 
inputs. See rule 12-13A, n. 5 of Regulation S-X; see also infra 
section II.C.4.
---------------------------------------------------------------------------

c. Open Forward Foreign Currency Contracts--New Rule 12-13B
    We are also adopting as proposed new rule 12-13B, which requires 
standardized disclosures for open forward foreign currency 
contracts.\596\ Under current rule 12-13, many funds reported for each 
open forward foreign currency contract, 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).\597\ 
In order to allow investors to better understand counterparty risk for 
forward foreign currency contracts, we are adopting as proposed, a 
requirement that funds also disclose the counterparty to each 
transaction.\598\ Under new rule 12-13B, funds holding open forward 
foreign currency contracts will 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; (5) 
unrealized appreciation/depreciation.\599\
---------------------------------------------------------------------------

    \596\ See proposed rule 12-13B of Regulation S-X.
    \597\ See rule 12-13 of Regulation S-X.
    \598\ See rule 12-13B, Column C of Regulation S-X.
    \599\ See rule 12-13B of Regulation S-X.
---------------------------------------------------------------------------

    One commenter recommended that we include a clear definition of 
``forward contract'' to avoid potential confusion and foster consistent 
derivatives disclosure under Form N-PORT, Regulation S-X, and Form 
ADV.\600\ Many funds appear to be already classifying forward foreign 
currency contracts in their financial statements, and the approach we 
are adopting allows flexibility as products evolve. We are therefore 
declining to adopt a definition of ``forward contract.''
---------------------------------------------------------------------------

    \600\ See T. Rowe Price Comment Letter.
---------------------------------------------------------------------------

    Commenters suggested that open forward foreign currency contracts 
be grouped by currencies purchased or sold, or more specifically by US 
dollars when US domiciled funds mark currency to the US dollar within 
financial statements.\601\ We do not believe that further refinement to 
the grouping of forward foreign currency contracts is necessary, as the 
commenters suggested, as new rule 12-13B provides funds with the 
flexibility to organize foreign currency contracts in the manner that 
they believe provides the clearest presentation of their financial 
statements. For example, if a fund concentrates its investments in a 
country such that its investments are generally denominated in a 
currency other than the US dollar, it may determine that grouping its 
contracts, including cross-currency forwards, by that currency would 
provide a clearer presentation to investors. We are therefore adopting 
instruction 1 to rule 12-13B as proposed, which will require the fund 
to separately organize forward foreign currency contracts where the 
description of currency purchased, currency sold, counterparties, or 
settlement dates differ.\602\
---------------------------------------------------------------------------

    \601\ See State Street Comment Letter (forward foreign currency 
contracts should be grouped by purchased or sold US dollars); 
Morningstar Comment Letter (foreign currency forwards should be 
grouped and subtotaled by currencies purchased or sold).
    \602\ See rule 12-13B, n. 1 of Regulation S-X.
---------------------------------------------------------------------------

    One commenter suggested that since most funds report derivatives on 
a gross basis, appreciation and depreciation for the disclosures of 
non-exchange-traded derivatives such as forward foreign currency 
contracts and swaps contracts should be disclosed in two separate 
columns or include subtotals, rather than in one column, as was 
proposed.\603\ We agree that in certain circumstances this change in 
format would assist with reconciling the unrealized appreciation and 
depreciation with the corresponding figures on the fund's balance sheet 
and would encourage this presentation to the extent it provides such 
assistance. In some cases, however, an extra column may not be 
necessary \604\ and we are therefore not adopting the commenters' 
suggested modifications to the disclosure tables for those rules, 
although we note that the rules do not prevent a fund from presenting 
the information in two separate columns, if it so chooses.\605\
---------------------------------------------------------------------------

    \603\ See BlackRock Comment Letter.
    \604\ For example, if derivatives are presented net in 
accordance with ASC Topic 210 (Balance Sheet).
    \605\ See rule 12-13A, Column F and rule 12-13C, Column H of 
Regulation S-X.
---------------------------------------------------------------------------

    We are also adopting, as proposed, but subject to the modifications 
discussed below,\606\ certain new instructions to the schedule for rule 
12-13B that are similar to the other derivatives disclosure 
requirements.\607\
---------------------------------------------------------------------------

    \606\ See infra section II.C.4.
    \607\ Instruction 1 will require the fund to separately list 
forward foreign currency contracts where the description of currency 
purchased, currency sold, counterparties, or settlement dates 
differ. See rule 12-13B, n. 1 of Regulation S-X. Instruction 2 will 
require the fund to indicate each investment which cannot be sold 
because of restrictions or conditions applicable to the investment. 
See rule 12-13B, n. 2 of Regulation S-X; see also infra section 
II.C.4. Instruction 3 will require the fund to indicate each 
investment whose value was determined using significant unobservable 
inputs. See rule 12-13B, n. 3 of Regulation S-X; see also infra 
section II.C.4. Instruction 4 will clarify that Column E (unrealized 
appreciation/depreciation) should be totaled and agree with the 
total of correlative amounts shown on the related balance sheet. See 
rule 12-13B, n. 4 of Regulation S-X.

---------------------------------------------------------------------------

[[Page 81919]]

d. Open Swap Contracts--New Rule 12-13C
    We are also adopting, substantially as proposed, rule 12-13C, which 
will standardize reporting of fund positions in open swap 
contracts.\608\ Under current rule 12-13, for each open swaps contract, 
funds reported 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).\609\ 
Under new rule 12-13C, funds will also be required to report the 
counterparty to each transaction (except for exchange-traded and 
centrally cleared swaps), the contract's value, and any upfront 
payments or receipts.\610\ This additional information will allow 
investors to both better understand the economics of the transaction, 
as well as its associated risks.\611\ Therefore, funds will 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.\612\ Commenters were generally supportive of 
this proposed disclosure, although some expressed concerns about some 
aspects of the disclosures, as discussed in more detail below. We are 
adopting rule 12-13C substantially as proposed in an effort to increase 
transparency of swap contracts, but are making some modifications in 
response to comments, which are discussed below. The final rules are 
designed to maintain enough flexibility for the variety of swap 
products that currently exist and future products that might come to 
market.
---------------------------------------------------------------------------

    \608\ See rule 12-13C of Regulation S-X.
    \609\ See rule 12-13 of Regulation S-X.
    \610\ See rule 12-13C, Columns C, F, and G of Regulation S-X.
    \611\ For example, upfront payments or receipts disclose whether 
cash was paid or received when entering into a swap contract, 
allowing investors to better understand the initial cost of the 
investment, if any.
    \612\ See rule 12-13C of Regulation S-X. The description and 
terms of payments to be paid and received (and other information) to 
and from another party should reflect the investment owned by the 
fund and allow an investor to understand the full nature of the 
transaction. One commenter suggested that, for over-the-counter 
swaps, appreciation and depreciation should be disclosed in two 
separate columns or include subtotals for appreciation and 
depreciation instead of one column. See BlackRock Comment Letter. 
But, for the same reasons as discussed in our discussion of rule 12-
13B, we are not adopting the corresponding modification to the table 
for rule 12-13C, although the rules do not prevent a fund from 
presenting the information in two separate columns, if it so 
chooses.
---------------------------------------------------------------------------

    In addition to the major categories of swaps, commenters also 
recommended that centrally cleared swaps be grouped separately from 
over-the-counter swaps, as centrally cleared swaps do not bear the same 
types of risks as over-the-counter swaps.\613\ While we do not believe 
that it is necessary to separately categorize centrally cleared swaps 
for purposes of Regulation S-X, as discussed more fully above, we are 
modifying proposed instruction 4 to Rule 12-13C to reflect that both 
exchange-traded and centrally cleared swaps need not list counterparty 
information.\614\ Moreover, instruction 1 to rule 12-13C provides 
enough flexibility as drafted to allow funds to further categorize 
swaps contracts by over-the-counter or centrally cleared, should they 
choose to do so.\615\
---------------------------------------------------------------------------

    \613\ See, e.g., State Street Comment Letter; BlackRock Comment 
Letter.
    \614\ See supra footnote 557 and accompanying text; see also 
rule 12-13C, n. 4 of Regulation S-X.
    \615\ See rule 12-13C, n. 1 of Regulation S-X.
---------------------------------------------------------------------------

    We are also adopting instruction 3 of rule 12-13C as proposed, 
which will provide specific examples of the more common types of swap 
contracts (e.g., credit default swaps, interest rate swaps, and total 
return swaps).\616\ We recognize that other types of swaps exist (e.g., 
currency swaps, commodity swaps, variance swaps, and subordinated risk 
swaps). For example, for a cross-currency swap, funds will report for 
purposes of Column A of 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 rule 12-13C will 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 
will include both notional amounts and the currency in which each is 
denominated, or the same information could be presented in two separate 
columns.
---------------------------------------------------------------------------

    \616\ See rule 12-13C, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    In the context of providing comments on Form N-PORT, one commenter 
noted that credit default swaps are unique enough instruments that they 
should be treated separately from other types of swaps.\617\ We 
designed our amendments to Regulation S-X with enough flexibility to 
allow funds to report the significant elements of current and future 
investments and believe that rule 12-13C adequately requires funds to 
disclose the information sufficient for a user of financial information 
to understand the terms of payments to be received and paid of a fund's 
investments in swaps contracts, including credit default swaps. We are 
therefore adopting this portion of instruction 3 as proposed and not 
providing a separate schedule for credit default swaps.\618\
---------------------------------------------------------------------------

    \617\ See Morningstar Comment Letter (Commission should require 
disclosure of protection written and protection purchased with the 
description containing the underlying, as well as columns for 
notional, ongoing payment, initial payment, maturity, and value.); 
see also supra section II.A.2.g.iv.
    \618\ See rule 12-13C, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    Consistent with comparable reporting requirements that we proposed 
in connection with Form N-PORT and rule 12-13 (open options contracts), 
in the case of a swaps contract with an underlying investment that is 
an index or basket of investments for which components are publicly 
available on a Web site as of the fund's balance sheet date,\619\ or if 
the notional amount of the investment does not exceed one percent of 
the fund's NAV as of the close of the period, we proposed that the fund 
provide information sufficient to identify the underlying 
investment.\620\ We also proposed that 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 swaps 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.\621\
---------------------------------------------------------------------------

    \619\ As proposed, the components would be required to be 
publicly available on a Web site as of the fund's balance sheet date 
at the time of transmission to stockholders for any report required 
to be transmitted to stockholders under rule 30e-1. The components 
would be required to remain publicly available on a Web site as of 
the fund's balance sheet date until 70 days after the fund's next 
fiscal year-end. For example, components of an index underlying an 
option contract for a fund's 12/31/14 annual report must be made 
publicly available on a Web site as of 12/31/14 by the time that the 
12/31/14 annual report is transmitted to stockholders. The 
components must remain publicly available until 3/10/16.
    \620\ See proposed rule 12-13, n. 3 of Regulation S-X. See supra 
footnotes 360-362 and accompanying text (discussing the rationale 
for similar proposed requirements in Form N-PORT).
    \621\ See id.
---------------------------------------------------------------------------

    In a modification from the proposal, and as discussed more fully in 
the open option contracts \622\ and the Form N-PORT sections of this 
release,\623\ in the case of a swaps contract with a referenced asset 
that is an index whose components are publicly available on a

[[Page 81920]]

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 requiring that the fund provide information 
sufficient to identify the referenced asset, such as a 
description.\624\ If the referenced asset is an index or custom basket 
whose components are not publicly available on a Web site as of the 
balance sheet date, and the notional amount of the derivative 
represents more than 1% of the net asset value of the fund as of the 
close of the period, the fund will provide a description of the index 
or custom basket and list separately (i) the 50 largest components in 
the index or custom basket and (ii) any other components where the 
notional value for that components is over 1% of the notional value of 
the index or custom basket.\625\ For each investment separately listed, 
the fund will include the description of the underlying investment as 
would be required by Article 12 of Regulation S-X, as part of the 
description, the quantity held, the value at the close of the period, 
and the percentage value when compared to the custom basket's net 
assets.\626\ 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.
---------------------------------------------------------------------------

    \622\ See supra section II.C.2.a.
    \623\ See supra section II.A.2.g.iv.
    \624\ See rule 12-13C, n. 3 of Regulation S-X.
    \625\ See rule 12-13C, n. 3 of Regulation S-X.
    \626\ See id.
---------------------------------------------------------------------------

    For swaps which pay or receive financing payments, we proposed that 
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.\627\ Commenters expressed concern 
that disclosing financing rates for swaps contracts could harm fund 
investors as financing rates are negotiated between parties.\628\ We 
believe, however, that the Commission's objective to increase 
transparency and enhance investor understanding in these instruments by 
giving investors the opportunity to better understand the investments 
held in a fund's portfolio justifies the disclosure of financing rates 
for swaps contracts.\629\ We are therefore adopting this portion of 
instruction 3 to rule 12-13C as proposed.\630\
---------------------------------------------------------------------------

    \627\ See proposed rules 12-13C, n. 3; and 12-12, n. 4 of 
Regulation S-X.
    \628\ See, e.g., MFS Comment Letter; Invesco Comment Letter; ICI 
Comment Letter (public benefit of disclosure does not outweigh 
potential competitive harm).
    \629\ For example, negotiated terms of an investment in a 
restricted security of a private company are required to be 
disclosed. See current rule 12-12, n. 6 of Regulation S-X. For the 
same reasons we discussed above, we believe that it is necessary for 
funds to report the specific terms for other derivatives holding 
information.
    \630\ See rule 12-13C, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    We are also adopting, as proposed, but subject to the modifications 
discussed below,\631\ other instructions to this rule that are similar 
across all of our rules for derivatives contracts, as well as one 
modification to our proposed instruction 7.\632\
---------------------------------------------------------------------------

    \631\ See infra section II.C.4.
    \632\ Instruction 5 will require the fund to indicate each 
investment which cannot be sold because of restrictions or 
conditions applicable to the investment. See rule 12-13C, n. 5 of 
Regulation S-X; see also infra section II.C.4. Instruction 6 will 
require the fund to indicate each investment whose value was 
determined using significant unobservable inputs. See rule 12-13C, 
n. 6 of Regulation S-X; see also infra section II.C.4. Instruction 7 
will require that Columns G (upfront payments/receipts) and H 
(unrealized appreciation/depreciation) be totaled and agree with the 
totals of their respective amounts shown on the related balance 
sheet. See rule 12-13C, n. 7 of Regulation S-X. Note we proposed for 
instruction 7 to also include Column F (value) in the total, 
however, upon further review, we have determined that correlating 
the amounts from Columns F, in addition to Columns G and H would be 
duplicative and therefore unnecessary.
---------------------------------------------------------------------------

e. Other Investments--Rule 12-13D (Current Rule 12-13)
    We are also adopting, as proposed, amendments to current rule 12-13 
and, for organization and consistency, are renumbering it as rule 12-
13D.\633\ Rule 12-13D will 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.\634\ We 
received no comments on our proposed amendments to current rule 12-13 
(and are adopting rule 12-13D as proposed). Thus rule 12-13D will 
require reporting of: (1) Description; (2) balance held at close of 
period-quantity; and (3) value of each item at close of period.\635\ We 
expect that funds will report, among other holdings, investments in 
physical holdings, such as real estate or commodities, pursuant to rule 
12-13D. As discussed below, we are amending current rule 12-13's 
requirement that funds disclose ``each investment not readily 
marketable'' \636\ in favor of disclosures concerning whether an 
investment is restricted and if an investment's value was determined 
using significant unobservable inputs.\637\ We are also adopting the 
proposed new instructions to the schedule that are generally the same 
across all the schedules for derivatives contracts, subject to the 
modifications discussed below.\638\
---------------------------------------------------------------------------

    \633\ See rule 12-13D of Regulation S-X.
    \634\ See id.
    \635\ Id.
    \636\ See rule 12-13, n. 4 of Regulation S-X.
    \637\ See proposed rule 12-13D, n. 6 of Regulation S-X 
(requiring the fund to indicate each investment which cannot be sold 
because of restrictions or conditions applicable to the investment); 
rule 12-13D, n. 7 (requiring the fund to indicate each issue of 
securities whose value was determined using significant unobservable 
inputs); see also infra section II.C.4.
    \638\ Instruction 1 will require the fund to organize each 
investment separately where any portion of the description differs. 
See rule 12-13D, n. 1 of Regulation S-X. Instruction 2 will require 
the fund to categorize the schedule by the type of investment, and 
related industry, country, or geographic region, as applicable. See 
rule 12-13D, n. 2 of Regulation S-X. Instruction 3 will require that 
the description of the asset include information sufficient for a 
user to understand the nature and terms of the investment. See rule 
12-13D, n. 3 of Regulation S-X; see also infra section II.C.4.
---------------------------------------------------------------------------

3. Amendments to Current Rules 12-12 Through 12-12C
    While we did not propose changes to the current schedules for rules 
12-12, 12-12A, and 12-12C, we proposed certain additional rule 
instructions that would include new reporting requirements, as well as 
certain clarifying changes, including renumbering several of the 
schedules. With the exception of the instructions discussed below, we 
are adopting the amendments to new rules 12-12 through 12-12B as 
proposed.
    We proposed several modifications to the instructions to rule 12-
12, the rule concerning disclosure of investments in securities of 
unaffiliated issuers. We proposed to modify instruction 2 to rule 12-12 
(and the corresponding instructions to proposed rules 12-12A, 12-12B, 
12-13D, and 12-14) which would require funds to categorize the schedule 
by type of investment, the related industry, and the related country, 
or geographic region.\639\ Commenters noted that requiring 
categorization of both the industry and geographic region (as opposed 
to categorizing one factor) would add considerable length to the 
schedule of investments and make it more difficult to understand.\640\ 
We were persuaded

[[Page 81921]]

that requiring categorization of both industry and geographic region 
would add unnecessary length and confusion to the schedule of 
investments, which could ultimately undermine the schedule's usefulness 
to investors, and are therefore not adopting these requirements.\641\
---------------------------------------------------------------------------

    \639\ See proposed rule 12-12, n. 2 of Regulation S-X; see also 
proposed rules 12-12A, n. 2; 12-12B, n. 1; 12-13D, n. 2; and 12-14, 
n. 2 of Regulation S-X.
    \640\ See, e.g., Oppenheimer Comment Letter; State Street 
Comment Letter; Vanguard Comment Letter; MFS Comment Letter; Wells 
Fargo Comment Letter (in chart or table); SIFMA Comment Letter I; 
ICI Comment Letter; BlackRock Comment Letter (results in additional 
costs to shareholders, without a corresponding benefit); AICPA 
Comment Letter. In response to our proposal to categorize 
investments by both industry and geographic regions, some commenters 
suggested as an alternative that funds should report the percentage 
of securities by country or geographic region as a separate 
schedule, graph, or chart. See, e.g., State Street Comment Letter; 
MFS Comment Letter; ICI Comment Letter; BlackRock Comment Letter; 
AICPA Comment Letter. However, given the fact that we are not 
adopting this proposal, we believe a separate schedule is 
unnecessary.
    \641\ See rule 12-12, n. 2 of Regulation S-X; see also rules 12-
12A, n. 4; 12-12B, n. 2; 12-13D, n. 2; and 12-14, n. 2 of Regulation 
S-X.
---------------------------------------------------------------------------

    One commenter requested that, should we adopt the proposed 
instructions relating to categorization of both industry and geographic 
region (which, as discussed in the prior paragraph, we are not 
adopting), the instructions should be integrated into Regulation S-X 
that standardize how funds report geographic concentrations.\642\ 
Others noted that the disclosure of country of risk or geographic 
region should be treated as nonpublic since it is subjective in nature 
and based on unique assumptions and inputs used by fund 
management.\643\ Since we have decided to not adopt the proposed 
instructions which would have required funds to categorize investments 
by both industry and geographic regions, we do not think it is 
necessary to include specific instructions on how funds should report 
geographic concentrations or treat the disclosure as nonpublic. 
However, we note the current GAAP requirement to disclose significant 
concentrations of credit risk, which includes information about shared 
regions that identify the concentration remains unchanged.\644\
---------------------------------------------------------------------------

    \642\ See SIFMA Comment Letter I.
    \643\ See, e.g., MFS Comment Letter; ICI Comment Letter 
(pertaining to disclosure of country of risk in Form N-PORT).
    \644\ See FASB ASC 825-10-50-21(a) (Financial Instruments-
Overall-Disclosure-Concentrations of Credit Risk of All Financial 
Instruments).
---------------------------------------------------------------------------

    In order to provide more transparency to a fund's investments in 
debt securities, we are adopting, with certain modifications discussed 
below, our proposed instruction to rule 12-12 requiring a fund to 
indicate the interest rate or preferential dividend rate and maturity 
date for certain enumerated debt instruments.\645\ When disclosing the 
interest rate for variable rate securities, we proposed that the fund 
describe the referenced rate and spread.\646\ In proposing disclosures 
for variable rate securities, we requested comment on other 
alternatives, such as period-end interest rate (e.g. the investment's 
interest rate in effect at the end of the period).\647\ We received 
several comments supporting our proposal to provide the reference rate 
and spread for variable rate securities, reasoning that the disclosure 
of the components of the variable rate would be easier for investors 
and other interested parties to determine the investment's current rate 
at any given time (as opposed to the rate at the end of the reporting 
period).\648\ However, another commenter suggested that the period-end 
interest rate is the most appropriate variable rate security disclosure 
for shareholders.\649\
---------------------------------------------------------------------------

    \645\ See proposed rule 12-12, n. 4 of Regulation S-X.
    \646\ See id.
    \647\ See Proposing Release, supra footnote 7, at 33622.
    \648\ See State Street Comment Letter; see also Morningstar 
Comment Letter (Disclosure would allow investors to identify when 
cash flows associated with a fund's returns are fixed or variable).
    \649\ See Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that disclosure of the referenced rate and 
spread will allow investors to better understand the economics of the 
fund's investments in variable rate debt securities. We are persuaded, 
however, that the period-end interest rate is also important for 
investors because it will provide investors with the actual interest 
rate of the investment at the period end, thereby giving investors both 
the ability to understand the investment's current return (through 
period-end rate) and to better understand how interest rate changes 
could affect the investment's future returns. Therefore, in a 
modification from the proposal, we are now including in the instruction 
a requirement that the fund both describe the referenced rate and 
spread and provide the end of period interest rate for each investment, 
or include disclosure of each referenced rate at the end of the 
period.\650\ For securities with payments-in-kind, we proposed 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.\651\ We received no comments addressing this item and 
therefore are adopting as proposed.\652\
---------------------------------------------------------------------------

    \650\ See rules 12-12, n. 4; 12-12A, n. 3; 12-14, n. 3 of 
Regulation S-X. For purposes of clarity, we also amended our 
proposed instructions to 12-12A and 12-14 to state the complete 
instruction, rather than, as proposed, reference the instruction in 
rule 12-12, n. 4. Id.
    \651\ See proposed rule 12-12, n. 4 of Regulation S-X.
    \652\ See rule 12-12, n. 4 of Regulation S-X; see also See rules 
12-12A, n. 3 and 12-14, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    We also proposed to modify the current instruction to rule 12-12 
\653\ 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.\654\ We received no comments on this item. This 
disclosure, which we believe is consistent with current industry 
practices, will increase the transparency of the fund's securities 
lending activities, and we are adopting the modification to the 
instruction as proposed.\655\
---------------------------------------------------------------------------

    \653\ See current rule 12-12, n. 7 of Regulation S-X.
    \654\ See proposed rule 12-12, n. 11 of Regulation S-X; see also 
proposed rule 12-12B, n. 14 of Regulation S-X.
    \655\ See rule 12-12, n. 10 of Regulation S-X; see also rule 12-
12B, n. 13 of Regulation S-X.
---------------------------------------------------------------------------

    We proposed to modify current instruction 3 of rule 12-12 (proposed 
instruction 5 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.\656\ We 
received no comments on this item and are adopting as proposed.\657\
---------------------------------------------------------------------------

    \656\ See proposed rule 12-12, n. 5 of Regulations S-X; see also 
proposed rule 12-12B, n. 2 of Regulation S-X
    \657\ See rule 12-12, n. 5 of Regulations S-X; see also rules 
12-12A, n. 4; rule 12-12B, n. 2 of Regulation S-X; see also rule 12-
14, n. 7 of Regulation S-X.
---------------------------------------------------------------------------

    Likewise, we are adopting several modifications to rule 12-12A 
regarding the presentation of securities sold short, in order to 
conform the instructions to rule 12-12.\658\
---------------------------------------------------------------------------

    \658\ Instruction 2 will require the fund to organize the 
schedule in rule 12-12A in the same manner as is required by 
Instruction 2 of rule 12-12. See rule 12-12A, n. 2. Instruction 3 
will require the fund to identify the interest rate or preferential 
dividend rate and maturity date as required by Instruction 4 of rule 
12-12. See rule 12-12A, n. 3 of Regulation S-X. Instruction 4 will 
require the subtotals for each category of investments, subdivided 
both by type of investment and industry, country, or geographic 
region to be shown together with their percentage value compared to 
net assets, in the same manner as is required by Instruction 5 of 
rule 12-12. See rule 12-12A, n. 4 of Regulation S-X. Instruction 6 
will require the fund to identify each issue of securities whose 
fair value was determined using significant unobservable inputs. See 
rule 12-12A, n. 6 of Regulation S-X; see also infra section II.C.4.
     The proposal included an instruction in the schedule, as we 
proposed in the other schedules, that would require the fund to 
identify each issue of securities held in connection with open put 
or call option contracts. See proposed rule 12-12A, n. 7 of 
Regulation S-X. We are not adopting this instruction because, as 
noted by one commenter, it is not relevant to securities sold short. 
See AICPA Comment Letter.
---------------------------------------------------------------------------

    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

[[Page 81922]]

(Summary schedule of investments in securities of unaffiliated issuers) 
and the full schedule is filed under Form N-CSR.\659\ In order to 
maintain numbering consistency and organization throughout the 
regulation, we are renaming 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 proposed to modify the schedule of 
proposed rule 12-12B (current rule 12-12C), but again added similar 
changes to its instructions. We received no comments addressing this 
proposal and, subject to the relevant modifications discussed above, we 
are adopting these instructions as proposed. \660\
---------------------------------------------------------------------------

    \659\ See rule 6-10(c)(2) of Regulation S-X [17 CFR 210.6-
10(c)(2)]; see also Quarterly Portfolio Holdings Adopting Release, 
supra footnote 421.
    \660\ Instruction 2 will add ``type of investment'' to the 
current subtotal requirements for the summary schedule. See proposed 
rule 12-12B, n. 2 of Regulation S-X. Instruction 3 will extend rule 
12-12's requirement that funds indicate the interest rate or 
preferential dividend rate and maturity date for certain enumerated 
securities. See rule 12-12B, n. 3 of Regulation S-X. Instruction 5 
will require for options purchased all information that would be 
required by rule 12-13 for written option contracts. See rule 12-
12B, n. 5 of Regulation S-X. Instruction 12 will require the fund to 
indicate each issue of securities whose fair value was determined 
using significant unobservable inputs. See rule 12-12B, n. 12 of 
Regulation S-X; see also infra section II.C.4. Instruction 13 will 
extend rule 12-12's requirement that the fund indicate ``where any 
portion of the issue is on loan.'' See rule 12-12B, n. 13 of 
Regulation S-X.
---------------------------------------------------------------------------

4. Instructions Common to Rules 12-12 Through 12-12B and 12-13 Through 
12-13D
    We proposed several instructions to the proposed rules in order to 
maintain consistency with the disclosures required by current rules 12-
12 and 12-13. Current rule 12-13 contains an instruction requiring 
identification of ``each investment not readily marketable.'' \661\ We 
proposed to modify this requirement in current rule 12-13 (new rule 12-
13D), and add it to the new schedules we are adopting or modifying 
concerning derivatives, by adding instructions that funds must indicate 
(1) whether an investment was fair valued by using significant 
unobservable inputs \662\ and (2) whether an investment cannot be sold 
because of restrictions or conditions applicable to the 
investment.\663\ These proposed instructions were intended to increase 
transparency into the marketability of, and observability of valuation 
inputs for, a fund's investments by instead requiring separate 
identification of investments that are restricted investments, as well 
as those investments that were fair valued using significant 
unobservable inputs. Similarly, for proposed rules 12-12, 12-12A, and 
12-12B, we proposed to include an instruction requiring funds to 
indicate whether an issue of securities was fair valued by using 
significant unobservable inputs.\664\
---------------------------------------------------------------------------

    \661\ See current rule 12-13, n. 4 of Regulation S-X (``The term 
`investment not readily marketable' shall include investments for 
which there is no independent publicly quoted market and investments 
which cannot be sold because of restrictions or conditions 
applicable to the investment or the company.'').
    \662\ See proposed rules 12-13, n. 7; 12-13A, n. 5; 12-13B, n. 
3; 12-13C, n. 6; 12-13D, n. 7 of Regulation S-X.
    \663\ See proposed rules 12-13, n. 6; 12-13A, n. 4; 12-13B, n. 
2; 12-13C, n. 5;12-13D, n. 6, of Regulation S-X.
    \664\ See proposed rules 12-12, n. 9; 12-12A, n. 6; 12-12B, n. 
12.
---------------------------------------------------------------------------

    We received comments generally supporting the disclosure of 
investments fair valued using significant unobservable inputs.\665\ 
However, in order to make ``value'' consistent with current Article 12, 
the final rule amendments only refer to ``value'' (rather than ``fair 
value,'' as we do in the proposed amendments to Regulation S-X), which 
is consistently used and defined under Regulation S-X.\666\ We are 
therefore adopting the requirement that funds indicate if an 
investment's value was determined using significant unobservable 
inputs.\667\
---------------------------------------------------------------------------

    \665\ See, e.g., Harvest Comment Letter; Markit Comment Letter.
    \666\ See, e.g., current rule 12-12, Column C (``Value of each 
item at close of period''); current rule 12-13, Column C (same).
    \667\ See rule 12-13, n. 7 of Regulation S-X; see also rules 12-
12, n. 9; 12-12A, n. 6, 12-12B, n. 12; 12-13A, n. 5; 12-13B, n. 3; 
12-13C, n. 6; and 12-13D, n. 7 of Regulation S-X. These instructions 
will require funds to identify each investment categorized in Level 
3 of the fair value hierarchy in accordance with ASC Topic 820. See 
FASB ASC 820-10-20 (Fair Value Measurement-Overall-Glossary) (``ASC 
820-10-20'') (defining ``level 3 inputs'' as ``unobservable inputs 
for the asset or liability''); see also FASB ASC 820-10-35-37A (Fair 
Value Measurement-Overall-Subsequent Measurement-Fair Value 
Hierarchy) (``ASB 820-10-35-37A'') (``In some cases, the inputs used 
to measure the fair value of an asset or a liability might be 
categorized within different levels of the fair value hierarchy. In 
those cases, the fair value measurement is categorized in its 
entirety in the same level of the fair value hierarchy as the lowest 
level input that is significant to the entire measurement.'') 
(emphasis added); Harvest Comment Letter (supporting disclosure of 
level 3 securities).
---------------------------------------------------------------------------

    We received one comment relating to our proposed instruction 
requiring identification of a derivative that cannot be sold because of 
restrictions or conditions applicable to the derivative.\668\ That 
commenter noted that we should clarify and provide examples of what is 
meant by restrictions applicable to derivatives.\669\ We believe the 
instruction is clear that a derivative that cannot be sold as of the 
reporting date because of a restriction applicable to the investment 
itself (as opposed to e.g. illiquidity in the market) should be 
identified. Therefore, we are adopting the instruction as 
proposed.\670\
---------------------------------------------------------------------------

    \668\ See State Street Comment Letter.
    \669\ Id. (``For example, it is unclear whether the lockup 
period for trading blocks would be included as a restriction 
applicable to derivatives. If the SEC's purpose is to have a narrow 
definition, then it is unclear whether the stricter definition 
includes limitation on the types of entities that would be able to 
buy an instrument such as rule 144a [sic] restrictions, which limits 
trading to qualified institutional buyers.''). Consistent with this 
example, a restricted security subject to rule 144A would be 
identified as restricted under rules 12-12, 12-12A, or 12-12B only 
if the security has restrictions and the fund cannot sell the 
security to qualified institutional buyers at the report date due to 
those restrictions.
    \670\ See rule 12-13, n. 6 of Regulation S-X; see also rules 12-
13A, n. 4; 12-13B, n. 2; 12-13C, n. 5; and 12-13D, n. 6 of 
Regulation S-X.
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    Current rules 12-12, 12-12C, and 12-13 each contain an instruction 
to include tax basis disclosures for investments.\671\ We proposed 
extending this requirement to the proposed rules concerning derivatives 
holdings and securities sold short \672\ because we believed that this 
type of tax basis information may be important to investors in 
investment companies, which are generally pass-through entities 
pursuant to Subchapter M of the Internal Revenue Code.\673\ We received 
several comments arguing against extending our proposed tax basis 
disclosures to the proposed derivatives schedules. Several commenters 
noted their belief that disclosure of tax basis by investment type 
would not provide meaningful disclosure to investors, while increasing 
the volume and complexity of the financial statements.\674\ Others 
stated that the tax-basis information is unnecessary in light of 
recently added GAAP-required disclosure of tax basis components of 
dividends and distributions.\675\ The current GAAP requirement that 
funds disclose the components of distributable

[[Page 81923]]

earnings (including undistributed ordinary income, undistributed long-
term capital gains, capital loss carryforwards and unrealized 
appreciation/depreciation) on a tax basis using the most recent tax 
year-end enables investors to determine the amount of accumulated and 
undistributed earnings that they could potentially receive in the 
future and on which they could be taxed.\676\ Some commenters 
recommended an alternative that funds should disclose the aggregate tax 
basis of all investments relating to the portfolio as whole, or those 
that are recorded as assets or liabilities.\677\
---------------------------------------------------------------------------

    \671\ See rule 12-12, n. 8; 12-12C, n. 11; and 12-13, n. 7 of 
Regulation S-X.
    \672\ See proposed rule 12-13, n. 10 of Regulation S-X; see also 
proposed rules 12-12A, n. 8; 12-13A, n. 8; 12-13B, n. 6; 12-13C, n. 
9; and 12-13D, n. 11 of Regulation S-X.
    \673\ See 26 U.S.C. 851, et seq.
    \674\ See PwC Comment Letter; EY Comment Letter; CRMC Comment 
Letter; State Street Comment Letter; MFS Comment Letter; ICI Comment 
Letter; AICPA Comment Letter.
    \675\ See Oppenheimer Comment Letter; MFS Comment Letter; and 
ICI Comment Letter (Recommending that the Commission require funds 
to present tax basis information relating to the tax basis 
components of dividends and distributions in the notes to the 
financial statements); see also FASB ASC 946-20-50-12 (Financial 
Services--Investment Companies, Investment Company Activities) 
(``ASC 946-20-50-12'');
    \676\ ASC 946-20-50-12; see also ICI Comment Letter. We believe 
that this level of information in the aggregate is sufficient for 
investor needs and additionally recognize the complexity involved in 
capturing the tax characterizations of certain investments in the 
format of the Schedules. See PwC Comment Letter.
    \677\ See PwC Comment Letter; and Vanguard Comment Letter 
(federal tax disclosure should be provided, annually instead of 
semiannually, on an aggregate basis, instead of in separate 
investment schedules).
---------------------------------------------------------------------------

    We agree that tax disclosures relating to the portfolio as a whole 
provides sufficient information for investors. However, current GAAP 
disclosures do not require funds to report the cost of all investments 
in an unrealized appreciation and the cost of all assets in an 
unrealized depreciation on a gross basis, which we believe may be 
useful to investors to further understand the potential amounts they 
might receive and on which they could be taxed. As a result, we have 
determined not to extend the tax basis disclosures currently required 
by rules 12-12, 12-12B, and 12-13 to our new disclosures of derivative 
investments (rules 12-13 through 12-13C) and securities sold short 
(rule 12-12A). For the same reasons, we are removing this disclosure 
requirement from each of the rules 12-12, 12-12B (current rule 12-12C), 
and 12-13D (current rule 12-13) \678\ and instead moving it to Article 
6 of Regulation S-X as a rule of general application requiring that 
funds report these tax basis disclosures relating to the portfolio as a 
whole.\679\
---------------------------------------------------------------------------

    \678\ See current rules 12-12, n. 8; 12-12C, n. 11; 12-13, n. 7 
of Regulation S-X.
    \679\ See rule 6-03(h)(2) (adding the requirement that the fund 
``state the following amounts based on cost for Federal income tax 
purposes: (i) Aggregate gross unrealized appreciation for all 
investments in which there is an excess of value over tax cost, (ii) 
The aggregate gross unrealized depreciation for all investments in 
which there is an excess of tax cost over value, (iii) The net 
unrealized appreciation or depreciation, and (iv) The aggregate cost 
of investments for Federal income tax purposes.'')
---------------------------------------------------------------------------

    We also proposed to require funds to identify illiquid 
investments.\680\ As we stated in the proposal, liquidity is an 
important consideration for a fund's investors in understanding the 
risk exposure of a fund.\681\ We received numerous comments registering 
concerns with this proposed instruction to require portfolio-level 
liquidity disclosures.\682\ For example, commenters noted that 
disclosure of illiquid assets could confuse fund shareholders, as they 
could erroneously assume that disclosure of illiquid assets is an 
objective determination.\683\ Similarly, commenters noted that 
liquidity information could become stale given the time delay between 
the end of the period and the time that such information would become 
available to the public.\684\ Others expressed concern that portfolio-
level liquidity disclosures in financial statements would be difficult 
and costly to audit, as auditors would be required to engage 
specialists to determine the validity of the fund's liquidity 
determinations for each investment.\685\ Moreover, as discussed in the 
Liquidity Adopting Release, we are concurrently adopting portfolio-
level liquidity reporting on Form N-PORT which we believe mitigates 
many of the commenters' concerns and is a more appropriate method of 
public reporting.\686\ Accordingly, we are not adopting the proposed 
instructions in Regulation S-X relating to the liquidity of 
investments.\687\
---------------------------------------------------------------------------

    \680\ See proposed rule 12-12, n. 10 of Regulation S-X; see also 
proposed rules 12-12B, n. 13; and 12-13, n. 8 of Regulation S-X; see 
also proposed rules 12-13A, n. 6; 12-13B, n. 4; 12-13C, n. 7; and 
12-13D, n. 8 of Regulation S-X. See generally 1992 Release, supra 
footnote 290.
    \681\ See Proposing Release, supra footnote 7, at 116. See also 
Liquidity Adopting Release, supra footnote 9.
    \682\ See State Street Comment Letter (Commission should provide 
guidance as to what assumptions would be appropriate in determining 
if an investment is illiquid); PwC Comment Letter (Recommending 
disclosure of fund's basis for determining illiquid investment as 
defined by management/board of directors); EY Comment Letter (defer 
adopting until the proposed illiquidity standards have been 
updated); CRMC Comment Letter (same); Pioneer Comment Letter; contra 
Morningstar Comment Letter (``The requirement to identify positions 
that are illiquid is adequate and appropriate to replace 
`investments not readily marketable.' This information can tie 
directly to monitoring of investment limitations under the Act.'').
    \683\ See, e.g., PwC Comment Letter; Oppenheimer Comment Letter; 
MFS Comment Letter (liquidity determinations should be non-public); 
Deloitte Comment Letter; Invesco Comment Letter; Schwab Comment 
Letter; ICI Comment Letter; and AICPA Comment Letter.
    \684\ See Deloitte Comment Letter.
    \685\ See, e.g., PwC Comment Letter; ICI Comment Letter; and 
AICPA Comment Letter. Commenters also suggested, as an alternative, 
requiring registrant to label the disclosure of illiquid investments 
as ``unaudited subject to change based on market conditions'' as a 
way to mitigate financial statement and audit costs. See Deloitte 
Comment Letter. However, while this suggestion may mitigate some 
auditing costs for funds, as discussed above, we have determined 
that disclosures on Form N-PORT, with portfolio-level liquidity 
information being made public, provides an appropriate method of 
providing information for the benefit of the Commission, investors, 
and other interested third parties.
    \686\ See Liquidity Adopting Release, supra footnote 9.
    \687\ See id.
---------------------------------------------------------------------------

5. Investments In and Advances to Affiliates--Rule 12-14
    We proposed amendments to rule 12-14 (Investments in and advances 
to affiliates).\688\ Rule 12-14 currently 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.\689\ 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 had proposed to modify Column C of the schedule to rule 12-
14 to require ``net realized gain or loss for the period,'' \690\ and 
Column D to require ``net increase or decrease in unrealized 
appreciation or depreciation for the period'' for each affiliated 
investment.\691\ We received one comment supporting this aspect of the 
proposal and are adopting it as proposed.\692\
---------------------------------------------------------------------------

    \688\ See proposed rule 12-14 of Regulation S-X.
    \689\ See rule 12-14 of Regulation S-X; see also section 
2(a)(3)(A) of the Investment Company Act (defining an ``Affiliated 
person'' as ``any person directly or indirectly owning, controlling, 
or holding with power to vote, 5 per centum or more of the 
outstanding voting securities of such other person.'').
    \690\ See proposed rule 12-14, Column C of Regulation S-X. 
Column C of current rule 12-14 requires disclosure of the ``amount 
of equity in net profit and loss for the period,'' which is derived 
from the controlled company's income statement and does not directly 
translate to the impact to a fund's statement of operations. We 
proposed to replace this requirement with ``net realized gain or 
loss for the period.''
    \691\ See proposed rule 12-14, Column D of Regulation S-X.
    \692\ See Morningstar Comment Letter; see also Columns C and D 
of Rule 12-14 of Regulation S-X.
---------------------------------------------------------------------------

    Likewise, in instruction 6(e) and (f), we proposed 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

[[Page 81924]]

correlate these totals to the statement of operations.\693\ Disclosure 
of these realized gains or losses and changes in unrealized 
appreciation or depreciation, in addition to the current requirement to 
disclose the amount of affiliated income, will allow investors to 
understand the full impact of an affiliated investment on a fund's 
statement of operations.\694\ We received no comments on this proposal 
and are therefore adopting our modifications to instructions 6(e) and 
6(f) as proposed.\695\
---------------------------------------------------------------------------

    \693\ See proposed rule 12-14, n. 6(e) and (f) of Regulation S-
X.
    \694\ See current rule 6-07 of Regulation S-X [17 CFR 210.6-07].
    \695\ See rule 12-14, n. 6(e) and (f) of Regulation S-X.
---------------------------------------------------------------------------

    Additionally, we proposed 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 rules 12-12, 12-12A, and 12-
12B, for which we received no comments and are adopting as 
proposed.\696\
---------------------------------------------------------------------------

    \696\ See id., n. 7; see also proposed rules 12-12, n. 5; 12-12A 
n. 4; and 12-12B, n. 2 of Regulation S-X.
---------------------------------------------------------------------------

    We proposed several other amendments to the instructions to rule 
12-14 in order to, in part, conform the rule to our disclosure 
requirements in rules 12-12 and 12-13. Subject to the modifications 
discussed above in section II.C.4, we are adopting as proposed.\697\
---------------------------------------------------------------------------

    \697\ Instruction 1 will delete the instruction to segregate 
subsidiaries consolidated in order to make the disclosures under 
rule 12-14 consistent with the fund's balance sheet. See rule 12-14, 
n. 1 of Regulation S-X. Instruction 2 will require the fund to 
categorize the schedule to rule 12-14 in the same manner as is 
required by Instruction 2 of rule 12-12. See rule 12-14, n. 2 of 
Regulation S-X. Instruction 3 will require the fund to identify the 
interest rate or preferential dividend rated and maturity date, as 
applicable. See rule 12-14, n. 3 of Regulation S-X. Instruction 4 
will add Column F to the columns to be totaled and update the 
instruction to state that Column F should agree with the correlative 
amount shown on the related balance sheet. See rule 12-14, n. 4 of 
Regulation S-X. Instruction 5 will update the reference to 
Instruction 8 of rule 12-12 and reference to rule 12-13 to reflect 
the changes in the numbering of the instructions for those rules. 
See rule 12-14, n. 5 of Regulation S-X. Instructions 6(a) and (b) 
will update references to Column D to reference Column E in order to 
reflect our proposed changes to rule 12-14's schedule. See rule 12-
14, nn. 6(a) and (b) of Regulation S-X. Instruction 6(d), which adds 
clarifying language from Instruction 7 of rule 12-12, will provide 
the fund with more detail on the definition of non-income producing 
securities. See rule 12-14, n. 6(d) of Regulation S-X. Instruction 8 
will require the fund to identify each issue of securities whose 
fair value was determined using significant unobservable inputs. See 
rule 12-14, n. 8 of Regulation S-X; see supra section II.C.4. 
Instruction 9 will require the fund to indicate each issue of 
securities held in connection with open put or call option 
contracts, loans for short sales, or where any portion of the issue 
is on loan, as required by note 10 to rule 12-12. See rule 12-14, n. 
9 of Regulation S-X.
---------------------------------------------------------------------------

6. Form and Content of Financial Statements
    Finally, we are adopting substantially as proposed, 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 
adopting today are intended to conform Article 6 with our changes to 
Article 12 and update other financial statement requirements.\698\ As 
part of these changes, we proposed to modify the title and the 
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.\699\ 
This amendment is a technical amendment and does not change existing 
requirements for BDCs.\700\ Commenters did not object to this 
change,\701\ and we are adopting it as proposed.\702\
---------------------------------------------------------------------------

    \698\ We proposed to amend the reference in rule 6-03(c) to 
Sec.  210.3A-05, as that section of Regulation S-X was rescinded in 
2011. See Rescission of Outdated Rules and Forms, and Amendments to 
Correct References, Securities Act Release No. 33-9273 (Nov. 4, 
2011) [76 FR 71872 (Nov. 21, 2011)]. We received no comments on this 
proposed amendment and are adopting as proposed. See rule 6-03(c) of 
Regulation S-X [17 CFR 210.6-03(c)].
    \699\ See proposed rules 6-01; 6-03; 6-03(c)(1); 6-03(d); 6-
03(i); 6-04; and 6-07 of Regulation S-X.
    A BDC is a closed-end fund that is operated for the purpose of 
making investments in small and developing businesses and 
financially troubled businesses and that elects to be regulated as a 
BDC. See section 2(a)(48) of the Investment Company Act (defining 
BDCs). BDCs are not subject to periodic reporting requirements under 
the Investment Company Act, although they must comply with periodic 
reporting requirements under the Exchange Act.
    \700\ See Instruction 1.a to Item 6.c of Form N-2 (``A business 
development company should comply with the provisions of Regulation 
S-X generally applicable to registered management investment 
companies. (See section 210.3-18 [17 CFR 210.3-18] and sections 
210.6-01 through 210.6-10 of Regulation S-X [17 CFR 210.6-01 through 
210.6-10]).'').
    \701\ See, e.g., Deloitte Comment Letter. This commenter 
suggested that, in addition, we also clarify that Article 6 applies 
to Securities Act registrants who meet the definition of 
``Investment Company'' under FASB or IFRS, yet are not registered 
under the Investment Company Act. Id. The change to reference BDCs 
is a technical change that is not intended to expand the entities 
subject to Article 6. See supra footnote 699 and accompanying text. 
The Proposing Release addressed the reporting and disclosure of 
information by registered investment companies and BDCs. Since the 
Proposing Release did not address the possibility of subjecting 
other entities, such as the ones described by the commenter, to this 
rulemaking, extending the regulations could have unforeseen 
implications, including potentially subjecting such entities to the 
requirements of Article 6. We believe such a change is beyond the 
scope of this rulemaking.
    \702\ See rules 6-01; 6-03; 6-03(c)(1); 6-03(d); 6-03(i); 6-04; 
6-04.10; and 6-07 of Regulation S-X.
---------------------------------------------------------------------------

    In order to allow a more uniform presentation of investment 
schedules in a fund's financial statements, we proposed to rescind 
subparagraph (a) of rule 6-10 under Regulation S-X, regarding which 
schedules are to be filed.\703\ One commenter noted that consolidated 
subsidiary information could be useful for investors, as information 
about the specific entities' ownership may make the structure of the 
fund more transparent to investors.\704\ We were persuaded that such 
information may be useful to investors and are therefore not rescinding 
subparagraph (a) of rule 6-10.\705\
---------------------------------------------------------------------------

    \703\ See proposed rule 6-10 of Regulation S-X.
    \704\ Deloitte Comment Letter (``For example, if certain 
consolidated investments are owned by a consolidated subsidiary 
domiciled in a foreign jurisdiction where the political climate 
might be unstable or where creditors may have inferior or superior 
rights to assets, investors are better served when informed of these 
economic distinctions.'').
    \705\ See rule 6-10(a) of Regulation S-X.
---------------------------------------------------------------------------

    Another commenter requested that we require disclosure of costs 
associated with the management of controlled foreign corporations 
(``CFCs'') or expenses embedded in the return being received in the 
footnotes to the financial statements.\706\ The commenter also 
requested that funds be required to report these expenses either in 
calculations of total operating expenses or as acquired fund expenses 
in other filings.\707\ We believe that disclosure of these expenses are 
already included, as applicable, in (1) the expenses reported within 
the statement of operations of the consolidated investment company 
where the CFC is a consolidated entity,\708\ or (2) in the required 
Acquired Fund Fees and Expenses disclosures within the prospectus 
filing of the investment company where the CFC is not consolidated; and 
therefore no further modifications are necessary.\709\
---------------------------------------------------------------------------

    \706\ See Morningstar Comment Letter.
    \707\ Id.
    \708\ See FASB ASC 946-810 (Financial Services--Investment 
Companies--Consolidation).
    \709\ See Item 3 and Instruction 3(f) to Item 3 of Form N-1A.
---------------------------------------------------------------------------

    Current rule 6-10(a) also 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.\710\ As we stated in the Proposing Release, 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

[[Page 81925]]

12-12C. Our proposal to rescind rule 6-10(a) would have also eliminated 
this instruction. Commenters generally supported eliminating this 
instruction as it would assist with the comparability of funds by 
shareholders.\711\ In light of the increased use of derivatives by 
funds, we continue to 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 this 
may 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. However, as discussed above, we 
were persuaded to not rescind rule 6-10(a) in these final rules. Thus 
we are adopting a conforming modification to rule 6-10(a) to eliminate 
this specific instruction.\712\
---------------------------------------------------------------------------

    \710\ See current rule 6-10(a) of Regulation S-X.
    \711\ See, e.g., State Street Comment Letter; ICI Comment 
Letter.
    \712\ See rule 6-10(a) of Regulation S-X (``When information is 
required in schedules for both the person and its subsidiaries 
consolidated, it may be represented in the form of a single 
schedule, provided that items pertaining to the registrant are 
separately shown and that such single schedule affords a properly 
summarized presentation of the facts.'') Additionally, in order to 
conform rule 6-10(c) with the new requirements under Article 12, we 
added schedules corresponding to our proposed new schedules of 
derivatives investments, as discussed above. See rule 6-10(c) of 
Regulation S-X.
---------------------------------------------------------------------------

    We also proposed changes to rules 6-03 and 6-04 to specifically 
reference the investments required to be reported on separate schedules 
in amended Article 12.\713\ We received no comment on these proposals 
and are adopting them as proposed.\714\ Additionally, we proposed 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.\715\ 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 may 
present 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 
continue to believe eliminating current rule 6-04.4 would provide more 
complete information to investors. We received no comments on this 
proposal and are adopting this change as proposed, as well as the 
corresponding proposed change in rule 6-03(d) to remove the reference 
to ``total investments reported under [rule 6-04.4].'' \716\ As 
discussed above in section II.C.4, we are also adding a requirement to 
rule 6-03(h) requiring funds to report the cost of all investments in 
an unrealized appreciation and the cost of all assets in an unrealized 
depreciation on a gross basis.\717\
---------------------------------------------------------------------------

    \713\ See proposed rules 6-03(d); 6-04.3; 6-04.9 of Regulation 
S-X. We also proposed to amend rule 6-04.10 to reflect that the 
amount of liabilities for securities sold short and for open options 
contracts written would be reported under proposed rule 6-04.9. See 
proposed rule 6-04.10 of Regulation S-X.
    \714\ See rules 6-03(d); 6-04.3; 6-04.9; and 6-04.10 of 
Regulation S-X.
    \715\ See current rule 6-04.4 of Regulation S-X [17 CFR 201.6-
04.4].
    \716\ See rules 6-04.4; and 6-03(d) of Regulation S-X.
    \717\ See rule 6-03(h).
---------------------------------------------------------------------------

    We are also adopting, as proposed, an amendment to rule 6-04 to 
refer individually to our derivatives disclosures in proposed rules 12-
13A through 12-13C.\718\ As is currently the case, these proposed 
amendments are not meant to require gross presentation where netting is 
allowed under U.S. GAAP.\719\ 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. We received no comments on this proposal.
---------------------------------------------------------------------------

    \718\ See rules 6-04.3; 6-04.6; and 6-04.9 of Regulation S-X.
    \719\ See FASB ASC 210 (Balance Sheet) and ASC 815.
---------------------------------------------------------------------------

    We also proposed, amendments to rule 6-05.3 which would 
specifically require presentation of items relating to investments 
other than securities in the notes to financial statements.\720\ 
Current rule 6-05.3 only requires presentation in the notes to 
financial statements of disclosures required by rules 6-04.10 through 
6-04.13, which include information relating to securities sold short 
and open option contracts written.\721\ Our proposal would also have 
amended rule 6-05.3 to require fund financial statements to reflect all 
unaffiliated investments other than securities presented on separate 
schedules under Article 12.\722\ We received no comments on this aspect 
of the proposal and are adopting it as proposed.\723\
---------------------------------------------------------------------------

    \720\ See proposed rule 6-05.3 of Regulation S-X.
    \721\ See current rule 6-05.3 of Regulation S-X [17 CFR 210.6-
05.3].
    \722\ See proposed rule 6-05.3 of Regulation S-X.
    \723\ See rule 6-05.3 of Regulation S-X.
---------------------------------------------------------------------------

    We also proposed to add new disclosure requirements that are 
designed to increase transparency to investors about certain 
investments and activities. First, we proposed 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 in order to allow investors to better understand 
the income generated from, as well as the expenses associated with, 
securities lending activities.\724\ As discussed in more detail below, 
after consideration of issues raised by commenters, we have determined 
that it is more appropriate to require that these disclosures be made 
in a fund's Statement of Additional Information (or, for closed-end 
funds, reports on Form N-CSR) or in Form N-CEN, rather than to require 
their inclusion in its financial statements.\725\
---------------------------------------------------------------------------

    \724\ See proposed rule 6.03(m) of Regulation S-X.
    \725\ See infra section II.F and section II.D.4.c.iii.
---------------------------------------------------------------------------

    Second, we proposed to amend rule 6-07 to require funds to make a 
separate disclosure for income from non-cash dividends and payment-in-
kind interest on the statement of operations.\726\ Our proposed 
amendment to rule 6-07 was 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. While one commenter 
generally supported disclosure for in-kind payments,\727\ many 
recommended, if the Commission should adopt such a disclosure, that we 
provide a disclosure threshold for non-cash income, such as one similar 
to the requirement to disclose expense items that exceed 5

[[Page 81926]]

percent of total expenses.\728\ We agree with commenters' that a 
disclosure threshold for non-cash disclosures would alleviate 
unnecessary reporting burdens. We also agree with commenters that, in 
order to keep all income disclosures under rule 6-07.1 consistent, a 5 
percent de minimis threshold, which is the current requirement for 
categories of investment income and expenses under current rule 6-07.1, 
is also appropriate for our amended non-cash income disclosure under 
rule 6-07.1.\729\ As a result, we are modifying the proposal by 
adopting a new instruction to rule 6-07.1 clarifying that a separate 
disclosure of income from payment-in-kind interest or non-cash 
dividends, like other types of income under current rule 6-07.1, is 
only required if all income of this type exceeds 5 percent of the 
fund's investment.\730\
---------------------------------------------------------------------------

    \726\ See proposed rule 6-07.1 of Regulation S-X.
    \727\ See ICI Comment Letter (supporting disclosure of payment-
in-kind income with a 5 percent threshold).
    \728\ See State Street Comment Letter (recommending a 10% 
benchmark); AICPA Comment Letter (5% threshold); MFS Comment Letter 
(opposed to separate presentation of non-cash income for payment-in-
kind securities because the schedule of investments provides 
adequate disclosure of securities with payment-in-kind income, but 
supporting a de minimis threshold for other types of non-cash 
income); PwC Comment Letter (same).
    \729\ See, e.g., PwC Comment Letter; and MFS Comment Letter.
    \730\ See rule 6-07.1 of Regulation S-X.
---------------------------------------------------------------------------

    Other commenters requested that we define ``non-cash dividends'' 
and ``payment-in-kind-interest earned.'' \731\ Finally, as in Form N-
PORT, some commenters noted that certain in-kind payments, such as when 
a fund has the option to elect to receive either cash or in-kind 
payments, do not raise the same risks as in-kind payments resulting 
from a distressed issuer and should therefore be disclosed 
separately.\732\ As discussed above in connection with Form N-PORT, we 
agree that in-kind payments resulting from an election, rather than, 
for example, issuer distress, do not involve the same risk of issuer 
default. Therefore not requiring funds to report on Form N-PORT 
interest paid in-kind if the fund has the option of electing in-kind 
payments and has elected to be paid in-kind.\733\ However, we believe 
for the statement of operations, it is important that all types of 
income from in-kind payments be subject to the separate disclosure 
threshold so that investors can compare this information to other 
funds. Thus, we do not believe that it is appropriate or necessary to 
provide prescriptive definitions of ``non-cash dividends'' and 
``payment-in-kind-interest earned ''for purposes of income statement 
disclosure and, unlike Form N-PORT, we are not amending Regulation S-X 
to differentiate income from different types of in-kind payments.\734\
---------------------------------------------------------------------------

    \731\ See PwC Comment Letter; and AICPA Comment Letter.
    \732\ See, e.g., AICPA Comment Letter; and PwC Comment Letter; 
see also supra section II.A.2.g.ii.
    \733\ See supra section II.A.2.g.ii; see also Item C.9.e of Form 
N-PORT.
    \734\ See rule 6-07.1 of Regulation S-X. Commenters specifically 
requested that we not require separate disclosures for amortization 
and accretion as it is unnecessary because shareholders generally do 
not distinguish between cash interest income and income in the form 
of accretion or amortization. See, e.g., PwC Comment Letter; MFS 
Comment Letter; ICI Comment Letter; AICPA Comment Letter. We agree 
and are not including a separate disclosure for amortizations and 
accretions.
---------------------------------------------------------------------------

    We proposed 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.\735\ Likewise, we proposed 
similar changes to proposed rule 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.\736\ We 
received no comments on this proposal and are adopting both changes as 
proposed.\737\
---------------------------------------------------------------------------

    \735\ See proposed rule 6-07.7(a) of Regulation S-X.
    \736\ See proposed rule 6-07.7(c) of Regulation S-X.
    \737\ See rules 6-07.7(a) and (c) of Regulation S-X.
---------------------------------------------------------------------------

    We also proposed to eliminate Regulation S-X's requirement for 
specific disclosure of written options activity under current rule 6-
07.7(c).\738\ This provision was adopted prior to FASB adopting 
disclosures generally applicable to derivatives, including written 
options, now required by FASB ASC Topic 815.\739\ We continue to 
believe that the requirement for specific disclosures for written 
options activity should be removed because they are generally 
duplicative of the requirements of FASB 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.\740\ Commenters 
expressed support for this proposal, which we are adopting.\741\
---------------------------------------------------------------------------

    \738\ See current rule 6-07.7(c) of Regulation S-X [17 CFR 
210.6-07.7(c)].
    \739\ See ASC 815 (Derivatives and Hedging).
    \740\ Id. Rule 6-07.7(c) requires disclosure in a note to the 
financial statements of the number and associated dollar amounts as 
to option contracts written: (i) At the beginning of the period; 
(ii) during the period; (iii) expired during the period; (iv) closed 
during the period; (v) exercised during the period; and (vi) balance 
at end of the period. The balances at the beginning of the period 
and end of the period are available in the prior period-end and 
current period-end schedules of open option contracts written, 
respectively. By eliminating the written options roll-forward, 
investors would no longer have information regarding the number of 
contracts expired, closed, or exercised during the period. However, 
disclosures required by ASC 815 provide gains and losses on 
derivative instruments, including written options, along with 
information that would enable users to understand the volume of 
derivative activity during the period.
    \741\ See, e.g., ICI Comment Letter; BlackRock Comment Letter.
---------------------------------------------------------------------------

    We proposed 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.\742\ We believe 
that it is appropriate to eliminate this exception, because a fund may 
have significant notional amounts in its portfolio that could be valued 
at one percent or less of the value of total investments. Accordingly, 
removing this exception will provide more transparency to investors 
regarding a fund's derivatives activity. We received no comments on 
this proposal, and we are adopting it as proposed.\743\
---------------------------------------------------------------------------

    \742\ See current rule 6-10(c)(1) Schedule II of Regulation S-X; 
see also proposed rule 6-10(b)(1) Schedule II of Regulation S-X.
    \743\ We also made several technical, non-substantive changes to 
the proposed rules. See rules 6-03(d) and 6-07 (moved ``business 
development companies'' to after ``other than face-amount 
certificates.'').
---------------------------------------------------------------------------

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

1. Overview
    We are adopting a new framework by which registered investment 
companies will report census-type information to the Commission by 
rescinding Form N-SAR and replacing it with a new form--Form N-
CEN.\744\ Most commenters generally supported our proposal to replace 
Form N-SAR with Form N-CEN, agreeing that Form N-CEN provides both the 
Commission and the public with enhanced and updated census-type 
information on a wide range of compliance, risk assessment, and policy 
related matters.\745\ Form N-SAR was adopted by the Commission in

[[Page 81927]]

1985 and requires that funds report a variety of census-type 
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.\746\ By contrast, as 
discussed further below, all funds will now file reports on Form N-CEN 
annually.\747\
---------------------------------------------------------------------------

    \744\ We are rescinding Form N-SAR and replacing it with a new 
census reporting form, Form N-CEN, rather than amending Form N-SAR 
in order to avoid technical difficulties that could arise with 
filing reports on an amended Form N-SAR (e.g., difficulties related 
to changes to filing format and form specifications). We have 
modified the numbering convention for items within Form N-CEN to be 
consistent with that of the numbering conventions of other forms 
(e.g., Forms N-MFP and N-PORT).
    \745\ See, e.g., SIFMA Comment Letter I; ICI Comment Letter; 
Invesco Comment Letter; Morningstar Comment Letter; BlackRock 
Comment Letter.
    \746\ See current rule 30b1-1 and current rule 30a-1.
    \747\ See rule 30a-1.
---------------------------------------------------------------------------

    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. We believe that by updating the content and format 
requirements for census reporting through new Form N-CEN, the 
Commission will be better able to carry out its regulatory functions 
while at the same time reducing burdens on filers.
    Many commenters agreed that Form N-SAR is outdated and commended 
the Commission's efforts to improve the relevance of information 
reported to the Commission.\748\ Commenters generally supported Form N-
CEN as proposed, and we are adopting the form substantially as proposed 
with some modifications to address specific issues raised by 
commenters, as discussed in more detail below.
---------------------------------------------------------------------------

    \748\ See, e.g., ICI Comment Letter; SIFMA Comment Letter I; 
Invesco Comment Letter; BlackRock Comment Letter.
---------------------------------------------------------------------------

    Form N-CEN gathers similar census information about the fund 
industry that funds currently report on Form N-SAR, which will be able 
to be aggregated and analyzed by Commission staff to better understand 
industry trends, inform policy, and assist with the Commission's 
examination program. To improve the quality and utility of information 
reported, Form N-CEN streamlines and updates information reported to 
the Commission to reflect current Commission staff information needs 
and developments in the industry.\749\ Where possible, we have 
endeavored to exclude items from Form N-CEN that are disclosed or 
reported pursuant to other Commission forms, or are otherwise 
available; however, in some limited cases, we are collecting 
information on Form N-CEN that may be similarly disclosed or reported 
elsewhere, but that the staff would benefit from collecting in a 
structured format.
---------------------------------------------------------------------------

    \749\ We are streamlining our data collection, in part, through 
the use of yes/no questions in order to flag certain information for 
follow-up, if necessary, by Commission staff. See, e.g., Item B.10 
and Item C.6.a of Form N-CEN. For example, staff of our Office of 
Compliance Inspections and Examinations may rely on responses to 
flag questions in Form N-CEN to indicate areas for follow-up 
discussion or to request additional information.
---------------------------------------------------------------------------

    In order to improve the utility of the information reported to the 
Commission, we are requiring that reports on Form N-CEN be structured 
in an XML format.\750\ Under this format, filers will no longer be 
required to use outdated technology for census reporting. Additionally, 
the XML structured format will allow reported information to be more 
efficiently and effectively validated, aggregated, compared, and 
analyzed through automated means and, therefore, more useful to end 
users.
---------------------------------------------------------------------------

    \750\ The Commission has adopted a number of other forms that 
are structured in an XML format, including Form N-MFP. Reports on 
Form N-SAR, by contrast, are filed using an outdated filing 
application.
---------------------------------------------------------------------------

    One commenter expressed support for the XML format.\751\ As 
discussed above in connection with Form N-PORT, certain others 
generally advocated for XBRL, a tagged system that is based on XML and 
was created specifically for the purpose of reporting financial and 
business information.\752\ Another commenter noted that the Commission 
should standardize the formatting requirements (i.e., ASCII/TXT, HTML, 
XBRL, XML) across all fund reporting in order to ease the burden on 
funds that would have to comply with different formatting 
requirements.\753\
---------------------------------------------------------------------------

    \751\ Morningstar Comment Letter (noting that the format will 
provide more accessible data to the public and reduce the amount of 
defective reporting currently possible in Form N-SAR).
    \752\ See AICPA Comment Letter; XBRL US Comment Letter; but see 
Morningstar Comment Letter (``Extensible Business Reporting Language 
has had very limited success, and certain aspects of the standard 
are too lenient for regular data validation.''). See also supra 
footnotes 444-449 and accompanying text.
    \753\ See Schnase Comment Letter (opining that the Commission 
should also ease the burdens on funds by allowing funds to input 
their data through a pre-formatted web portal or web form).
---------------------------------------------------------------------------

    As discussed above in connection with Form N-PORT, 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-CEN in an XML format will provide the 
information that we seek in an appropriate manner.\754\ Moreover, the 
interoperability of data between Forms N-MFP, PF, N-PORT, and N-CEN 
will aid the staff with cross-checking information reported to the 
Commission and in monitoring the fund industry.\755\ As discussed 
further below in the economic analysis, the XML format will also 
improve the quality of the information disclosed by imposing 
constraints on how the information will be provided and by providing a 
built-in validation framework of the data in the reports.\756\ We are 
therefore adopting the requirement that reports on Form N-CEN be filed 
in an XML format as proposed.
---------------------------------------------------------------------------

    \754\ See supra footnotes 444-449 and accompanying text. Based 
on our experience with reports on Form N-MFP and other XML-based 
reports, we anticipate that the XML structured data file will be 
compatible with a wide range of open source and proprietary 
information management software applications. Continued advances in 
structured data software, search engines, and other web-based tools 
may further enhance the accessibility and usability of the data. 
See, e.g., Money Market Reform 2010 Release, supra footnote 447, at 
n. 341.
    \755\ See Morningstar Comment Letter.
    \756\ See infra section III.B.
---------------------------------------------------------------------------

2. Who Must File Reports on Form N-CEN
    We are adopting, as proposed, the requirement that all registered 
investment companies, except face-amount certificate companies,\757\ 
file reports on Form N-CEN.\758\ No commenters objected to this 
requirement.\759\ As proposed, funds offering multiple series will 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

[[Page 81928]]

or more series.\760\ One commenter opined that one report covering 
multiple series would be sufficient as many questions apply to the 
registrant.\761\
---------------------------------------------------------------------------

    \757\ Face-amount certificate companies are investment companies 
which are engaged or propose to engage in the business of issuing 
face-amount certificates of the installment type, or which have been 
engaged in such businesses and have any such certificates 
outstanding. See section 4(1) of the Investment Company Act. Face-
amount certificate companies currently are not required to file 
reports on Form N-SAR. See General Instruction A of Form N-SAR. 
Face-amount certificate companies will continue to file periodic 
reports pursuant to section 13 [17 CFR 240.13a-1] or section 15(d) 
of the Exchange Act [17 CFR 240.15d-1].
    \758\ See Proposing Release, supra footnote 7, at section 
II.E.2. See also rule 30a-1. Consistent with Form N-SAR, BDCs, which 
are not registered investment companies, will not be required to 
file reports on Form N-CEN.
    \759\ See Morningstar Comment Letter (noting that the filing 
requirement is appropriate, but also suggesting that the Commission 
allow flexibility on how a fund chooses to report the data, 
including filing at the CIK-level with separate ``nodes'' for each 
series ID and designing the data base that is to house this 
information using the filing data and CIK as a key for each 
registrant-level data record).
    \760\ General Instruction A of Form N-CEN. Unlike Form N-PORT 
where separate reports will be filed for each series, registrants 
will file one report on Form N-CEN covering all series (as is 
currently done with reports on Form N-SAR). We are adopting this 
framework for Form N-CEN to help minimize reporting burdens, as much 
of the information that will be required by Form N-CEN (for example, 
the information reported pursuant to Part A and Part B) will be the 
same across a fund's various series. We note that Form N-SAR's 
approach to series information is slightly different than that of 
Form N-CEN, in that Form N-SAR allows registrants to indicate 
instances where the information is the same across all series, 
rather than requiring repetitive information. See General 
Instruction D(8) of Form N-SAR. Unlike Form N-SAR, however, to limit 
the reporting of repetitive information, Form N-CEN is organized 
such that information that is generally the same for all series is 
reported in Parts A and B of the form, with Part C, the part of the 
form that requires each series to respond separately, requesting 
information that is more likely to differ between series.
    \761\ See State Street Comment Letter.
---------------------------------------------------------------------------

    Like Form N-SAR, the sections of Form N-CEN that a fund is required 
to complete will depend on the type of registrant in order to better 
tailor the reporting requirements.\762\ As was proposed, all funds will 
be required to complete Parts A and B, and file any attachments 
required under Part G. In addition, funds will be required to complete 
the following Parts as applicable:
---------------------------------------------------------------------------

    \762\ See General Instruction A of Form N-CEN. As reflected in 
General Instruction A, registrants will be required to respond to 
each item in each required Part. To the extent an item in a required 
Part is inapplicable to a registrant, the registrant should respond 
``N/A'' to that item. Registrants will not, however, have to provide 
responses to items in Parts they are not required to respond to.
---------------------------------------------------------------------------

     All management companies, other than SBICs, will complete 
Part C;
     Closed-end funds and SBICs will complete Part D;
     ETFs (including those that are UITs) will complete Part E; 
\763\ and
---------------------------------------------------------------------------

    \763\ See id. Certain investment products known as ``exchange-
traded managed funds'' will also be required to complete Part E of 
Form N-CEN.
---------------------------------------------------------------------------

     UITs will complete Part F.\764\
---------------------------------------------------------------------------

    \764\ See id. Management companies that are registered on Form 
N-3 are also required to complete certain items in Part F as 
directed by Item B.6.c.i of Form N-CEN. See General Instruction A of 
Form N-CEN.
---------------------------------------------------------------------------

3. Frequency of Reporting and Filing Deadline
    Management investment companies currently file reports on Form N-
SAR semi-annually,\765\ and UITs file such reports annually.\766\ To 
reduce reporting burdens, we proposed that reports on Form N-CEN be 
filed on an annual basis, regardless of type of filer.\767\ While one 
commenter suggested semi-annual reporting on Form N-CEN if certain 
additional requirements were to be included,\768\ most commenters 
generally supported the annual filing requirement.\769\ Because Form N-
CEN requires census-type information, which in our experience does not 
change as frequently as, for example, portfolio holdings information, 
we continue to believe that an annual filing requirement will be 
sufficient for purposes of review by Commission staff, as well as 
investors and other market participants that might use this 
information.\770\ We are, therefore, adopting as proposed the 
requirement that reports on Form N-CEN be filed on an annual 
basis.\771\
---------------------------------------------------------------------------

    \765\ See current rule 30b1-1.
    \766\ See current rule 30a-1.
    \767\ See Proposing Release, supra footnote 7, at 33634.
    \768\ See Morningstar Comment Letter (suggesting semi-annual 
reporting as of the fund's fiscal year end should the Commission 
decide to include Items 34-44, Items 47-52, Item 54, Item 72, and 
Item 75 of Form N-SAR, as suggested). See infra section II.D.5 
concerning these current Form N-SAR Items.
    \769\ See, e.g., Carol Singer Comment Letter; State Street 
Comment Letter; Wells Fargo Comment Letter.
    \770\ As discussed above, certain items that are currently 
reported on Form N-SAR that would be helpful to have updated on a 
more frequent basis are included on Form N-PORT. For example, Item 
28 of Form N-SAR requires the fund to provide its monthly sales and 
repurchases of the Registrant's/Series' shares. In order to increase 
the timeliness of the information reported to the staff for funds 
flows, certain information relating to monthly flows will be 
reported on Item B.6 of Form N-PORT.
    \771\ Because Form N-CEN is to be filed annually by all 
registered investment companies, we are rescinding 17 CFR 270.30b1-1 
and revising 17 CFR 270.30a-1 to require all registered investment 
companies to file reports on Form N-CEN, as proposed. See infra 
section II.G (concerning technical and conforming amendments related 
to current rule 30b1-1 and current rule 30a-1). See rule 30a-1.
---------------------------------------------------------------------------

    We proposed that for all funds, the reporting period for Form N-CEN 
reports would be based on the fund's fiscal year.\772\ Currently, 
management companies file Form N-SAR reports on a fiscal year 
basis,\773\ while UITs file Form N-SAR reports on a calendar year 
basis.\774\ After further consideration, we have determined to require 
that management companies and UITs include in Form N-CEN reports 
information from the same time period as they currently report on Form 
N-SAR because we believe that calendar-year reporting for UITs will 
yield more comparable data while also reducing costs for reporting 
UITs.\775\ One commenter expressed support for reporting by funds on a 
fiscal year basis, as that would permit comparisons by data users 
between information reported on Form N-CEN and information on Form N-
CSR.\776\ As regards management investment companies, which are 
required to file reports on Form N-CSR, we agree that fiscal year 
reporting could have this beneficial effect, though the same would not 
be true of UITs. Therefore, under the final rule, management companies 
will file reports on Form N-CEN on a fiscal year basis while UITs will 
file such reports on a calendar year basis.\777\
---------------------------------------------------------------------------

    \772\ See Proposing Release, supra footnote 7, at 33634.
    \773\ See current rule 30b1-1.
    \774\ See current rule 30a-1.
    \775\ In particular, we note that the items relating to UITs in 
Part F require reporting of aggregate information across all series 
of the UIT (as distinct from Part C, which requires series-specific 
information in the case of management companies offering multiple 
series). As proposed, UITs with multiple series with different 
fiscal year end dates would have been required to file more than 
once per year, at least once for each unique date. Considering that 
the reported information itself relates to the entire UIT and not 
each individual series, we have determined, after further 
consideration, that it would be less costly for UITs to report once 
per year, even if their series have different fiscal years. 
Moreover, we believe that the resulting data will be more useful to 
the Commission and other data users because the reported information 
will be as of a consistent date across UITs, and therefore more 
readily compared and contrasted. Accordingly, we are requiring UITs 
to file Form N-CEN reports on a calendar year basis even where the 
UIT offers multiple series with different fiscal years.
    \776\ See Morningstar Comment Letter.
    \777\ See rule 30a-1.
---------------------------------------------------------------------------

    We have also added an instruction to the form to clarify that 
management investment companies that offer multiple series with 
different fiscal year ends must file a report as of each fiscal year 
end that responds to (i) Parts A, B, and G, and (ii) Part C and, if 
applicable, Part E as to only those series with the fiscal year end 
covered by the report.\778\ UITs that offer multiple series will file a 
single annual report covering all series as of the end of the calendar 
year.
---------------------------------------------------------------------------

    \778\ See General Instruction C.1 of Form N-CEN.
---------------------------------------------------------------------------

    Additionally, we received a number of comments on the proposed 60-
day filing period. Some commenters supported this proposed filing 
period.\779\ Several other commenters, however, requested that the 
filing period be extended to at least a 75-day period, arguing, among 
other things, that a longer time period would help stagger the filing 
deadline from other end-of-month filing requirements and allow 
sufficient time to address accounting-related questions.\780\
---------------------------------------------------------------------------

    \779\ See Carol Singer Comment Letter; State Street Comment 
Letter.
    \780\ See, e.g., Comment Letter of The Committee of Annuity 
Insurers (Aug. 11, 2015) (``CAI Comment Letter'') (75 days after 
fiscal year end); ICI Comment Letter (at least 75 days); Invesco 
Comment Letter (75 days after fiscal year end); MFS Comment Letter 
(75 days after fiscal year end, at least for initial filing for all 
funds in the fund complex); T. Rowe Price Comment Letter (75 days 
after fiscal year end).

---------------------------------------------------------------------------

[[Page 81929]]

    We have been persuaded by these comments and are adopting a filing 
period of 75 days after the fiscal year-end (for management companies) 
and calendar year-end (for UITs). We believe that a 75-day filing 
period appropriately balances 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. Furthermore, the census-
type information reported on Form N-CEN, in our experience, does not 
change frequently, thereby reducing the risk that a longer filing 
period would cause the information provided to become stale.
    Current rule 30b1-3 under the Investment Company Act requires a 
fund to file a transition report on Form N-SAR when a fund's fiscal 
year changes.\781\ Because reports on Form N-CEN are required to be 
filed annually rather semi-annually, we believe that a rule outlining 
the requirements for a transition report will 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 rescinding rule 30b1-3 
as proposed. We received no comments on this aspect of the proposal. To 
ensure, however, that reports are filed at least annually, we are 
requiring that reports on Form N-CEN not cover a period of more than 12 
months as proposed.\782\ Thus, if a fund changes its fiscal year, a 
report filed on Form N-CEN may cover a period shorter than 12 months, 
but may not cover a period longer than 12 months or a period that 
overlaps with a period covered by a previously filed report.\783\ We 
received no comments on this aspect of the proposal.
---------------------------------------------------------------------------

    \781\ See current rule 30b1-3; see also infra section II.G 
concerning technical and conforming amendments to current rule 30b1-
3.
    \782\ See General Instruction C.1 of Form N-CEN.
    \783\ Id.
---------------------------------------------------------------------------

    As proposed, a fund would be able to file an amendment to a 
previously filed report on Form N-CEN at any time, including an 
amendment to correct a mistake or error in a previously filed 
report.\784\ A fund that files an amendment to a previously filed 
report on the form should provide information in response to all items 
of Form N-CEN, regardless of why the amendment is filed.\785\ 
Commenters did not object to these proposed requirements although one 
commenter suggested that an amendment should not be required for any 
subsequent changes to previously reported information and that, except 
for any material errors, any subsequent changes should be reported in 
the next filing period.\786\ We are adopting these requirements as 
proposed.\787\ Although funds generally should correct a material 
mistake in a Form N-CEN report by filing an amendment to that report, 
Form N-CEN does not generally require registrants to file amendments in 
order to update information throughout the year. Rather, changes in 
information during the course of the year would be reflected in the 
fund's next report on the form.
---------------------------------------------------------------------------

    \784\ See General Instruction E of proposed Form N-CEN.
    \785\ Id.
    \786\ See State Street Comment Letter.
    \787\ See General Instruction C.2 of Form N-CEN.
---------------------------------------------------------------------------

    Similar to Form N-PORT,\788\ Form N-CEN also includes general 
filing instructions,\789\ as well as definitions of specific terms 
referenced in the form.\790\ As discussed in connection with Form N-
PORT above, we have eliminated proposed instructions regarding the 
signature and filing of reports,\791\ because we believe that the 
general rules and regulations applicable under the Act provide 
sufficient guidance regarding those issues.\792\ As discussed further 
below, we have also revised, consistent with the changes to Form N-PORT 
discussed above, the definitions of ``Exchange-Traded Fund'' and 
``Exchange-Traded Managed Funds'' to clarify that the terms would apply 
to a series or class of a UIT organized as an ETF or ETMF.\793\ We have 
also revised, as we did in Form N-PORT, the definition of ``LEI'' to 
reflect new terminology regarding LEIs.\794\
---------------------------------------------------------------------------

    \788\ See supra section II.A.3 regarding Form N-PORT.
    \789\ See General Instruction C of Form N-CEN.
    \790\ See General Instruction E of Form N-CEN.
    \791\ General Instruction E of proposed Form N-CEN.
    \792\ See General Instruction B to Form N-CEN (``The General 
Rules and Regulations under the Act contain certain general 
requirements that are applicable to reporting on any form under the 
Act. These general requirements should be carefully read and 
observed in the preparation and filing of reports on this Form, 
except that any provision in the Form or in these instructions shall 
be controlling.'').
    \793\ General Instruction E of Form N-CEN. See supra footnotes 
93-94 and accompanying text; infra footnote 896 and accompanying 
text.
    \794\ See supra footnote 95 and accompanying text. Form N-CEN's 
revised definition of ``LEI'' refers to the legal entity identifier 
``endorsed'' by LEI ROC or ``accredited'' by GLEIF, as opposed to 
``assigned or recognized'' by those two entities. General 
Instruction E to Form N-CEN.
---------------------------------------------------------------------------

4. Information Required on Form N-CEN
a. Part A--General Information
    We are adopting, as proposed, Part A of Form N-CEN. We did not 
receive comments on Part A. Part A, which will be completed by all 
funds, will collect information about the reporting period covered by 
the report. It requires funds to report the fiscal-year end date and 
indicate if the report covers a period of less than 12 months.\795\
---------------------------------------------------------------------------

    \795\ See Item A.1 of Form N-CEN.
---------------------------------------------------------------------------

b. Part B--Information About the Registrant
    We proposed a number of reporting items under Part B of Form N-CEN 
to provide information about the registrant. Although commenters did 
not raise broad objections to the reporting requirements under Part B, 
many commenters raised concerns with and/or requested clarification on 
specific reporting items. We are adopting Part B substantially as 
proposed with some modifications in response to comments on specific 
reporting items. Where we have received comments on specific reporting 
requirements, we discuss them in more detail below.
    As proposed, Part B of Form N-CEN would have been required to have 
been completed by all funds and would have required certain background 
and other identifying information about the funds. Part B of Form N-
CEN, as proposed, would have included an instruction that required 
funds offering multiple series to provide a response for each series 
when the response to an item in Part B of the form differed between 
series, and to label the response with the name and series 
identification number of the series to which a response relates.\796\ 
In order to provide more clarity to filers as to when series 
information is required in Part B of the form, we have removed the 
proposed instruction to Part B and have instead added sub-items 
requesting series information, when applicable, for certain items in 
Part B of the form. We have added these sub-items to the items in Part 
B where we believe identification of the particular series would be 
most helpful to our monitoring efforts and general review and analysis 
of the information reported on the form.\797\
---------------------------------------------------------------------------

    \796\ See Instruction to Part B of proposed Form N-CEN.
    \797\ See Item B.10, Item B.11, Item B.14, Item B.19, Item B.20, 
Item B.22, and Item B.23 of Form N-CEN. We note that, with respect 
to those items in Part B that do not include sub-items for series 
information, a registrant may still provide more than one response 
to the item (where applicable), but the response will not be 
required to indicate the relevant series to which it relates.
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    As proposed, Part B of the form requires certain background and 
other identifying information about the fund. This background 
information will allow the staff to categorize filers by fund type and 
will assist with our oversight of

[[Page 81930]]

funds. Included in this background information is the fund's name,\798\ 
Investment Company Act filing number,\799\ and other identifying 
information, such as its CIK \800\ and LEI,\801\ each of which we are 
adopting as proposed. In addition, we are adopting as proposed the 
requirement that the report include the fund's address, telephone 
number, and public Web site (if any),\802\ and the location of the 
fund's books and records.\803\ While the fund's name, address, 
telephone number, and filing number are currently required by Form N-
SAR,\804\ some of the additional information, such as the fund's CIK, 
LEI, public Web site and location of books and records are new. As 
discussed in the proposal and the Form N-PORT section above, 
information such as the CIK and LEI will assist the Commission and 
other data users with organizing the data and allow the data reported 
on Form N-CEN to be cross-referenced with data received from other 
sources.\805\ For tracking purposes, Form N-CEN also requires 
information relating to whether the filing is the initial or final 
filing.\806\
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    \798\ Item B.1.a of Form N-CEN.
    \799\ Item B.1.b of Form N-CEN.
    \800\ Item B.1.c of Form N-CEN. Because UITs that register on 
Form N-8B-2 obtain CIKs for the UIT itself as well as for series 
offered by the UIT, we have made a clarifying modification to Form 
N-CEN by including a requirement in Part F of the form that such 
UITs also report the CIKs for each of their existing series. See 
Item F.6.b of Form N-CEN.
    \801\ Item B.1.d of Form N-CEN.
    \802\ Item B.2 of Form N-CEN.
    \803\ Item B.3 of Form N-CEN; see also infra footnotes 807-809 
and accompanying text.
    \804\ Item 1 and Item 2 of Form N-SAR.
    \805\ See supra section II.A.2.a (discussing additional 
information such as CIK and LEI and comment letters received 
regarding the use of identifiers).
    \806\ Item B.4 of Form N-CEN. As proposed, the instruction to 
Item B.4--then numbered as ``Item 5''--stated that a fund should 
indicate that a filing is its final filing on Form N-CEN only if the 
fund has filed an application to deregister on Form N-8F ``or 
otherwise.'' We believe it would be useful to filers for the 
instruction to provide more context as to what should be considered 
``or otherwise.'' Therefore, the final Form clarifies that a fund 
should indicate that a filing on Form N-CEN is its final filing 
``only if the Registrant has filed an application to deregister or 
will file an application to deregister before its next required 
filing on this form.'' We note that even if a fund indicates a 
filing is its final filing on Form N-CEN, a fund is required to file 
reports on Form N-CEN until it is deregistered.
---------------------------------------------------------------------------

    We are adopting, as proposed, the requirement that funds include 
the location of their books and records in reports on Form N-CEN. We 
note that books and records information is currently required by fund 
registration forms; \807\ however, this information is not filed with 
the Commission in a structured format. We believe that having books and 
records information in a structured format will increase our efficiency 
in preparing for exams and, thus, we have determined to include this 
information in Form N-CEN.\808\ In addition, so as not to create 
unnecessary burdens, we are adopting proposed amendments to 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 Form N-CEN.\809\
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    \807\ See Item 33 of Form N-1A; Item 32 of Form N-2; Item 36 of 
Form N-3; Item 30 of Form N-4; and Item 31 of Form N-6.
    \808\ Additionally, by including books and records information 
in Form N-CEN, we may receive more frequently updated books and 
records information from closed-end funds. Closed-end funds do not 
update their registration statements as regularly as open-end funds 
and, thus, the information regarding their books and records may not 
always be current.
    \809\ Funds that have not yet filed a report on Form N-CEN will 
have to continue to include this information in their registration 
statement filings.
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    Similar to Form N-SAR,\810\ Form N-CEN requires information 
regarding whether the fund is part of a ``family of investment 
companies.'' \811\ The form, which includes a substantially similar 
definition as Form N-SAR,\812\ defines 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.\813\ This item will assist Commission 
staff with analyzing multiple funds across the same family of 
investment companies. One commenter suggested that a broader term such 
as ``fund complex'' would be a beneficial alternative to the proposed 
term ``family of investment companies.'' \814\ We believe, however, 
that ``fund complex,'' as such term is defined for purposes of Form N-
1A, for example, could be overly broad (e.g., could unintentionally 
incorporate unaffiliated sub-advisers), and thus, we have determined to 
adopt the item as proposed.\815\
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    \810\ Item 19, Item 94, and Item 116 of Form N-SAR; see also 
General Instruction H to Form N-SAR (defining ``family of investment 
companies'').
    \811\ Item B.5 of Form N-CEN.
    \812\ See id.; see also Instruction 1 to Item 17 of Form N-1A.
    \813\ Instruction to Item B.5 of Form N-CEN. The instruction, 
like the definition of ``family of investment companies'' in Form N-
SAR, also clarifies that insurance company separate accounts that 
may not hold themselves out to investors as related companies 
(products) for purposes of investment and investor services should 
consider themselves part of the same family if the operational or 
accounting or control systems under which these entities function 
are substantially similar. See General Instruction H to Form N-SAR.
    \814\ See Morningstar Comment Letter.
    \815\ See Instruction 1(b) to Item 17 of Form N-1A (defining 
``fund complex'' to mean two or more registered investment companies 
that: (1) Hold themselves out to investors as related companies for 
purposes of investment and investor services; or (2) have a common 
investment adviser or have an investment adviser that is an 
affiliated person of the investment adviser of any of the other 
registered investment companies).
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    We are adopting, as proposed, a requirement in Form N-CEN that the 
fund provide its classification (e.g., open-end fund, closed-end fund), 
similar to Form N-SAR.\816\ Unlike the requirements of Form N-SAR, 
however, we are also adopting, as proposed, a requirement in Form N-CEN 
that specifically asks whether the fund issues a class of securities 
registered under the Securities Act.\817\ These questions are intended 
to elicit background information on the fund, which will assist us in 
our monitoring and oversight functions (for example, identifying those 
funds that have not issued securities registered under the Securities 
Act).
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    \816\ Item B.6 of Form N-CEN; see also Item 5, Item 6, Item 27, 
Item 58, Item 59 and Item 117 of Form N-SAR. If the registrant is an 
open-end fund, Form N-CEN also requires information on the total 
number of series of the registrant and, if a series of the 
registrant with a fiscal year end covered by the report was 
terminated during the reporting period, information regarding that 
series. See Item B.6.a.i-Item B.6.a.ii of Form N-CEN. In addition, 
registrants that indicate they are management companies registered 
on Form N-3 are directed by Item B.6 to respond to certain 
additional items in Part F of the form that relate to insurance 
company separate accounts. See Item B.6.c.i of Form N-CEN.
    \817\ Item B.7 of Form N-CEN.
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    We are also adopting, as proposed, the requirement in Form N-CEN 
that a management company 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.\818\ 
Some commenters supported inclusion of such information \819\ and one 
commenter suggested that the Commission request additional information 
concerning individual directors (and chief compliance officers 
(``CCOs'')), such as length of service, roles certain directors have on 
the board, and prior experience as fund directors.\820\ Another 
commenter opposed the inclusion of additional disclosure requirements 
concerning the board or individual directors beyond those in the 
proposed

[[Page 81931]]

form without a prior statement of regulatory purpose and opportunity 
for public comment.\821\ We have determined to adopt these requirements 
as proposed because we believe it appropriately balances the need for 
director information in a structured format with efforts to minimize 
the partially duplicative reporting requirements.\822\
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    \818\ Item B.8 of Form N-CEN.
    \819\ See Franco Comment Letter; Morningstar Comment Letter.
    \820\ Morningstar Comment Letter.
    \821\ See IDC Comment Letter. It was unclear whether the 
commenter intended also to express concerns about the proposed 
requirements concerning directors, in addition to the concerns it 
expressed about other potential requirements concerning directors. 
Id. (``First, the Release asks about the information regarding fund 
directors that is proposed to be included in Form N-CEN, which 
includes each director's name, whether they are an ``interested 
person'' and the Investment Company Act file number of any other 
fund for which they serve as a director. Specifically, the Release 
asks whether funds should be required to include on Form N-CEN any 
additional information concerning the board or individual directors, 
such as information about the length of service of directors. The 
Release does not discuss why the Commission might be interested in 
this or other possible director-related information or how it would 
be used. Absent a clear statement of how information about directors 
would assist the Commission in carrying out its regulatory 
functions, and the opportunity to comment on any such information, 
we do not support adding it to Form N-CEN.'') To the extent that the 
commenter was commenting on the proposed requirements, we note, as 
we did in the Proposing Release, that although the 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 data users to sort and 
analyze the data more efficiently. See Proposing Release, supra 
footnote 7, at 33636.
    \822\ This information (along with additional director 
information) is also disclosed in a management company's Statement 
of Additional Information and its annual report to shareholders, 
albeit in an HTML or ASCII, rather than structured, format. See, 
e.g., Item 17 and Item 27(b)(5) of Form N-1A (requiring, for 
example, disclosures regarding length of service, position(s) held 
with the fund, and other directorships held by the director).
---------------------------------------------------------------------------

    However, in a modification from the proposal, we have determined to 
add one additional reporting requirement concerning directors. In the 
Proposing Release, we solicited comment regarding whether Form N-CEN 
should require any additional information concerning directors. In 
response, a commenter stated that, as discussed below, the proposed 
form would require funds to report CRD numbers for CCOs, as applicable, 
and suggested that data users could more readily analyze particular 
directors across funds and over time if a unique identifier were 
reported for each director.\823\ We acknowledge that not all fund 
directors have associated CRD numbers, but we are persuaded by the 
commenter that, for those that do, reporting of the CRD number would 
improve data comparability and help us in our risk assessment and 
examination functions by making it easier for Commission staff to 
identify persons and collect information across funds.\824\
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    \823\ See Morningstar Comment Letter; infra notes 825-833 and 
accompanying text.
    \824\ Item B.8.b of Form N-CEN.
---------------------------------------------------------------------------

    In addition, as proposed, a fund will be required to provide the 
CCO's name, CRD number (if any), address, and phone number,\825\ as 
well as indicate if the CCO has changed since the last filing.\826\ 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 will also be required to report the name and IRS Employer 
Identification Number of the person providing such compensation.\827\ 
One commenter objected to this reporting requirement stating that the 
information is already provided in other Commission filings.\828\ As we 
stated in the Proposing Release, we recognize that some funds provide 
this information in their registration statements. However, as we also 
noted, not all funds do \829\ and we believe that this requirement will 
provide staff with information on all fund CCOs and will allow the 
staff to contact a fund's CCO directly.
---------------------------------------------------------------------------

    \825\ Item B.9 of Form N-CEN. Because we expect that funds will 
provide the CCO's direct phone number in response to this 
information request, the CCO's phone number will not be made 
publicly available in Form N-CEN filings on EDGAR. See General 
Instruction D to Form N-CEN.
    \826\ Item B.9.i of Form N-CEN.
    \827\ Item B.9.j of Form N-CEN. We proposed to require funds 
provide the name and ``Employee Identification Number'' of the 
person providing compensation for CCO services (Proposing Release, 
supra footnote 7, at n. 409 and accompanying text). We are adopting 
a reference to ``IRS Employer Identification Number'' to conform 
with Form ADV (see, e.g., Item 7 of Schedule A of Form ADV).
    \828\ See Schnase Comment Letter.
    \829\ See, e.g., Item 17 of Form N-1A (requesting information 
regarding fund officers). For example, Form N-1A defines the term 
``officer'' to mean ``the president, vice-president, secretary, 
treasurer, controller, or any other officer who performs policy-
making functions.'' It is our understanding that in some fund 
complexes, the CCO does not fit within the category of officers 
covered by this definition (i.e., the CCO does not perform a policy-
making function), and therefore, information as to their CCO is not 
provided pursuant to the item.
---------------------------------------------------------------------------

    One commenter suggested that the Commission require additional 
information concerning CCOs, such as ``length of service and prior 
experience in order to aid in assessing the caliber of a fund or a fund 
company's regulatory practices.'' \830\ We believe, however, that the 
reporting requirement as proposed and adopted is sufficient for our 
regulatory oversight purposes and appropriately balances the benefits 
of additional information for Form N-CEN data users against the burdens 
imposed upon filers. Specifically, because Commission data users could 
link Form N-CEN information about CCOs across filings, over time, using 
the required CRD number, the reporting requirements that we are 
adopting today will still allow users to inform themselves about a 
CCO's length of service without adding another reporting 
requirement.\831\ Another commenter expressed support for the CCO 
reporting requirement but suggested that the item should also require 
the fund to report the name of the investment adviser's CCO as 
well.\832\ We are not adopting this suggestion because Form N-CEN is 
designed to collect census-type information, including certain 
corporate governance information, about funds--not similar information 
about investment advisers. Investment advisers are currently required 
to report the name and contact information of the adviser's CCO on Form 
ADV, which facilitates the ability of the Commission to link fund and 
investment adviser CCO data without imposing an additional reporting 
burden on funds.\833\ Accordingly, we believe that the item requirement 
as proposed is appropriate and are adopting it without any changes.
---------------------------------------------------------------------------

    \830\ Morningstar Comment Letter.
    \831\ The same commenter stated that the required CRD numbers 
should be sufficiently specific to analyze the information over 
time. See id.
    \832\ See Franco Comment Letter.
    \833\ See, e.g., Item 1.J of Part 1A of Form ADV.
---------------------------------------------------------------------------

    We are also adopting, substantially as proposed, the requirement in 
Part B that funds report matters that have been submitted to a vote of 
security holders during the relevant period.\834\ 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.\835\ In order to 
alleviate the burden on filers, we are reducing 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.\836\
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    \834\ See Item B.10 of Form N-CEN. We have added an instruction 
to the item to clarify that registrants registered on Forms N-3, N-4 
or N-6, should respond ``yes'' to the item only if security holder 
votes were solicited on contract-level matters.
    \835\ See Item 77.C of Form N-SAR; see also Instruction to 
Specific Items for Item 77C of N-SAR.
    \836\ See, e.g., rule 30e-1(b) under the Investment Company Act 
(requiring management companies to include in shareholder reports 
certain information relating to matters submitted to a vote of 
shareholders through the solicitation of proxies or otherwise) [17 
CFR 270.30e-1(b)]. The information request in Form N-CEN applies to 
UITs as well as management companies. The Form N-SAR requirement 
applies only to management companies (see Item 77.C of Form N-SAR; 
see also Instruction to Specific Items for Item 77C of Form N-SAR). 
We believe it is important for the Commission to have information 
for all registered investment companies on matters submitted for 
security holder vote in order to assist us in our oversight and 
examination functions.

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[[Page 81932]]

    Form N-CEN, like Form N-SAR, will also include an item relating to 
material legal proceedings during the reporting period.\837\ One 
commenter suggested that the Commission define legal proceedings for 
purposes of Form N-CEN.\838\ The relevant item includes an instruction 
highlighting certain proceedings that should be described in response 
to the item \839\ and the item itself only requests information on 
``material legal proceedings, other than routine litigation incidental 
to the business.'' We believe the instruction and language of the item 
appropriately describes the legal proceedings funds should include when 
responding to this item. Another commenter suggested that the 
Commission state that derivative suits reported in response to this 
item are deemed to satisfy the requirements under section 33 of the 
Investment Company Act for filing pleadings and other documents in 
connection with that type of lawsuit.\840\ Section 33 requires every 
fund which is a party and every affiliated person of such fund who is a 
party defendant to any action or claim by a fund or a security holder 
thereof in a derivative capacity or representative capacity against 
certain persons to file certain documents related to the action or 
claim with the Commission.\841\ We do not believe that reporting 
pursuant to this requirement, taken alone, would be an appropriate 
alternative for a fund to use to satisfy the legal proceeding filing 
requirements under section 33, as Form N-CEN requires only a brief 
description of the proceeding (as well as the case or docket number (if 
any) and names of the principal parties to the proceeding) and does not 
itself require the filing of all materials plainly required by section 
33.\842\ Moreover, for data users interested in the materials required 
to be filed under section 33, the reporting required by Form N-CEN 
would not be the same as, nor in many cases a suitable substitute for, 
the materials themselves. Accordingly, we are adopting the reporting 
item as proposed.
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    \837\ Item B.11 of Form N-CEN. As in Item 77.E of Form N-SAR, if 
there were any material legal proceedings, or if a proceeding 
previously reported had been terminated, the registrant will file an 
attachment as required by Part G of Form N-CEN. See Item G.1.a.i of 
Form N-CEN. We note that Form N-CEN, unlike Form N-SAR, will require 
UITs to respond to the information request related to material legal 
proceedings. For the same reasons discussed above with respect to 
matters submitted for security holder vote, we believe it is 
important to have information on material legal proceedings of all 
registered investment companies. See supra footnotes 834-836 and 
accompanying text.
    \838\ See State Street Comment Letter.
    \839\ See Instruction to Item B.11 of Form N-CEN, which states, 
``[f]or purposes of this Item, the following proceedings should be 
described: (1) Any bankruptcy, receivership or similar proceeding 
with respect to the Registrant or any of its significant 
subsidiaries; (2) any proceeding to which any director, officer or 
other affiliated person of the Registrant is a party adverse to the 
Registrant or any of its subsidiaries; and (3) any proceeding 
involving the revocation or suspension of the right of the 
Registrant to sell securities.''
    \840\ See Schnase Comment Letter.
    \841\ Section 33 of the Investment Company Act.
    \842\ We note that the commenter did not explain how reporting 
pursuant to this requirement, taken alone, would be consistent with 
the requirements of section 33.
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    Form N-SAR currently requires management companies to report a 
number of data points relating to fidelity bond and errors and 
omissions insurance policy coverage.\843\ As proposed, we are limiting 
this request to two separate items in Form N-CEN in order to limit the 
number of items to those most useful to the Commission staff and reduce 
burdens on filers.
---------------------------------------------------------------------------

    \843\ Items 80-85 and Items 105-110 of Form N-SAR.
---------------------------------------------------------------------------

    One item requires funds to report if any claims were filed under 
the management company's fidelity bond and the aggregate dollar amount 
of any such claims.\844\ One commenter requested that we eliminate the 
item requesting fidelity bond information, stating that the information 
is already provided elsewhere by funds.\845\ The other item requires 
registrants to report 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 reporting period with respect to the registrant.\846\ 
The staff appreciates that some of this information may be disclosed in 
other filings with the Commission, although it is not reported in a 
structured data format.\847\ We continue to believe that having 
responses to these questions in a structured data format 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. 
Accordingly, we are adopting these reporting requirements as proposed.
---------------------------------------------------------------------------

    \844\ Item B.12 of Form N-CEN; cf. Item 83 of Form N-SAR.
    \845\ See Schnase Comment Letter (referring to fidelity bond 
disclosures submitted on Edgar Form 40-17G and Form 40-17G/A (for 
amendments)).
    \846\ Item B.13 of Form N-CEN; cf. Item 85 of Form N-SAR.
    \847\ For example, a fund is required to provide and maintain a 
fidelity bond against larceny and embezzlement, which in general 
covers each officer and employee of the fund who has access to 
securities or funds. See rule 17g-1(a) under the Investment Company 
Act [17 CFR 270.17g-1(a)].
---------------------------------------------------------------------------

    In order to better understand instances when funds receive 
financial support from an affiliated entity, we are adopting, 
substantially as proposed but with a modification that is designed to 
address a commenter's suggestion, a new requirement for information 
regarding the provision of such financial support.\848\ We 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, reporting, among other things, the receipt of financial 
support.\849\ As with money market funds, we believe that it is 
important that the Commission understand the nature and extent to which 
a fund's sponsor provides financial support to a fund. Therefore, we 
are extending this requirement to all funds that will file reports on 
Form N-CEN. As we stated in the Proposing Release, 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 will allow Commission staff to readily identify any funds 
that have received such support for further analysis and review, as 
appropriate.
---------------------------------------------------------------------------

    \848\ Item B.14 of Form N-CEN.
    \849\ See Money Market Fund Reform 2014 Release, supra footnote 
33.
---------------------------------------------------------------------------

    One commenter suggested that, for purposes of Form N-CEN, the 
instruction concerning the definition of ``financial support'' provide 
additional guidance concerning exclusions from the definition. The 
proposed instruction regarding the definition of ``financial support'' 
provided for certain of the exclusions suggested by the commenter, such 
as for routine waiver of fees or reimbursement of fund expenses and 
routine inter-fund lending.\850\ We continue to think that the proposed 
exclusions are appropriate, and we are adopting those exclusions 
today.\851\ However, the commenter also suggested specifying that the 
purchase of a defaulted or devalued security would constitute 
``financial support'' only when it is intended to increase or stabilize 
the value or liquidity of the fund's portfolio.\852\ We agree with the 
commenter that purchases of a defaulted

[[Page 81933]]

or devalued security at fair value need only be characterized as 
``financial support'' for purposes of Form N-CEN if they are intended 
to increase or stabilize the value or liquidity of the fund's 
portfolio, and, accordingly, have modified the instruction in this 
manner.\853\ In addition, and as proposed, if a fund other than a money 
market fund received financial support, it will also be required to 
provide more detailed information in the form of an attachment as 
required by Part G of Form N-CEN.\854\
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    \850\ See Dechert Comment Letter; Instruction to Item 15 of 
proposed Form N-CEN.
    \851\ See Instruction to Item B.14 of Form N-CEN.
    \852\ See Dechert Comment Letter.
    \853\ See Instruction to Item B.14 of Form N-CEN.
    \854\ Item G.1.a.ii of Form N-CEN. Money market funds currently 
provide this information through reports on Form N-CR. However, all 
funds, including money market funds, will be required to respond 
``yes'' or ``no'' to Item B.14 of Form N-CEN.
---------------------------------------------------------------------------

    We are also adopting, as proposed, an item in Form N-CEN 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.\855\ Funds are required to identify any 
such order by release number.\856\ Collecting this information in a 
structured format will assist us with our oversight functions and 
improve our ability to monitor fund reliance on exemptive orders.
---------------------------------------------------------------------------

    \855\ Item B.15 of Form N-CEN. If any actions were taken during 
the reporting period, which were required to be reported on Form N-
1Q pursuant to an exemptive order, Form N-SAR requires that 
information be reported in response to Sub-Item 77P of Form N-SAR. 
See Instructions to Sub-Items 77P and 102O of Form N-SAR. Form N-CEN 
requires the fund to file as an attachment any information required 
to be filed pursuant to exemptive orders issued by the Commission 
and relied on by the fund. Instruction 5 to Item G.1 of Form N-CEN.
    \856\ See Item B.15.a.i of Form N-CEN.
---------------------------------------------------------------------------

    One commenter expressed support for this new reporting requirement, 
including the reporting of release numbers applicable to such exemptive 
orders.\857\ The commenter suggested, however, that in addition to 
release numbers, the form include the classification or category of the 
exemptive order in relation to the Commission's Investment Company Act 
Notices and Orders Category Listing Web page \858\ and similar 
reporting requirements for a fund's reliance on staff no-action 
letters.\859\ We have determined to adopt the reporting item as 
proposed. We believe that reporting requirements regarding reliance on 
no-action letters may impose additional administrative costs on filers. 
Therefore, we believe that the requested information as proposed 
balances the Commission's need for information to monitor a fund's 
regulatory compliance with the costs imposed on registrants reporting 
this information.
---------------------------------------------------------------------------

    \857\ See Morningstar Comment Letter.
    \858\ Investment Company Act Notices and Orders Category Listing 
Web page is available at: https://www.sec.gov/rules/icreleases.shtml.
    \859\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    As proposed, Form N-CEN, similar to Form N-SAR,\860\ will require 
identifying information for the fund's principal underwriters \861\ and 
independent public accountants,\862\ 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.\863\ We are adopting these requirements as proposed.
---------------------------------------------------------------------------

    \860\ Item 11, Item 13, Item 77.K, Item 91, Item 102.J, Item 
114, and Item 115 of Form N-SAR.
    \861\ Item 17 of proposed Form N-CEN.
    \862\ Item 18 of proposed Form N-CEN.
    \863\ Item 17.b and Item 18.f of proposed Form N-CEN, 
respectively.
---------------------------------------------------------------------------

    If the independent public accountant changed since the last filing, 
under the proposal, the fund would also have been required to provide a 
detailed narrative attachment to Form N-CEN similar to the exhibit in 
Form N-SAR reporting a change in independent registered public 
accountants, along with the predecessor accountant's letter reporting 
the change in independent registered public accountants also required 
to be reported on Form N-SAR.\864\
---------------------------------------------------------------------------

    \864\ Item 79.a.iii of proposed Form N-CEN.
---------------------------------------------------------------------------

    Some commenters expressed concern that because Form N-CEN would be 
an annual reporting form, rather than a semi-annual reporting form like 
Form N-SAR, the exhibit may be filed a significant amount of time after 
an accountant had changed.\865\ Commenters instead suggested that the 
proposed attachment be filed by funds with their semi-annual Form N-CSR 
filings.\866\ We are persuaded by these concerns, and are modifying the 
requirement by moving the change in independent public accountant 
attachment from Form N-CEN to Form N-CSR as a new attachment to reports 
on that form.\867\ We share commenters' concerns that, as proposed, a 
significant amount of time may lapse before shareholders would be 
provided the letter reporting a change in independent registered public 
accountants. We also believe that moving the attachment from Form N-CEN 
to Form N-CSR will help ensure concurrent review and written agreement 
by the predecessor accountant of the required management statement in 
both annual and semi-annual reports, as reports on Form N-CSR are 
required to be filed no later than 10 days after reports to 
shareholders are transmitted. Thus, Form N-CEN provides a means to 
track funds that change accountants in a structured data format on an 
annual basis, while the accountant's letter regarding the change will 
become available to the public semi-annually as an exhibit on Form N-
CSR.
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    \865\ See AICPA Comment Letter; and PwC Comment Letter (noting 
that Item 27(c)(4) of Form N-1A and Item 24, Instruction 5, of Form 
N-2 both require that the management statement required under Item 
4.01 of Form 8-K be presented in both semi-annual and annual 
shareholder reports. Thus, for any change in accountants occurring 
in the first six months of a registrant's fiscal year, management's 
statement regarding a change in accountants would be required to be 
issued and filed publicly in the fund's semi-annual shareholder 
report while the predecessor accountant's letter reported semi-
annually on former Form N-SAR would, under the proposal, have been 
filed in Form N-CEN six months later).
    \866\ See AICPA Comment Letter; and PwC Comment Letter.
    \867\ See Item 12(a)(4) of Form N-CSR.
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    We also proposed 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. Commenters generally did not object to these proposed 
reporting requirements,\868\ and we are adopting them largely as 
proposed, with some revisions in response to specific commenter 
suggestions. These items include a question relating to material 
changes in the method of valuation of the fund's assets.\869\ If there 
have been material changes in the method of valuation of assets during 
the reporting period, Item B.20 requires that the fund report the types 
of investments involved.
---------------------------------------------------------------------------

    \868\ See, e.g., Morningstar Comment Letter.
    \869\ Item B.20 of Form N-CEN. As discussed in the Proposing 
Release, valuation methodologies are approved by fund directors for 
use by funds to determine, in good faith, the fair value of 
portfolio securities (and other assets) for which market quotations 
are not readily available. For example, valuation methodology 
changes may include, but are not limited to, changing from use of 
bid price to mid-price for fixed income securities or changes in the 
trigger threshold for use of fair value factors on international 
equity securities. Unlike Form N-SAR, this requirement will apply to 
UITs as well as management investment companies. As we noted in the 
Proposing Release, we believe it is important for the Commission to 
have information on accounting and valuation for all registered 
investment companies in order to assist us in our oversight and 
examination functions.
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    One commenter expressed support for this reporting requirement, 
noting that the information would be sufficient to conduct due 
diligence on pricing and valuation issues.\870\ This commenter

[[Page 81934]]

also suggested aligning the type of investments involved with the list 
of asset types identified in Form N-PORT.\871\ After considering the 
commenter's request, we have added an additional sub-item and 
clarifying instructions to Item B.20 to require the applicable ``asset 
type'' category specified in Item C of Form N-PORT.\872\ We believe 
that requiring responses based on the categories used in Form N-PORT 
will provide some measure of standardization that will generally assist 
the staff in its monitoring of changes in valuation methodologies by 
asset class, and will provide regulatory consistency that will assist 
Commission staff in its review of information reported pursuant to both 
forms.
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    \870\ Morningstar Comment Letter.
    \871\ See id.
    \872\ See Item B.20.c of Form N-CEN and related instruction 
(requiring responses to provide the applicable ``asset type'' 
category specified in Item C.4.a of Form N-PORT).
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    In addition, and as proposed, funds will also be required to 
provide a brief description of the types of investments involved.\873\ 
However, we have modified the instruction to this sub-Item from the 
proposal to provide that if the change in methodology relates to a sub-
asset type included in the response to Item B.20.c, then funds should 
report the sub-asset class in responding to Item B.20.d.\874\ This 
modification is intended to avoid duplicative responses to Item B.20.c 
and Item B.20.d by eliciting more specific information as to any sub-
asset classes contained in the broader Form N-PORT asset categories 
that are impacted by the change of valuation methodologies. Unlike 
reports on Form N-SAR, Form N-CEN does not require a separate 
attachment detailing the circumstances surrounding a change in 
valuation methods.\875\ Instead, to facilitate review of this 
information in a structured format, Form N-CEN includes 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.\876\ Also as proposed, Form N-CEN 
carries forward the requirement from Form N-SAR \877\ 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.\878\
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    \873\ Item B.20.d of Form N-CEN.
    \874\ See Instruction to Item B.20 of Form N-CEN. Thus, if a 
fund changed its valuation methodologies with respect to municipal 
securities, the fund would report ``debt' in response to Item B.20.c 
and ``municipal securities'' in response to Item B.20.d.
    \875\ See Item 77.J and Item 102.I of Form N-SAR.
    \876\ Compare Item 77.J of Form N-SAR with Item B.20 of Form N-
CEN. An instruction to Item B.20 of Form N-CEN clarifies that we do 
not expect responses to this item to include changes to valuation 
techniques used for individual securities (e.g., changing from 
market approach to income approach for a private equity security). 
Form N-SAR does not contain a similar instruction, but we are 
including it in Form N-CEN to provide clarity for filers and because 
we believe that responding to Item B.20 of Form N-CEN for individual 
securities may be overly burdensome.
    \877\ See Item 77.L and Item 102.K of Form N-SAR.
    \878\ Item B.21 and Item G.1.a.iv of Form N-CEN. Like the 
information requested regarding changes in valuation methods, Form 
N-SAR only requests information from management companies regarding 
changes in accounting principles and practices. Unlike Form N-SAR, 
Form N-CEN requires this information from UITs as well, for the same 
reasons as discussed above with respect to changes in valuation 
methods. See supra footnote 869.
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    We are also adopting, largely as proposed, a requirement in Form N-
CEN 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.\879\ To flag instances where a 
report noted any material weaknesses, Form N-CEN also includes, as 
proposed, a question that asks whether the report on internal control 
noted any material weaknesses.\880\ In addition, as was proposed, Form 
N-CEN contains a new requirement that the fund report if the certifying 
accountant issued an opinion other than an unqualified opinion with 
respect to its audit of the fund's financial statements.\881\ These 
questions will elicit information on potential accounting issues 
identified by a fund's accountant.
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    \879\ Item G.1.a.iii of Form N-CEN. Management companies other 
than SBICs are currently required to file a copy of the independent 
public accountant's report on internal control with their reports on 
Form N-SAR. See Item 77.B of Form N-SAR. We continue to believe that 
a copy of the management company's report on internal control should 
be filed with the Commission and thus are carrying over the filing 
requirement to Form N-CEN.
    \880\ Item B.18 of Form N-CEN. One commenter suggested that the 
word ``find'' in the text of proposed Item 19 be changed to 
``note,'' stating that the term ``find'' could be misinterpreted, 
creating an ``expectation gap'' over the nature of the consideration 
of internal control in an audit of financial statements, 
particularly for investment companies, which (except for BDCs) are 
not subject to the integrated audit requirements of the Sarbanes-
Oxley Act. See PwC Comment Letter. We are persuaded by the 
commenter's concern and have revised the language of the item from 
``find'' to ``note'' as recommended.
    \881\ Item B.19 of Form N-CEN.
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    We are also adopting, largely as proposed, a requirement in Form N-
CEN, not contained in Form N-SAR, to indicate 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.\882\ One 
commenter expressed support for additional information related to NAV 
errors.\883\ Another commenter recommended that this item be omitted 
from Form N-CEN, arguing that the item is not an appropriate reporting 
item for a census form, would likely engender inquiries and claims from 
potential litigants, and could be obtained through the Commission's 
examination program.\884\ We continue to believe, however, that the 
item will assist the staff's monitoring efforts and the yes/no 
reporting structure of the item will be a useful means to flag the 
occurrence of NAV corrections whereby Commission staff can request 
further information in connection with staff examinations and other 
inquiries.\885\
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    \882\ Item B.22 of Form N-CEN.
    \883\ Morningstar Comment Letter.
    \884\ See SIFMA Comment Letter I.
    \885\ Regarding the commenter's concerns regarding potential 
increased litigation risk or inquiries based on public disclosure, 
based on our experience, we understand that these types of payments 
and reprocessing transactions are typically already disclosed to 
investors through account statements.
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    In addition, one commenter requested that we revise the item to 
ensure that any errors that ``exceeded the registrant's threshold for 
reprocessing'' were captured, even if the reprocessing was paid for by 
a service provider.\886\ After consideration of the comment, we agree 
that this question should capture all incidents of reprocessed 
shareholder accounts regardless of the source of payment and have 
revised the item to clarify that a registrant should respond 
affirmatively if any payments were made to shareholders (i.e., 
regardless of the source of the payment) or if any shareholder accounts 
were reprocessed as a result of an error in calculating the 
registrant's NAV.\887\
---------------------------------------------------------------------------

    \886\ See BlackRock Comment Letter.
    \887\ Item B.22.a of Form N-CEN.
---------------------------------------------------------------------------

    As proposed, Form N-CEN also requires 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.\888\ 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

[[Page 81935]]

requirements under section 19(a) and rule 19a-1. One commenter stated 
that there is not currently a consistent method used across funds to 
determine whether a rule 19a-1 notice is required, and that this 
inconsistency could limit comparability of the reported data.\889\ The 
commenter suggested that the Commission could increase comparability of 
the reported data by clarifying the method that should be used to 
determine whether a 19a-1 notice is required.\890\ Although we 
recognize, as the commenter suggests, that different substantive 
practices relating to 19a-1 notices could affect the comparability of 
the reported data, revising the substantive provisions of rule 19a-1 is 
beyond the intended scope of the requirements of Form N-CEN.
---------------------------------------------------------------------------

    \888\ Item B.23 of Form N-CEN. Section 19(a) of the Investment 
Company Act generally prohibits a fund from making a distribution 
from any source other than the fund's net income, unless that 
payment is accompanied by a written statement that adequately 
discloses the source or sources of the payment. See 15 U.S.C. 80a-
19(a). Rule 19a-1 under the Investment Company Act specifies the 
information required to be disclosed in the written statement. [17 
CFR 270.19a-1]; see also Shareholder Notices of the Sources of Fund 
Distributions--Electronic Delivery, IM Guidance Update No. 2013-11 
(Nov. 2013), available at https://www.sec.gov/divisions/investment/guidance/im-guidance-2013-11.pdf.
    \889\ See State Street Comment Letter.
    \890\ Id.
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c. Part C--Items Relating to Management Investment Companies
i. Background and Classification of Funds
    We proposed a number of reporting items under Part C of Form N-CEN 
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 in Part C will 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. We are adopting those reporting 
items substantially as proposed with some modifications in response to 
comments. Where we have received comments on specific reporting 
requirements, we discuss them in more detail below.
    Part C will be completed by management investment companies other 
than SBICs. As in the proposal, for management companies offering 
multiple series, the required information will be reported separately 
as to each series.\891\
---------------------------------------------------------------------------

    \891\ General Instruction A to Form N-CEN.
---------------------------------------------------------------------------

    Similar to Form N-SAR and as proposed, Form N-CEN includes 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 time filing the 
form.\892\ Unlike Form N-SAR, 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 are required under Form N-CEN.\893\ In addition, Form N-CEN 
includes a requirement (unlike Form N-SAR) to specifically provide 
identifying information for each share class outstanding, including the 
name of the class, the class identification number, and ticker 
symbol.\894\
---------------------------------------------------------------------------

    \892\ Item C.1 of Form N-CEN; see also supra section II.A.2.a 
(discussing the use of LEIs for purposes of Form N-PORT and related 
comments received regarding the use of LEIs). The requirements 
relating to the name of the fund and if this is the first filing 
with respect to the fund are currently required by Form N-SAR. See 
Item 3 and Item 7.C of Form N-SAR.
    \893\ Item C.2.a-Item C.2.c of Form N-CEN.
    \894\ Item C.2.d of Form N-CEN.
---------------------------------------------------------------------------

    Form N-CEN also requires--substantially as proposed with some 
modifications in response to public comment--management companies to 
identify if they are any of the following types of funds: \895\ ETF or 
exchange-traded managed fund (``ETMF''); \896\ index fund; \897\ fund 
seeking to achieve performance results that are a multiple of an index 
or other benchmark, the inverse of an index or other benchmark, or a 
multiple of the inverse of an index or other benchmark; \898\ interval 
fund; \899\ fund of funds; \900\ master-feeder fund; \901\ money market 
fund; \902\ target date fund; \903\ and underlying fund to a variable 
annuity or variable life insurance contract.
---------------------------------------------------------------------------

    \895\ Item C.3 of Form N-CEN. As discussed herein, many of the 
types of funds listed in Item C.3 are defined in Form N-CEN. With 
the exception of ``index fund'' and ``money market fund,'' these 
terms are not currently defined in Form N-SAR. See General 
Instruction H and Item 69 of Form N-SAR.
    \896\ Item C.3.a of Form N-CEN. As discussed above, we have 
revised, consistent with the changes to Form N-PORT discussed above, 
the definitions of ``Exchange-Traded Fund'' and ``Exchange-Traded 
Managed Funds'' to clarify that the definitions would apply to a 
class or series of a UIT organized as an ETF or ETMF. See supra 
footnote 793 and accompanying text. Consequently, for purposes of 
reporting on Form N-CEN, ``exchange-traded fund'' is defined as an 
open-end management investment company (or series or class thereof) 
or UIT (or series thereof), the shares of which are listed and 
traded on a national securities exchange at market prices, and that 
has formed and operates under an exemptive order under the 
Investment Company Act granted by the Commission or in reliance on 
an exemptive rule under the Act adopted by the Commission. 
Similarly, ``exchange-traded managed fund'' is defined as an open-
end management investment company (or series or class thereof) or 
UIT (or series thereof), the shares of which are listed and traded 
on a national securities exchange at NAV-based prices, and that has 
formed and operates under an exemptive order under the Investment 
Company Act granted by the Commission or in reliance on an exemptive 
rule under the Act adopted by the Commission. See General 
Instruction E of Form N-CEN. These definitions are substantially 
identical to the definitions we proposed, however, we have added a 
parenthetical to each definition to clarify that an ETF or exchange-
traded managed fund would include a series of a UIT that meets the 
rest of the applicable definition. We believe that these are 
appropriate definitions as they are similar to the one used for 
determining the applicability of ETF registration statement 
disclosure requirements for open-end funds. See General Instruction 
A of Form N-1A. Currently, all ETFs and exchange-traded managed 
funds rely on relief from certain provisions of the Investment 
Company Act that is granted by Commission order. See ETF Proposing 
Release, supra footnote 5; Eaton Vance Management, et al., 
Investment Company Act Release No. 31333 (Nov. 6, 2014) [79 FR 67471 
(Nov. 13, 2014)] (Notice); Eaton Vance Management, et al., 
Investment Company Act Release No. 31361 (Dec. 2, 2014) (Order). The 
Commission, however, proposed in 2008 to codify the exemptive relief 
previously granted to ETFs by order. See ETF Proposing Release, 
supra footnote 5 (proposing rule 6c-11).
    \897\ Item C.3.b of Form N-CEN.
    \898\ Item C.3.c of Form N-CEN. This item is being modified from 
the proposed requirement, which would have required a fund to 
indicate if it seeks 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. The modifications clarify that the 
benchmark may be an index.
    \899\ Item C.3.d of Form N-CEN.
    \900\ Item C.3.e of Form N-CEN.
    \901\ Item C.3.f of Form N-CEN.
    \902\ Item C.3.g of Form N-CEN.
    \903\ Item C.3.h of Form N-CEN. As in the proposal, for purposes 
of reporting on Form N-CEN, ``target date fund'' is defined as an 
investment company that has an investment objective or strategy of 
providing varying degrees of long-term appreciation and capital 
preservation through a mix of equity and fixed income exposures that 
changes over time based on an investor's age, target retirement 
date, or life expectancy. See Instruction 5 to Item C.3.b of Form N-
CEN. This is the same definition as was proposed by the Commission 
in our 2010 proposing release relating to target date funds. See 
Investment Company Advertising Release, supra footnote 6. We note 
that one commenter suggested that target-date funds should also 
self-identify whether their glide path is ``to'' or ``through'' 
retirement. See Morningstar Comment Letter. We have not made any 
changes in response to this comment because we believe that the 
identifying information requested by the form with respect to 
target-date funds is sufficient for the Commission's purposes.
---------------------------------------------------------------------------

    For purposes of reporting on Form N-CEN, as proposed, ``index 
fund'' is defined as an investment company, including an ETF, which 
seeks to track the performance of a specified index.\904\ The 
definition is largely similar to the definition of ``index fund'' in 
rule 2a19-3 under the Investment Company Act, but will capture both 
broad-based and affiliated indexes.\905\ Additionally, we note that the 
definition is substantially similar to the definition of ``index fund'' 
in Form N-SAR, but also takes into account the emergence of ETFs.\906\ 
One commenter expressed support for the proposed definition of index 
fund, but

[[Page 81936]]

strongly encouraged that funds using indexes constructed by affiliated 
service providers be disclosed clearly and that funds disclose whether 
the index tracked by the fund is exclusively constructed for the 
fund.\907\ We agree with the commenter and are requiring index funds to 
indicate whether the index whose performance the fund tracks is 
constructed by an affiliated person of the fund and whether the index 
is exclusively constructed for the fund.\908\ We believe this 
information will further assist Commission staff in monitoring trends 
in funds that track these indexes, which often use more complex 
methodologies that choose constituents by weighing factors other than 
market capitalization. It also will assist staff in monitoring 
conflicts of interest that could exist when an index is constructed by 
an affiliated person of the fund or is exclusively constructed for the 
fund.
---------------------------------------------------------------------------

    \904\ See Instruction 2 to Item C.3 of Form N-CEN.
    \905\ See rule 2a19-3 under the Investment Company Act [17 CFR 
270.2a19-3] (referring to an index fund for purposes of the rule as 
a fund that has ``an investment objective to replicate the 
performance of one or more broad-based securities indices . . .'').
    \906\ See Instruction to Item 69 of Form N-SAR.
    \907\ Morningstar Comment Letter.
    \908\ Item C.3.b.i of Form N-CEN.
---------------------------------------------------------------------------

    As proposed, ``interval fund'' is defined as a closed-end 
management company that makes periodic repurchases of its shares 
pursuant to rule 23c-3 under the Investment Company Act.\909\ One 
commenter suggested that the definition of interval fund should not be 
limited to closed-end funds, but rather, expanded to other investment 
companies.\910\ We believe, however, that the definition is appropriate 
as proposed because the term ``interval fund'' is commonly used to 
refer to funds that rely on rule 23c-3.\911\
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    \909\ See Instruction 3 to Item C.3 of Form N-CEN.
    \910\ Morningstar Comment Letter (noting that there is one 
investment company registered on Form N-1A whose redemption 
parameters are largely similar to an interval fund pursuant to 
exemptive relief and suggesting that the definition of interval fund 
be expanded to other investment companies in light of the existence 
of this fund).
    \911\ See rule 23c-3 under the Investment Company Act [17 CFR 
270.23c-3]. We believe that it is more appropriate to maintain the 
definition of interval fund as a closed-end fund that makes periodic 
purchases of its shares pursuant to rule 23c-3 as proposed, rather 
than expand the definition to capture funds that share some similar 
characteristics with interval funds but operate outside the context 
of rule 23c-3. For example, we believe that reports on Form N-CEN 
will appropriately capture an open-end fund that operates with 
redemption procedures similar to an interval fund pursuant to 
exemptive relief in response to Item B.15 of Form N-CEN.
---------------------------------------------------------------------------

    For purposes of reporting on Form N-CEN, we also proposed to define 
``fund of funds'' as a fund that acquires securities issued by another 
investment company in excess of the amounts permitted under section 
12(d)(1)(A) of the Investment Company Act.\912\ Some commenters 
suggested that we revise the definition to exclude funds that invest in 
money market funds for cash management purposes in excess of the amount 
permitted under section 12(d)(1)(A) in reliance on rule 12d1-1 of the 
Investment Company Act.\913\ After consideration of these comments, we 
acknowledge that the definition as proposed would have included a 
larger universe of funds than we intended for our regulatory purposes. 
The proposed definition would have yielded data that would have impeded 
identification of those funds that acquire securities issued by another 
investment company in excess of the amounts permitted under section 
12(d)(1)(A) other than those that do so only for short-term cash 
management purposes. Therefore, we have revised the instructions to 
Item C.3 to note that for purposes of the item, the term ``fund of 
funds'' does not include a fund that acquires securities issued by 
another investment company solely in reliance on rule 12d1-1.\914\ We 
received no other comments on the other definitions for fund types.
---------------------------------------------------------------------------

    \912\ See 15 U.S.C. 80a-12(d)(1)(A); Instruction 1 to Item 27 of 
proposed Form N-CEN.
    \913\ Schwab Comment Letter; ICI Comment Letter; MFS Comment 
Letter.
    \914\ See Instruction 1 to Item C.3 of Form N-CEN.
---------------------------------------------------------------------------

    As proposed, ``master-feeder fund'' was defined as a two-tiered 
arrangement in which one or more funds holds shares of a single fund in 
accordance with section 12(d)(1)(E) of the Investment Company Act.\915\ 
We understand that certain interpretations of this definition could 
exclude some funds that operate in a master-feeder structure and hold 
themselves out as master-feeder funds, but for technical reasons must 
obtain exemptive relief from the Commission rather than rely on section 
12(d)(1)(E) to operate in this manner. Accordingly, we have revised the 
definition of ``master-feeder fund'' to more clearly include two-tiered 
arrangements in which one or more funds holds shares of a single fund 
pursuant to exemptive relief granted by the Commission.\916\
---------------------------------------------------------------------------

    \915\ See Instruction 4 to Item 27 of proposed Form N-CEN.
    \916\ See Instruction 4 to Item C.3. of Form N-CEN which defines 
the term ``master-feeder fund'' to mean ``a two-tiered arrangement 
in which one or more funds (each a feeder fund) holds shares of a 
single Fund (the master fund) in accordance with section 12(d)(1)(E) 
of the Act (15 U.S.C. 80a-12(d)(1)(E)) or pursuant to exemptive 
relief granted by the Commission'' (emphasis added).
---------------------------------------------------------------------------

    ETFs and ETMFs, index funds, and master-feeder funds are also 
required to provide additional information under Part C.\917\ First, as 
in the proposal, Form N-CEN requires a management company to further 
indicate if it is an ETF or an ETMF.\918\ Second, as in the proposal, 
index funds will be required to report certain standard industry 
calculations of relative performance. In particular, index funds will 
be required to report a measure of the difference between the index 
fund's total return during the reporting period \919\ and the index's 
return both before and after fees and expenses--commonly called the 
``tracking difference'' \920\--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.'' \921\ One 
commenter suggested that tracking difference and tracking error should 
be reported monthly on Form N-PORT rather than annually on Form N-CEN, 
because monthly reporting would allow the Commission to receive 
observations for all index funds for the same time period, and the 
commenter opined that the additional information would help the 
Commission be more responsive, particularly in times of market 
stress.\922\ Although we recognize that there may be additional 
potential benefits of monthly reporting, as the commenter suggests, we 
continue to believe that annual reporting more appropriately balances 
the usefulness of the reported information to the Commission and other 
data users with the additional administrative costs that would be 
associated with a requirement for monthly reporting and the associated 
recordkeeping necessary to support it.

[[Page 81937]]

Moreover, we believe that the frequency and timeliness of reports on 
Form N-CEN are, both generally and specifically with respect to these 
reporting requirements, sufficient for collecting census-type 
information, but that reporting of these particular annualized figures 
on Form N-PORT would not be so timely or so frequent as to advance the 
purposes the commenter suggested (viz., to respond in periods of market 
stress), particularly in light of the Form N-PORT 60-day reporting 
delay.
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    \917\ See Item C.3.a, Item C.3.b, and Item C.3.f of Form N-CEN.
    \918\ See Item C.3.a.i and Item C.3.a.ii of Form N-CEN.
    \919\ With respect to index funds that are ETFs, we expect a 
fund to use its NAV-based total return, rather than market-based 
total return, in responding to Item C.3.a.i and Item C.3.a.ii of 
Form N-CEN.
    \920\ Item C.3.b.i of Form N-CEN. The tracking difference is the 
return difference between the fund and the index it is following, 
annualized. Morningstar ETF Research, Ben Johnson, et al., On the 
Right Track: Measuring Tracking Efficiency in ETFs (Feb. 2013) 
(``Morningstar Paper'') at 29, available at https://media.morningstar.com/uk/MEDIA/Research_Paper/Morningstar_Report_Measuring_Tracking_Efficiency_in_ETFs_February_2013.pdf. Thus, tracking difference = (1 + RNAV-
RINDEX) \1/N\-1, where RNAV is the total 
return for the fund over the reporting period, RINDEX is 
the total return for the index for the reporting period, and N is 
the length of the reporting period in years. N will equal to 1 if 
the reporting period is the fiscal year. Id.
    \921\ See Item C.3.b.ii of Form N-CEN. Tracking error is 
commonly understood as the standard deviation of the daily 
difference in return between the fund and the index it is following, 
annualized. Morningstar Paper, supra footnote 920, at 29. Thus, 
tracking error = std (RNAV - RINDEX) x 
[radic]n, where RNAV is the daily return for the fund, 
RINDEX is the daily return for the index, std([middot]) 
represents the standard deviation function, and n is the number of 
trading days in the fiscal year. Id.
    \922\ See Morningstar Comment Letter (recommending that tracking 
difference and tracking error be reported on N-PORT with trailing 
one-year data rather than annually on Form N-CEN).
---------------------------------------------------------------------------

    While supporting the inclusion of tracking difference and tracking 
error reporting items, a couple of commenters suggested alternatives to 
the calculation methods underlying the reporting requirements, 
including, for example, measuring tracking error on a weekly or monthly 
basis rather than a daily basis as proposed.\923\ With respect to 
tracking error, we believe that it is important to calculate tracking 
error using the same observation frequency across funds and that, based 
on staff experience, a daily frequency for tracking data is likely more 
commonly calculated and therefore more readily available to funds than 
the alternatives proposed. We also believe that daily calculations 
better reflect the nature of the daily redeemability of an open-end 
fund, including capturing the daily trading activities on the secondary 
market for ETFs. One commenter argued that daily tracking error 
calculations may contain temporary anomalies outside portfolio 
management control, such as differences in holidays or pricing sources 
used by the fund and/or index providers or temporary market aberrations 
which may cause a higher daily tracking error.\924\ We do not believe 
such differences would be uninformative. Rather, we believe receiving 
information on these potential anomalies will better inform investors 
and Commission staff about the behaviors of index funds and the indexes 
they track and assist the Commission in our oversight responsibilities. 
Overall, we do not perceive significant additional benefits in the 
alternative calculation methods recommended by commenters and continue 
to believe that the calculation methodologies for tracking difference 
and tracking error, as proposed, are appropriate.
---------------------------------------------------------------------------

    \923\ See Invesco Comment Letter (recommending that tracking 
error be based on a monthly basis rather than a daily basis and that 
tracking difference be calculated pursuant to an excess return 
calculation); Confluence Comment Letter (recommending that tracking 
error be based on a weekly basis rather than a daily basis, arguing 
that daily periodicity will show excess volatility, providing the 
Commission and investors with a skewed picture of tracking error).
    \924\ See Invesco Comment Letter.
---------------------------------------------------------------------------

    Specifically, tracking difference will be calculated as the 
annualized difference between the index fund's total return during the 
reporting period and the index's return during the reporting period, 
and tracking error will be calculated as the annualized standard 
deviation of the daily difference between the index fund's total return 
and the index's return during the reporting period.\925\ 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.\926\ In addition, tracking difference and tracking error before 
fees and expenses \927\ will allow data users to better understand the 
effect of factors other than fees and expenses on the degree to which 
the index fund replicates the performance of the target index.\928\
---------------------------------------------------------------------------

    \925\ See Proposing Release, supra footnote 7, at 33639-40. See 
also Morningstar Paper, supra footnote 920, at 29.
    \926\ See Morningstar Paper, supra footnote 920, at 5. We 
believe that this information will help data users understand which 
funds are best tracking their target indexes and could highlight 
outlier funds.
    \927\ See Item C.3.b.ii.1 and Item C.3.b.iii.1 of Form N-CEN.
    \928\ See Morningstar Paper, supra footnote 920, at 9.
---------------------------------------------------------------------------

    Finally, as proposed, master funds will 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.\929\ Similarly, a feeder fund will be required 
to provide identifying information of its master fund.\930\
---------------------------------------------------------------------------

    \929\ Item C.3.f.ii of Form N-CEN.
    \930\ Item C.3.f.i of Form N-CEN.
---------------------------------------------------------------------------

    We are also adopting, as proposed, the requirement in Form N-CEN 
that a management company report if it seeks to operate as a non-
diversified company, as defined in section 5(b)(2) of the Investment 
Company Act.\931\ Form N-SAR, in contrast, asks if the management 
company was a diversified investment company at any time during the 
period or at the end of the reporting period.\932\ The item in Form N-
CEN is forward looking rather than backward looking as in Form N-SAR 
and 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.\933\ We 
believe this item will allow our staff to more accurately ascertain the 
universe of non-diversified funds and, thus, better assist us in our 
analysis and inspection functions. One commenter suggested that this 
reporting requirement also consider the identification of funds that 
intended to operate as non-diversified at some point during the 
reporting period but have since changed to diversified status.\934\ We 
believe that the reporting requirement as proposed is appropriate for 
our purpose of being able to efficiently identify non-diversified 
companies.
---------------------------------------------------------------------------

    \931\ Item C.4 of Form N-CEN.
    \932\ See Item 60 of Form N-SAR.
    \933\ For example, if a fund generally operates as a non-
diversified fund, but as a result of market conditions or other 
reasons, happens to meet the definition of ``diversified fund'' as 
of the end of the reporting period, it will still be required to 
indicate that it was a non-diversified fund for purposes of this 
item.
    \934\ See Schnase Comment Letter.
---------------------------------------------------------------------------

ii. Investments in Certain Foreign Corporations
    Form N-CEN requires, as proposed, that a management company 
identify if it invests in a CFC for the purpose of investing in certain 
types of instruments, such as commodities.\935\ If it does, it must 
include the name and LEI of such corporation, if any.\936\ As discussed 
above in section 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 CFC for the purpose of investing in certain types of 
instruments will provide investors greater insight into CFCs that may 
have certain legal, tax, and country-specific risks associated with 
them. Combined with the information that we are collecting in Form N-
PORT, Commission staff will use this information to better understand 
the use of CFCs, which could allow for more efficient collaboration 
with foreign financial regulatory authorities to the extent the 
Commission may need books and records or other information for specific 
funds or general inquiries related to CFCs.
---------------------------------------------------------------------------

    \935\ Item C.5.a of Form N-CEN. As in the proposal, an 
instruction to the item defines ``controlled foreign corporation'' 
as having the meaning provided in section 957 of the Internal 
Revenue Code.
    \936\ Id.
---------------------------------------------------------------------------

iii. Securities Lending
    As discussed above, we are adopting requirements that funds provide 
certain

[[Page 81938]]

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 related cash 
collateral reinvestments.\937\ Additionally, we are adopting 
requirements that funds include in their statements of additional 
information \938\ 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.\939\
---------------------------------------------------------------------------

    \937\ See supra sections II.A.2.d and II.A.2.g.v.
    \938\ ``Statement of additional information'' means the 
statement of additional information required by Part B of the 
registration form applicable to the fund.
    \939\ See discussion infra section II.F regarding securities 
lending disclosures in the Statement of Additional Information and 
Form N-CSR; see also supra footnote 192.
---------------------------------------------------------------------------

    We proposed, and continue to believe it is appropriate, 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 Form N-PORT. In this regard, we believe that the 
proposed annual reporting requirement on Form N-CEN yields sufficiently 
timely data and more appropriately balances the requirements' benefits 
with their associated costs than would additional monthly reporting 
requirements on Form N-PORT. Some commenters expressed general support 
for reporting securities lending information on Form N-CEN.\940\ One 
commenter suggested that the Commission require even more detailed 
reporting requirements concerning services provided by securities 
lending agents, including, for example, information about how 
securities are selected for loan, contending that the public 
availability of the information may assist a fund board in 
understanding fees and services and drawing conclusions concerning 
their comparability.\941\
---------------------------------------------------------------------------

    \940\ See, e.g., BlackRock Comment Letter; Blackrock Directors 
Comment Letter; CFA Comment Letter; EY Comment Letter (suggesting, 
however, that securities lending disclosures proposed in Regulation 
S-X would be more appropriate in Form N-CEN than on Form N-PORT); 
Fidelity Comment Letter (recommending, however, that information 
concerning third-party lending agent arrangements should be non-
public); Morningstar Comment Letter; RMA Comment Letter; SIFMA 
Comment Letter I; State Street Comment Letter.
    \941\ See Blackrock Directors Comment Letter (recommending that 
the Commission specifically require disclosures on whether qualified 
dividend income management is provided by lending agents, the client 
fund, or other third parties; whether securities for loan are 
selected by the lending agent, the client fund, or other third 
parties; and whether the lender's securities lending program 
includes ``specials'' only (and, if so, how ``specials'' are 
defined) or general collateral as well).
---------------------------------------------------------------------------

    We acknowledge that the commenter's recommended additions could 
yield information that may be useful to the Commission as well as to 
some data users, and recognize that a fund board's consideration of 
securities lending services may rightfully include consideration of how 
securities are selected for loan and the other matters raised by the 
commenter. However, the information required by Form N-CEN is intended 
primarily for Commission regulatory purposes, and--balancing those 
purposes against the reporting costs associated with additional 
requirements--we have determined that the requirements we are adopting 
today are appropriate. The adopted requirements are meant to yield 
census-type information that is, to the extent practicable, comparable 
across reporting funds and that permits the Commission and other 
potential users to follow up, as appropriate, on patterns and 
idiosyncrasies in the reported data. We believe, therefore, that the 
nuanced information the commenter suggests requiring is better provided 
in a fund's registration statement than in reports on Form N-CEN, to 
the extent required.
    We are therefore adopting, as proposed, a requirement that each 
management company report annually on new Form N-CEN whether it is 
authorized to engage in securities lending transactions and whether it 
loaned securities during the reporting period.\942\ In addition, we are 
adopting, as proposed, reporting requirements regarding information 
about the fees associated with securities lending activity and 
information about the management company's relationship with certain 
securities-lending-related service providers.
---------------------------------------------------------------------------

    \942\ Item C.6.a-Item C.6.b of Form N-CEN.
---------------------------------------------------------------------------

    As in the proposal, management companies that loaned any securities 
during the reporting period will be required to report certain 
information, with some modifications in response to comments. 
Specifically, those management companies will be required to report 
annually whether any borrower of securities failed to return the loaned 
securities by the contractual deadline with the result that the fund 
(or its securities lending agent) liquidated collateral pledged to 
secure the loaned securities or that the fund was otherwise adversely 
impacted during the reporting period.\943\
---------------------------------------------------------------------------

    \943\ Item C.6.b.i of Form N-CEN.
---------------------------------------------------------------------------

    However, this reporting requirement has been modified from the 
proposal, which would have required funds to report whether a borrower 
defaulted on its obligations to return loaned securities or return them 
on time in connection with a security on loan during that period. Some 
commenters requested that the Commission narrow the definition of 
borrower default to exclude ``technical'' defaults, citing concerns 
that the item, as proposed, could be read to require that funds report 
any default, including defaults that are not likely to result in 
potential harm to the fund and would not appropriately represent 
counterparty risk.\944\ These types of defaults may occur when loaned 
securities are returned to a fund after the contractual deadline due to 
operational issues related to processing or communication, which, 
according to commenters, is not uncommon.\945\ Commenters recommended 
various alternatives to defining borrower default, including, for 
example, as any default that causes a fund to liquidate securities 
lending collateral pledged in connection with the securities lending 
arrangement \946\ or any default that results in losses to the 
fund.\947\ Others noted that a fund can be further protected from 
borrower default if it is indemnified by the securities lending agent 
against loss resulting from a shortfall in pledged collateral when a 
borrower has defaulted.\948\
---------------------------------------------------------------------------

    \944\ See, e.g., Fidelity Comment Letter; SIFMA Comment Letter 
I; Vanguard Comment Letter.
    \945\ See ICI Comment Letter; SIFMA Comment Letter I; Vanguard 
Comment Letter (recommending that the definition of borrower default 
be limited to any default that causes a fund to liquidate securities 
lending collateral pledged in connection with the securities lending 
arrangement); RMA Comment Letter and State Street Comment Letter 
(recommending that borrower default be limited to any default due to 
events of insolvency or upon an agent lender otherwise formally 
declaring a default by the borrower pursuant to the relevant 
borrower agreement); Fidelity Comment Letter (recommending that 
borrower default be limited to any default that results in losses to 
the fund, which could arise when the value of collateral for loaned 
securities and any reimbursement payments due to the fund are 
insufficient to eliminate losses associated with the default).
    \946\ See ICI Comment Letter; Vanguard Comment Letter; SIFMA 
Comment Letter I.
    \947\ See Fidelity Comment Letter. See also RMA Comment Letter 
and State Street Comment Letter (generally recommending borrower 
default being defined as any default due to events of insolvency or 
upon an agent lender otherwise formally declaring a default by the 
borrower pursuant to the relevant borrower agreement). We believe 
these recommended definitions of default are too narrow because a 
fund could be harmed by a borrower's failure to return loaned 
securities whether or not the borrower is insolvent or the lending 
agent declares an event of default.
    \948\ See, e.g., RMA Comment Letter; State Street Comment 
Letter.
---------------------------------------------------------------------------

    We are persuaded by commenters and have modified the reporting 
requirement regarding borrower default to focus on failures to return 
loaned

[[Page 81939]]

securities that result in the fund (or its securities lending agent) 
having to liquidate collateral pledged to secure the loaned securities 
or the fund otherwise being adversely impacted.\949\ We have also added 
an instruction to clarify that, for purposes of this reporting 
requirement, other adverse impacts to the fund would include, for 
example, (1) a loss to the fund if collateral and indemnification were 
not sufficient to replace the loaned securities or their value, (2) the 
fund's ineligibility to vote shares in a proxy,\950\ or (3) the fund's 
ineligibility to receive a direct distribution from the issuer.\951\ We 
believe that with these modifications to the proposal, the Commission 
may better monitor the risks associated with borrower defaults that 
have the potential to expose the fund and its shareholders to harm 
without having funds account for technical defaults that do not pose 
the same risks.
---------------------------------------------------------------------------

    \949\ See Item C.6.b.i of Form N-CEN.
    \950\ Proxy voting rights generally transfer with loaned 
securities. See Concept Release on the U.S. Proxy System, Investment 
Company Act Release No. 29340 (July 14, 2010) [75 FR 42982 (July 22, 
2010)] at 42994-95.
    \951\ See Instruction to Item C.6.b.i.2 of Form N-CEN.
---------------------------------------------------------------------------

    We are also adopting, as proposed, a requirement that management 
companies report 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.\952\ In 
addition, in a modification from the proposal, we are now including a 
requirement that management companies report whether the fund exercised 
its indemnification rights during the reporting period.\953\ A 
commenter recommended that the Commission require funds to report 
whether they exercised their indemnification rights to, in part, 
provide information about defaults and the extent to which counterparty 
risks are covered by third parties that provide indemnification.\954\ 
We agree with the commenter that this additional requirement would 
illuminate the frequency of defaults and indemnifications thereby 
providing the Commission with information about such counterparty 
defaults and the extent to which those risks are covered by third 
parties that provide indemnification. We believe that this additional 
requirement, together with the other default and indemnification 
requirements, will yield data that will allow the Commission, 
investors, and other potential users to more effectively 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.\955\
---------------------------------------------------------------------------

    \952\ Item C.6.c.iv and Item C.6.c.v of Form N-CEN.
    \953\ Item C.6.c.vi of Form N-CEN.
    \954\ See ICI Comment Letter.
    \955\ As discussed above, commenters to the FSOC Notice 
suggested that enhanced securities lending disclosures could be 
beneficial to investors and counterparties. See supra footnote 190.
---------------------------------------------------------------------------

    One commenter recommended that details concerning indemnification 
protection should be made nonpublic.\956\ We continue to believe, 
however, that public reporting is a necessary part of improving 
transparency regarding a fund's securities lending activities. 
Specifically, we believe that the information regarding indemnification 
provisions is relevant to investors evaluating the risks associated 
with securities lending and comparing those risks across funds, 
particularly for funds that regularly engage in securities lending 
activities.
---------------------------------------------------------------------------

    \956\ See Fidelity Comment Letter (noting that public disclosure 
may negatively impact a fund's ability to negotiate for lending 
services).
---------------------------------------------------------------------------

    Because management companies often 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 the interconnectedness these service providers may have 
one with another. Accordingly, we are adopting, as proposed, a 
requirement that management companies report some basic identifying 
information about each securities lending agent and cash collateral 
manager.\957\ One commenter suggested that the Commission define the 
terms ``securities lending agent'' and ``cash collateral manager'' for 
purposes of Form N-CEN.\958\ While we continue to believe that these 
terms are generally understood within the fund industry, we have 
clarified in the Form that the term ``cash collateral manager'' refers 
to an entity that manages a pooled investment vehicle in which a fund's 
cash collateral is invested.\959\ In addition, we are requiring that 
funds report whether each of these service providers is a first- or 
second-tier affiliated person of the management company.\960\ One 
commenter specifically expressed support for this reporting 
requirement.\961\ This data will highlight those funds that might be 
expected to rely on Commission exemptive relief in order to engage in 
securities lending activities with affiliates.\962\ Additionally, the 
disclosure of whether the cash collateral manager is a first- or 
second-tier affiliate of the securities lending agent \963\ 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

[[Page 81940]]

a share of revenue generated by the cash collateral reinvestment pool.
---------------------------------------------------------------------------

    \957\ Item C.6.c.i-Item C.6.c.ii and Item C.6.d.i-Item C.6.d.ii 
of Form N-CEN.
    \958\ See RMA Comment Letter (noting that the terms are 
generally well-understood within the fund industry, but suggesting 
that, for purposes of Form N-CEN, the Commission could define the 
term ``securities lending agent'' to mean a party employed by a 
lender to administer the lender's securities lending program 
according to the prescribed terms of a legal agreement and the term 
``cash collateral manager'' to mean a party employed by the lender 
to manage cash collateral on behalf of securities loans).
    \959\ See Item C.6.d of Form N-CEN.
    \960\ See Item C.6.c.iii and Item C.6.d.iv of Form N-CEN 
(requiring a Fund to report if the named securities lending agent or 
cash collateral manager is an ``affiliated person'' (i.e. first-tier 
affiliate) or ``an affiliated person of an affiliated person'' (i.e. 
second-tier affiliate) of the Fund). See also section 2(a)(3) of the 
Investment Company Act for a definition of the term ``affiliated 
person.'' 15 U.S.C. 80a-2(a)(3).
    \961\ See RMA Comment Letter.
    \962\ Section 17(d) of the Investment Company Act makes it 
unlawful for a first- or second-tier affiliate, among others, acting 
as principal, to effect any transaction in which the fund, or a 
company it controls, is a joint or a joint and several participant 
in contravention of Commission rules. 15 U.S.C. 80a-17(d). Rule 17d-
1(a) prohibits a first- or second-tier affiliate of a registered 
fund, among others, acting as principal from participating in or 
effecting any transaction in connection with any joint enterprise or 
other joint arrangement or profit-sharing plan in which the fund (or 
any company it controls) is a participant unless an application or 
arrangement or plan has been filed with the Commission and has been 
granted. 17 CFR 270.17d-1. These provisions would prohibit a fund 
from lending to a borrower that is a first- or second-tier affiliate 
or compensating a securities lending agent that is a first- or 
second-tier affiliate with a share of revenue generated by the 
lending program unless the fund (and/or its affiliate) has obtained 
an exemptive order from the Commission. These provisions also 
generally prohibit a fund from investing cash collateral in a first- 
or second-tier affiliated liquidity pool unless the fund satisfies 
the conditions in rule 12d1-1 under the Investment Company Act, 
which provides exemptive relief, subject to certain conditions, for 
fund investments in an affiliated registered money market fund and a 
pooled investment vehicle that would be an investment company but 
for sections 3(c)(1) and 3(c)(7) of the Investment Company Act and 
that the fund reasonably believes operates in compliance with money 
market fund regulations. See Fund of Funds Investments, Investment 
Company Act Release No. 27399 (June 20, 2006) [71 FR 36640 (June 27, 
2006)] at n. 27 and accompanying text.
    \963\ Item C.6.d.iii of Form N-CEN.
---------------------------------------------------------------------------

    As proposed, Form N-CEN also requires each management company to 
report whether it has made any 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.\964\ In the Proposing Release, we sought comment on whether, in 
addition to requiring management companies to report whether they made 
each of the proposed types of payments associated with securities 
lending, we should also require disclosure of specific rates or amounts 
paid for each of the enumerated types of compensation.\965\ Two 
commenters expressed general support for disclosure of securities 
lending income and compensation of securities lending agents and cash 
collateral managers but recommended that, if compensation figures were 
required, that they be calculated on the basis of income and fees paid 
during the reporting period.\966\
---------------------------------------------------------------------------

    \964\ See Item C.6.e of Form N-CEN; see also Proposing Release, 
supra footnote 7, at section II.E.4.c.iii. Management companies that 
report that ``other'' payments were made to one or more securities 
lending agents or cash collateral managers during the reporting 
period will also be required to describe the type or types of other 
payments. See Item C.6.e.vi of Form N-CEN. In addition, management 
companies will be required to disclose the total amount of each 
payment for the reporting period and describe the services provided 
for the payment. See infra section II.F.2 regarding amendments to 
the Statement of Additional Information and Form N-CSR.
    \965\ See Proposing Release, supra footnote 7, at 33641-42.
    \966\ See RMA Comment Letter; State Street Comment Letter.
---------------------------------------------------------------------------

    We believe that the information we proposed about the types of 
payments relating to securities lending activities will allow the 
Commission, investors and other management company boards of directors 
to understand better the nature 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.\967\ We recognize the potential benefits 
for some data users of access to information about amounts paid for 
each of the types of compensation in a structured format. However, in 
light of the fact that Form N-CEN reporting requirements are intended 
primarily for the Commission's regulatory purposes and that there would 
be additional reporting costs related to such a change, and further 
recognizing that additional securities lending information will now be 
available to investors pursuant to new Statement of Additional 
Information (or, for closed-end funds, Form N-CSR) requirements 
discussed below,\968\ we have determined not to require reporting of 
specific compensation amounts or fee rates in reports on Form N-CEN. In 
addition, we have included in Form N-CEN, a requirement that management 
companies report the monthly average of the value of portfolio 
securities on loan during the reporting period.\969\ This requirement 
was originally proposed to be included in Regulation S-X along with 
other securities lending disclosure requirements.\970\ We have 
determined to move this information to Form N-CEN as we believe having 
this information in a structured format will assist our staff in its 
analyses of the information. As previously noted, we have also 
determined to move the other proposed securities lending disclosures 
from Regulation S-X to the Statement of Additional Information (or, for 
closed-end funds, Form N-CSR), as we believe the Statement of 
Additional Information (or, for closed-end funds, Form N-CSR) is a more 
appropriate location for these disclosures.\971\ One commenter 
recommended that funds be required to report average monthly aggregate 
dollar amounts on loan for each counterparty to the securities 
loan.\972\ We continue to believe, however, that information on the 
overall monthly average of the value of portfolio securities on loan 
provides a better understanding of a fund's securities lending program 
without burdening registrants with additional counterparty reporting 
requirements.
---------------------------------------------------------------------------

    \967\ In evaluating the fees and services of any securities 
lending agent, the board of directors of a management company that 
engages in securities lending may be assisted by reviewing and 
comparing information on securities lending agent fee arrangements 
of other management companies. See, e.g., SIFE Trust Fund, SEC No-
Action Letter (pub. avail. Feb. 17, 1982) (management company's 
board of directors determines that the securities lending agent's 
fee is reasonable and based solely on the services rendered); 
Neuberger Berman Equity Funds, et al., Investment Company Act 
Release No. 25880 (Jan. 2, 2003) [68 FR 1071 (Jan. 8, 2003)] 
(Notice); Neuberger Berman Equity Funds, et al., Investment Company 
Act Release No. 25916 (Jan. 28, 2003) (Order) (management company's 
board of directors, including a majority of independent directors, 
will determine initially and review annually, among other things, 
that (i) the services to be performed by the affiliated securities 
lending agent are appropriate for the lending fund, (ii) the nature 
and quality of the services to be provided by the agent are at least 
equal to those provided by others offering the same or similar 
services; and (iii) the fees for the agent's services are fair and 
reasonable in light of the usual and customary charges imposed by 
others for services of the same nature and quality).
    \968\ See infra section II.F.
    \969\ Item C.6.f of Form N-CEN
    \970\ See proposed rule 6-03(m)(6) of Regulation S-X; Proposing 
Release, supra footnote 7, at 33624.
    \971\ See supra section II.C.6 (discussing securities lending 
disclosures in the Statement of Additional Information and Form N-
CSR).
    \972\ See John Adams Comment Letter.
---------------------------------------------------------------------------

    Finally, we are also adopting a requirement that funds report the 
net income from securities lending activities in Form N-CEN.\973\ We 
proposed to require disclosure of this information in fund financial 
statements pursuant to proposed amendments to Regulation S-X, and we 
sought comment on whether the information should be required in reports 
on Form N-CEN.\974\ One commenter suggested that the proposed 
securities lending financial statement disclosure requirements be 
instead included in Form N-CEN, as presentation there would be less 
likely to detract from other material information in the financial 
statements.\975\ Another commenter suggested that requiring additional 
information on Form N-CEN, including income from securities lending 
activities, would make the other required information more complete and 
useful.\976\ We agree with commenters that reporting of net income from 
securities lending activities would yield useful information for the 
Commission and other data users and have determined to add this 
requirement. In particular, information about net income from 
securities lending activity in a structured format provides useful 
context for the other securities lending reporting requirements, such 
as those concerning fees.
---------------------------------------------------------------------------

    \973\ Item C.6.g of Form N-CEN.
    \974\ Proposed rule 6-03(m)(3) of Regulation S-X; Proposing 
Release, supra footnote 7, at 33625.
    \975\ EY Comment Letter.
    \976\ See BlackRock Directors Comment Letter.
---------------------------------------------------------------------------

    Together, the data that these requirements will yield will allow 
the Commission to better understand the interaction of these service 
providers with management companies. We also believe that the reporting 
of this data will increase the transparency of information available to 
the public on the lending and borrowing of securities by funds, a 
subset of the market participants engaged in securities lending 
activities.\977\ In addition to informing the Commission's risk 
analysis, we believe that this information will also help inform other 
data users about the use of, and possible risks associated with, the 
lending of

[[Page 81941]]

portfolio securities by management companies.
---------------------------------------------------------------------------

    \977\ See, e.g., supra footnote 192.
---------------------------------------------------------------------------

iv. Reliance on Certain Rules
    We are adopting, as proposed, a requirement in Form N-CEN that 
management companies report whether they relied on certain rules under 
the Investment Company Act during the reporting period.\978\ A similar 
reporting item is contained in Form N-SAR.\979\ However, Form N-CEN 
requires information with respect to additional rules not currently 
covered by Form N-SAR.\980\ We are collecting 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.
---------------------------------------------------------------------------

    \978\ Item C.7 of Form N-CEN.
    \979\ Compare id. (requiring management companies to identify if 
they relied upon any of the following rules: Rule 10f-3 (exemption 
for the acquisition of securities during the existence of an 
underwriting or selling syndicate) [17 CFR 270.10f-3], rule 12d1-1 
[17 CFR 270.12d1-1] (exemptions for investments in money market 
funds), rule 15a-4 [17 CFR 270.15a-4] (temporary exemption for 
certain investment advisers), rule 17a-6 [17 CFR 270.17a-6] 
(exemption for transactions with portfolio affiliates), rule 17a-7 
[17 CFR 270.17a-7] (exemption of certain purchase or sale 
transactions between an investment company and certain affiliated 
persons thereof), rule 17a-8 [17 CFR 270.17a-8] (mergers of 
affiliated companies), rule 17e-1 [17 CFR 270.17e-1] (brokerage 
transactions on a securities exchange), rule 22d-1 [17 CFR 270.22d-
1] (exemption from section 22(d) to permit sales of redeemable 
securities at prices which reflect sales loads set pursuant to a 
schedule), rule 23c-1 [17 CFR 270.23c-1] (repurchase of securities 
by closed-end companies), rule 32a-4 [17 CFR 270.32a-4] (independent 
audit committees)) with Item 40, Item 77.N, Item 77.O, Item 102.M, 
and Item 102.N of Form N-SAR (requiring information regarding rule 
2a-7 [17 CFR 270.2a-7] (money market funds), rule 10f-3 (see above 
for description), and rule 12b-1 [17 CFR 270.12b-1] (distribution of 
shares by registered open-end management investment company)).
    \980\ Id.
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    One commenter suggested that the Commission specify the name of 
each rule next to the rule number.\981\ We believe, however, that the 
rule number descriptions as proposed in Item C.7 are consistent with 
other reporting forms and provide sufficient information for 
registrants, and thus, are adopting the item as proposed.
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    \981\ Schnase Comment Letter.
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    In addition, we are adopting, as proposed, amendments to 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.\982\ 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.\983\ Our amendments to rule 10f-3 will eliminate the 
requirement to periodically report this information,\984\ but will 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.\985\ We did not receive comment on this aspect of the 
proposal.
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    \982\ See adopted amendments to rule 10f-3.
    \983\ See rule 10f-3(c)(12) under the Investment Company Act [17 
CFR 270.10f-3(c)(12)].
    \984\ See rule 10f-3(c)(9) under the Investment Company Act [17 
CFR 27010f-3(c)(9)].
    \985\ Similar exemptive rules take this approach and do not 
require filings with the Commission. See, e.g., rule 17a-7 under the 
Investment Company Act [17 CFR 270.17a-7] and rule 17e-1 under the 
Investment Company Act [17 CFR 270.17e-1]. We note that we 
previously proposed deleting this filing requirement from rule 10f-3 
in 1996. See Exemption for the Acquisition of Securities During the 
Existence of an Underwriting Syndicate, Investment Company Act 
Release No. 21838 (Mar. 21, 1996) [61 FR 13620 (Mar. 27, 1996)]. We 
chose not to delete the filing requirement in the final amended rule 
in light of the other amendments to the rule at that time, including 
the increase in the percentage limit on the principal amount of an 
offering that an affiliated fund could purchase. See Exemption for 
the Acquisition of Securities During the Existence of an 
Underwriting of Selling Syndicate, Investment Company Act Release 
No. 22775 (July 31, 1997) [62 FR 42401 (Aug. 7, 1997)].
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v. Expense Limitations
    As in Form N-SAR,\986\ Form N-CEN requires information regarding 
expense limitations.\987\ The requirements in Form N-CEN are, as 
proposed, modified from Form N-SAR and require 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.\988\ We believe that more specific questions relating to 
management company expense limitation arrangements will limit 
uncertainty for management companies when responding to these items and 
will be a useful means to flag the occurrence of expense limitations 
whereby Commission staff can request further information in connection 
with staff examinations and other inquiries. One commenter expressed 
support for the expense limitation reporting requirement but suggested 
that the item include reporting of the actual dollar values of the 
expense information.\989\ We continue to believe, however, that the 
reporting item, as proposed, appropriately balances the burden on funds 
of providing this information and information necessary for our 
regulatory purposes. The adopted requirements are meant to yield 
census-type information that is, to the extent practicable, comparable 
across reporting funds and that permits the Commission and other 
potential users to follow up, as appropriate, on patterns and 
idiosyncrasies in the reported data. We believe therefore that the 
detailed and nuanced information the commenter suggests requiring is 
better provided in a fund's registration statement than in reports on 
Form N-CEN, to the extent required or otherwise appropriate.
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    \986\ See Item 53.A-Item 53.C of Form N-SAR (requiring the fund 
to identify if expenses of the Registrant/Series were limited or 
reduced during the reporting period by agreement, and, if so, 
identify if the limitation was based upon assets or income).
    \987\ Item C.8 of Form N-CEN.
    \988\ Id. Form N-CEN also includes an instruction that filers 
should provide information in response to the item concerning any 
direct or indirect limitations, waivers or reductions, on the level 
of expenses incurred by the fund during the reporting period. The 
instructions also provide an example of how an expense limit may be 
applied--when an adviser agrees to accept a reduced fee pursuant to 
a voluntary fee waiver or for a temporary period such as for a new 
fund in its start-up phase. See Instruction to Item C.8 of Form N-
CEN.
    \989\ See Morningstar Comment Letter.
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vi. Service Providers
    Form N-CEN (similar to Form N-SAR) \990\ will, as proposed, collect 
identifying information on the management company's service providers, 
including its advisers and sub-advisers,\991\ transfer agents,\992\ 
pricing services agents,\993\ custodians (including custodians that 
provide services as sub-custodians),\994\ shareholder servicing 
agents,\995\ administrators,\996\ and affiliated broker-dealers.\997\ 
Together, these items will assist the Commission in analyzing the use 
of third-party service providers by management companies, as well as 
identify service providers that service large portions of the fund 
industry.
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    \990\ See Item 8 and Items 10-15 of Form N-SAR.
    \991\ Item C.9 of Form N-CEN.
    \992\ Item C.10 of Form N-CEN. Form N-SAR equates a 
``shareholder servicing agent'' with a ``transfer agent.'' See 
Instruction to Item 12 of Form N-SAR.
    \993\ Item C.11 of Form N-CEN.
    \994\ Item C.12 of Form N-CEN.
    \995\ Item C.13 of Form N-CEN.
    \996\ Item C.14 of Form N-CEN.
    \997\ Item C.15 of Form N-CEN.
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    Unlike Form N-SAR, Form N-CEN will, as proposed, also require the

[[Page 81942]]

management company to 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).\998\ In 
addition, like Form N-SAR, and as proposed, Form N-CEN requests 
custodians to indicate the type of custody, but will expand upon the 
types of custody listed.\999\
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    \998\ See, e.g., Item C.9.a.vii, Item C.9.c.vii, Item 
C.9.c.viii, Item C.10.a.vi, Item C.10.b, Item C.11.a.v, Item C.11.b, 
Item C.12.a.v, Item C.12.b, Item C.13.a.v, Item C.13.b, Item 
C.14.a.v and Item C.14.b of Form N-CEN.
    \999\ Compare Item 15.E and Item 18 of Form N-SAR with Item 
C.12.a.vii.1-Item C.12.a.vii.9 of Form N-CEN.
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    One commenter recommended that the text of Item C.10 separate the 
term ``transfer agent'' from ``sub-transfer agents'' by including 
disclosures about the nature of the services rendered by sub-transfer 
agents to help assess shareholder costs paid.\1000\ The commenter did 
not, however, suggest a particular list of specific services. We note 
that the proposed form requested information with respect to ``each'' 
service provider, which we believe would include service providers 
providing services to the fund in a sub-service provider 
capacity.\1001\ However, in response to this comment, we have clarified 
for each relevant service provider, including transfers agents, that 
the fund must report sub-service providers in response to the service 
provider items.\1002\ Thus, with respect to the item, we have added a 
sub-item requiring that funds indicate if the transfer agent is a sub-
transfer agent.\1003\ We have determined not to require a description 
of the services provided by each transfer agent (or of other service 
providers) in Form N-CEN as we believe the information as proposed is 
sufficient for our regulatory purposes and because it is unclear 
whether, absent a specific set of listed services in Form N-CEN, which 
the commenter did not provide, this information on services would yield 
comparable census-type data across funds.
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    \1000\ Morningstar Comment Letter.
    \1001\ We understand that a sub-service provider generally 
contracts with a primary service provider of the fund, rather than 
the fund itself, to provide a certain subset of the services that 
the primary service provider has otherwise agreed to provide the 
fund.
    \1002\ See Item C.10.a.vii, Item C.12.a.vi, Item C.13.a.vi, and 
Item C.14.a.vi of Form N-CEN. We note that a similar requirement was 
proposed with respect to custodians. See Item 37.a.vi of proposed 
Form N-CEN.
    \1003\ See Item C.10.a.vii of Form N-CEN.
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    With respect to custodian information, one commenter suggested that 
the form should require identification of the primary custodian only, 
citing that the primary custodian is the primary service provider of 
the fund, whereas any sub-custodians, depositories, or clearing 
organizations that provide custodial services will be a function of the 
specific instruments that the fund invests in during the reporting 
period.\1004\ We note that identifying sub-custodians on Form N-CEN is 
consistent with reporting requirements on Form N-SAR.\1005\ Because 
sub-custodians and other sub-service providers may provide important 
services to funds, we continue to believe that requesting information 
about sub-custodians and other sub-service providers in addition to the 
primary service providers is appropriate and useful for purposes of our 
oversight responsibilities. For example, should an adverse market event 
affect a particular sub-custodian, Commission data analysts could use 
the required information about sub-custodians to identify potentially 
affected funds. Information about the primary custodian alone would not 
permit such identification.
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    \1004\ State Street Comment Letter.
    \1005\ See, e.g., Instructions to Item 15 of Form N-SAR; see 
also Item 15 and Item 92 of Form N-SAR, including Item 15.E and Item 
92.D of Form N-SAR, which require reporting of rule 17f-5 [17 CFR 
270.17f-5] foreign custodians.
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    As proposed, the form would have included two new requirements 
regarding pricing services. Management companies would have to provide 
identifying information on persons that provided pricing services 
during the reporting period,\1006\ 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.\1007\ Based on staff experience, management companies 
and their boards often rely on pricing agents to help price securities 
held by the fund.
---------------------------------------------------------------------------

    \1006\ See Item 35 of proposed Form N-CEN.
    \1007\ See Item 36 of proposed Form N-CEN.
---------------------------------------------------------------------------

    One commenter expressed support for the new reporting requirements, 
noting that the information would be sufficient to conduct due 
diligence on pricing and valuation issues.\1008\ One commenter 
expressed concern that reporting pricing services no longer retained 
could improperly imply that valuation services provided by the former 
service provider were incorrect and/or unreliable.\1009\ In response to 
that comment, we have determined to remove from the form the item 
requiring funds to provide information on pricing services no longer 
retained. We have instead revised Item C.11 of the form, which requires 
information on persons who provided pricing services to the fund during 
the reporting period, to ask whether a pricing agent was hired or 
terminated during the report period.\1010\ Unlike the proposed 
requirement and in response to the commenter's concern, Item C.11 as 
modified does not identify specifically the pricing service that was 
terminated. A similar question is also included in the form for other 
fund service providers and, as with the information provided for other 
service providers, will still provide Commission staff with a method 
for identifying whether a fund has initiated or terminated a service 
provider relationship during the reporting period.\1011\
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    \1008\ Morningstar Comment Letter.
    \1009\ See Fidelity Comment Letter.
    \1010\ As proposed, Item 35(f) would have asked ``Was the 
pricing service first retained by the Fund to provide pricing 
services during the current reporting period?'' As adopted, Item 
C.11.b asks ``Was a pricing service hired or terminated during the 
reporting period?''.
    \1011\ See, e.g., Item C.10-Item C.14 of Form N-CEN (requesting 
information regarding transfer agents, custodians, shareholder 
servicing agents, and third-party administrators).
---------------------------------------------------------------------------

    As in the proposal, Part C will 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 \1012\ and with which the management company did the 
largest dollar amount of principal transactions.\1013\ Form N-SAR also 
requests identifying information on these entities,\1014\ which is not 
available elsewhere in a structured format. We continue to believe that 
brokerage commission and principal transaction information provides 
valuable information to Commission staff about management company 
brokerage practices, and will assist the staff in identifying the 
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. Additionally, similar to Form N-
SAR, Form N-CEN requires information concerning whether the management 
company paid commissions to broker-dealers for ``brokerage and research 
services'' within the meaning of section 28(e) of

[[Page 81943]]

the Exchange Act.\1015\ We did not receive comment on these aspects of 
the proposal.
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    \1012\ Item C.16 of Form N-CEN.
    \1013\ Item C.17 of Form N-CEN.
    \1014\ Items 20-23 of Form N-SAR. Form N-SAR includes an 
instruction designed to help filers distinguish between agency and 
principal transactions for purposes of reporting information 
regarding brokerage commissions and principal transactions. See 
Instruction to Items 20-23 of Form N-SAR. A substantially similar 
instruction will be included in Form N-CEN. See Instructions to Item 
C.16 and Item C.17 of Form N-CEN.
    \1015\ Item C.18 of Form N-CEN; see also Item 26.B of Form N-SAR 
(requiring disclosure if the fund's receipt of investment research 
and statistical information from a broker or dealer was a 
consideration which affected the participation of brokers or dealers 
or other entities in commissions or other compensation paid on 
portfolio transactions of Registrant). Section 28(e) of the Exchange 
Act establishes a safe harbor that allows money managers to use 
client funds to purchase ``brokerage and research services'' for 
their managed accounts under certain circumstances without breaching 
their fiduciary duties to clients. See 15 U.S.C. 78bb(e); see also 
Commission Guidance Regarding Client Commission Practices Under 
Section 28(e) of the Securities Exchange Act of 1934, Securities 
Exchange Act Release No. 34-54165 (July 18, 2006) [71 FR 41978 (July 
24, 2006)]. We continue to believe that an item indicating whether a 
fund uses soft dollars will assist our staff in their examinations 
and provide census data as to the number and type of funds that rely 
on the safe harbor provided by section 28(e).
---------------------------------------------------------------------------

    In a modification from the proposal, we are now including a 
requirement that (1) funds other than money market funds report their 
monthly average net assets during the reporting period,\1016\ and (2) 
money market funds report the daily average net assets during the 
reporting period.\1017\ Funds currently report this information on Form 
N-SAR reports.\1018\
---------------------------------------------------------------------------

    \1016\ Item C.19.a of Form N-CEN.
    \1017\ Item C.19.b of Form N-CEN.
    \1018\ See Item 75 of Form N-SAR.
---------------------------------------------------------------------------

    One commenter suggested that such net asset information (e.g., Item 
75) as well as fee and expense information (e.g., Items 34-44, 47-52, 
54, and 72), currently available semi-annually on Form N-SAR should 
carry over into Form N-CEN, arguing that the removal of these reporting 
items will make the fee and expense information more difficult to 
acquire and analyze.\1019\ The commenter argued, in part, that while 
this information could be calculated based on information available 
through other sources, the manual aggregation of this information would 
put comprehensive analysis out of reach for investors and fund boards 
unless they were using services from third-party market data providers 
that may have the means to conduct such data aggregation. We continue 
to believe that fee and expense information reported on Form N-SAR need 
not be reported on Form N-CEN because fee and expense information is 
largely already disclosed in fund registration statements and, with 
respect to some information, in a structured format.\1020\ However, we 
find the commenter's suggestion regarding reporting of average net 
assets persuasive and have added the reporting items of Item 75 of Form 
N-SAR into Form N-CEN.\1021\ We believe that this information will 
assist data users in their analysis of various reporting items, 
including other information reported on Form N-CEN (for example, the 
monthly average of the value of portfolio securities on loan that will 
be reported pursuant to Item C.6.f).
---------------------------------------------------------------------------

    \1019\ See Morningstar Comment Letter.
    \1020\ See infra footnote 1169 and accompanying text. We note 
that certain fee and expense information for closed-end funds, which 
is not disclosed in a structured format in closed-end fund 
registration statements, is included in Part D of Form N-CEN. See 
Item D.8 and Item D.9 of Form N-CEN. These items will provide 
Commission staff with the fee and expense information for closed-end 
funds that the staff finds most useful to have in a structured data 
format.
    \1021\ See Item C.19 of Form N-CEN.
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d. Part D--Closed-End Management Companies and Small Business 
Investment Companies
    The Commission recognizes that closed-end funds and SBICs have 
particular characteristics that warrant questions targeted specifically 
to them.\1022\ Like Form N-SAR and as proposed, Form N-CEN requires 
additional information to be reported by closed-end funds in Part D of 
the form and also treats SBICs differently than other management 
investment companies, requiring them to complete Part D of the form in 
lieu of Part C.\1023\ The information required in Part D will provide 
us with information that is particular to closed-end funds and SBICs 
and, thus, will assist us in monitoring the activities of these funds 
and our examiners in their preparation for exams of these funds. Where 
we have received comments on specific reporting requirements of Part D, 
we discuss them in more detail below.
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    \1022\ See Items 86-88 of Form N-SAR (relating specifically to 
closed-end funds) and Items 89-104 of Form N-SAR (relating 
specifically to SBICs).
    \1023\ As discussed above, SBICs are unique investment companies 
that operate differently than other management investment companies. 
See supra footnote 49.
---------------------------------------------------------------------------

    Similar to Form N-SAR, we are adopting, as proposed, a reporting 
requirement in Part D of Form N-CEN for 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.\1024\ As 
in the proposal, we are requiring new information relating to rights 
offerings \1025\ and secondary offerings by the closed-end fund or 
SBIC,\1026\ including whether there was such an offering during the 
reporting period and if so, the type of security involved.\1027\ 
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.
---------------------------------------------------------------------------

    \1024\ Item D.1 of Form N-CEN; cf. Items 87-88 and Item 96 of 
Form N-SAR (requesting information on the title and ticker of each 
class of securities issued on an exchange and information regarding 
certain specific types of securities). An instruction to Item D.1 of 
Form N-CEN indicates that the fund should provide the ticker symbol 
for any security not listed on an exchange, but has a ticker symbol.
    \1025\ Item D.2 of Form N-CEN.
    \1026\ Item D.3 of Form N-CEN.
    \1027\ See Item D.3.a and Item D.3.b of Form N-CEN. Item D.2.c 
of Form N-CEN also requires the percentage of participation in a 
primary rights offering and an accompanying instruction to this item 
addresses the method of calculating such percentage.
---------------------------------------------------------------------------

    Like Form N-SAR,\1028\ we are also adopting, as proposed, a 
requirement that each closed-end fund or SBIC report information on 
repurchases of its securities during the reporting period.\1029\ 
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, we are adopting, as proposed, the requirement in Form 
N-CEN that a closed-end fund or SBIC only needs 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.\1030\
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    \1028\ See Item 86 and Item 95 of Form N-SAR.
    \1029\ Item D.4 of Form N-CEN.
    \1030\ We note that, with respect to closed-end funds, financial 
information relating to monthly sales and repurchases of shares will 
be reported monthly on Form N-PORT. See Item B.6 of Form N-PORT 
(requiring the aggregate dollar amounts for sales and redemptions/
repurchases of fund shares during each of the last three months).
---------------------------------------------------------------------------

    As proposed, we are also carrying over Form N-SAR's requirements 
\1031\ relating to default on long-term debt \1032\ and dividends in 
arrears.\1033\ However, unlike Form N-SAR, which requires an attachment 
providing detailed information on defaults and arrears on senior 
securities,\1034\ Form N-CEN only will require a yes/no question and 
text-based responses.\1035\ Also as proposed,

[[Page 81944]]

we are similarly carrying over the Form N-SAR requirement \1036\ 
regarding modifications to the constituent's instruments defining the 
rights of holders.\1037\ Similar to Form N-SAR, if a closed-end fund or 
SBIC made modifications to such an instrument, it also will be required 
to file an attachment in Part G of Form N-CEN with a more detailed 
description of the modification.\1038\ This item provides the 
Commission with information on and copies of documents reflecting 
changes to shareholders' rights.
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    \1031\ See Item 77.G and Item 102.F of Form N-SAR.
    \1032\ Item D.5 of Form N-CEN.
    \1033\ Item D.6 of Form N-CEN.
    \1034\ Item 77.G and Item 102.F of Form N-SAR.
    \1035\ Item D.5 of Form N-CEN requires, with respect to any 
default on long-term debt, the nature of the default, the date of 
the default, the amount of the default per $1000 face amount, and 
the total amount of default. An instruction to this item defines 
``long-term debt'' to mean a debt with a period of time from date of 
initial issuance to maturity of one year or greater. Item D.6 of 
Form N-CEN requires, with respect to any dividends in arrears, the 
title of the issue and the amount per share in arrears. This item 
defines ``dividends in arrears'' to mean dividends that have not 
been declared by the board of directors or other governing body of 
the fund at the end of each relevant dividend period set forth in 
the constituent instruments establishing the rights of the 
stockholders.
    \1036\ Item 77.I and Item 102.H of Form N-SAR.
    \1037\ Item D.7 of Form N-CEN.
    \1038\ Item G.1.b.ii of Form N-CEN.
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    We are also adopting, as proposed, requirements in Part G of Form 
N-CEN that closed-end funds or SBICs file attachments regarding 
material amendments to organizational documents,\1039\ new or amended 
investment advisory contracts,\1040\ information called for by Item 405 
of Regulation S-K,\1041\ and, for SBICs only, senior officer codes of 
ethics.\1042\ Where possible, we sought to eliminate the need to file 
attachments with the report in order to simplify the filing process and 
maximize the amount of information we receive in a data tagged format. 
However, the attachments required by Form N-CEN will 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 Form N-CEN that are specific to closed-
end funds and SBICs are also currently required by Form N-SAR.\1043\
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    \1039\ Item G.1.b.i of Form N-CEN.
    \1040\ Item G.1.b.iii of Form N-CEN.
    \1041\ Item G.1.b.iv of Form N-CEN.
    \1042\ Item G.1.b.v of Form N-CEN. This item applies only to 
SBICs because other management investment companies, including 
closed-end funds, provide this information in filings on Form N-CSR. 
See Item 2 and Item 3 of Form N-CSR; see also rule 30d-1 under the 
Investment Company Act [17 CFR 270.30d-1].
    \1043\ Compare Item G.1.b of Form N-CEN with Item 77.Q.1, Item 
77.Q.2, Item 102.P.1, Item 102.P.2, and Item 102.P.3 of Form N-SAR; 
see also Instructions to Specific Item 77Q1(a), Item 77Q1(e), Item 
77Q2, Item 102P1(a), Item 102P1(e), Item 102P2, and Item 102P3 of 
Form N-SAR.
---------------------------------------------------------------------------

    Similar to Form N-SAR, we are adopting, as proposed, a requirement 
for other census-type information relating to management fees and net 
operating expenses. Closed-end funds will be required to report the 
fund's advisory fee as of the end of the reporting period as a 
percentage of net assets.\1044\ Some commenters expressed support for 
this specific item requirement.\1045\ One of the commenters also 
suggested that funds report the actual management fee paid as a 
percentage of the average NAV of the fund during the reporting period 
so that the fee reported reflects the fee charged during the reporting 
period.\1046\ We are adopting the requirement as proposed because it 
meets our regulatory purposes and is consistent with the fee disclosure 
requirements for closed-end funds in their registration 
statements.\1047\ We believe that reporting in this manner will yield 
information that is more readily comparable across types of funds, as 
open-end funds must currently disclose tagged fee information as a 
percentage of net assets in XBRL in the fund's risk/return 
summary.\1048\
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    \1044\ Item D.8 of Form N-CEN; cf. Items 47-52 and Item 72.F of 
Form N-SAR (requesting advisory fee information for management 
companies, including closed-end funds). Whereas Form N-SAR requests 
information regarding the advisory fee rate and the dollar amount of 
gross advisory fees, an instruction to Item D.8 of Form N-CEN 
explains that the management fee reported should be based on the 
percentage of amounts incurred during the reporting period.
    \1045\ See ICI Comment Letter (agreeing that management fee 
information should be backward looking); State Street Comment Letter 
(also agreeing that the advisory fee should be backward looking, 
noting that backward looking disclosures are consistent with the 
annual financial statements of regulated investment companies).
    \1046\ See ICI Comment Letter.
    \1047\ See Item 3 of Form N-2 (requesting management fee 
information as a percentage of net assets attributable to common 
shares).
    \1048\ See General Instruction C.3.G to Form N-1A.
---------------------------------------------------------------------------

    Additionally, as proposed, closed-end funds and SBICs will 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.\1049\ Unlike open-end funds, which provide 
management fee and net expense information to the Commission in a 
structured format,\1050\ such information is not reported to or updated 
with the Commission in a structured format by closed-end funds or 
SBICs. This information will allow the Commission to track industry 
trends relating to fees. As proposed, Form N-CEN carries forward the 
Form N-SAR requirement that market price per share \1051\ and NAV per 
share \1052\ of the fund's common stock be reported for the end of the 
reporting period.
---------------------------------------------------------------------------

    \1049\ Item D.9 of Form N-CEN; cf. Item 72.X and Item 97.X of 
Form N-SAR (requesting total expenses in dollars for closed-end 
funds and SBICs).
    \1050\ Management fee information for open-end funds is 
currently tagged in XBRL format in the fund's risk return summary 
and is therefore not required by Form N-CEN. See General Instruction 
C.3.G to Form N-1A.
    \1051\ Item D.10 of Form N-CEN; see Item 76 and Item 101 of Form 
N-SAR
    \1052\ Item D.11 of Form N-CEN; see Item 74.V.1 and Item 99.V of 
Form N-SAR.
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    Finally, as proposed, Form N-CEN (like Form N-SAR) will require 
information regarding an SBIC's investment advisers,\1053\ transfer 
agents,\1054\ and custodians (including custodians that provide 
services as sub-custodians).\1055\ This information is the same as what 
will be reported by open-end and closed-end funds in Part C of Form N-
CEN, but SBICs will not be required to fill out Part C of the form. The 
majority of questions in Part C of Form N-CEN are inapplicable to SBICs 
or otherwise request information that will not be helpful to us in 
carrying out our regulatory functions with respect to SBICs. 
Accordingly, we are excepting SBICs from filling out Part C of the form 
and instead including for SBICs certain service provider questions from 
Part C in Part D of the form.
---------------------------------------------------------------------------

    \1053\ Item D.12 of Form N-CEN.
    \1054\ Item D.13; see supra footnotes 990-997 and accompanying 
text; see also supra footnotes 1000-1002, and accompanying text 
(discussing the addition of a sub-item related to sub-transfer 
agents).
    \1055\ Item D.14 of Form N-CEN.
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e. Part E--Exchange-Traded Funds and Exchange-Traded Managed Funds
    As we proposed, we are adopting a section in Form N-CEN related 
specifically to ETFs--Part E--which ETFs will 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 generally 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'').\1056\

[[Page 81945]]

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.\1057\
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    \1056\ For purposes of Form N-CEN, ``creation unit'' is defined 
as ``a specified number of Exchange-Traded Fund or Exchange-Traded 
Managed Fund shares that the fund will issue to (or redeem from) an 
authorized participant in exchange for the deposit (or delivery) of 
specified securities, positions, cash, and other assets.'' 
Instruction to Item E.3 of Form N-CEN. We have made a modification 
from the proposed definition of ``creation unit'' to clarify, 
consistent with current Commission exemptive relief, that a 
``creation unit'' could also include ``positions'' that may not be 
``assets.'' For purposes of Form N-CEN, ``authorized participant'' 
is defined as ``a broker-dealer that is also a member of a clearing 
agency registered with the Commission or a DTC Participant, and 
which has a written agreement with the Exchange-Traded Fund or 
Exchange-Traded Managed Fund or one of its designated service 
providers that allows the authorized participant to place orders to 
purchase or redeem creation units of the Exchange-Traded Fund or 
Exchange-Traded Managed Fund.'' Instruction to Item E.1.b of Form N-
CEN. We have made a modification from the proposed definition of 
``authorized participant'' to clarify, consistent with current 
Commission exemptive relief, that the definition of ``authorized 
participant'' includes broker-dealers that are DTC participants and 
otherwise fall within the definition's scope.
    \1057\ See generally Actively Managed Exchange-Traded Funds, 
Investment Company Act Release No. 25258 (Nov. 8, 2001) [66 FR 57614 
(Nov. 15, 2001)]; ETF Proposing Release, supra footnote 5.
---------------------------------------------------------------------------

    ETFs currently are subject to the same 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 \1058\ that are open-end 
funds to better meet the needs of investors who purchase those ETF 
shares in secondary market transactions.\1059\ We believe that it is 
appropriate to similarly tailor some of the comprehensive information 
reporting requirements in Form N-CEN to the special characteristics of 
ETFs. As we proposed, funds and UITs meeting the definition of 
``exchange-traded fund'' in Form N-CEN will be required to report 
information pursuant to the items in Part E of the form, as will 
certain similar investment products known as ``exchange-traded managed 
funds.'' \1060\ Taken together, we believe that, in addition to 
informing the Commission's risk analysis and, potentially, future 
policymaking concerning ETFs, the information these requirements will 
yield could also help inform the interested public about the operation 
of, and possible risks associated with, these funds.
---------------------------------------------------------------------------

    \1058\ See General Instruction A of Form N-1A (defining 
``Exchange-Traded Fund'').
    \1059\ See Enhanced Disclosure and New Prospectus Delivery 
Option for Registered Open-End Management Investment Companies, 
Securities Act Release No. 8998 (Jan. 13, 2009) [74 FR 4546, 4558 
(Jan. 26, 2009)].
    \1060\ General Instruction A to Form N-CEN; see also supra 
footnote 763.
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    Some commenters supported having a distinct section for ETFs.\1061\ 
However, as discussed in detail below, some commenters expressed 
certain concerns about specific reporting items, and, in particular, 
the public disclosure of certain reporting items.\1062\ We are adopting 
proposed Part E, with some modifications in response to specific 
commenter concerns, which are addressed in more detail below. In 
particular, several of the modifications we are making today are 
intended to address concerns raised by commenters that certain of the 
proposed Part E reporting requirements may yield data that is not 
representative of the ETF's activity over the course of the reporting 
period and may not be appropriately reflective of the range of activity 
in the ETF primary market today or in the future.\1063\
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    \1061\ See, e.g., BlackRock Comment Letter; Morningstar Comment 
Letter.
    \1062\ See BlackRock Comment Letter; Invesco Comment Letter; 
SIFMA Comment Letter I; State Street Comment Letter.
    \1063\ See, e.g., infra footnotes 1077, 1081, 1091-1092 and 
accompanying text.
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    Some of the new reporting requirements for ETFs that we are 
adopting 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.\1064\ Because 
of their importance, we proposed new reporting requirements concerning 
these entities,\1065\ and we have determined to adopt these new 
reporting requirements as proposed.
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    \1064\ See ETF Proposing Release, supra footnote 5, at 14620-21.
    \1065\ Proposing Release, supra footnote 7, at 33645-46; 
Liquidity Proposing Release, supra footnote 11, at 62348.
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    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 
will 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 are adopting, as proposed, a new requirement for each 
ETF to report identifying information about its authorized 
participants.\1066\ More specifically, Form N-CEN will 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) \1067\ and certain other identifying 
information,\1068\ including the authorized participant's SEC file 
number.\1069\ One commenter expressly supported reporting of this 
information, but suggested that authorized participants, rather than 
funds, should be required to provide this identifying information to 
the Commission, reasoning that authorized participants would have more 
ready access to the required information than funds.\1070\ Although we 
acknowledge that authorized participants would be expected to have 
access to the required information, we believe that, because authorized 
participants are counterparties to ETFs in primary market transactions, 
the required information should also be available to ETFs with which 
the authorized participants contract and transact. Because the 
requirements are intended in part to yield information about reliance 
by ETFs on particular authorized participants, and the Commission as 
well as other data users seeking census-type information about ETFs 
will likely be able to find and analyze it most efficiently using 
reports on Form N-CEN, we believe that ETFs themselves are the most 
appropriate source for the required information.
---------------------------------------------------------------------------

    \1066\ Item E.2.a-Item E.2.d of Form N-CEN.
    \1067\ Item E.2.a of Form N-CEN.
    \1068\ Item E.2.b-Item E.2.d of Form N-CEN.
    \1069\ Item E.2.b of Form N-CEN.
    \1070\ See State Street Comment Letter (stating that it would be 
appropriate for an ETF to list the authorized participants with 
which it has contracted, but that the additional information 
proposed in Part E (including the SEC file number, central 
registration depository (CRD) number, LEI number, and the dollar 
value of the ETF shares purchased and redeemed during the reporting 
period) would be more appropriately requested from the authorized 
participants themselves).
---------------------------------------------------------------------------

    In addition, we are adopting a requirement for each ETF to report 
the dollar value of the ETF shares that each authorized participant 
purchased and redeemed from the ETF during the reporting period.\1071\ 
Some commenters objected to the inclusion of this requirement in Form 
N-CEN, expressing concerns that reporting authorized participant 
activities on Form N-CEN could discourage authorized participants from 
participating in the ETF market, leading to further concentration in 
the authorized participant community or authorized participants' moving 
their ETF-related trading activities to banks or ``clearing''

[[Page 81946]]

authorized participants.\1072\ We continue to believe, however, that 
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. We believe that adopting the 
new reporting requirements is appropriate in light of these benefits 
notwithstanding the possibility that public availability of the 
information might affect the ETF primary markets in the manner those 
commenters suggest.
---------------------------------------------------------------------------

    \1071\ Item E.2.e-Item E.2.f of Form N-CEN.
    \1072\ See BlackRock Comment Letter; Invesco Comment Letter; 
SIFMA Comment Letter I; State Street Comment Letter.
---------------------------------------------------------------------------

    We also proposed, in the Liquidity Proposing Release, to require an 
ETF to report whether it required that an authorized participant post 
collateral to the ETF or any of its designated service providers in 
connection with the purchase or redemption of ETF shares during the 
reporting period.\1073\ We understand that some ETFs (or their 
custodians), particularly ETFs that invest in non-U.S. securities, 
require authorized participants transacting primarily on an in-kind 
basis to post collateral when purchasing or redeeming shares, most 
often for the duration of the settlement process. This can protect the 
ETF in the event, for example, that the authorized participant fails to 
deliver the basket securities.\1074\ The requirement to post collateral 
for creating or redeeming ETF shares impacts the authorized 
participant's operating capital, which could, in turn, affect the 
ability and willingness of authorized participants to transact with 
such ETFs or transact with other market makers on an agency basis. 
Accordingly, we continue to believe that information about required 
posting of collateral by authorized participants when purchasing or 
redeeming shares--alongside the other information that will be required 
in Form N-CEN--will be helpful in understanding whether, and to what 
extent, there may be concentration in the authorized participant 
framework for such ETFs. Therefore, we are adopting this requirement as 
proposed.\1075\
---------------------------------------------------------------------------

    \1073\ Liquidity Proposing Release, supra footnote 11, at 62348.
    \1074\ See, e.g., ICI, The Role and Activities of Authorized 
Participants of Exchange-Traded Funds (Mar. 2015) at 4, available at 
https://www.ici.org/pdf/ppr_15_aps_etfs.pdf. In addition to ETFs 
that invest in non-U.S. securities, Commission Staff understands 
that there are other ETFs that have collateral requirements for 
purchases and redemptions, such as ETFs that invest in debt 
securities.
    \1075\ Item E.2.g of Form N-CEN.
---------------------------------------------------------------------------

    Other new reporting requirements relate to certain characteristics 
of ETF creation units--the large blocks of shares that authorized 
participants may purchase from or redeem with the ETF. In the primary 
market, ETF shares, bundled in creation units, are sold or redeemed for 
consideration composed of some combination of the ETF's constituent 
portfolio securities (i.e., an ``in-kind'' basis) and cash (i.e., on a 
cash basis). Whether transacting in kind or in cash, there may be costs 
that result from the process of carrying out the transaction. In 
addition, 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. In the course of such primary market 
transaction, the particular authorized participant wishing to purchase 
(or redeem) shares typically bears the costs associated with 
transacting in the creation unit or units in the form of one or more 
transaction fees. The costs, therefore, are not directly borne by non-
transacting shareholders. In the Proposing Release, we characterized 
these transaction fees as taking two specific forms (viz., ``fixed 
fees'' and ``variable fees'') with corresponding purposes, and that 
characterization reflects our understanding of the typical transaction 
costs in the ETF primary markets today.\1076\ As discussed below, a 
commenter raised concerns that transaction fees may not uniformly fit 
within the two types of fees discussed in the Proposing Release, and we 
are persuaded that it is appropriate to modify the proposed form's 
characterization of these transaction fees in Form N-CEN as we are 
adopting it today.\1077\
---------------------------------------------------------------------------

    \1076\ See Proposing Release, supra footnote 7, at 33646. We 
characterized a ``fixed fee'' as a fee covering the transactional 
costs associated with assembling (or disassembling) creation units. 
Id. We characterized a ``variable fee'' as one intended to ensure 
that the purchasing or redeeming party bears the costs associated 
with transacting entirely or partially on a cash basis. Id.
    \1077\ See Invesco Comment Letter.
---------------------------------------------------------------------------

    In order to better understand the capital markets implications of 
different creation unit requirements, primary market transaction 
methods, and transaction fees, we proposed requirements 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 new data items is 
limited and indeterminable. To better understand how common different 
transaction methods are and the degree to which they vary across ETFs 
and over time, we proposed 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; 
(ii) of those that were redeemed ``primarily'' on an in-kind basis; 
(iii) of those that were purchased by authorized participants 
``primarily'' in exchange for cash; and (iv) of those that were 
redeemed ``primarily'' on a cash basis.\1078\ For purposes of these 
reporting requirements concerning transaction methods and transaction 
fees, we proposed to define ``primarily'' to mean greater than 50% of 
the value of the creation unit.\1079\ One commenter expressed general 
support for this information, opining that it would be helpful for 
investors.\1080\ Another commenter, however, expressed concerns with 
the proposed distinction between transactions conducted ``primarily'' 
on an in-kind basis and those conducted ``primarily'' in exchange for 
cash, arguing that treating a creation unit that is almost entirely in-
kind with a small cash balancing amount as equivalent to one that is 
effected with nearly half the value of the creation unit in the form of 
cash would yield data that would not serve the requirement's 
purpose.\1081\
---------------------------------------------------------------------------

    \1078\ See Item 60 of proposed Form N-CEN; see also Proposing 
Release, supra footnote 7, at 33646.
    \1079\ Instruction 9 to Item 60 of proposed Form N-CEN; see also 
See Proposing Release, supra footnote 7, at 33646.
    \1080\ See BlackRock Comment Letter.
    \1081\ Invesco Comment Letter.
---------------------------------------------------------------------------

    We found this comment persuasive, and we agree with the commenter 
that it would better achieve the proposed requirement's purpose of 
better understanding different creation unit requirements, primary 
market transaction methods, and transaction fees to collect such 
information in a manner that obviates the need for the ``primarily'' 
distinction about which the commenter expressed concern. Therefore, in 
a modification from the proposal, we have eliminated the proposed 
distinction between ``primarily'' in-kind and ``primarily'' cash 
transactions. Instead, as adopted, Form N-CEN will require ETFs to 
report, based on the dollar value paid for each creation unit purchased 
by authorized participants during the

[[Page 81947]]

reporting period, (i) the average percentage of that value composed of 
cash; \1082\ (ii) the standard deviation of the percentage of that 
value composed of cash; \1083\ (iii) the average percentage of that 
value composed of non-cash assets and other positions exchanged on an 
in-kind basis: \1084\ And (iv) the standard deviation of the percentage 
of that value composed of non-cash assets and other positions exchanged 
on an in-kind basis.\1085\ The ETF will also be required to report, 
based on the total dollar value of creation units redeemed by 
authorized participants during the reporting period, (i) the average 
percentage of that value composed of cash; \1086\ (ii) the standard 
deviation of the percentage of that value composed of cash; \1087\ 
(iii) the average percentage of that value composed of non-cash assets 
and other positions exchanged on an in-kind basis; \1088\ and (iv) the 
standard deviation of the percentage of that value composed of non-cash 
assets and other positions exchanged on an in-kind basis.\1089\ We 
believe that this modified requirement will better achieve the purposes 
of the proposed requirement and address the commenter's concerns about 
the proposed distinction between ``primarily'' in-kind and 
``primarily'' cash transactions.
---------------------------------------------------------------------------

    \1082\ Item E.3.b.i of Form N-CEN.
    \1083\ Item E.3.b.ii of Form N-CEN.
    \1084\ Item E.3.b.iii of Form N-CEN.
    \1085\ Item E.3.b.iv of Form N-CEN.
    \1086\ Item E.3.c.i of Form N-CEN.
    \1087\ Item E.3.c.ii of Form N-CEN.
    \1088\ Item E.3.c.iii of Form N-CEN.
    \1089\ Item E.3.c.iv of Form N-CEN.
---------------------------------------------------------------------------

    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 proposed a requirement that ETFs report applicable 
transaction 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.\1090\
---------------------------------------------------------------------------

    \1090\ Proposing Release, supra footnote 7, at 33646; see also 
Item 60.e-Item 60.h of proposed Form N-CEN.
---------------------------------------------------------------------------

    As discussed above, one commenter expressed concerns about a 
potential lack of uniformity in how ETFs name and calculate 
transactional fees and suggested that the Commission provide 
definitional guidance about the types of fees to be reported in order 
to receive accurate and standardized information.\1091\ Another 
commenter expressed concerns that the information the proposed 
requirement would have yielded--which would have pertained specifically 
to the last creation units purchased or redeemed in the reporting 
period--may not be representative of the transactions occurring during 
the period and suggested that an alternative formulation would be more 
meaningful and helpful for investors.\1092\
---------------------------------------------------------------------------

    \1091\ Invesco Comment Letter.
    \1092\ BlackRock Comment Letter (suggesting instead that a range 
of fees paid over the reporting period be required).
---------------------------------------------------------------------------

    We find both of these comments persuasive, and consistent with our 
overarching objectives of the proposed requirement to collect 
information that helps data users better understand the effects of 
primary market transaction fees on ETF pricing and trading and to 
better inform the public about such fees in a manner that is more 
representative of the ETF's activity over the course of the reporting 
period, while being flexible enough to embrace the range of activity in 
the ETF market today and, to the extent practicable, in the future. 
Therefore, in a modification from the proposal that we believe will 
better help us meet these objectives while also responding to 
commenters' concerns, we are requiring reporting of average fees based 
on the terms by which they are applied rather than how they are 
characterized or what purpose they serve. Thus we have modified the 
proposed requirement in two respects: First, the terms ``fixed fee'' 
and ``variable fee'' have been eliminated, and the fees required to be 
reported have been specified in a manner that would allow ETFs that 
today or in the future employ an alternative transaction fee schedule 
to report those fees consistent with their actual practice. Second, the 
requirement to report as to the last creation unit purchased or 
redeemed has been replaced with a requirement to report as to the 
average creation unit purchased or redeemed during the reporting 
period, so that the information reported will better reflect the ETF's 
fees over the course of the reporting period rather than at a specific 
moment in time. Accordingly, we are adopting a requirement that, as to 
creation units purchased by authorized participants during the 
reporting period, ETFs report the average transaction fee (i) charged 
in dollars per creation unit; \1093\ (ii) charged for one or more 
creation units on the same business day; \1094\ and (iii) charged as a 
percentage of the value of the creation unit.\1095\ ETFs will also be 
required to report, as to only those creation units purchased by 
authorized participants that were fully or partially composed of cash, 
the average transaction fee (i) charged in dollars per creation unit; 
\1096\ (ii) charged for one or more creation units on the same business 
day; \1097\ and (iii) charged as a percentage of the value of the cash 
in the creation unit.\1098\ Finally, as in the proposed requirements, 
ETFs will be required to report the parallel information for the 
redemption of creation units by authorized participants.\1099\ We 
believe that this modified requirement will better achieve the purposes 
of the proposed requirement and address the commenters' concerns about 
the lack of uniformity in the naming and calculating of ETF primary 
market transaction fees as well as the representativeness of the fees 
on the last business day of the reporting period.
---------------------------------------------------------------------------

    \1093\ Item E.3.d.i.1 Form N-CEN.
    \1094\ Item E.3.d.i.2 Form N-CEN.
    \1095\ Item E.3.d.i.3 Form N-CEN.
    \1096\ Item E.3.d.ii.1 Form N-CEN.
    \1097\ Item E.3.d.ii.2 Form N-CEN.
    \1098\ Item E.3.d.ii.3 of Form N-CEN.
    \1099\ Item E.3.e of Form N-CEN.
---------------------------------------------------------------------------

    We also are adopting, as proposed, a requirement for ETFs to report 
the number of ETF shares required to form a creation unit as of the 
last business day of the reporting period,\1100\ which we believe will 
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. One commenter expressed support for this 
information, opining that it would be helpful for investors.\1101\ In 
addition to information about authorized participants and creation 
units, we are requiring, as proposed, that ETFs, like closed-end funds, 
report 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 affected should an idiosyncratic risk or market event arise in 
connection with a particular exchange.\1102\ In a modification from the 
proposal, we are also adopting a requirement that ETFs provide their 
ticker symbol. As discussed above, management investment companies with 
one or more classes of shares outstanding will be required to provide a 
ticker symbol, if any, relating to that class,\1103\ and as we observed

[[Page 81948]]

throughout the Proposing Release, identifiers will assist the 
Commission with organizing the data received and allow the staff to 
cross-reference the data reported on Form N-CEN with data received from 
other sources.\1104\ We have determined that it is appropriate for ETFs 
to provide a ticker symbol also, as not all ETFs would be subject to 
the ticker symbol requirement for management investment companies.
---------------------------------------------------------------------------

    \1100\ Item E.3.a of Form N-CEN.
    \1101\ See BlackRock Comment Letter.
    \1102\ Item E.1.a of Form N-CEN.
    \1103\ See Item C.2.d.iii; 892-894.
    \1104\ See, e.g., Proposing Release, supra note 7, at 33635.
---------------------------------------------------------------------------

    Finally, with respect to ETFs that are UITs, we are requiring 
information regarding whether the index whose performance the fund 
tracks is constructed by an affiliated person of the fund and/or 
exclusively constructed for the fund, as requested by a 
commenter,\1105\ and, as proposed, information regarding tracking 
difference and tracking error.\1106\ One commenter expressed support 
for the reporting of tracking difference and tracking error, stating 
that it would be helpful for investors.\1107\ Another commenter 
suggested that tracking error should be reported on a monthly basis, 
rather than on a daily basis, as proposed.\1108\ The index fund 
information is also required of open-end index funds and, for the same 
reasons discussed above in connection with those requirements, the form 
will require this same information of ETFs that are UITs.\1109\ As 
discussed above, commenters made similar suggestions about the 
methodology for calculating tracking error in the open-end fund index 
context, and we have determined to adopt the proposed methodology for 
the same reasons discussed in connection with the open-end index fund 
requirements.\1110\
---------------------------------------------------------------------------

    \1105\ See supra footnote 907 and accompanying text.
    \1106\ Item E.4 of Form N-CEN.
    \1107\ See BlackRock Comment Letter.
    \1108\ See Invesco Comment Letter. See supra footnotes 920-928 
and accompanying text.
    \1109\ See Item C.3.b of Form N-CEN; supra section II.D.4.c.i.
    \1110\ See supra footnotes 923-928 and accompanying text.
---------------------------------------------------------------------------

f. Part F--Unit Investment Trusts
    As proposed, Part F of Form N-CEN requires information specific to 
UITs. Like Form N-SAR, Form N-CEN recognizes that UITs have particular 
characteristics that warrant questions targeted specifically to 
them.\1111\ The information requested in Part F will inform us further 
about the scope and composition of the UIT industry and, thus, will 
assist us in monitoring the activities of UITs and our examiners in 
their preparation for exams of UITs. We did not receive specific 
comments on Part F of the form and are adopting it as proposed.
---------------------------------------------------------------------------

    \1111\ See Items 111-133 of Form N-SAR (relating specifically to 
UITs).
---------------------------------------------------------------------------

    Form N-CEN (similar to Form N-SAR \1112\) also requires certain 
identifying information relating to a UIT's service providers and 
entities involved in the formation and governance of UITs, including 
its depositor,\1113\ sponsor,\1114\ trustee,\1115\ and 
administrator.\1116\ We are also adopting, as proposed, an item in Form 
N-CEN that asks whether a UIT is a separate account of an insurance 
company,\1117\ and, depending on a UIT's response to this item, it will 
then proceed to answer certain additional questions in Part F.\1118\ 
While Form N-SAR generally does not differentiate between UITs that are 
and are not separate accounts of insurance companies, Form N-CEN makes 
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.
---------------------------------------------------------------------------

    \1112\ See Item 111 (depositor information), Item 112 (sponsor 
information), Item 113 (trustee information), and Item 114 
(principal underwriter information) of Form N-SAR.
    \1113\ Item F.1 of Form N-CEN.
    \1114\ Item F.4 of Form N-CEN (only applies to UITs that are not 
insurance company separate accounts).
    \1115\ Item F.5 of Form N-CEN (only applies to UITs that are not 
insurance company separate accounts).
    \1116\ Item F.2 of Form N-CEN; see also supra footnotes 1001-
1002 (discussing the addition of a sub-administrator sub-item). Form 
N-SAR does not request information about a UIT's administrator.
    \1117\ Item F.3 of Form N-CEN; see Item 117.A of Form N-SAR.
    \1118\ If a UIT responds ``yes'' to this item, it will proceed 
to respond to Item F.12-Item F.17 of the form. However, if a UIT 
responds ``no'' to this item, it will proceed to Item F.4-Item F.11, 
and Item F.17. See Instruction to Item F.3 of Form N-CEN.
---------------------------------------------------------------------------

    As in the proposal and similar to Form N-SAR,\1119\ a UIT that is 
not a separate account of an insurance company will provide the number 
of series existing at the end of the reporting period that had 
securities registered under the Securities Act \1120\ and, for new 
series, the number of series for which registration statements under 
the Securities Act became effective during the reporting period \1121\ 
and the total value of the portfolio securities on the date of 
deposit.\1122\ As proposed, Form N-CEN also carries over from Form N-
SAR \1123\ requirements relating to the number of series with a current 
prospectus,\1124\ the number of existing series (and total value) for 
which additional units were registered under the Securities Act,\1125\ 
and the value of units placed in portfolios of subsequent series.\1126\ 
We are also adopting, as proposed, a requirement in Form N-CEN 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,\1127\ 
which is also currently required by Form N-SAR.\1128\
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    \1119\ See Items 118-120 of Form N-SAR (all UITs are required to 
complete these items).
    \1120\ Item F.6.a of Form N-CEN. As noted earlier, because UITs 
that register on Form N-8B-2 obtain CIKs for the UIT itself as well 
as for series offered by the UIT, we have made a clarifying 
modification to Form N-CEN by including a requirement that such UITs 
report the CIKs for each of their existing series in response to 
Item F.6.b of Part F of the form in addition to reporting the CIK 
for the UIT itself in response to Item B.1.c. See supra footnote 
800.
    \1121\ Item F.7.a of Form N-CEN.
    \1122\ Item F.7.b of Form N-CEN.
    \1123\ See Items 121-124 of Form N-SAR (all UITs are required to 
complete these items).
    \1124\ Item F.8 of Form N-CEN.
    \1125\ Item F.9 of Form N-CEN.
    \1126\ Item F.10 of Form N-CEN.
    \1127\ Item F.11 of Form N-CEN.
    \1128\ See Item 127.L of Form N-SAR (all UITs are required to 
complete this item). Form N-CEN does not require UITs to report 
certain assets held by a UIT as required by Item 127 of Form N-SAR. 
See Items 127.A-K of Form N-SAR.
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    We are also adopting, as proposed, new requirements in Form N-CEN 
for separate accounts offering variable annuity and variable life 
insurance contracts. Specifically, if the UIT is a separate account of 
an insurance company, Form N-CEN requires reporting of its series 
identification number \1129\ 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.\1130\
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    \1129\ Item F.12 of Form N-CEN.
    \1130\ Item F.13 of Form N-CEN.
---------------------------------------------------------------------------

    With respect to insurance company separate accounts, we are also 
adopting, as proposed, new requirements in Form N-CEN to identify and 
provide census information for each security issued through the 
separate account. These requirements will include the name of the 
security,\1131\ contract identification number,\1132\ total assets 
attributable to the security,\1133\ number of contracts sold,\1134\ 
gross premiums received,\1135\ and amount of contract value

[[Page 81949]]

redeemed.\1136\ This item also requires additional information relating 
to section 1035 exchanges, including gross premiums received pursuant 
to section 1035 exchanges,\1137\ number of contracts affected in 
connection with such premiums,\1138\ amount of contract value redeemed 
pursuant to section 1035 redemptions \1139\ and the number of contracts 
affected by such redemptions.\1140\ In addition, as proposed, insurance 
company separate accounts will be required to provide information on 
whether they relied on rules 6c-7 \1141\ and 11a-2 \1142\ 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.
---------------------------------------------------------------------------

    \1131\ Item F.14.a of Form N-CEN.
    \1132\ Item F.14.b of Form N-CEN.
    \1133\ Item F.14.c of Form N-CEN.
    \1134\ Item F.14.d of Form N-CEN.
    \1135\ Item F.14.e of Form N-CEN.
    \1136\ Item F.14.h of Form N-CEN.
    \1137\ Item F.14.f of Form N-CEN.
    \1138\ Item F.14.g of Form N-CEN.
    \1139\ Item F.14.i of Form N-CEN.
    \1140\ Item F.14.j of Form N-CEN.
    \1141\ Item F.15 of Form N-CEN. Rule 6c-7 under the Investment 
Company Act provides exemptions from certain provisions of sections 
22(e) and 27 of the Investment Company Act for registered separate 
accounts offering variable annuity contracts to participants in the 
Texas Optional Retirement Program. See 17 CFR 270.6c-7.
    \1142\ Item F.16 of Form N-CEN. Rule 11a-2 under the Investment 
Company Act relates to offers of exchange by certain registered 
separate accounts or others, the terms of which do not require prior 
Commission approval. See 17 CFR 270.11a-2.
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    Finally, as proposed, Form N-CEN carries over the Form N-SAR \1143\ 
requirement that a UIT provide certain information relating to 
divestments under section 13(c) of the Investment Company Act.\1144\ 
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.\1145\ If the UIT 
holds any securities of the issuer on the date of the filing, it will 
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.\1146\
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    \1143\ Item 133 of Form N-SAR. Section 13(c) of the Investment 
Company Act provides a safe harbor for a registered investment 
company and its employees, officers, directors and investment 
advisers, based solely upon the investment company divesting from, 
or avoiding investing in, securities issued by persons that the 
investment company determines, using credible information that is 
available to the public, engage in certain investment activities in 
Iran or Sudan. The safe harbor, however, provides that this 
limitation on actions does not apply unless the investment company 
makes disclosures about the divestments in accordance with 
regulations prescribed by the Commission. See 15 U.S.C. 80a-
13(c)(2)(B). Management investment companies are required to provide 
the disclosure on Form N-CSR, pursuant to Item 6(b) of the form, and 
UITs are required to provide the disclosure on Form N-SAR, pursuant 
to Item 133 of the form. See Technical Amendments to Forms N-CSR and 
N-SAR in Connection With the Comprehensive Iran Sanctions, 
Accountability, and Divestment Act of 2010, Securities Exchange Act 
Release No. 34-63087 (Oct. 13, 2010) [75 FR 64120 (Oct. 19, 2010)].
    \1144\ Item F.17 of Form N-CEN.
    \1145\ Item F.17.a of Form N-CEN.
    \1146\ Item F.17.b of Form N-CEN. An instruction to Item F.17 
addresses when the UIT should report divestments pursuant to this 
item.
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g. Part G--Attachments
    Like Form N-SAR,\1147\ Form N-CEN requires, substantially as 
proposed, certain attachments to reports filed on the form in order to 
provide the staff with more granular information regarding certain key 
issues.\1148\ Due to the narrative format of the information required, 
these attachments will not be required to be reported in a structured 
data format. Where possible, we eliminated 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 structured 
format.\1149\ Accordingly, we believe we have limited 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 attachments 
to Form N-CEN are current requirements in Form N-SAR.\1150\
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    \1147\ See Item 77.E, Item 77.I, Item 77.K, Item 77.L, Item 
77.N, Item 77.P, Item 77.Q.1, Item 77.Q.2, Item 102.D, Item 102.H, 
Item 102.J, Item 102.K, Item 102.M, Item 102.O, Item 102.P.1, Item 
102.P.2, and Item 102.P.3 of Form N-SAR.
    \1148\ Form N-SAR requires only management companies to file 
attachments to reports on the form, whereas Form N-CEN requires 
certain attachments for all Registrants.
    \1149\ With respect to certain attachments currently in Form N-
SAR, we are integrating the data requirements into the form itself, 
rather than keep the attachment requirements. See, e.g., Item 77.G 
and Item 102.F of Form N-SAR; Item D.5 (default on long-term debt) 
and Item D.6 (dividends in arrears) of Form N-CEN. However, not all 
of the attachments currently required by Form N-SAR lend themselves 
to integration into the form, either because of the amount of 
information reported in the attachment or because the attachment is 
a standalone document (e.g., the accountant's report on internal 
control).
    \1150\ But see supra footnote 1148.
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    Thus, as proposed, all funds are required, where applicable, to 
file attachments regarding legal proceedings,\1151\ provision of 
financial support,\1152\ independent public accountant's report on 
internal control,\1153\ and changes in accounting principles and 
practices, where applicable.\1154\ Unlike the proposal, however, the 
registrant will not be required under the form to file an attachment 
related to changes in the fund's independent public accountant (i.e., 
information called for by Item 4 of Form 8-K under the Exchange Act). 
As previously discussed in section II.D.4.b above, this change was made 
in response to comments.\1155\
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    \1151\ Item G.1.a.i of Form N-CEN.
    \1152\ Item G.1.a.ii of Form N-CEN.
    \1153\ Item G.1.a.iii of Form N-CEN. As noted in Item G.1.a.iii, 
this item will only apply to management companies other than SBICs.
    \1154\ Item G.1.a.iv of Form N-CEN.
    \1155\ See supra footnotes 860-867 and accompanying text.
---------------------------------------------------------------------------

    In addition, as in the proposal, all funds will be required, where 
applicable, to provide attachments relating to information required to 
be filed pursuant to exemptive orders issued by the Commission and 
relied on by the registrant,\1156\ and other information required to be 
included as an attachment pursuant to Commission rules and 
regulations.\1157\ Moreover, we are adopting, as proposed, requirements 
for closed-end funds and SBICs to provide attachments, where 
applicable, relating to material amendments to organizational 
documents,\1158\ instruments defining the rights of the holders of any 
new or amended class of securities,\1159\ new or amended investment 
advisory contracts,\1160\ information called for by Item 405 of 
Regulation S-K,\1161\ and, for SBICs only, senior officer codes of 
ethics.\1162\ As proposed, each attachment required by Form N-CEN 
includes instructions describing the information that should be 
provided in the attachment.\1163\
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    \1156\ Item G.1.a.v of Form N-CEN.
    \1157\ Item G.1.a.vi of Form N-CEN.
    \1158\ Item G.1.b.i of Form N-CEN. Unlike open-end funds, 
closed-end funds and SBICs do not otherwise update or file the 
information requested by this item with the Commission and, thus, we 
believe the information should continue to be filed as an attachment 
to the census reporting form.
    \1159\ Item G.1.b.ii of Form N-CEN.
    \1160\ Item G.1.b.iii of Form N-CEN. Unlike open-end funds, 
closed-end funds and SBICs do not otherwise update or file the 
information requested by this item with the Commission and, thus, we 
believe the information should continue to be filed as an attachment 
to the census reporting form.
    \1161\ Item G.1.b.iv of Form N-CEN.
    \1162\ Item G.1.b.v of Form N-CEN.
    \1163\ For example, the instructions to Item G.1.b.v require 
SBICs to attach detailed information regarding the senior officer 
code of ethics and certain information regarding the audit 
committee. The instructions also require SBICs to meet certain 
requirements regarding the availability of their senior office code 
of ethics.

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[[Page 81950]]

    As noted earlier, all of the attachments required by Form N-CEN, 
except one, are currently required by Form N-SAR.\1164\ The new 
attachment relates to the provision of financial support and will be 
filed by a fund (other than a money market 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.\1165\ As discussed in section II.D.4.b, we are adopting this 
requirement, as proposed, and including it in Form N-CEN because we 
believe that it is important that the Commission understand the nature 
and extent to which a fund's sponsor provides financial support to a 
fund.
---------------------------------------------------------------------------

    \1164\ See supra footnote 1150 and accompanying text.
    \1165\ Item G.1.a.ii of Form N-CEN.
---------------------------------------------------------------------------

5. Items Required by Form N-SAR That Will Be Eliminated by Form N-CEN
    As we discussed above and in the Proposing Release, with Form N-
CEN, we seek to modernize and improve the information that we collect 
in order to reflect changes in the fund industry since Form N-SAR's 
adoption in 1985. Accordingly, and substantially as proposed, we are 
not carrying forward certain items in Form N-SAR to Form N-CEN that we 
believe are no longer needed by Commission staff or are outdated in 
their current form. For example, in Form N-CEN, we are not including 
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.\1166\ Many 
commenters agreed that Form N-SAR is outdated and commended the 
Commission's efforts to improve the relevance of information reported 
to the Commission.\1167\ Where we have received comments on specific 
reporting requirements, we discuss them in more detail below.
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    \1166\ Item 26 of Form N-SAR. Form N-CEN does, however, contain 
information relating to funds that paid commissions to brokers and 
dealers for research services. See Item C.18 of Form N-CEN.
    \1167\ See, e.g., ICI Comment Letter; SIFMA Comment Letter I; 
Invesco Comment Letter; BlackRock Comment Letter.
---------------------------------------------------------------------------

    As proposed, Form N-CEN eliminates a number of Form N-SAR items 
where the information is (or will be) 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.\1168\ Many of the fee and expense items 
required by Form N-SAR are already reported, 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.\1169\ 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.\1170\ For similar reasons as 
above, we are also not requiring other information in 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, and certain other condensed balance sheet data 
items.\1171\
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    \1168\ See generally Items 29-44 and Items 47-52 of Form N-SAR. 
Form N-CEN does, however, contain an item relating to expense 
limitations, reductions, and waivers. See Item C.8 of Form N-CEN. As 
discussed above, Form N-CEN also requires information on management 
fees and net operating expenses for closed-end funds, as that 
information is not available elsewhere in a structured format. See 
Item D.8 and Item D.9 of Form N-CEN; see also supra section 
II.D.4.d.
    \1169\ See General Instruction C.3.G to Form N-1A; see generally 
Form N-1A, Form N-2, Form N-4, Form N-5, and Form N-6.
    \1170\ We acknowledge that some of the information reported in 
reports on Form N-SAR related to loads paid to captive or 
unaffiliated broker-dealers has been used by interested third-
parties, including researchers. See, e.g., Susan E.K. 
Christoffersen, Richard Evans, & David K. Musto, What do Consumers' 
Fund Flows Maximize? Evidence from Their Brokers' Incentives, J. of 
Fin., Vol. 68(1), 201-235 (2013) (``Christoffersen Journal 
Article''). While this is evidence of a discrete instance where such 
information has been useful to a third party, based on staff 
experience with this information and Form N-SAR information 
generally, we believe that no longer requiring funds to gather and 
report this information appropriately balances the burden on funds 
of providing this information and the overall utility of the 
information to the Commission, investors and third parties.
    \1171\ See generally Item 57, Item 61, and Items 70-74 of Form 
N-SAR.
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    One commenter requested that the Commission include certain 
information required on Form N-SAR that was proposed to be eliminated 
in Form N-CEN.\1172\ That commenter, for example, suggested that 
certain fee and expense information currently available semi-annually 
on Form N-SAR (e.g., Items 34-44, 47-52, 54, 72, and 75) should carry 
over into Form N-CEN. As discussed above, we find the commenter's 
concerns persuasive with respect to Item 75 of Form N-SAR and have 
added a reporting requirement in Form N-CEN that (1) funds other than 
money market funds provide the fund's monthly average net assets during 
the reporting period, and (2) money market funds provide the fund's 
daily average net assets during the reporting period.\1173\ Otherwise, 
we continue to believe that Form N-CEN strikes an appropriate balance 
between the current information needs of Commission staff as well as 
the developments in the fund industry and the reduction of reporting 
burdens for registrants where information may be similarly disclosed or 
reported elsewhere.
---------------------------------------------------------------------------

    \1172\ See Morningstar Comment Letter.
    \1173\ See discussion at supra footnotes 1016-1021 and 
accompanying text (discussing Item C.19 of Form N-CEN.
---------------------------------------------------------------------------

    We are also eliminating, as proposed, 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 is 
minimal to the Commission's oversight and examination functions while 
the burdens to these funds of reporting such information is 
costly.\1174\ Additionally, with respect to the Form N-SAR item 
relating to closed-end fund monthly sales and repurchases of 
shares,\1175\ this information will be reported on Form N-PORT,\1176\ 
rather than Form N-CEN.
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    \1174\ See Item 86, Item 93, Item 95, Items 97-100, Items 103-
104, Item 109, and Items 125-132 of Form N-SAR.
    \1175\ See Item 86 (closed-end funds) of Form N-SAR; see also 
Item 28 (management investment companies generally) of Form N-SAR.
    \1176\ See Item B.6 of Form N-PORT.
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    The full list of items from Form N-SAR that will be included in 
Form N-CEN or eliminated is included in Figure 2 below.
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BILLING CODE 8011-01-P

E. Option for Web Site Transmission of Shareholder Reports

    The Commission proposed new rule 30e-3 under the Investment Company 
Act, which would have permitted a fund to satisfy requirements under 
the Act and rules thereunder to transmit reports to shareholders if the 
fund made

[[Page 81961]]

the reports and certain other materials accessible on a Web site. 
Reliance on the rule would have been subject to certain conditions, 
including conditions relating to (1) the availability of the 
shareholder report and other required information; (2) implied 
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. The 
proposed option was intended to modernize the manner in which periodic 
information is transmitted to shareholders. When we proposed the rule, 
we stated that we believed it would improve the information's overall 
accessibility while reducing burdens such as printing and mailing costs 
that are borne by funds and, ultimately, by fund shareholders.\1177\
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    \1177\ See Proposing Release, supra footnote 7, at 33626.
---------------------------------------------------------------------------

    Proposed rule 30e-3 generated substantial public comment, with over 
900 commenters expressing views on the rule. Comments received on the 
proposal were mixed. Many commenters expressed support for the proposed 
rule, citing, for example, positive internet access and use trends, 
consistency with the preferences of many investors, intra- and inter-
agency regulatory consistency benefits, and anticipated reduction in 
printing and mailing expenses for funds and their shareholders.\1178\ 
However, many other commenters expressed concerns with the proposed 
rule, arguing, for example, that the proposed rule would have potential 
adverse effects on investor readership of shareholder reports generally 
and on certain demographic groups in particular.\1179\ Commenters also 
disagreed about the size and distribution of printing and mailing 
expense savings that would result from the rule as proposed, 
particularly in the context of investors who purchase shares through 
intermediaries.\1180\
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    \1178\ See, e.g., BlackRock Comment Letter; ICI Comment Letter; 
Schnase Comment Letter.
    \1179\ See, e.g., Comment Letter of Leah J. Adams (Jan. 9, 
2016); Comment Letter of Anonymous (Jan. 10, 2016); Comment Letter 
of Julia Benson (Jan. 10, 2016); Comment Letter of Broadridge 
Financial Solutions, Inc. (Jan. 13, 2016) (``Broadridge Comment 
Letter''); Comment Letter of Julia Cole (Jan. 8, 2016); Comment 
Letter of Lisa A. Darling (Aug. 7, 2015); Comment Letter of Don 
(Jan. 10, 2016); Comment Letter of Keene Ferrer (Jan. 9, 2016); 
Comment Letter of Association of Free Community Papers (Aug. 11, 
2015); Comment Letter of Anthony W. Golden (Aug. 11, 2015); Comment 
Letter of Patricia Hanbury (Jan. 10, 2016); Comment Letter of Zane 
Hollenberger (July 27, 2015); Comment Letter of Lucy James (Jan. 9, 
2016); Comment Letter of Gary Kasufkin (Jan. 12, 2016); Comment 
Letter of Debbi Lambert (Aug. 6, 2015); Comment Letter of William D. 
Looman (Jan. 9, 2016); Comment Letter of Sharon L. McCain (Jan. 9, 
2016); Comment Letter of National Association of Letter Carriers 
(Aug. 4, 2015); Comment Letter of Dan Oved (Jan. 8, 2016); Comment 
Letter of Tim Plunk (July 16, 2015); Comment Letter of Joanne Rock 
(Aug. 7, 2015); Comment Letter of Thomas Scibek (Aug. 10, 2015); 
Comment Letter of Robin Snyder (Aug. 6, 2015); Comment Letter of 
Teresa (Jan. 8, 2016); Comment Letter of Manuel E. Velosa, Jr. (Jan. 
10, 2016); Comment Letter of Wise (Aug. 3, 2015); Form Letter Type A 
(7 copies received); Form Letter Type B (234 copies received); Form 
Letter Type C (57 copies received); Form Letter Type D (93 copies 
received); Form Letter Type E (43 copies received).
    \1180\ See, e.g., Broadridge Comment Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    While the Commission plans to continue to consider how to promote 
electronic transmission to those who might prefer it, the comments 
discussed above raised issues with respect to this proposal that merit 
further consideration. We have, therefore, determined not to adopt 
proposed rule 30e-3 at this time.

F. Amendments to Forms Regarding Securities Lending Activities

    We are also adopting form amendments that require a management 
investment company to disclose in its registration statement (or, in 
the case of a closed-end fund, its reports on Form N-CSR) certain 
disclosures regarding securities lending activities.\1181\ We proposed 
similar requirements as part of the proposed amendments to Regulation 
S-X, including disclosure in the fund's financial statements 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 fund 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 fund 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 fund 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.\1182\ We proposed these disclosures in 
order to allow investors to better understand the income generated 
from, as well as the expenses associated with, a fund's securities 
lending activities.\1183\
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    \1181\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; Item 
12 of Form N-CSR. Because closed-end funds do not offer their shares 
continuously, and are therefore generally not required to maintain 
an updated Statement of Additional Information to meet their 
obligations under the Securities Act, we are requiring closed-end 
funds to disclose their securities lending activities information 
annually on Form N-CSR.
    \1182\ See proposed rule 6-03(m) of Regulation S-X; Proposing 
Release, supra footnote 7, at 33624.
    \1183\ See id.
---------------------------------------------------------------------------

    We received a number of comments addressing our proposed securities 
lending disclosures. Comments on the proposed disclosure requirements 
were mixed. Most of the commenters who addressed the issue expressed 
support for requiring disclosure of securities lending income and fees, 
although some specifically opposed or expressed concerns about the 
proposed requirement to disclose the terms governing the compensation 
of the securities lending agent.\1184\ Some commenters expressed 
opposition generally to the public nature of the proposed new 
disclosure requirements concerning fund securities lending 
activities.\1185\ Some commenters also

[[Page 81962]]

expressed particular concerns relating to the location of the required 
disclosure in the fund's financial statements.\1186\
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    \1184\ See AICPA Comment Letter (stating that the requirements 
would provide meaningful information to investors and other 
potential users and allow them to better understand the fund's 
securities lending activities, except for disclosure of the terms 
governing the compensation of the securities lending agent other 
than for related parties); BlackRock Comment Letter (stating that 
``investor protection is well served by a level playing field that 
allows investors to make informed choices on a risk adjusted basis'' 
and that uniform and clear information requirements associated with 
securities lending activities will empower mutual fund directors to 
more effectively evaluate and compare securities lending services); 
Deloitte Comment Letter (opposing required financial statement 
disclosure of indirect fees); Fidelity Comment Letter (expressing 
support for enabling investors to better understand the income 
generated from securities lending activity and all proposed 
disclosures except for fee split with a third-party lending agent); 
ICI Comment Letter (expressing support for the proposed requirements 
except the required public disclosure of the terms governing the 
compensation of the securities lending agent); PwC Comment Letter 
(opposing the proposed financial statement disclosure requirement of 
the terms of compensation, including any revenue sharing split, 
while stating that the categories of disclosure would provide 
meaningful information to readers); RMA Comment Letter (opposing a 
requirement to disclose borrower rebates and recommending that, if 
required, revenue sharing percentage disclosure be calculated using 
the fund's net lending income and fees paid during the reporting 
period); Simpson Thacher Comment Letter (opposing required public 
disclosure of securities lending splits); State Street Comment 
Letter (opposing disclosure requirement for borrower rebates and 
recommending requirements for actual income and fees paid rather 
than contractual terms); cf. BlackRock Directors Comment Letter 
(stating, in the context of proposed Form N-CEN requirements, that 
``[i]mproved transparency as to the economic terms in the market for 
securities lending services will assist independent directors in 
assessing annually the customary charges imposed for such 
services'').
    \1185\ See Invesco Comment Letter (opposing required public 
disclosure of fund's securities lending activities); MFS Comment 
Letter (opposing required public disclosure of securities lending 
fees); SIFMA Comment Letter I (opposing public disclosure 
requirements concerning financial arrangements of fund securities 
lending activities); Wells Fargo Comment Letter (opposing required 
public disclosure of securities lending income and expenses); cf. 
IDC Comment Letter (opposing required public disclosure of 
compensation and other fee and expense information relating to 
securities lending arrangements).
    \1186\ See infra note 1190.
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    We continue to believe that because net earnings from securities 
lending can contribute to the investment performance of a fund, 
investors and others would benefit from the additional transparency 
into the impact of securities lending fees on the income from these 
activities and further believe that the benefits of this additional 
transparency justify the potential unintended consequences, highlighted 
by commenters and discussed below, of public disclosure of certain 
information. We have, however, made certain modifications to the 
proposed requirements in an effort to mitigate some of these potential 
consequences.\1187\ As discussed in greater detail below, these 
modifications include, for example, replacing the proposed requirement 
that funds disclose the terms governing the compensation of the 
securities lending agent--including any revenue split--with a 
requirement to report actual fees paid during the fund's prior fiscal 
year, because commenters persuaded us that backward-looking dollar-
based requirements would yield clearer disclosure than would the 
proposed requirements and may also enhance disclosure comparability 
across funds for investors and reduce preparation complexity for funds.
---------------------------------------------------------------------------

    \1187\ See infra footnotes 1212-1219 and accompanying text.
---------------------------------------------------------------------------

1. Determination To Adopt Requirements as Amendments to Registration 
Statement and Annual Report Forms
    As proposed, certain disclosures relating to securities lending 
activities, including income and expenses, would have been required to 
be included in a fund's financial statements.\1188\ However, we sought 
public comment on whether the proposed or similar disclosures should 
instead be provided as part of other disclosure documents such as the 
Statement of Additional Information.\1189\ In response, some commenters 
raised concerns about including this information in the fund's 
financial statements, including concerns about cost and that lengthy 
disclosure concerning securities lending activity in a fund's financial 
statements could detract from other financial statement 
disclosures.\1190\ After consideration of these issues raised by 
commenters, we have determined that it is appropriate to require funds 
to include these disclosures in their Statements of Additional 
Information (or, for closed-end funds, in their reports on Form N-CSR), 
rather than to require their inclusion in fund financial statements. 
Therefore, we are adopting these disclosure requirements as amendments 
to the fund registration forms (viz., Forms N-1A and N-3) and reports 
on Form N-CSR (for closed-end funds only), rather than as amendments to 
Regulation S-X.\1191\
---------------------------------------------------------------------------

    \1188\ See proposed rule 6-03(m) of Regulation S-X; Proposing 
Release, supra footnote 7, at 33624.
    \1189\ See Proposing Release, supra footnote 7, at 33625.
    \1190\ See Deloitte Comment Letter (noting that indirect fees 
``are typically management's estimate that is imprecise'' and 
stating that additional costs of auditing the disclosure of these 
fees ``would most likely outweigh any benefits of reporting this 
information''); EY Comment Letter (stating that ``the proposed 
disclosures would result in the presentation of detailed information 
with varying degrees of usefulness that could detract from other 
material information presented in the financial statements'' and 
recommending that ``the Commission use other reporting mechanisms 
more suited for that purpose'').
    \1191\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; Item 
12 of Form N-CSR.
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2. Requirement To Disclose Securities Lending Income, Expenses, and 
Services
    As discussed in detail below, the final rules will require funds to 
disclose gross and net income from securities lending activities, fees 
and compensation in total and broken out by enumerated types, and a 
description of the services provided to the fund by the securities 
lending agent. We proposed to require disclosure of gross income from 
securities lending, including income from cash collateral reinvestment; 
\1192\ the dollar amount of fees and compensation paid by the fund for 
securities lending activities and related services, including borrower 
rebates and payments for cash collateral management services; \1193\ 
the net income from securities lending activities; \1194\ the details 
of any other fees paid directly or indirectly, including any fees paid 
directly by the fund for cash collateral management and any management 
fee deducted from a pooled investment vehicle in which cash collateral 
is invested; \1195\ and the terms governing the compensation of the 
securities lending agent, including any revenue sharing split, with the 
related percentage split between the fund and the securities lending 
agent, and/or any fee for service and a description of services 
included.\1196\ After consideration of issues raised by commenters, we 
are generally adopting the substance of the proposed fee disclosure 
requirements but are requiring funds to make these disclosures in their 
Statements of Additional Information (or, in the case of a closed-end 
fund, Form N-CSR) rather than as part of their financial statements (as 
proposed). We are amending the Statement of Additional Information 
requirements in Forms N-1A and N-3, and Form N-CSR (for closed-end 
funds) to require funds to disclose dollar amounts of income and fees 
and compensation paid to service providers related to their securities 
lending activities during their most recent fiscal year, as illustrated 
in Table 1 below.\1197\
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    \1192\ Proposed rule 6-03(m)(1) of Regulation S-X.
    \1193\ Proposed rule 6-03(m)(2) of Regulation S-X.
    \1194\ Proposed rule 6-03(m)(3) of Regulation S-X.
    \1195\ Proposed rule 6-03(m)(5) of Regulation S-X.
    \1196\ Proposed rule 6-03(m)(4) of Regulation S-X.
    \1197\ See Item 19(i)(1) of Form N-1A; Item 21(j)(i) of Form N-
3; Item 12(a) of Form N-CSR. The disclosure need not be presented in 
a tabular format.

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[[Page 81963]]

[GRAPHIC] [TIFF OMITTED] TR18NO16.011

    The modifications from the proposed requirements are designed to, 
among other things, enhance comparability of the disclosed information 
and potentially ameliorate some concerns commenters expressed about the 
proposed required public disclosure of the terms governing compensation 
of the securities lending agent. Several commenters expressed concern 
that the proposed disclosure requirements could yield information that 
would suggest, inaptly, that fees and expenses related to securities 
lending activities among funds are readily compared and 
contrasted.\1198\ Specifically, one commenter highlighted that 
information provided under the proposed requirements might not be 
comparable due to the subjectivity of related inputs and 
assumptions.\1199\ Another commenter, however, suggested that we could 
facilitate comparability by specifying the fees for particular services 
that must be disclosed.\1200\ We have considered these commenters' 
views and suggestions and have been persuaded to specify in the final 
rules which specific fees should be disclosed and what those fees 
should include rather than requiring, as proposed, disclosure of all 
fees and/or compensation paid for securities lending and related 
services without specifying which fees should be disclosed.\1201\ We 
believe that these modifications will enhance comparability of the 
disclosed fees and compensation. The list of specific fees we are 
enumerating has been adapted from the list of securities lending 
payments about which reporting will be required by Form N-CEN, which, 
as discussed above, we are adopting as proposed.\1202\ We have 
determined that, in specifying the specific categories of fees that are 
required to be disclosed, it is appropriate to adapt the list of fees 
from proposed Form N-CEN because consistency between the two lists will 
allow for better comparability of information from reports on Form N-
CEN and disclosures in funds' Statements of Additional Information and, 
with respect to closed-end funds, reports on Form N-CSR.
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    \1198\ See MFS Comment Letter; PwC Comment Letter.
    \1199\ See MFS Comment Letter. The commenter did not provide 
examples of specific subjective inputs and assumptions in connection 
with the terms of securities lending expenses.
    \1200\ See Fidelity Comment Letter.
    \1201\ Item 19(i)(1)(ii) of Form N-1A (requiring disclosure of 
all fees and/or compensation for each of the following securities 
lending activities and related services: Any share of revenue 
generated by the securities lending program paid to the securities 
lending agent or agents--the ``revenue split''; fees paid for cash 
collateral management services--including fees deducted from a 
pooled cash collateral reinvestment vehicle--that are not included 
in the revenue split; administrative fees that are not included in 
the revenue split; fees for indemnification that are not included in 
the revenue split; rebates paid to borrowers; and any other fees 
relating to the securities lending program that are not included in 
the revenue split, including a description of those fees); Item 
21(j)(i)(B) of Form N-3 (same); Item 12(a)(2) of Form N-CSR (same). 
If a fee for a service is included in the revenue split, state that 
the fee is ``included in the revenue split.'' Instruction to Item 
19(i)(1) of Form N-1A; Instruction to Item 21(j)(i) of Form N-3 
(same); Instruction (a) to Item 12 of Form N-CSR (same).
    \1202\ See Item 30.e of proposed Form N-CEN; Item C.6.e of Form 
N-CEN; supra section II.D.4.c.iii.
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    The comparability of the disclosed fee and expense information may 
also depend on the nature of the services provided to a particular fund 
in connection with its securities lending activities. To that end, we 
proposed a disclosure requirement for a description of services 
included in the fund's arrangement with its securities lending 
agent.\1203\ One commenter suggested robust disclosure of the services 
provided by the securities lending agent and provided several examples 
of the types of services that should be disclosed to improve 
comparability.\1204\ The commenter stated that it had observed a lack 
of uniformity in the package of services performed by securities 
lending agents, which can hinder understanding of securities lending 
fees.\1205\ We agree with the commenter that enhanced and more 
comparable disclosure of services provided can help users of the 
information to better understand the particular services provided by

[[Page 81964]]

securities lending agents for the aggregate fees they were paid over 
the reporting period. Accordingly, to further enhance the comparability 
of the disclosed information and allow users to better assess fee and 
expense information, we have determined to specify that this 
information should be provided on the basis of the services actually 
provided to the fund in its most recent fiscal year. Some examples of 
the types of services that could be enumerated include, as applicable, 
locating borrowers, monitoring daily the value of the loaned securities 
and collateral, requiring additional collateral as necessary, cash 
collateral management, qualified dividend management, negotiation of 
loan terms, selection of securities to be loaned, recordkeeping and 
account servicing, monitoring dividend activity and material proxy 
votes relating to loaned securities, and arranging for return of loaned 
securities to the fund at loan termination.\1206\
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    \1203\ Proposed rule 6-03(m)(4) of Regulation S-X.
    \1204\ See BlackRock Directors Comment Letter (suggesting such a 
requirement in the context of reports on Form N-CEN).
    \1205\ Id.
    \1206\ Item 19(i)(2) of Form N-1A (requiring disclosure of the 
services provided to the fund by the securities lending agent); Item 
21(j)(ii) of Form N-3 (same); Item 12(b) of Form N-CSR (same).
---------------------------------------------------------------------------

    Another commenter expressed concerns that the proposed fee and 
expense information could be used to evaluate the terms of a fund's 
lending arrangements and could, without access to additional 
information, result in potentially inappropriate conclusions that a 
fund negotiated its arrangements poorly or was otherwise disadvantaged 
in its negotiations.\1207\ That commenter noted that the revenue split 
can depend on numerous factors, including the range, amount, and 
attractiveness of the securities a fund complex as a whole may make 
available for loan.\1208\ Two commenters suggested eliminating the 
proposed requirement for disclosure of borrower rebates, reasoning that 
they are primarily a function of prevailing short-term interest 
rates.\1209\ However, we continue to believe that it is appropriate to 
require disclosure of borrower rebates, because, irrespective of how 
they may be determined in particular cases, they are nonetheless an 
expense of securities lending. One commenter argued that a fund board 
wishing to evaluate the fund's securities lending program would have 
access to more detailed analyses than could be practically included in 
the fund's financial statements.\1210\ Conversely, another commenter 
stated that uniform and clear information requirements would have the 
benefit of empowering more effective evaluation and comparison of 
securities lending services.\1211\ While, as commenters suggested, a 
thorough evaluation of a fund's securities lending activities, such as 
an evaluation by that fund's board, may appropriately include 
information beyond the scope of the disclosure requirements we are 
adopting today, we believe that these new requirements will nonetheless 
enhance comparability and allow investors to better understand the 
expenses associated with securities lending activities. We also note 
that today's amendments are not meant to circumscribe the factors to be 
rightfully considered in such an evaluation.
---------------------------------------------------------------------------

    \1207\ PwC Comment Letter (particularly with respect to the 
proposed terms of compensation disclosure requirement); see also RMA 
Comment Letter (concerning borrower rebates).
    \1208\ PwC Comment Letter.
    \1209\ RMA Comment Letter; State Street Comment Letter.
    \1210\ PwC Comment Letter.
    \1211\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    Commenters also expressed concerns with the proposed requirements 
based on the currently nonpublic character of some of the information 
that would be required to be disclosed publicly, particularly the 
proposed requirement to disclose the terms governing compensation of 
the securities lending agent.\1212\ Commenters argued that some funds 
currently enjoy privately negotiated competitive advantages with 
securities lending services or counterparties that could be jeopardized 
should their arrangements with their securities lending agents be made 
public.\1213\ We continue to believe, however, that the required fee 
information will allow investors to better understand the expenses 
associated with securities lending activities and have therefore 
determined to adopt these modified disclosure requirements with 
modifications to address commenters' concerns. We believe that the 
modifications to the proposed requirements that we are making today 
eliminate the disclosures from the proposed requirements that some 
commenters indicated could be the most sensitive--specifically, the 
terms of the revenue split and the terms governing the compensation of 
the securities lending agent more generally--while retaining the 
required information that we think will be most useful to investors in 
understanding the expenses associated with fund securities lending 
activities.
---------------------------------------------------------------------------

    \1212\ See AICPA Comment Letter (particularly concerned with 
respect to the terms governing the compensation of the securities 
lending agent); Fidelity Comment Letter (particularly concerned with 
respect to the revenue split); ICI Comment Letter; Invesco Comment 
Letter; MFS Comment Letter; SIFMA Comment Letter I; Simpson Thacher 
Comment Letter (particularly concerned with respect to the revenue 
split); Wells Fargo Comment Letter.
    \1213\ See AICPA Comment Letter; Fidelity Comment Letter; ICI 
Comment Letter; Invesco Comment Letter; MFS Comment Letter; SIFMA 
Comment Letter I; Simpson Thacher Comment Letter; Wells Fargo 
Comment Letter.
---------------------------------------------------------------------------

    In particular, some commenters suggested that, rather than 
requiring disclosure of the terms governing the compensation of the 
securities lending agent, as we proposed,\1214\ we consider instead 
requiring disclosure of backward-looking actual compensation 
levels.\1215\ One of these commenters argued that, because there are a 
variety of fee arrangements in the marketplace, such an alternative 
disclosure requirement may provide a clearer, more concise view of each 
party's compensation.\1216\ We have been persuaded by these commenters' 
suggestions that backward-looking dollar-based requirements would yield 
clearer disclosure than would the proposed requirements and may also 
enhance disclosure comparability across funds for investors and reduce 
preparation complexity for funds and thus have modified the 
requirements accordingly.\1217\ This dollar-based requirement would 
also eliminate the requirement that potentially sensitive negotiated 
contractual terms be disclosed, while nonetheless allowing investors to 
better understand the expenses associated with securities lending 
activities. A commenter also counseled against placing undue emphasis 
on the securities lending agent's revenue split at the expense of other 
securities lending fees and expenses,\1218\ and we believe that the 
schedule of fees and expenses we are requiring to be disclosed places 
an appropriate level of emphasis on that figure situated among the 
other required fee and expense disclosures.\1219\
---------------------------------------------------------------------------

    \1214\ See proposed rule 6-03(m)(4) of Regulation S-X.
    \1215\ See RMA Comment Letter (recommending that funds report a 
calculated split based on a fund's actual net lending income and 
fees paid during the reporting period); State Street Comment Letter.
    \1216\ State Street Comment Letter.
    \1217\ Item 19(i)(1)(ii) of Form N-1A; Item 21(j)(i)(B) of Form 
N-3; Item 12(a)(1) of Form N-CSR.
    \1218\ See Fidelity Comment Letter.
    \1219\ See supra Table 1.
---------------------------------------------------------------------------

    We also proposed to require disclosure of gross income from 
securities lending, including income from cash collateral 
reinvestment,\1220\ as well as net income.\1221\ We did not receive 
comments specific to these proposed requirements. We are adopting the 
proposed requirement to disclose gross income from securities lending 
activities. Moreover, as further clarification about the types of 
income that could be included in this total, we

[[Page 81965]]

note that--in addition to income from cash collateral reinvestment--
disclosed gross income may also include negative rebates (i.e., those 
paid by the borrower to the lender), loan fees paid by borrowers when 
collateral is noncash, management fees from a pooled cash collateral 
reinvestment vehicle that are deducted from the vehicle's assets before 
income is distributed, and any other income.\1222\ We are adopting the 
proposed requirement to disclose net income and clarifying that the 
reported figure should be equal to the difference between gross income 
and aggregate fees/compensation.\1223\
---------------------------------------------------------------------------

    \1220\ Proposed rule 6-03(m)(1) of Regulation S-X.
    \1221\ Proposed rule 6-03(m)(3) of Regulation S-X.
    \1222\ Item 19(i)(1)(i) of Form N-1A; Item 21(j)(i)(A) of Form 
N-3 (same); Item 12(a)(1) of Form N-CSR. Gross income for purposes 
of this disclosure generally should include indirect fees paid for 
cash collateral management services--i.e., management services 
provided to a pooled investment vehicle in which cash collateral is 
invested. Those fees are indirect because they are taken from the 
pooled assets before any income is distributed to the lending fund. 
In order for the net income disclosure from securities lending to 
sum to the net income for securities lending reported at period end, 
we believe that indirect fees for cash collateral management 
generally should be added to the gross income from securities 
lending in the Statement of Additional Information or, with respect 
to closed-end funds, in reports on Form N-CSR.
    \1223\ Item 19(i)(1)(iv) of Form N-1A; Item 21(j)(i)(D) of Form 
N-3; Item 12(a)(4) of Form N-CSR.
---------------------------------------------------------------------------

3. Required Disclosures of Monthly Average Value on Loan
    We also proposed to require disclosure of the monthly average of 
the value of portfolio securities on loan.\1224\ As discussed above, we 
have determined to adopt a similar requirement in Form N-CEN where it 
will be available in a structured data format and are not including it 
in the amendments to Forms N-1A, N-3, and N-CSR.\1225\
---------------------------------------------------------------------------

    \1224\ See proposed rule 6-03(m)(6) of Regulation S-X.
    \1225\ See supra footnotes 969-972 and accompanying text.
---------------------------------------------------------------------------

G. Technical and Conforming Amendments

    As proposed, we are also adopting technical and conforming 
amendments to various rules and forms. As discussed above, we are 
rescinding Form N-Q and adopting new Form N-PORT. In order to implement 
this change, we are revising 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.\1226\ In addition, we are rescinding 17 CFR 249.332 and revising 
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.
---------------------------------------------------------------------------

    \1226\ See Instruction 3(b) to Item 16(f) of Form N-1A; 
Instruction 4 to Item 27(d)(1) of Form N-1A; Instruction 6.b to Item 
24 of Form N-2; Instruction 6(ii) to Item 28(a) of Form N-3; 
Instruction 3(b) to Item 19(e)(ii) of Form N-3.
---------------------------------------------------------------------------

    We are also rescinding Form N-SAR and replacing it with new Form N-
CEN. In order to implement this change, we are revising the following 
rules and sections to remove references to Form N-SAR and replacing 
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, 17 CFR 274.101, and Form N-8F.\1227\
---------------------------------------------------------------------------

    \1227\ Although we are deleting references to Form N-SAR in 17 
CFR 232.301, we are not replacing them with references to Form N-CEN 
because the references in that section relate to specific portions 
of the EDGAR Filer Manual that would not be relevant to Form N-CEN.
---------------------------------------------------------------------------

    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 we are 
requiring reports on Form N-CEN to be filed annually by all registered 
investment companies, we are rescinding 17 CFR 270.30b1-1 and revising 
17 CFR 270.30a-1 to require all registered investment companies to file 
reports on Form N-CEN. We are also revising the following rules to 
remove references to 17 CFR 270.30b1-1 and add references to revised 
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 
are rescinding 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 
adopting new rule 17 CFR 270.30a-4--which will permit wholly-owned 
management investment company subsidiaries of management investment 
companies to not file Form N-CEN under those same circumstances. We are 
also amending 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.\1228\
---------------------------------------------------------------------------

    \1228\ See infra section IV.
---------------------------------------------------------------------------

    Our amendments to Regulation S-X will, among other things, require 
management investment companies to report new schedules for certain 
derivatives holdings.\1229\ To implement these changes, we are 
renumbering the sections for schedules required to be reported by 
management investment companies and renumbering the list of schedules 
provided in 17 CFR 210.6-10, which outlines the schedules to be 
reported by investment companies.\1230\ We are also adopting 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.\1231\
---------------------------------------------------------------------------

    \1229\ Our amendments require new schedules to be filed to 
report open futures contracts, open forward foreign currency 
contracts, and open swap contracts. See new rules 12-13A-C of 
Regulation S-X.
    \1230\ Among other things, our amendments will renumber the CFR 
sections for open option contracts and the summary schedule of 
investments in unaffiliated issuers from 17 CFR 210.12-12B and 17 
CFR 210.12-12C to 17 CFR 210.12-13 and 17 CFR 210.12-B, 
respectively. These amendments group the schedule for open option 
contracts written together with the new schedules for open futures 
contracts, open forward foreign currency contracts, and open swap 
contracts, and list the summary schedule sequentially after the 
investments in securities of unaffiliated issuers. We are also 
amending 17 CFR 210.6-10 to, among other things, add new schedules 
V, VI, and VII for open futures contracts, open forward foreign 
currency contracts, and open swap contracts, respectively, and 
renumber schedule II for investments other than securities and 
schedule VI for summary of investments in securities of unaffiliated 
issuers as schedules VIII and IX, respectively. See amended rule 6-
10 of Regulation S-X (listing the schedules required to be filed by 
management investment companies, UITs, and face-amount certificate 
companies).
    \1231\ See Item 27(b)(1) of Form N-1A (reference to schedule VI 
changed to schedule IX and reference to schedule I are corrected to 
cite to the appropriate CFR section); Instruction 7 to Item 24 of 
Form N-2 (we are updating references to schedule VI); Instruction 
7(i) and (ii) to Item 28(a) of Form N-3 (we are updating references 
to schedule VI).
---------------------------------------------------------------------------

    We are also amending Form N-CSR to revise instructions addressing 
how disclosures and certifications as to the effectiveness and changes 
in the registrant's internal control over financial reporting should be 
handled during the transition period when certifications for funds' 
portfolio holdings for their first and third fiscal quarters will no 
longer be provided on Form N-Q but instead will provided on Form N-
CSR.\1232\ In the Proposing Release we proposed deleting these 
instructions, but we are revising the instructions to clarify how these 
disclosures and certifications shall be handled with regards to smaller 
entities

[[Page 81966]]

as opposed to larger entities during the transition period.
---------------------------------------------------------------------------

    \1232\ Item 11 and Item 12 of Form N-CSR.
---------------------------------------------------------------------------

    We are also removing and reserving paragraph (a) of 17 CFR 232.105, 
which currently requires electronic filers to submit Forms N-SAR and 
13F in ASCII. We are rescinding Form N-SAR, and Form 13F has been 
submitted by electronic filers in XML, rather than ASCII, since 
2013.\1233\ Although we also proposed to revise the section heading of 
17 CFR 232.105 and redesignate paragraphs (b) and (c) as (a) and (b), 
respectively, upon further consideration we believe those changes are 
unnecessary at this time.
---------------------------------------------------------------------------

    \1233\ See SEC, Announcement: Notice to EDGAR Form 13F Filers 
(Mar. 29, 2013), available at https://www.sec.gov/divisions/investment/imannouncements/notice-form-13f-im.htm (requiring funds 
to file Form 13F according to EDGAR XML Technical Specifications 
beginning on April 29, 2013).
---------------------------------------------------------------------------

    We received no comments on these technical and conforming 
amendments, and are adopting them substantially as proposed, as 
discussed herein.

H. Compliance Dates

    We are adopting the following compliance dates for our amendments, 
as set forth below.
1. Form N-PORT, Rescission of Form N-Q, and Amendments to the 
Certification Requirements of Form N-CSR
    As proposed, given the nature and frequency of filings on Form N-
PORT, the Commission is providing 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'' \1234\ have net assets of $1 billion or 
more as of the end of the most recent fiscal year of the fund--we are 
adopting a compliance date of June 1, 2018. This will result in larger 
funds filing their first reports on Form N-PORT, reflecting data as of 
June 30, no later than July 30, and will provide those funds with a 
compliance period of at least 18 months, consistent with our proposal. 
For these entities, we expect that this period of time will 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 new Form N-PORT with the Commission.\1235\
---------------------------------------------------------------------------

    \1234\ For these purposes, the threshold is based on the 
definition of ``group of related investment companies,'' as such 
term is defined in rule 0-10 under the Investment Company Act [17 
CFR 270.0-10]. Rule 0-10 defines the term as ``two or more 
management companies (including series thereof) that: (i) Hold 
themselves out to investors as related companies for purposes of 
investment and investor services; and (ii) Either: (A) Have a common 
investment adviser or have investment advisers that are affiliated 
persons of each other; or (B) Have a common administrator; and [. . 
.] In the case of a unit investment trust, the term group of related 
investment companies shall mean two or more unit investment trusts 
(including series thereof) that have a common sponsor.'' We believe 
that this broad definition will encompass most types of fund 
complexes and therefore is an appropriate definition for compliance 
date purposes.
    \1235\ We believe that this compliance period for larger groups 
of investment companies is an adequate amount of time for funds to 
implement new Form N-PORT and make the necessary system and 
operational changes. We adopted a nine month compliance period when 
we first required money market funds to report their portfolio 
holdings to the Commission on a monthly basis on Form N-MFP. Based 
upon our Form N-MFP compliance experience, and the larger number of 
non-money market fund filers, we believe that doubling the Form N-
MFP compliance period to eighteen months for filing reports on Forms 
N-PORT is appropriate. See Money Market Fund Reform 2010 Release, 
supra footnote 447, at 10087.
---------------------------------------------------------------------------

    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 of the fund),\1236\ the compliance date 
will be June 1, 2019. This will provide smaller entities an extra 12 
months, as proposed, to comply with the new reporting requirements. We 
believe that smaller groups will benefit from this extra time to comply 
with the filing requirements for Form N-PORT and will potentially 
benefit from the lessons learned by larger investment companies and 
groups of investment companies during the adoption period for Form N-
PORT.
---------------------------------------------------------------------------

    \1236\ Based on staff analysis of data obtained from Morningstar 
Direct, as of June 30, 2016, we estimate that a $1 billion assets 
threshold would provide an extended compliance period to more than 
67% of fund groups, but only 0.6% of all fund assets. We therefore 
believe that the $1 billion threshold will appropriately balance the 
need to provide smaller groups of investment companies with more 
time to prepare for the initial filing of reports on Form N-PORT, 
while still including the vast majority of fund assets in the 
initial compliance period.
---------------------------------------------------------------------------

    In the Proposing Release, we stated that we intended to rescind 
Form N-Q and require implementation of the amendments to the 
certification requirements of Form N-CSR within a timing that would be 
consistent with this adoption. We received no comments on this aspect 
of the proposal. Therefore, consistent with the timing for the 
implementation of reporting requirements for Form N-PORT, we are also 
rescinding Form N-Q (referenced in 17 CFR 274.130) and implementing the 
amendments to the certification requirements of Form N-CSR (referenced 
in 17 CFR 274.128) with approximately the same time frame. However, we 
are delaying the rescission of Form N-Q by two additional months to 
allow funds sufficient time to satisfy Form N-Q's 60-day filing 
requirements with regard to their final filing on Form N-Q for the 
reporting period preceding their first filing on Form N-PORT. Thus, the 
compliance dates for the amendments to the certification requirements 
of Form N-CSR will be June 1, 2018 for larger entities, and June 1, 
2019 (12 months later) for smaller entities. Form N-Q and related rules 
referencing Form N-Q will be rescinded two months later, on August 1, 
2019. In addition, as discussed below, the compliance date for 
reporting a change in independent public accountant on Form N-CSR will 
be consistent with the compliance date for other information reported 
on Form N-CEN.\1237\
---------------------------------------------------------------------------

    \1237\ See infra section II.H.2.
---------------------------------------------------------------------------

    We understand that certain changes to issuers' and market 
participants' systems may not be able to occur until the final 
technical requirements are published in the EDGAR Filer Manual and 
EDGAR Technical Specifications documents. In order to provide issuers 
and other filers time to make adjustments to their systems, we 
anticipate making a draft of the EDGAR Technical Specifications 
documents available in advance. We believe that test submissions may 
assist both the Commission and issuers with addressing unknown and 
unforeseeable issues that may arise with the reporting of information 
on Form N-PORT. We will permit funds to file test submissions during a 
trial period.
    Additionally, we have determined to maintain as nonpublic all 
reports filed on Form N-PORT for the first six months following June 1, 
2018. We believe that, separate from the voluntary trial, having a time 
period where all funds are required to file reports on Form N-PORT with 
the Commission but not have those reports disclosed publicly will allow 
funds and the Commission to make adjustments to fine-tune the technical 
specifications and data validation processes. We believe that this 
process can ultimately improve the data that is reported to the 
Commission and, as required disclosed to the public. Accordingly, we 
find that it is neither necessary nor appropriate in the public 
interest or for the protection of investors to make reports filed on 
Form N-PORT during the first six months following the compliance date 
publicly available.\1238\ However, portfolio information attached as

[[Page 81967]]

exhibits to Form N-PORT for the first and third quarters of a fund's 
fiscal year will still be made public during this period, to ensure 
that information about funds' portfolio holdings continues to be 
publicly available to investors and other users during the six month 
period when reports on Form N-PORT will not be made publicly 
available.\1239\
---------------------------------------------------------------------------

    \1238\ See section 45(a) of the Investment Company Act.
    \1239\ See supra section II.A.2.j (discussing exhibits to Form 
N-PORT).
---------------------------------------------------------------------------

    One commenter did not explicitly address compliance dates for Form 
N-PORT, but suggested that the compliance period for Regulation S-X be 
changed to 18 months so that Form N-PORT and the amendments to 
Regulation S-X would have the same compliance date.\1240\ Other 
commenters suggested extending the compliance period for Form N-PORT 
for all funds, including specific recommendations for 24 months, 30 
months, or 36 months after the later of the effective date for this 
rulemaking or the adoption of amendments requiring funds to report 
liquidity information on Form N-PORT.\1241\
---------------------------------------------------------------------------

    \1240\ See State Street Comment Letter (stating that ``[m]any of 
the changes to disclosures for derivatives are aligned with the 
information required within Form N-PORT and will require significant 
enhancements to systems'').
    \1241\ See, e.g., Dreyfus Comment Letter (compliance date of 24 
months after the effective date); SIFMA Comment Letter I (later of 
24 months following adoption or six months following publication of 
the final XML data structure for Form N-PORT); Fidelity Comment 
Letter (30 months after the effective date); ICI Comment Letter (30 
months after the effective date of Form N-PORT or the requirement to 
report liquidity information on Form N-PORT); Oppenheimer Comment 
Letter (30 months after the effective date); Pioneer Comment Letter 
(36 months after the effective date).
---------------------------------------------------------------------------

    We are adopting an initial compliance date for Form N-PORT of June 
1, 2018, which is consistent with the 18-month compliance period we 
proposed. As discussed above, we anticipate that the information that 
will be reported on Form N-PORT will enable us to further our mission 
to protect investors by assisting us in carrying out our regulatory 
responsibilities related to the asset management industry. We believe 
that it is important for the Commission to obtain and benefit from such 
information as soon as it is reasonably possible for this information 
to be reported. Although several commenters recommended extending the 
compliance period in order to update reporting systems,\1242\ based in 
part upon our experience with Form N-MFP reporting implementation, we 
continue to believe that 18 months for larger entities and 30 months 
for smaller entities will provide sufficient time for funds and their 
service providers to prepare to file reports on Form N-PORT.
---------------------------------------------------------------------------

    \1242\ See, e.g., Fidelity Comment Letter; Vanguard Comment 
Letter; Pioneer Comment Letter; and Invesco Comment Letter.
---------------------------------------------------------------------------

    Separately, as discussed above, our adoption includes numerous 
modifications from or clarifications to the proposal that address 
concerns raised by commenters and that are intended, in part, to 
decrease reporting and implementation burdens relative to the proposal. 
For example, we have added an instruction to Form N-PORT specifying 
that funds must report portfolio information on the same basis used in 
computing NAV, which is generally a T + 1 basis, rather than on a T + 0 
basis, which is currently used for financial statement reporting. 
Several commenters asked for this clarification, as filing on a T + 0 
basis would have required time-intensive conversion of portfolio 
transactions normally recorded on a T+1 basis.\1243\ We are also 
permitting funds to attach Regulation S-X compliant portfolio holdings 
schedules to Form N-PORT within 60 days after the end of the first and 
third fiscal quarters as opposed to our proposed 30 days, thus allowing 
funds to focus on preparing their Form N-PORT filings as opposed to 
also preparing their Regulation S-X compliant portfolio holdings 
schedules simultaneously.\1244\ More generally, we are permitting a 
fund to generally use its own methodology or the methodology of its 
service provider, so long as the methodology is consistently applied 
and is consistent with the way the fund reports internally and to 
current and prospective investors, which should help circumvent 
operational challenges that would have arisen if firms had attempted to 
standardize reporting of certain non-standardized information such as 
country of risk for each portfolio holding.\1245\
---------------------------------------------------------------------------

    \1243\ See supra footnotes 74-76 and accompanying text.
    \1244\ See supra footnote 438 and accompanying and following 
text.
    \1245\ See supra footnote 79 and accompanying and following 
text.
---------------------------------------------------------------------------

    Several commenters suggested that the Commission should provide for 
a phase-in period based on a fund's fiscal year-end, such that the 
Commission would require each fund to first begin filing its Form N-
PORT as of its next fiscal year following the compliance date.\1246\ We 
decline to adopt this suggestion. A rolling compliance period based on 
fiscal year would mean that some funds would be filing reports on Form 
N-PORT while other funds would be filing reports on Form N-Q for the 
same reporting period, which would delay the Commission and other users 
from obtaining complete information about the industry on Form N-PORT 
for up to a year. Commission staff believes that this would diminish 
the value of the information reported on Form N-PORT in terms of 
assessing industry trends, identifying outliers, and monitoring 
industry developments, because only a portion of the industry would be 
filing reports on Form N-PORT each month in a structured data format. 
This would also create complexities for investors who might not 
understand why some of their funds would be reporting on one form while 
other funds would be reporting on a different form, and would diminish 
the ability of investors to compare the information reported by one 
fund with information reported by another fund if each fund reported 
information on a different form. While our staggered compliance 
approach will also result in some funds reporting on Form N-PORT while 
others are still reporting on Form N-Q, the difference will be less 
significant than with a rolling compliance date because under our 
approach only smaller funds representing a relatively small proportion 
of assets will continue to use Form N-Q after the initial compliance 
date.
---------------------------------------------------------------------------

    \1246\ See ICI Comment Letter (recommending a rolling compliance 
period, with each fund not required to file Form N-PORT until the 
beginning of its next fiscal year following 30 months after the 
effective date); Invesco Comment Letter (same, except each fund not 
required to file Form N-PORT until the beginning of its next fiscal 
year following 36 months after the effective date).
---------------------------------------------------------------------------

    One commenter suggested that the Commission should consider 
limiting liability for Form N-PORT filings for a transition period, 
similar to what was done with earlier structured data reporting 
rules.\1247\ We decline to adopt this suggestion. In the prior 
structured data reporting rules, filers were required to report the 
same information in both structured and non-structured formats, with 
limited liability for the information reported in a structured format 
and full liability for that same information when reported in a non-
structured format. In this case, the information will be reported on 
Form N-PORT in only a structured data format.
---------------------------------------------------------------------------

    \1247\ See Simpson Thacher Comment Letter (for a two-year 
transition period, structured data filings remained subject to 
standard antifraud provisions under federal securities laws, but 
were not subject to section 34(b) of the Investment Company Act of 
1940 or section 18 of the Securities Exchange Act of 1934). See also 
Interactive Data to Improve Financial Reporting, Investment Company 
Act Release No. 28609 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)].
---------------------------------------------------------------------------

    One commenter suggested raising the asset threshold for determining 
the larger entities that would be required to comply with Form N-PORT 
filing

[[Page 81968]]

requirements following an 18 month compliance period, as opposed to 30 
months for smaller entities that fell below the asset threshold.\1248\ 
As discussed above, we estimate that our proposed $1 billion assets 
threshold will provide an extended compliance period to more than 67% 
of the fund groups, but only 0.6% of all fund assets, and therefore 
believe that the $1 billion threshold will appropriately balance the 
need to provide smaller groups of investment companies with more time 
to prepare for the initial filing of reports on Form N-PORT, while 
still including the vast majority of fund assets in the initial 
compliance period.\1249\
---------------------------------------------------------------------------

    \1248\ See Simpson Thacher Comment Letter.
    \1249\ See supra footnote 1236.
---------------------------------------------------------------------------

2. Form N-CEN, Rescission of Form N-SAR, and Amendments to the Exhibit 
Requirements of Form N-CSR
    We are adopting a compliance date of June 1, 2018 to comply with 
the new Form N-CEN reporting requirements. We expect that this 
compliance period, consistent with the 18 month compliance period that 
we proposed, will 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 Form N-CEN with the 
Commission. We are adopting the same compliance date for the related 
amendments to other rules and forms we are adopting today, including 
the rescission of Form N-SAR and related rules referencing Form N-
SAR.\1250\
---------------------------------------------------------------------------

    \1250\ We similarly are rescinding Form N-SAR (referenced in 17 
CFR 274.101) with a timing that is consistent with this adoption.
---------------------------------------------------------------------------

    We also are adopting a compliance date of June 1, 2018 to comply 
with the modified reporting requirement for a registrant to file as an 
exhibit to Form N-CSR the letter reporting a change in independent 
registered public accountants. This exhibit was already required to be 
reported semi-annually on Form N-SAR, and as such, we do not expect 
that registrants will require significant amounts of time to modify 
systems or establish internal processes to prepare exhibit filings on 
Form N-CSR in accordance with our amendments.
    Unlike Form N-PORT, we are not providing a tiered compliance date 
based on asset size. We believe that it is less likely that smaller 
fund complexes will 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 requiring all funds, regardless of size, to file reports 
on Form N-CEN with the same compliance period.
    Furthermore, unlike Form N-PORT, we are not keeping reports filed 
during a phase in period after the compliance date nonpublic. Much of 
the information that will be filed on Form N-CEN is currently already 
reported by funds on Form N-SAR, and thus funds should already have 
processes and procedures in place to reduce the risk of inadvertent 
errors. In addition, filings on Form N-CEN are not expected to be as 
technically complex nor present comparable challenges in terms of 
reporting and data validation as filings on Form N-PORT. However, as 
with Form N-PORT, we anticipate allowing funds to file test submissions 
on Form N-CEN on a voluntary basis for a period of time before the 
compliance date.
    Some commenters suggested that the compliance period be extended to 
the later of 30 months after the adoption of Form N-CEN, or 18 months 
after the effective date of amendments requiring funds to report 
liquidity information on Form N-CEN.\1251\ We decline to adopt these 
suggestions. As discussed above, much of the information that will be 
reported on Form N-CEN is currently already reported by funds on Form 
N-SAR, and was reported by funds pursuant to a six-month compliance 
period upon our adoption of Form N-SAR.\1252\ One commenter also 
estimated in the Form N-PORT context that implementing processes to 
report structured information in an XML format would take six months 
following publication of the final XML data structure.\1253\ We 
therefore continue to believe, based in part upon this comment and also 
our prior experience with implementation of reporting requirements for 
Form N-SAR, that 18 months is an appropriate compliance period for Form 
N-CEN.
---------------------------------------------------------------------------

    \1251\ See, e.g., Fidelity Comment Letter (suggesting a 
compliance date of 30 months after the adoption of Form N-CEN); MFS 
Comment Letter (same); CAI Comment Letter (same); IDC Comment Letter 
(same); Comment Letter of David W. Blass, General Counsel, 
Investment Company Institute (Jan. 13, 2016) (suggesting the later 
of 30 months after the adoption of Form N-CEN or 18 months after the 
adoption of amendments requiring funds to report liquidity 
information on Form N-CEN).
    \1252\ See Form N-SAR; Temporary Suspension of Quarterly 
Reporting Obligations of Certain Registered Investment Companies 
Pending Receipt of Comments on Proposed Final Action, Investment 
Company Act Release No. 14299 (Jan. 4, 1985) [50 FR 1442 (Jan. 11, 
1985)].
    \1253\ See SIFMA Comment Letter I (estimating how long it would 
take to implement processes to report structured information in an 
XML format for Form N-PORT).
---------------------------------------------------------------------------

3. Regulation S-X, Statement of Additional Information, and Related 
Amendments
    As discussed above, our amendments to Regulation S-X are largely 
consistent with existing fund disclosure practices. As such, we do not 
expect that funds, intermediaries, or service providers will 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 adopting a 
compliance date for our amendments to Regulation S-X of August 1, 2017. 
This is consistent with our proposed compliance period of eight months. 
The same compliance date will apply to conforming amendments related to 
our amendments to Regulation S-X, including the related amendments to 
the Statement of Additional Information (and Form N-CSR for closed-end 
funds) we are adopting today.
    One commenter supported the proposed compliance date for the 
amendments to Regulation to S-X, although the commenter suggested that 
implementation be required for each fund with its next fiscal year end 
following the proposed compliance date.\1254\ However, the commenter's 
rationale for a rolling compliance date was not that funds needed more 
time to comply, but rather that enhanced disclosure pursuant to the 
amendments to Regulation S-X should be initially provided over an 
entire fiscal year, as opposed to just a portion of the first fiscal 
year during which the amendments become effective.
---------------------------------------------------------------------------

    \1254\ See Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    Many other commenters requested that the compliance date be 
extended, with four commenters suggesting a compliance period of 18 
months after the effective date of the amendments, one commenter 
recommending 24 months, and another commenter recommending 36 
months.\1255\ Commenters supported their requests

[[Page 81969]]

for a longer compliance date by asserting that the information that 
will be reported pursuant to the amendments to Regulation S-X overlaps 
with the information that will be reported on Form N-PORT, and thus the 
compliance date for Regulation S-X should be identical to the 
compliance date for Form N-PORT.\1256\
---------------------------------------------------------------------------

    \1255\ See Fidelity Comment Letter (recommending a compliance 
date of 18 months after the effective date); Oppenheimer Comment 
Letter (same); State Street Comment Letter (same); MFS Comment 
Letter (same, although with implementation on a rolling basis based 
on the fund's fiscal year end); SIFMA Comment Letter I (recommending 
the compliance date for the amendments to Regulation S-X be the same 
as SIFMA's recommended compliance date for Form N-PORT, namely 24 
months after the effective date or six months after publication of 
the final XML data structure for Form N-PORT); Invesco Comment 
Letter (recommending 36 months, after the effective date with 
implementation on a rolling basis based on the fund's fiscal year 
end).
    \1256\ See SIFMA Comment Letter I; State Street Comment Letter.
---------------------------------------------------------------------------

    We decline to adopt these suggestions. Although some of the 
information that will be reported pursuant to the amendments to 
Regulation S-X overlaps with the information that will be reported on 
Form N-PORT, many of the amendments to Regulation S-X are unrelated to 
what will be reported in Form N-PORT. More significantly, as discussed 
above, our amendments to Regulation S-X are generally consistent with 
existing disclosure practices of many funds. As such, we do not expect 
that funds, intermediaries, or service providers will require 
significant amounts of time to modify systems or establish internal 
processes to prepare financial statements in accordance with our final 
amendments to Regulation S-X.
    Additionally, some of the amendments we are adopting to Form N-CEN 
and the Statement of Additional Information (and Form N-CSR for closed-
end funds) were originally proposed as part of our amendments to 
Regulation S-X, and we received no objections to our proposed timeframe 
for compliance for those portions of the amendments to Regulation S-X. 
Furthermore, the amendments to the Statement of Additional Information 
and Form N-CSR, like the amendments to Regulation S-X, do not entail 
the complications of having to develop and test an XML schema or EDGAR 
validation behaviors, as is the case for our reporting requirements 
regarding information that will be reported on Form N-PORT and Form N-
CEN.

III. 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 adopted changes to the 
current reporting regime. Changes to the current reporting regime 
include new Form N-PORT, the rescission of Form N-Q, amendments to the 
certification and exhibit filing requirements for Form N-CSR, 
amendments to Regulation S-X, new Form N-CEN, and the rescission of 
Form N-SAR. The economic effects of the adopted changes are discussed 
below.
    The Commission is modernizing 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 amendments are designed 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 section II above, the Commission 
is adopting the following changes to its rules and forms:
     We are requiring registered management investment 
companies and ETFs organized as UITs, other than money market funds and 
SBICs, to report monthly portfolio information in a structured data 
format on a new form, Form N-PORT.
     We are rescinding Form N-Q. We are also lengthening 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 are revising Regulation S-X to require new, 
standardized enhanced disclosures regarding fund holdings in 
derivatives instruments; update the disclosures for other investments; 
and amend the rules regarding the general form and content of fund 
financial statements.
     We are rescinding Form N-SAR and replacing it with new 
Form N-CEN, which will require the annual reporting of similar and 
additional census information in an updated, structured data format.
     We are adopting amendments to Forms N-1A, N-3, and N-CSR 
(for closed-end funds) to require certain disclosures in fund 
Statements of Additional Information regarding securities lending 
activities.
    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 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 have established 
industry practices for the disclosure of a fund's schedule of 
investments and financial statements. Lastly, the baseline includes the 
current practice of some funds to voluntarily disclose additional 
information, and the requirement that actively managed ETFs, and many 
index ETFs, disclose their portfolios on a daily basis. 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 will be 
affected by the new rules, forms, and 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 of the 
following new rules, forms, and amendments: The introduction of Form N-
PORT, the rescission of Form N-Q, the amendments to Form N-CSR, the 
amendments to Regulation S-X, the introduction of Form N-CEN, the 
rescission of Form N-SAR, and the amendments to multiple registration 
statement forms. We identify for each of the new rules, forms, and 
amendments 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 2015, having grown from about $5.8 
trillion at the end of 1998.\1257\ In addition, approximately 93 
million individuals own shares of registered investment companies, 
representing 55 million or 44% of U.S. households.\1258\ Among 
investment companies, we estimate that, as of December 2015, there were 
3,113 active investment companies registered with the Commission, of 
which 1,642 were open-end funds, 750 were closed-end funds (including 1 
SBIC), and 721 were UITs (including 5 exchange-traded funds).\1259\ We 
further estimate that those registered investment companies included 
17,052 funds or series thereof, of which 1,594 were exchange-traded 
funds (including eight organized as

[[Page 81970]]

UITs), 5,188 were UITs, 750 were closed-end funds, 481 were money 
market funds, and 9,039 were other mutual funds. The following table 
summarizes the entities likely to be affected by the new forms, 
rescissions, and amendments.
---------------------------------------------------------------------------

    \1257\ See supra footnote 4.
    \1258\ See id.
    \1259\ Based on data obtained from registrants' filings with the 
Commission on Form N-SAR.
[GRAPHIC] [TIFF OMITTED] TR18NO16.012

    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, the new rules, forms, and amendments will 
modernize the fund reporting regime and, among other effects, will 
result in an increased transparency of fund portfolios and investment 
practices. The increased transparency will 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. We believe that the increase in 
transparency will 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. We also believe that the increase in 
transparency will 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 of the 
new rules, forms, and amendments 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 depend upon a number of factors that we cannot 
estimate or quantify. Factors include 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 change in the availability of fund information to all 
investors, institutional and individual; 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

[[Page 81971]]

describe where possible the direction of these effects.
    In the Proposing Release, we requested general comment on the 
feasible alternatives to the information we proposed to require funds 
to report that would minimize the reporting burdens on funds while 
maintaining the anticipated benefits of the reporting and disclosure, 
as well as 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.\1260\ In adopting today's 
rules, forms, and amendments, we considered, among other things, such 
alternatives, utility, and costs.
---------------------------------------------------------------------------

    \1260\ See Proposing Release, supra footnote 7, at nn. 160-161.
---------------------------------------------------------------------------

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

1. Introduction and Economic Baseline
    Form N-PORT will require registered management investment companies 
and ETFs organized as UITs, other than money market funds and 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 will 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 will be filed in a structured data format using XML 
to allow for easier aggregation and manipulation of the data. As 
discussed above, we are also rescinding Form N-Q but requiring that 
funds attach their complete portfolio holdings to Form N-PORT for the 
first and third fiscal quarters in accordance with Regulation S-X. We 
are also amending 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.\1261\ As discussed above, we also are moving the 
management's statement regarding a change in accountant, which 
originally was an exhibit filed on Form N-SAR and was proposed as an 
attachment to Form N-CEN, to an exhibit to Form N-CSR.\1262\ In 
addition, as discussed above, we are adopting amendments to require 
closed-end funds to report on Form N-CSR certain disclosures regarding 
securities lending activities.\1263\
---------------------------------------------------------------------------

    \1261\ Amended Item 11(b) of Form N-CSR; amended paragraph 4(d) 
of certification exhibit of Item 11(a)(2) of Form N-CSR.
    \1262\ Item 12(a)(4) of Form N-CSR; see also supra section 
II.D.4.b.
    \1263\ See Item 12 of Form N-CSR; see also supra footnote 1181 
and accompanying text and section II.F.
---------------------------------------------------------------------------

    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,\1264\ 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.\1265\ 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 Commission; the Commission; and other current and 
future users of investment company portfolio investment information 
including investors, third-party information providers, and other 
interested potential users; and other market participants that could be 
affected by the change in fund disclosure of portfolio investment 
information.
---------------------------------------------------------------------------

    \1264\ Form N-PORT will also require information that is 
currently being reported on Form N-SAR such as information on fund 
flows, assets, and liabilities. The current requirement to report 
this information as part of Form N-SAR is also part of this 
baseline.
    The baseline also includes the current obligation of Form N-Q 
filers to make certifications regarding (1) the accuracy of the 
portfolio holdings information reported on that form, and (2) the 
fund's disclosure controls and procedures and internal control over 
financial reporting.
    \1265\ Additionally, many funds currently provide information 
concerning derivatives investments, similar to the requirements we 
are adopting in our amendments to Regulation S-X. See discussion 
supra section II.C.2.
---------------------------------------------------------------------------

    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.\1266\ 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 \1267\ and in reports on Form N-CSR as of the end 
of the second and fourth fiscal quarters of each year.\1268\ 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).\1269\ These reports are generally 
required to be filed on the EDGAR system and are made publicly 
available upon receipt.\1270\ Reports on Form N-CSR may be filed up to 
70 days after the end of the reporting period,\1271\ and reports on 
Form N-Q may be filed up to 60 days after the end of the reporting 
period.
---------------------------------------------------------------------------

    \1266\ See General Instruction A to Form N-CSR; Item 6 of Form 
N-CSR; General Instruction A to Form N-Q; Quarterly Portfolio 
Holdings Adopting Release, supra footnote 421.
    \1267\ Item 1 of Form N-Q.
    \1268\ Item 6 of Form N-CSR.
    \1269\ Instruction to Item 6(a) of Form N-CSR; Item 1 of Form N-
Q.
    \1270\ See rule 101(a)(i) of Regulation S-T [17 CFR 
232.101(a)(i)].
    \1271\ Form N-CSR must be filed within 10 days after the 
shareholder report is sent to shareholders, and the shareholder 
report must be sent within 60 days after the end of the reporting 
period. Rule 30b2-1(a); rule 30e-1(c).
---------------------------------------------------------------------------

    Forms N-CSR and N-Q are required to be filed in HTML or ASCII/SGML 
format.\1272\ 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.\1273\ 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.
---------------------------------------------------------------------------

    \1272\ See rule 301 of Regulation S-T; EDGAR Filer Manual 
(Volume II) version 27 (June 2014), at 5-1.
    \1273\ In so doing, reporting persons typically strip out 
incompatible metadata (i.e., syntax that is not part of the HTML or 
ASCII/SGML specification) that their business systems use to ascribe 
meaning to the stored data items and to represent the relationships 
among different data items.
---------------------------------------------------------------------------

    We received no comments that specifically addressed the baseline 
described in the Proposing Release. We believe that the economic 
effects from the introduction of new Form N-PORT will largely result 
from the disclosure of portfolio investment information in a structured 
data format, as well as the additional information that investment 
companies will report relative to current reporting practices. We also 
believe that the economic effects will depend on the extent to which 
the portfolios and investment activities of investment

[[Page 81972]]

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, investors, and others to utilize the 
information. The current reporting requirements for investment 
companies, however, limit the ability of Commission staff to evaluate 
the potential economic effects. For example, the non-structured data 
format of reported portfolio investment information and the lack of 
standardized reporting requirements for certain types of portfolio 
investments all reduce the ability of Commission staff to aggregate 
information across the fund industry and to evaluate the economic 
effects of the regulatory changes.
    The new rules, forms, and amendments will 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, will provide more 
information about 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 2015, on average 76.5% of investment companies 
reported as permitted investment policies involving the writing or 
investing in options or futures, and on average 5.3% of investment 
companies reported engaging in each one of these policies during the 
report period.\1274\ In addition, the total net assets of alternative 
funds from which more information would become available were as of 
year-end 2015 approximately $219 billion or 1.3% of the total net 
assets of the mutual fund market.\1275\ 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 11.9% 
in 2013, 4.0% in 2014, and 6.1% in 2015.\1276\
---------------------------------------------------------------------------

    \1274\ See Item 70 of Form N-SAR for a list of permitted 
investment policies, and if permitted, the investment policies 
engaged in during the reporting period. The percentages are 
calculated from the percentage of funds that report affirmatively to 
either of the two parts for Items 70.B though 70.I. There is little 
difference in the proportion of investment companies that reported 
as permitted the investment practices relating to Items 70.B through 
70.I. The greatest proportion of funds reported engaging in writing 
or investing in stock index futures (14.0%) and engaging in writing 
or investing in interest rate futures (12.5%), and the smallest 
proportion of funds reported engaging in writing or investing in 
other commodity futures (1.6%) and engaging in writing or investing 
in options on stock index futures (0.7%). Aggregate condensed 
balance sheet information reported on Form N-SAR indicates that 
funds held $3.4 billion in options on equities and options on all 
futures (Item 74.G and Item 74.H) or 0.018% of net assets from the 
second half of 2015. Aggregate condensed balance sheet information 
reported on Form N-SAR from the second half of 2015 also indicates 
that funds had $54.1 billion in short sales (Item 74.R.(2)) and $3.8 
billion in written options (Item 74.R.(3)), or 0.291% and 0.020% of 
net assets, respectively. The estimates are approximate.
    \1275\ See supra footnote 39. These statistics were obtained 
from staff analysis of Morningstar Direct data, and are based on 
fund categories as defined by Morningstar.
    \1276\ See id.
---------------------------------------------------------------------------

    Information from a White Paper prepared by staff in the Division of 
Economic and Risk Analysis also describes current fund use of 
derivatives.\1277\ For example, based on data from Morningstar, the 
number of funds that can be categorized as engaging in alternative 
investment strategies increased from 2010 to 2014 at an annual rate of 
17%, whereas the total number of all funds increased at an average 
annual rate of 8%.\1278\ In addition, based on a random sample of funds 
drawn from Form N-CSR filings, 32% of funds held one or more 
derivatives, and the average aggregate exposure from derivatives, 
financial commitment transactions and other senior securities was 23% 
of net asset value. Evidence from the random sample also indicates that 
funds engaging in alternative investment strategies tended to use 
derivatives more often than other fund types, which the White Paper 
described collectively as ``Traditional'' mutual funds.
---------------------------------------------------------------------------

    \1277\ See White Paper entitled ``Use of Derivatives by 
Investment Companies,'' which was prepared by staff in the Division 
of Economic and Risk Analysis and was placed in the comment file for 
the Use of Derivatives by Registered Investment Companies and 
Business Development Companies, Investment Company Release No. 31933 
(Dec. 11, 2015) [80 FR 80883 (Dec. 28, 2015)]. Daniel Deli, et al., 
Use of Derivatives by Registered Investment Companies, Division of 
Economic and Risk Analysis (2015) (``DERA White Paper''), available 
at https://www.sec.gov/dera/staff-papers/white-papers/derivatives12-2015.pdf.
    \1278\ In 2010, 591 of the 8,577 sample funds were defined as 
engaging in alternative investment strategies, and in 2014 1,125 of 
the 11,573 sample funds were defined as engaging in alternative 
investment strategies.
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2. Benefits
    As discussed, Form N-PORT will 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 will disclose, and the additional 
information that reporting funds do not currently disclose, discussed 
in further detail below, will improve the ability of the Commission to 
understand, analyze, and monitor the fund industry. We believe that the 
information we receive on these reports will facilitate the oversight 
of reporting funds and will 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 funds make available monthly 
portfolio investment information to the Commission on Form N-PORT will 
improve the ability of the Commission to oversee reporting funds by 
increasing the timeliness of the information available, and by 
providing a larger number of data points. The expanded reporting also 
will increase the ability of Commission staff to identify trends in 
investment strategies and fund products as well as industry 
outliers.\1279\ As discussed above, the quarterly portfolio reports 
that the Commission currently receives on Forms N-Q and N-CSR can 
become stale due to changes in the holdings of portfolio securities or 
fluctuations in the values of the portfolio's investments. Requiring 
monthly filings on Form N-PORT will increase the timeliness of the 
information the Commission receives from funds. More timely portfolio 
investment information will improve the ability of Commission staff to 
oversee the fund industry by monitoring industry trends, informing 
policy and rulemaking, identifying risks, and assisting Commission 
staff in examination and enforcement efforts.
---------------------------------------------------------------------------

    \1279\ See, e.g., supra section II. Although likely not a 
significant effect, the increase in the frequency of portfolio 
investment disclosure to the Commission could also reduce the 
ability of investment companies to alter or ``window-dress'' 
portfolio investments in an attempt to disguise investment 
strategies and risk profiles. To the extent that managers may 
window-dress to affect public perception, managerial incentives for 
doing so would not change because the frequency of public disclosure 
of portfolio investment information would remain the same. See, 
e.g., Vikas Agarwal, Gerald D. Gay, and Leng Ling, Window Dressing 
in Mutual Funds, Rev. of Fin. Stud., Vol. 27(11), 3133-3170 (2014).
---------------------------------------------------------------------------

    The ability of Commission staff to effectively use the information 
reported

[[Page 81973]]

in Form N-PORT depends on the ability of staff to compile and aggregate 
information into a single database that can then be used 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. Several commenters agreed that the structuring of the 
information will improve the ability of the Commission to compile and 
aggregate information across all reporting funds, and to analyze 
individual funds or a group of funds, and will increase the overall 
efficiency of staff to analyze the information.\1280\ For example, the 
ability to compare portfolio investment information across reporting 
funds or for a single fund across report dates will improve the ability 
of the Commission to identify funds for examination and to identify 
trends in the fund industry. The Commission is requiring that filers 
disclose information using the Commission's XML schema. Based on the 
comments received and the Commission's experience, the Commission 
believes that requiring the information to be disclosed in an XML 
format will facilitate enhanced search capabilities, and statistical 
and comparative analyses across filings. With the data structured in 
XML, the Commission and the public can immediately download the 
information directly into databases and analyze it using various 
software packages. This enhances both the Commission's and the public's 
abilities to conduct large-scale analysis and immediate comparison 
across funds and date ranges.
---------------------------------------------------------------------------

    \1280\ See, e.g., ICI Comment Letter (``Receiving this 
information in XML format will facilitate the Commission's ability 
to efficiently analyze fund portfolio information on a regular 
basis.''); Morningstar Comment Letter; but see Federated Comment 
Letter.
---------------------------------------------------------------------------

    The usefulness of structured data depends on the care with which 
filers report the data. If filers were to report data that did not 
conform to the Commission's XML schema, data quality would be 
diminished and would impair the Commission's and the public's ability 
to aggregate, compare, and analyze the data. As a result, the 
Commission's XML schema also incorporates certain validations to help 
ensure consistent formatting among all filings, in other words, to help 
ensure data quality. Validations are restrictions placed on the 
formatting for each data element so that comparable data is presented 
comparably. However, these formatting validations are not designed to 
ensure the underlying accuracy of the data; they can only help ensure 
data quality. These validations cannot exist in the current reporting 
formats for Form N-CSR and Form N-Q.
    XML is an open standard \1281\ that is maintained by an 
organization other than the Commission and undergoes constant review. 
As updates to XML or industry practice develop, the Commission's XML 
schema will also be updated to reflect those developments, with the 
outdated version of the schema replaced in order to maintain data 
quality and consistency.
---------------------------------------------------------------------------

    \1281\ The term ``open standard'' is generally applied to 
technological specifications that are widely available to the 
public, royalty-free, at no cost.
---------------------------------------------------------------------------

    As we discussed above in section II.A.3, we considered, as several 
commenters suggested, alternative formats to XML, such as XBRL.\1282\ 
While the XBRL format allows funds to capture the rich complexity of 
financial information presented in accordance with GAAP, we believe 
that XML is more appropriate for the reporting requirements that we are 
adopting. Form N-PORT, as well as Form N-CEN, as adopted, will contain 
a set of relatively simple characteristics of the fund's portfolio- and 
position-level data, such as fund and class identifying information 
that is more suited for XML. While XBRL has more enhanced validation 
features, the simpler reporting elements on Form N-PORT and Form N-CEN 
do not require those enhanced features to ensure similar levels of 
formatting consistency.
---------------------------------------------------------------------------

    \1282\ See, e.g., XBRL US Comment Letter; Deloitte Comment 
Letter; but see Morningstar Comment Letter (``Extensible Business 
Reporting Language has had very limited success, and certain aspects 
of the standard are too lenient for regular data validation.'').
---------------------------------------------------------------------------

    In light of the benefits of structured data, we acknowledge that 
Form N-PORT duplicates some information filed in other forms, while 
also requiring funds to report information that is not currently 
required to be reported to the Commission, including portfolio- and 
position-level risk metrics and additional information describing debt 
securities and derivatives, securities lending activities, repurchase 
and reverse repurchase agreements, the pricing of securities, and fund 
flows and returns. Requesting data in a structured format may promote 
additional efficiency among investment companies to the extent that the 
new, standardized reporting requirements facilitate more automated 
report assembly, validation, and review processes for the disclosure 
and transmission of filings. Furthermore, filing this information in an 
XML format will allow the Commission staff to more efficiently review 
and analyze data for industry trends, and to better understand the 
risks of a particular fund (in the context of the fund's investment 
strategy), a group of funds, and the fund industry by being able to 
conduct large-scale analysis more easily, which will help in 
identifying outliers or trends that could warrant further investigation 
in a more immediate fashion.\1283\
---------------------------------------------------------------------------

    \1283\ See supra section II.A.2.c. See also, e.g., BlackRock 
Comment Letter (``Importantly, the greater depth and frequency of 
information requested by the Commission will help the Commission 
better identify and monitor emerging risks associated with specific 
RICs or categories of RICs as well as asset management 
activities.''); Wells Fargo Comment Letter (``we believe that the 
enhanced disclosure requirements of the Proposals represent 
appropriate valuable information for the Commission to have in order 
to assess trends in risks, for example, across the mutual fund 
industry.''); CFA Comment Letter (supporting transparency of 
derivatives holdings); Morningstar Comment Letter. See also ICI 
Comment Letter (``Much of the additional information the SEC 
proposes to collect can enhance its ability to monitor and oversee 
the fund industry.''). But see Federated Comment Letter (``A 
majority of the Commission's proposed amendments to Form N-1A, N-
PORT, and N-CEN would require a large effort from funds while 
offering data that is, at best, of little utility, and, at worst, 
misleading. Many of these deficiencies relate to flaws inherent in a 
security-level disclosure scheme.'').
---------------------------------------------------------------------------

    The requirement to report portfolio- and position-level risk 
metrics will provide Commission staff with a set of quantitative 
measurements that provide information about the risk exposures of a 
fund. The risk metrics will improve the ability of Commission staff to 
efficiently analyze information for all reporting funds based on 
exposure to certain risks, and to determine whether additional guidance 
or policy measures are appropriate to improve disclosures. We are 
requiring funds to report risk measures, rather than the raw inputs 
used to calculate risk measures, because the calculation of 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 will not require.\1284\ While the Commission would retain greater 
flexibility if funds were required to report substantially more 
detailed information regarding raw inputs on Form N-PORT,\1285\ it 
could be difficult for the Commission to efficiently calculate these 
same measures and funds would incur an

[[Page 81974]]

increase in reporting costs. We recognize that requiring funds to 
report these risk measures increases reporting burdens, but as 
discussed above, based on staff experience and outreach, we understand 
that most funds currently calculate risk measures for such securities 
and hence do not believe that the burden is significant.
---------------------------------------------------------------------------

    \1284\ One commenter stated that the Commission should not 
require that funds report risk sensitivity measures, and instead 
calculate the risk sensitivity measures using raw inputs (Vanguard 
Comment Letter). The commenter noted that the Commission would 
therefore be able to calculate the measures consistently and in 
doing so draw ``apples-to-apples'' comparisons.
    \1285\ See id.
---------------------------------------------------------------------------

    The requirement for investment companies to provide risk metrics at 
the position-level and at the portfolio-level will improve the ability 
of staff to efficiently identify the risk exposures of funds regardless 
of the types of investments held or that could be introduced to the 
marketplace. The portfolio-level measures of risk will 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. Also, staff could use the risk 
measures in combination to conduct additional analyses. For example, 
Commission staff can use the two measures of interest rate duration 
(i.e., DV01 and DV100) to generate a proxy for interest rate convexity.
    We have, however, made certain modifications to the proposed 
reporting requirements regarding the reporting of risk metrics in 
response to comments received. For example, as discussed in detail 
above, we are requiring the reporting of fewer key rates to reduce the 
reporting burden for funds, adopting a 1% de minimis threshold for 
reporting risk metrics for each currency to which the fund is exposed, 
and raising the threshold for fixed income allocation for risk 
reporting from 20% to 25% to align the reporting requirement with 
current disclosures required in the prospectus. To the extent that 
adopting a de minimis amount for reporting risk metrics for each 
currency will prevent the Commission, investors, and other users from 
seeing an exhaustive view of fund's currency risk exposures, there 
could be a reduction in the informational benefit to the Commission, 
investors, and other users relative to the proposal. However, relative 
to the baseline, we believe the economic effects of the disclosure of 
currency risk metrics are substantially similar with or without the 
adoption of a de minimis. Similarly, there could be a reduction in the 
informational benefit to the Commission, investors, and other users 
relative to the proposal to the extent that certain funds that would 
have had to report risk metrics under the 20% threshold do not have to 
report them under the 25% threshold, although we again believe that 
such a change will not significantly impact the benefits of this 
disclosure relative to the baseline because it is unlikely that funds 
that make investments in debt instruments as a significant part of 
their investment strategy have less than 25% of their NAV invested in 
such instruments. We believe, however, that such modifications are 
appropriate in light of the lower reporting burden for funds. 
Conversely, the Commission is adding a requirement to report DV100 in 
addition to DV01 to provide information about larger changes in 
interest rates, as well as information about nonparallel shifts in the 
yield curve. While funds will have an increased reporting cost to 
report DV100 in addition to DV01 relative to the proposal, as DV100 is 
a standard measure of interest rate sensitivity and a common measure of 
duration we do not believe the cost to funds relative to the baseline 
will change. Furthermore, we believe that this modification will 
provide the Commission with the ability to analyze data about larger 
shifts in the yield curve, as well as changes in the shape of the yield 
curve. Similarly, while funds will have a decreased reporting cost in 
light of our modification to require the reporting of fewer key rates, 
we do not believe that the decrease in information collected by the 
Commission will substantially affect our ability to analyze how debt 
portfolios will react to different interest rate changes and credit 
spreads along the Treasury curve, given that the rates at which funds 
will report these metrics are, in general, largely representative of 
bond funds' overall exposures.
    Form N-PORT will require reporting 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 convertible debt securities and derivatives; and 
information describing the size of the position. This information will 
provide Commission staff the 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 will 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 will also require additional identification information 
regarding the reporting fund, the issuers of the fund's portfolio 
investments, and the investments themselves, including the reference 
instruments for convertible debt securities and derivatives 
investments. The adopting release differs from the proposal with 
respect to the treatment of reference assets that are custom baskets or 
nonpublic indexes of securities in that for those that represent more 
than 1%, but less than 5%, of the fund's NAV, funds will be required to 
disclose the top 50 components of the basket and, in addition, those 
components that exceed 1% of the notional value of the index. For 
nonpublic indexes or custom baskets that represent greater than 5% of 
the fund's NAV, all components will be required to be disclosed. For 
nonpublic custom baskets or indexes that represent less than 1% of the 
fund's NAV, no disclosure is required. Although this modification will 
provide the Commission, investors, and other users with less than 
complete transparency into any such derivative investment that 
represents between 1% and 5% of a fund's NAV, given that this 
modification will still allow the Commission to collect information on 
a large portion of the significant reference assets for these 
investments, we do not believe this change will significantly impact 
the benefits derived relative to those discussed in the proposal. The 
additional identification information will benefit the Commission by 
improving the ability of staff to link the information from Form N-PORT 
to information from other sources that identify market participants and 
investments using these same identifiers, such as Form N-CEN. The 
additional identification information will improve upon the current 
requirement for funds to provide just the issuer name, and as such will 
aid the Commission in identifying both the issuers of fund portfolio 
investments and the investments themselves. As a result, Commission 
staff will be better able 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 will also experience benefits from the

[[Page 81975]]

introduction of Form N-PORT.\1286\ While the frequency of the public 
disclosure of portfolio information will not change, we believe that 
the structured data format of this information will allow investors and 
other potential users to more efficiently analyze portfolio investment 
information. Investors and other potential users will also have 
disclosure of additional information that is currently not included in 
the schedule of investments reported on Form N-Q and Form N-CSR. The 
structure of the information, as well as the additional information, 
will increase the transparency of a fund's investment strategies and 
improve the ability of investors and other potential users to more 
efficiently identify its risk exposures.
---------------------------------------------------------------------------

    \1286\ See also Morningstar Comment Letter (stating that modern 
electronic reporting should apply to all registered investment 
companies, as investors use open-end funds, ETFs, closed-end funds, 
and UITs as ``tools to build portfolios.'').
---------------------------------------------------------------------------

    Form N-PORT will 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 will be able to more efficiently identify funds that use 
derivatives and the extent to which they use derivatives as part of 
their investment strategies.\1287\ In general, we expect that 
institutional investors and other market participants will directly use 
the information from Form N-PORT more so than individual investors. For 
individual investors who choose not to access the data in an XML 
format, those investors can access similar information through the 
additional disclosure requirements in an unstructured format for 
investment companies, 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.\1288\ Investors, and in particular individual investors, 
could also indirectly benefit from the information in Form N-PORT to 
the extent that third-party information providers and other interested 
parties obtain, aggregate, provide, and report on the information. 
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.
---------------------------------------------------------------------------

    \1287\ Form N-PORT will also eliminate the reporting gap between 
money market funds, which report portfolio investment information in 
an XML format on Form N-MFP, and funds engaging in similar 
investment strategies such as ultra-short bond funds, which will be 
required to file reports on Form N-PORT.
    \1288\ See discussion supra section II.A.2.j.
---------------------------------------------------------------------------

    We received a number of comments supporting quarterly public 
disclosure of Form N-PORT, but requesting that certain information 
items be kept nonpublic.\1289\ In response to these comments, and in 
contrast to the proposing release, three items reported on Form N-PORT 
will be kept nonpublic: Delta, country of risk, and the explanatory 
notes related to delta and country of risk. Given that the Commission 
will still collect this information, we do not believe there will be a 
significant economic impact relative to the Proposing Release due to 
keeping these data items nonpublic, as the Commission is the primary 
user of these data elements. A discussion of the issue of public versus 
nonpublic data can be found in section II.A.4.
---------------------------------------------------------------------------

    \1289\ See, e.g., ICI Comment Letter (portfolio risk metrics, 
delta, liquidity determinations, country of risk and derivatives 
financing rates should be kept non-public); BlackRock Comment Letter 
(risk metrics); Invesco Comment Letter (portfolio level risk 
metrics, derivatives information, illiquidity determinations, and 
securities lending information should remain non-public); 
Oppenheimer Comment Letter (risk metrics, illiquidity 
determinations, country of risk determinations, derivatives payment 
terms (including financing rates), and securities lending fees and 
revenue sharing splits should be kept non-public).
---------------------------------------------------------------------------

    One clarifying change that has been made from the proposing release 
in response to commenters is the addition of an instruction that funds 
may use their own methodologies in General Instruction G. General 
Instruction G now provides that funds may respond to Form N-PORT using 
their own internal methodologies and the conventions of their service 
providers, provided the information is consistent with information that 
they report internally and to current and prospective investors, and 
the Fund's methodologies and conventions are consistently applied and 
the Fund's responses are consistent with any instructions or other 
guidance relating to the Form. To the extent this instruction decreases 
the comparability of the data collected, there could be some reduction 
in benefit relative to the proposal, although funds will likely benefit 
from the decreased reporting burden associated with explicitly allowing 
them to rely on their existing practices.
    The portfolio investment information that investment companies 
report to the Commission is informative in describing the investment 
strategy funds implement,\1290\ 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.\1291\ We 
believe that an increase in the ability of investors to differentiate 
investment companies could 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, we believe that the 
introduction of Form N-PORT could also promote capital formation.
---------------------------------------------------------------------------

    \1290\ Academic research indicates that the portfolio investment 
information funds provide to the Commission, such as on Form N-CSR 
and Form N-Q, has value even though the information is publicly 
available only after a time-lag. See infra footnotes 1307-1314. Just 
as investors can use the information to front-run, predatory trade, 
or copycat/reverse engineer of the trading strategy of a reporting 
fund, investors of funds can also use the information to identify 
funds for investment.
    \1291\ Empirical research shows that fund flows are sensitive to 
many factors including past fund performance and investor search 
costs. See, e.g., Erik R. Sirri & Peter Tufano, Costly Search and 
Mutual Fund Flows, 53 J. of Fin., 1589 (1998); Zoran Ivkovi[cacute] 
& Scott Weisbenner, Individual Investor Mutual Fund Flows, 92 J. of 
Fin. Econ., 223 (2009); George D. Cashman, Convenience in the Mutual 
Fund Industry, 18 J. of Corp. Fin., 1326 (2012).
---------------------------------------------------------------------------

    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 each fund will still be 
required to file portfolio schedules prepared in accordance with 
Sec. Sec.  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.
3. Costs
    Form N-PORT will require registered management investment companies 
and ETFs organized as UITs, other than money market funds and SBICs, to 
incur one-time and ongoing costs to comply with the new filing 
requirements. Funds will 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 fund Web sites, including monthly 
portfolio investments, and additional information in fund financial 
statements, including additional information regarding derivatives 
similar to the requirements that we are adopting today, will bear

[[Page 81976]]

fewer costs than those funds that do not.\1292\ The Commission is aware 
that even funds that do so report will nonetheless likely incur 
additional costs on reports on Form N-PORT than on voluntary 
submissions, such as validation and signoff processes, given that 
reports on Form N-PORT will be a required regulatory filing and will 
require different data than the funds are currently providing to third-
party information providers. However, over time, the filings could 
become highly automated and could involve fewer costs.\1293\
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    \1292\ Monthly portfolio investment information is available for 
approximately 42% of funds covered by The CRSP Survivor-Bias-Free US 
Mutual Fund Database as of the fourth quarter of 2015. The database 
covers more than 10,000 open-ended mutual funds during this time 
period. This estimate suggests that a large proportion of funds 
already report monthly portfolio investment information, although it 
is unclear whether monthly information is reported following each 
month or if information relating to several months is periodically 
reported at a later date. Calculated based on data from The CRSP 
Survivor-Bias-Free US Mutual Fund Database (copyright) 2015 Center 
for Research in Security Prices (CRSP[supreg]), The University of 
Chicago Booth School of Business. One commenter also cited the 
proportion of funds that are currently reporting monthly portfolio 
investment information, 6,500 of 12,000 portfolios, as well as the 
proportion of funds that report portfolio investment monthly 
information within 45 days, 6,200 of 6,500. Morningstar Comment 
Letter.
    \1293\ Costs related to such processes are included in the 
estimate below of the paperwork costs related to Form N-PORT, 
discussed below.
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    Funds will incur costs to file reports on Form N-PORT in a 
structured data format. Based on staff experience with other XML 
filings, however, these costs are expected to be minimal given the 
technology that will be used to structure the data.\1294\ 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 should be able to 
accommodate XML data without significant costs, and large-scale changes 
will likely not be necessary to output structured data files. In an 
effort to reduce some of the potential burdens on smaller entities, we 
are extending 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.\1295\ 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.
---------------------------------------------------------------------------

    \1294\ See, e.g., Form PF Adopting Release, supra footnote 80, 
at text following n. 357 (discussing the costs to advisers to 
private funds of filing Form PF in XML format); Money Market Fund 
Reform 2010 Release, supra footnote 447, at nn. 341-344 and 
accompanying text (discussing the costs to money market funds of 
filing reports on Form N-MFP in XML format).
    \1295\ See supra section II.H.1.
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    Form N-PORT will also require the disclosure of certain information 
that is not currently required by the Commission. To the extent that 
the new form will require information to be reported that is not 
currently contained in fund accounting or financial reporting systems, 
funds will bear one-time costs to update systems to adhere to the new 
filing requirements. The one-time costs will depend on the extent to 
which investment companies currently report the information required to 
be disclosed. The one-time costs will also depend on whether and to 
what extent an investment company would need to implement new systems 
and to integrate information maintained in separate internal systems or 
by third parties to comply with the new requirements. For example, 
based on staff outreach to funds, we believe that funds will 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 currently 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.
    In some instances, such as in the case of increased disclosures 
regarding derivatives investments and information concerning the 
pricing of investments, the Commission is requiring parallel 
disclosures in the fund's schedule of investments prepared pursuant to 
Regulation S-X; accordingly, we expect funds will 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 will be disclosed on Form N-PORT only.
    The Commission is sensitive to the costs that funds will incur to 
prepare, review, and file reports on Form N-PORT. Relative to the 
proposal, the Commission is making modifications to these final rules 
that should reduce the burden on investment companies to file reports 
on Form N-PORT. In particular, and in response to commenters,\1296\ we 
have raised the threshold for requiring reporting of portfolio level 
risk metrics and are providing a de minimis for requiring reporting of 
risk metrics for currency exposures. We are also modifying the 
requirements with respect to reference assets that are custom baskets 
or nonpublic indexes of securities so that for such investments that 
constitute more than 1%, but less than 5% of the fund's NAV, funds will 
be required to report only the top 50 components of the basket and, in 
addition, those components that represent more than 1% of the notional 
value of the index. We believe this will result in a decreased burden 
for filers relative to the proposal. In addition, and as requested by 
commenters, funds will report portfolio information on Form N-PORT on 
the same basis they use in NAV calculations under rule 2a-4 (generally 
a T+1 basis), which will alleviate the need of the majority of funds to 
alter reporting systems to report on a T+0 basis.\1297\ Although we did 
not specify the appropriate basis for reporting in the proposing 
release, commenters suggested that reporting on the same basis used in 
NAV calculations (generally a T+1 basis) was preferable to T+0, and we 
are sensitive to their concerns. Finally, we are adopting a new General 
Instruction G that clarifies that in reporting information on Form N-
PORT, the fund may respond using its own internal methodologies and the 
conventions of its service providers, provided the information is 
consistent with information that they report internally and to current 
and prospective investors, and the fund's methodologies and conventions 
are consistent with any instructions or other guidance relating to the 
Form. We believe that this alteration eases the reporting burden on 
funds by allowing them to rely on their existing practices and could 
result in a cost savings for filers relative to the proposal as it 
makes clear that they do not have to alter systems or methodology for 
reporting information items on Form N-PORT.
---------------------------------------------------------------------------

    \1296\ See, e.g., Oppenheimer Comment Letter; MFS Comment 
Letter; Wells Fargo Comment Letter.
    \1297\ Fidelity Comment Letter (requesting that funds be 
permitted to report on a T+1 basis); MFS Comment Letter (same); 
Pioneer Comment (same); Invesco Comment Letter (same).
---------------------------------------------------------------------------

    To the extent possible, we have attempted to quantify these costs. 
Based on updated industry statistics, we estimate that 11,382 funds 
will file Form N-PORT.\1298\ As discussed below, we estimate that these 
funds will incur certain costs associated with preparing, reviewing, 
and filing reports on Form N-PORT.\1299\ Assuming that 35% of

[[Page 81977]]

funds (3,984 funds) will choose to license a software solution to file 
reports on Form N-PORT, we estimate costs to funds choosing this option 
of $56,682 per fund for the first year \1300\ with annual ongoing costs 
of $47,465 per fund.\1301\ We further assume that 65% of funds (7,398 
funds) will 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 costs to funds 
choosing this option of $55,492 per fund for the first year \1302\ with 
annual ongoing costs of $39,214 per fund.\1303\ In total, we estimate 
that funds will incur initial costs of $636,350,904 and ongoing annual 
costs of $479,205,732.\1304\
---------------------------------------------------------------------------

    \1298\ See infra footnote 1495 (explaining calculation of 11,382 
funds).
    \1299\ See infra section V.A.1. Commenters questioned the 
estimates in the proposal relating to the paperwork costs associated 
with preparing, reviewing, and filing reports on Form N-PORT. See 
Invesco Comment Letter; Simpson Thacher Comment Letter. These 
comments are discussed infra section IV.A.1.
    \1300\ See infra footnotes 1473-1476, 1486, 1494 and 
accompanying text. This estimate is based upon the following 
calculations: $56,682 = $4,805 in external costs + $51,876.50 in 
internal costs ($51,876.50 = (15 hours x $308/hour for a senior 
programmer) + (38.5 hours x $317/hour for a senior database 
administrator) + (30 hours x $271/hour for a financial reporting 
manager) + (30 hours x $201/hour for a senior accountant) + (30 
hours x $160/hour for an intermediate accountant) + (30 hours x 
$306/hour for a senior portfolio manager) + (24 hours x $288/hour 
for a compliance manager)). The hourly wage figures in this and 
subsequent footnotes are from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified by Commission 
staff to account for an 1800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
    \1301\ See infra footnotes 1477, 1486 and accompanying text. 
This estimate is based upon the following calculations: $47,465 = 
$4,805 in external costs + $42,660 in internal costs ($42,660 = (30 
hours x $271/hour for a financial reporting manager) + (30 hours x 
$201/hour for a senior accountant) + (30 hours x $160/hour for an 
intermediate accountant) + (30 hours x $306/hour for a senior 
portfolio manager) + (24 hours x $288/hour for a compliance manager) 
+ (24 hours x $317/hour for a senior database administrator)).
    \1302\ See infra footnotes 1480-1482, 1487, 1494 and 
accompanying text. This estimate is based upon the following 
calculations: $55,492 = $11,440 in external costs + $44,051.50 in 
internal costs ($44,051.50 = (30 hours x $308/hour for a senior 
programmer) + (46 hours x $317/hour for a senior database 
administrator) + (16.5 hours x $271/hour for a financial reporting 
manager) + (16.5 hours x $201/hour for a senior accountant) + (16.5 
hours x $160/hour for an intermediate accountant) + (16.5 hours x 
$306/hour for a senior portfolio manager) + (16.5 hours x $288/hour 
for a compliance manager)).
    \1303\ See infra footnotes 1483, 1487 and accompanying text. 
This estimate is based upon the following calculations: $39,214 = 
$11,440 in external costs + $27,774 in internal costs ($27,774 = (18 
hours x $271/hour for a financial reporting manager) + (18 hours x 
$201/hour for a senior accountant) + (18 hours x $160/hour for an 
intermediate accountant) + (18 hours x $306/hour for a senior 
portfolio manager) + (18 hours x $288/hour for a compliance manager) 
+ (18 hours x $317/hour for a senior database administrator)).
    \1304\ These estimates are based upon the following 
calculations: $636,350,904 = (3,984 funds x $56,682 per fund) + 
(7,398 funds x $55,492 per fund). $479,205,732 = (3,984 funds x 
$47,465 per fund) + (7,398 funds x $39,214 per fund).
---------------------------------------------------------------------------

    Although there will 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.\1305\ Investors that trade ahead of 
funds could reduce the profitability of funds by increasing the prices 
at which funds purchase securities and by decreasing the prices at 
which funds sell securities. These activities can reduce the returns to 
shareholders who invest in actively managed funds, making actively 
managed funds less attractive investment options.\1306\ 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,\1307\ or create opportunities for other 
market participants to engage in predatory trading that could further 
hinder fund ability to unwind positions.\1308\ For example, Form N-PORT 
will 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 their risk exposures.\1309\ We note, however, that much, though not 
all, of the information that Form N-PORT requires is already reported 
by funds on Form N-CSR and Form N-Q.\1310\ The structured data format 
of portfolio investments disclosure could improve the ability of other 
investors to obtain and aggregate the data, and identify specific funds 
to front-run or trade in a predatory manner. These activities could 
reduce the profitability from developing new investment strategies, and 
therefore could reduce innovation and adversely impact competition in 
the fund industry.
---------------------------------------------------------------------------

    \1305\ One commenter questioned the potential impact of monthly 
public disclosure of Form N-PORT on the ability of other investors 
to engage in predatory trading or copycatting activities citing to 
the large proportion of funds that currently report monthly 
portfolio investment information (Morningstar Comment Letter). 
Although a large percentage of funds report monthly portfolio 
investment information, a large percentage of funds currently do 
not. See supra footnote 1292. The incentives of funds to report 
portfolio investment information on a more frequent basis is 
dependent on many factors including their perception of the impact 
of more frequent public disclosure on future returns. Other 
commenters expressed concern that the increase in the amount of 
publicly available information and the greater ability to analyze 
the information as a result of its structure would increase front-
running, predatory trading, and copycatting/reverse engineering of 
trading strategies by other investors and suggested that reports 
filed on Form N-PORT be made non-public (Schwab Comment Letter; T. 
Rowe Price Comment Letter). Another commenter recommended the 
quarterly reporting of monthly information to reduce these concerns 
(Dodge & Cox Comment Letter).
    \1306\ See, e.g., Potential Effects of More Frequent Disclosure, 
supra footnote 490.
    \1307\ See, e.g., Joshua Coval & Erik Stafford, Asset Fire Sales 
(and Purchases) in Equity Markets, 86 J. of Fin. Econ., 479 (2007).
    \1308\ See, e.g., Markus K. Brunnermeier & Lasse Heje Pedersen, 
Predatory Trading, 60 J. of Fin. 1825 (2005).
    \1309\ See, e.g., Simpson Thacher Comment Letter (``We further 
note that public disclosure of detailed information about each 
derivatives position will provide competitors of funds significantly 
enhances ability to reverse-engineer strategies.''); Pioneer Comment 
Letter.
    \1310\ See supra footnote 27 and accompanying text.
---------------------------------------------------------------------------

    A trading strategy that follows the publicly reported holdings of 
actively managed funds can also earn similar if not higher after 
expense returns.\1311\ An implication of this observation 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 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.\1312\
---------------------------------------------------------------------------

    \1311\ See, e.g., Mary Margaret Frank, et al., Copycat Funds: 
Information Disclosure Regulation and the Returns to Active 
Management in the Mutual Fund Industry, 47 J. Law and Econ. 515 
(2004).
    \1312\ See, e.g., Vikas Agarwal, et al., Mandatory Portfolio 
Disclosure, Stock Liquidity, and Mutual Fund Performance, 70 J. of 
Fin. Econ. 2733 (Dec. 2015) (``Agarwal et al.''), available at 
https://onlinelibrary.wiley.com/doi/10.1111/jofi.12245/pdf; Marno 
Verbeek & Yu Wang, Better than the Original? The Relative Success of 
Copycat Funds, 37 J. of Bank. & Fin., 3454 (2013) (``Verbeek & 
Wang'').
---------------------------------------------------------------------------

    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

[[Page 81978]]

of information that could have been acted upon by other investors. For 
example, studies suggest that the ability of copycat funds to 
outperform actively managed funds increased after the introduction of 
Form N-Q,\1313\ and additional studies suggest 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.\1314\ 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 will not increase the frequency of public disclosure, Form N-PORT 
will increase the amount of portfolio investment information available. 
In addition, Form N-PORT, unlike Form N-Q, will also increase the 
accessibility of the information as a result of its structured data 
format. By maintaining the status quo with respect to the frequency and 
timing of the disclosure of publicly available portfolio information, 
we aim to mitigate added costs while allowing the Commission, the fund 
industry, and the marketplace to assess the impact of the structured, 
more detailed data reported on Form N-PORT, and the extent to which 
these changes might affect the likelihood of predatory trading. The 
additional information and the structure of the information that is 
required under Form N-PORT, however, could 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 front-run, predatory 
trade, and copycat/reverse engineer trading strategies, and in 
particular those funds that would have more additional information 
disclosed, such as funds that use derivatives as part of their 
investment strategies.\1315\ We believe, however, that even though the 
reported information will be more easily and efficiently accessed and 
aggregated given the nature of structured data, the contribution of 
structured data to front-running, predatory trading, and reverse-
engineering will be minimal compared to the baseline given that funds 
currently have a quarterly public reporting frequency with a 60-day 
reporting delay. 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.
---------------------------------------------------------------------------

    \1313\ See Verbeek & Wang, supra footnote 1312.
    \1314\ See Agarwal et al., supra footnote 1312. Low information 
stocks include stocks with smaller market capitalization, less 
liquidity, and less analyst coverage. The authors also observed that 
the liquidity of stocks with higher fund ownership increased 
following the introduction of Form N-Q. Although the increase in 
liquidity will benefit investors by reducing trading costs, this 
benefit stems as a result of the costly disclosure of potential 
investment opportunities.
    \1315\ See supra footnote 1314 and accompanying text.
---------------------------------------------------------------------------

    Form N-PORT will require the disclosure of information that is 
currently nonpublic and could result in additional or other costs to 
funds and to market participants. For example, we proposed that Form N-
PORT would require a fund to report the identities and weights of all 
of the individual components in custom baskets or indexes comprising 
the reference instruments underlying the fund's derivative investments, 
as well as each component that represents more than one percent of the 
reference asset based on the notional value of the derivatives, unless 
the reference instrument is an index or custom basket 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.\1316\ Commenters informed us that index providers assert 
intellectual property rights to many indexes or custom baskets used as 
reference instruments in derivative investments to index providers, and 
are subject to licensing agreements between the index provider and the 
fund.\1317\ As further noted by commenters, we acknowledge that 
disclosing the components of a nonpublic index or custom basket could 
result in costs to both the index provider, whose indexing strategy 
could be imitated, and the fund, whose investments could be front-
run.\1318\ Moreover, as stated by commenters, disclosing the underlying 
components of such an index or custom basket 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 or custom basket.\1319\ Additionally, the 
increased transparency in nonpublic indexes and custom baskets could 
ultimately decrease the incentives of index providers to license the 
use of such indexes or custom baskets to funds as well as fund demand 
for securities products that incorporate these indexes. We are unable 
to quantify the extent to which these reporting requirements could 
affect the costs associated with licensing agreements, fees, and 
incentives.
---------------------------------------------------------------------------

    \1316\ See supra footnote 355 and accompanying text.
    \1317\ See MSCI Comment Letter; SIFMA Comment Letter I; ICI 
Comment Letter.
    \1318\ See, e.g., SIFMA Comment Letter I; see also Antti 
Petajisto, The Index Premium and its Hidden Cost for Index Funds, 18 
J. of Empirical Fin. 271 (2011). Petajisto analysis suggests that 
mechanically induced demand changes to demand, such as index fund 
rebalancing, can result in price effects. If predictable, then other 
investors could take advantage of the changes to the proprietary 
indexes by front-running future trades.
    \1319\ See ICI Comment Letter. The Commission does not have 
information available to provide a reliable estimate of the 
increased costs of such licensing agreements because funds are 
currently not required to disclose the agreements or the components 
of the index or custom basket.
---------------------------------------------------------------------------

    Although our determination to keep certain items nonpublic was 
based on factors other than competitive concerns,\1320\ by keeping 
delta and country of risk nonpublic relative to the proposal, as 
recommended by commenters, potential costs of disclosing previously 
nonpublic information may have been mitigated as well. We recognize 
that Form N-PORT, as well as the amendments to regulation S-X, will 
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.\1321\ 
As asserted by commenters, 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 would be known to other funds negotiating the terms 
of such contracts.\1322\ There is a possibility, however, that 
counterparties may choose not to transact with funds as a consequence 
of this disclosure, in which funds would have fewer potential 
counterparties to work with and the fees paid by funds would likely 
rise.
---------------------------------------------------------------------------

    \1320\ See generally supra section II.A.
    \1321\ See, e.g., MFS Comment Letter; Invesco Comment Letter; 
ICI Comment Letter.
    \1322\ See, e.g., MFS Comment Letter; Invesco Comment Letter.
---------------------------------------------------------------------------

    Form N-PORT also requires funds to disclose the variable financing 
rates for swaps that pay or receive financing payments.\1323\ Some 
commenters noted that variable financing rates for swap contracts are 
commercial terms of a deal that are negotiated between the fund and the 
counterparty to the swap.\1324\ Disclosure of favorable variable

[[Page 81979]]

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. However, the increased transparency could increase the 
competition among swap and security-based swap dealers to offer 
favorable fees and financing terms thereby decreasing the fees paid by 
funds. Counterparties could also choose not to transact with funds as a 
consequence of this disclosure, in which case competition for 
counterparties would increase and the fees paid by funds would rise.
---------------------------------------------------------------------------

    \1323\ See Item C.11.f.i. of Form N-PORT.
    \1324\ See, e.g., MFS Comment Letter; Invesco Comment Letter; 
and ICI Comment Letter (public benefit of disclosure does not 
outweigh potential competitive harm).
---------------------------------------------------------------------------

    Finally, some commenters noted that reporting of distressed debt 
issued by private companies could affect the private company's 
relationship with the fund. For example, one commenter argued that the 
public disclosure of default, arrears, or deferred coupon payments 
raises competitive concerns when a debt security is issued by a 
borrower that is a private company, as private borrowers may avoid 
registered funds in order to limit public disclosure if the company 
becomes distressed.\1325\ The commenter noted that public disclosure 
that a borrower is or may be financially distressed could increase 
prepayment risk and be disruptive to the fund's or adviser's 
relationship with the borrower.\1326\ Moreover, this disclosure could 
also harm private issuers by disclosing their financial distress to 
vendors and key employees and customers.\1327\ While we recognize that 
the disclosure of a private issuer in distress could result in costs 
for the issuer in the forms discussed above (e.g. a potentially 
negative impact on existing outside relationships or a decrease in 
prospective future borrowers), we believe that it is important that 
Commission staff have access to information relating to fund 
investments that are in default or arrears in order to monitor 
individual fund and industry risk. Moreover, funds investors will 
benefit from the transparency into the financial health of the fund's 
investments which will allow them to make more fully informed decisions 
regarding their investment. Moreover, default or arrears relating to a 
fund's investments in private issuer debt are already publicly 
available on a fund's quarterly financial statements, further 
mitigating any potential new costs to the fund or its private 
counterparties.\1328\
---------------------------------------------------------------------------

    \1325\ See Simpson Thacher Comment Letter.
    \1326\ See id.
    \1327\ See id.
    \1328\ See rule 12-12, n. 5 of Regulation S-X.
---------------------------------------------------------------------------

    As discussed, we expect that institutional investors and other 
market participants will directly use the information from Form N-PORT 
more so than individual investors as a result of the format and 
associated readability.\1329\ To the extent that third-party 
information providers obtain and present the information in a format 
that individual investors could understand, then individual investors 
will also benefit from the information that funds report on Form N-
PORT. We recognize that some commenters were concerned that individual 
investors may misinterpret the portfolio investment information that 
funds report on Form N-PORT, possibly including portfolio and position 
level risk metrics, country of risk and portfolio return information. 
As discussed above, we have determined to keep position-level reporting 
of delta and of country of risk nonpublic.\1330\ Regarding the other 
information, however, while there is some possibility of 
misinterpretation, we believe investors could benefit from the 
information and, accordingly determined that the disclosure of such 
information is appropriate and in the public's interest.
---------------------------------------------------------------------------

    \1329\ As discussed in section I.B.1., while we do not 
anticipate that many individual investors will analyze data using 
Form N-PORT, we believe that individual investors will benefit 
indirectly from the information collected on reports on Form N PORT, 
through enhanced Commission monitoring and oversight of the fund 
industry and through analyses prepared by third-party service 
providers and other parties, such as industry observers and 
academics.
    \1330\ See, e.g., IDC Comment Letter (warning of possible 
investor confusion from public disclosure of risk metrics); SIFMA 
Comment Letter I (same); Invesco Comment Letter (same); Schwab 
Comment Letter (same); ICI Comment Letter (same); CRMC Comment 
Letter (warning of possible investor confusion from public 
disclosure of portfolio return information); SIFMA Comment Letter I 
(same).
---------------------------------------------------------------------------

    For funds that invest in debt instruments or derivatives we are 
modifying our requirements from the proposing release in several ways 
that may affect the costs borne by affected filers. For example, as 
discussed in detail above, we are requiring the reporting of fewer key 
rates in order to reduce the reporting burden for funds, adding de 
minimis for reporting such metrics for certain currencies, and raising 
the threshold for fixed income allocation for risk reporting from 20% 
to 25% to align the reporting requirement with current disclosures 
required in the prospectus, which could reduce the number of funds that 
must report such metrics. We are also requiring filers to report DV100 
in addition to DV01, which will result in an additional reporting cost 
relative to the proposal; however, we believe that the extent of such 
reporting costs will be mitigated because DV100 is among the most 
common measures of interest rate sensitivity and that it will not be 
costly to report. Similarly, we are adding the requirement to report 
net realized gain (or losses) and net change in unrealized appreciation 
(or depreciation) attributable to derivatives by derivative instrument, 
in addition to by asset category as proposed, which will add an 
incremental cost relative to the proposal; however, as discussed above, 
we understand from commenters that funds already keep this information 
by derivative instrument type, which should mitigate the incremental 
increase in cost relative to the proposal.\1331\
---------------------------------------------------------------------------

    \1331\ See supra section II.A.2.e.
---------------------------------------------------------------------------

    As discussed above, although Form N-Q would be rescinded, it would 
also require funds to file portfolio schedules prepared in accordance 
with Sec. Sec.  210.12-12 to 12-14 of Regulation S-X for the fund's 
first and third fiscal quarters, by attaching those schedules to its 
reports on Form N-PORT for those reporting periods. The schedules 
attached to Form N-PORT would be largely identical to the information 
currently reported on Form N-Q to ensure that such information 
continues to be presented using the form and content which investors 
are accustomed to viewing in reports on Form N-Q, and we have modified 
this requirement from the Proposing Release to allow funds 60 days from 
the end of the reporting period to file this attachment, as opposed to 
30 days as proposed. This should lower the burden of preparing such 
attachments relative to the proposal, without any change in benefit, as 
the attachment is intended for investors and quarter-end Form N-PORT 
filings are made public 60 days after the end of the reporting period.
    Rescission of Form N-Q would eliminate certifications of the 
accuracy of the portfolio schedules reported for the first and third 
fiscal quarters. Rescission would also result in funds certifying their 
disclosure controls and procedures and internal control over financial 
reporting semi-annually (at the end of the second and fourth quarters) 
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

[[Page 81980]]

procedures and internal control over financial reporting. 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.
    Lastly, registrants also will be required to file the management's 
statement regarding a change in independent public accountant as an 
exhibit to reports on Form N-CSR. This exhibit filing requirement 
originated in Form N-SAR. Commission staff believes that moving this 
reporting requirement from Form N-SAR to Form N-CSR does not have new 
economic implications from the proposal. We have, however, attributed 
an annual burden of an additional one-tenth of an hour per registrant 
\1332\ and approximately an additional $32.40 per registrant \1333\ in 
reporting paperwork costs to Form N-CSR as a result of the 
modification.
---------------------------------------------------------------------------

    \1332\ See infra footnote1612 and accompanying text.
    \1333\ See infra footnote 1609 and accompanying text.
---------------------------------------------------------------------------

4. Alternatives
    The Commission has explored other ways to modernize and improve the 
utility and the quality of the portfolio investment information that 
funds provide to the Commission and to investors.\1334\ Commission 
staff examined how portfolio investment 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. We have considered many alternatives to 
the individual elements contained in this release, and those 
alternatives are discussed above in the sections pertinent to the major 
components of this rulemaking.\1335\ Alternatives to the filing of Form 
N-PORT and the disclosure of portfolio investment information relate to 
the timing and frequency of the reports, the public disclosure of the 
information, and the information that Form N-PORT would request.
---------------------------------------------------------------------------

    \1334\ We discuss other alternatives to the adopted changes to 
the current regulatory regime in section III.F, below. Other 
alternatives include the information that funds will report on Form 
N-PORT relative to the information that funds will report on Form N-
CEN, and alternative formats for structuring the data.
    \1335\ See generally supra section II.
---------------------------------------------------------------------------

    Funds will file reports on Form N-PORT no later than 30 days after 
the close of each month. The monthly reporting and the 30-day reporting 
lag will increase the timeliness of the information and improve the 
ability of the Commission to oversee investment companies. Alternatives 
include extending the filing period from thirty days, as recommended by 
many commenters, or shortening the filing period, which no commenters 
specifically recommended,\1336\ and to require the filing of monthly 
portfolio investment information at a quarterly frequency, as 
recommended by another commenter.\1337\ While a shorter filing period 
would provide more timely information to the Commission, it would also 
increase the burden on funds that need time to collect, verify, and 
report the required information to the Commission. Conversely, a longer 
filing period or a decrease in the frequency in which funds provide 
monthly information would give funds more time to report the 
information and may decrease the potential costs from front-running, 
predatory trading, and copycatting/reverse engineering of trading 
strategies by other investors,\1338\ but may also decrease the ability 
of the Commission to oversee investment companies and to identify risks 
a fund is facing, particularly during times of market stress, as the 
information is more likely to be stale or outdated. As discussed above 
in section II.A.3, we believe that the monthly reporting of Form N-PORT 
with a 30-day filing period appropriately balances the staff's need for 
timely information against the appropriate amount of time for funds to 
collect, verify, and report information to the Commission.
---------------------------------------------------------------------------

    \1336\ See, e.g., State Street Comment Letter (supporting a 30-
day reporting lag, but requesting an additional 15 days for the 
first year of reporting); Morningstar Comment Letter (supporting a 
30- or 45-day reporting lag); Vanguard Comment Letter (supporting a 
45-day reporting lag); CRMC Comment Letter (supporting a 60-day 
reporting lag); Dechert Comment Letter (generally supporting a 
longer reporting period, or alternatively a longer compliance period 
to enable the systems necessary to produce accurate information to 
be developed and implemented).
    \1337\ See, e,g., Dodge & Cox Comment Letter (supporting 
quarterly filings of monthly data).
    \1338\ See, e.g., Dodge & Cox Comment Letter (advocating for 
quarterly filings of monthly data due, in part, to concerns 
regarding potential data breaches regarding monthly portfolio data); 
Morningstar Comment Letter (supporting public disclosure of 
portfolio investment information at the monthly frequency, citing to 
the large number of funds already reporting monthly portfolio 
investment information without significant delay as evidence of a 
lack of industry concern relating to front-running or copycatting).
---------------------------------------------------------------------------

    As discussed above in section II.A.2.a and in response to comments 
received, the final amendments now include an instruction that funds 
report portfolio information on Form N-PORT on the same basis used in 
calculating NAV under rule 2a-4 (generally a T+1 basis). Alternatives 
include requiring all funds to file reports on Form N-PORT on a T+0 
basis or, providing the reporting fund the explicit option to file 
reports on Form N-PORT on either a T+0 basis or a T+1 basis, as 
recommended by a commenter.\1339\ Although requiring funds to file 
reports on Form N-PORT on a T+0 basis would be consistent with the 
current filing requirements for Form N-CSR and Form N-Q and thus would 
result in information that is reported on a more consistent basis 
across reports, the shorter time to file Form N-PORT relative to Form 
N-CSR and Form N-Q could require funds to alter reporting systems and 
result in additional filing costs, as pointed out by several 
commenters.\1340\ In addition, although providing funds the option to 
report on either a T+0 or a T+1 basis would eliminate the potential 
costs for all funds to alter systems to report on either a T+0 or a T+1 
basis, providing funds the option to report on either a T+0 or a T+1 
basis would result in information that is less comparable between 
funds.
---------------------------------------------------------------------------

    \1339\ SIFMA Comment Letter II.
    \1340\ See, e.g., Fidelity Comment Letter; Pioneer Comment 
Letter; and Invesco Comment Letter.
---------------------------------------------------------------------------

    Funds will have 18 to 30 months after the effective date to comply 
with the new reporting requirements for Form N-PORT. The compliance 
period varies with fund size, with smaller fund entities having an 
additional 12 months to comply with the new reporting requirements. An 
alternative would be to not allow for tiered compliance and require all 
investment companies to begin filing reports on Form N-PORT within 18 
months. Other alternatives would be to extend the compliance period for 
all investment companies, as recommended by many commenters.\1341\ As 
discussed above, we believe it is appropriate to tier the compliance 
period to provide the smaller fund complexes more time to make the 
system and internal process changes necessary to prepare reports on 
Form N-PORT. We also continue to believe that 18 months would provide 
an adequate period of time for larger fund entities,

[[Page 81981]]

intermediaries, and other service providers to update systems to 
conduct the requisite operational changes to their systems and to 
establish internal processes to prepare, validate, and file reports on 
Form N-PORT with the Commission. Nonetheless, as discussed above, we 
intend to keep the first six months of filings reported on Form N-PORT 
after the compliance date nonpublic, to allow funds and the Commission 
to refine the technical specifications and data validation 
processes.\1342\
---------------------------------------------------------------------------

    \1341\ See, e.g., IDC Comment Letter; Dreyfus Comment Letter; 
Fidelity Comment Letter; Oppenheimer Comment Letter; Vanguard 
Comment Letter; MFS Comment Letter; Mutual Fund Directors Forum 
Comment Letter; ICI Comment Letter; and SIFMA Comment Letter I.
    \1342\ See supra section II.H.1.
---------------------------------------------------------------------------

    Another alternative for tiered compliance would be to set the 
threshold at a level different than $1 billion. A higher threshold, 
such as $20 billion, as recommended by one commenter,\1343\ would 
increase the number of entities that could benefit from the additional 
time to update systems to adhere to the additional filing requirements, 
but would also decrease the amount of portfolio investment information 
that would be available to the Commission, investors, and other 
interested parties in a structured data format. A lower threshold, on 
the other hand, would have the opposite effects. As discussed above, 
the Commission believes that a $1 billion threshold for tiered 
compliance will address the need for structured portfolio investment 
information while providing smaller entities in most need of additional 
time a better opportunity to update systems.
---------------------------------------------------------------------------

    \1343\ Simpson Thacher Comment Letter.
---------------------------------------------------------------------------

    The information that funds report on Form N-PORT for the last month 
of each fiscal quarter will be made publicly available (with the 
exception of delta, country of risk, and associated explanatory notes) 
60 days after month-end (thirty days after the filing deadline). 
Additional alternatives include making more of the portfolio and other 
information reported on the form either nonpublic or public, including 
making all or none of the information reported on Form N-PORT each 
month publicly available, as discussed above in section II.A.3.\1344\
---------------------------------------------------------------------------

    \1344\ Commenters had mixed views on the public disclosure of N-
PORT information; those comments are discussed supra section II.A.3.
---------------------------------------------------------------------------

    In response to comments received we have removed delta, country of 
risk, and the associated explanatory notes from the public reporting 
requirements, but we believe that making more of the portfolio and 
other information reported on Form N-PORT nonpublic 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, including making all 
of the information reported on Form N-PORT each month publicly 
available, could increase the risk of front-running, predatory trading, 
and copycatting/reverse engineering of trading strategies by other 
investors, as well as the public disclosure of proprietary or sensitive 
information.\1345\ We believe that making the vast majority of items 
reported on Form N-PORT public, as well as keeping eight of the twelve 
months of data collected by the Commission on Form N-PORT nonpublic, 
balances the public's need for and the usefulness of the information 
without unnecessarily subjecting funds to potentially harmful trading 
strategies by other market participants.
---------------------------------------------------------------------------

    \1345\ See infra section III.C.3.
---------------------------------------------------------------------------

    Form N-PORT will require funds to report additional portfolio 
investment information relative to what is currently reported in Form 
N-CSR and Form N-Q. Alternatives include not requiring some of this 
additional information, or requiring information in addition to what 
will be required to be reported as currently adopted. Other 
alternatives would be to request information that is more granular, 
information that is more aggregate, and information that is more 
consistent with other current regulatory forms or that substitutes 
compliance with other current regulatory regimes.\1346\ Although we 
recognize that there are various alternative reporting requirements 
imposed in other contexts and by other regulators, the reporting 
requirements imposed by Form N-PORT have been designed specifically to 
meet the Commission's regulatory needs with regards to monitoring and 
oversight of registered funds. As discussed above, the information 
reported on Form N-PORT will increase the ability of Commission staff 
to better understand the risks of a particular fund, a group of funds, 
and the fund industry. Investors, third-party information providers, 
and other potential users will also experience benefits from the 
introduction of Form N-PORT. For example, to the extent that investors 
use the information, Form N-PORT will improve the ability of investors 
to differentiate funds based on their investment strategies and other 
activities. Although the new information that will be reported on Form 
N-PORT could increase the initial and ongoing reporting costs for 
investment companies, and could increase the likelihood of front-
running, predatory trading, and copycatting/reverse-engineering by 
other investors, the Commission continues to believe that the 
information is important to fully describe a fund's investments. The 
Commission also believes that the reporting requirements of Form N-PORT 
are appropriate given each filer's status as a registered investment 
company with the Commission and not as a private fund.\1347\
---------------------------------------------------------------------------

    \1346\ One commenter suggested that the Commission should use 
the same interest rate and credit spread risk metrics as is required 
in Form PF (BlackRock Comment Letter). Another commenter suggested 
that the Commission and the CFTC should agree on and implement a 
substituted compliance regime (SIFMA Comment Letter I).
    \1347\ See supra footnote 485 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, the Commission is requiring funds to report 
risk metrics at the portfolio and position level on Form N-PORT. In 
response to commenters' suggestions, we are now requiring the 
disclosure of measures of duration for a smaller number of key interest 
rates than we had originally proposed. However, an alternative would be 
to request those key rates detailed in the proposing release, or even 
additional measures. As discussed above, we believe that the number of 
key rates that we are adopting today will provide us with sufficient 
information and flexibility while also reducing the reporting burden. 
Other alternatives that would increase the reporting of risk-
sensitivity measures include requiring funds to report additional 
portfolio level measures that describe the sensitivity of a reporting 
fund at additional basis point changes in interest rates and credit 
spreads, and a measure (or measures) of convexity, and include 
requiring funds to report additional position level measures such as 
vega, as requested by one commenter.\1348\ Investment companies could 
also report fewer portfolio or position level risk-sensitivity 
measures, such as a single or total portfolio level measure of interest 
rate and credit spread duration, as recommended by some 
commenters,\1349\ or instead report the underlying data to calculate 
the measures, as recommended by another commenter.\1350\
---------------------------------------------------------------------------

    \1348\ See State Street Comment Letter (requesting that funds 
also be required to report credit spread, delta, duration, yield to 
maturity, option adjusted spread, exposure, delta-adjusted exposure, 
duration equivalents, foreign exchange sensitivity/risk, and vega).
    \1349\ See Simpson Thacher Comment Letter; Fidelity Comment 
Letter; Dreyfus Comment Letter; ICI Comment Letter; and Wells Fargo 
Comment Letter.
    \1350\ See Vanguard Comment Letter (suggesting that the 
Commission calculate risk metrics from information that funds report 
on Form N-PORT).
---------------------------------------------------------------------------

    As discussed above and in response to commenters' suggestions, we 
have made

[[Page 81982]]

a modification from the proposed requirement to report only DV01 to now 
require filers to report both DV01 and DV100 on Form N-PORT. The 
Commission believes that DV100 is among the most common measures of 
interest rate sensitivity and that it will, in conjunction with DV01, 
provide more useful information about non-parallel shifts in the yield 
curve than smaller measures, such as DV25 and DV5, while not requiring 
filers that do not calculate convexity internally to begin doing so. 
However, while potentially useful, requiring all funds to report 
further additional portfolio- or position-level risk-sensitivity 
measures would increase the burden on all funds and not significantly 
improve the ability of Commission staff to monitor the funds in most 
market environments, and in particular for funds which do not 
extensively use derivatives as part of their investment strategy (while 
we are requiring funds to report DV100, we believe the marginal cost of 
reporting it is minimal because we understand that many funds likely 
already calculate it). Although the burden to investment companies to 
report risk metrics would decrease if fewer or no risk-sensitivity 
measures were required by the Commission, the staff believes that the 
benefits from requiring the measures that we are including in Form N-
PORT today, including the ability of Commission staff to efficiently 
identify and size specific investment risks, justify the costs to 
investment companies to provide the information. Lastly, we believe 
that requiring funds to provide the risk measures would improve the 
ability of the Commission, investors, or other potential users to 
efficiently analyze the information rather than requiring funds to 
provide the inputs that might be necessary for interested parties to 
calculate these measures themselves,\1351\ and would enhance the 
ability of Commission staff to efficiently identify risk exposures, 
especially during times of market stress.
---------------------------------------------------------------------------

    \1351\ See supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    Other alternatives to the reporting of portfolio level risk-
sensitivity measures relate to the allocation thresholds for funds to 
report portfolio interest rate risk exposures and currency risk 
exposures. Given commenters' recommendations, we are raising the 
threshold for fixed income allocation for risk reporting from 20% to 
25%, and providing a de minimis threshold for reporting currency risk 
of 1%. We could, however, require lower/higher thresholds that would 
result in more/fewer funds reporting interest rate or currency risk 
exposures, respectively. As discussed above, the Commission believes 
that the reporting thresholds for Form N-PORT provide Commission staff 
the ability to analyze interest rate and currency exposures while 
reducing reporting burdens and the potential that funds inadvertently 
trigger the reporting requirement when the exposures are not part of 
its principal investment strategy.
    Form N-PORT will also require funds to report terms and conditions 
of each derivative investment that are important to understanding the 
payoff profile of the derivative, including the reference 
instrument.\1352\ As discussed above, for reference instruments that 
are indexes or custom baskets of securities that are not publicly 
available, Form N-PORT will require funds to report all the components 
of the index or custom basket if the investment constitutes more than 
5% of the fund's NAV, and the top 50 components of the index or custom 
basket and any components that represent more than 1% of the notional 
value of the index or custom basket if the investment represents more 
than1% but less than 5% of the fund's NAV. Alternatives would be for 
funds to report fewer or additional components of the underlying 
indexes or custom baskets.
---------------------------------------------------------------------------

    \1352\ We are requiring similar information on a fund's schedule 
of investments. See supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    Lastly, funds will no longer be required to file reports on Form N-
Q. An alternative is for funds to continue reporting Form N-Q along 
with Form N-PORT at the end of first and third fiscal quarters. 
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 will 
increase the burden of filing Form N-CSR, these certifications will 
fill the gap in certification coverage regarding the registrant's 
internal control over financial reporting that would otherwise exist 
once Form N-Q is rescinded.

C. Amendments to Regulation S-X

1. Introduction and Economic Baseline
    Regulation S-X prescribes the form and content required in 
financial statements. The amendments to Regulation S-X will require new 
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.\1353\
---------------------------------------------------------------------------

    \1353\ See supra section II.C. As discussed above, rule 12-13 of 
Regulation S-X requires limited generic information on the fund's 
investments other than securities. To address issues of inconsistent 
disclosures and lack of transparency, the amendments will have a 
consistent presentation of a fund's disclosures of open futures 
contacts, foreign currency forward contracts, and swaps. In 
addition, while many of the amendments to Regulation S-X are similar 
to the proposed disclosures in Form N-PORT (e.g., enhanced 
derivatives disclosures), the amendments to Regulation S-X will be 
in an unstructured but consistently presented format (as opposed to 
Form N-PORT's structured data).
---------------------------------------------------------------------------

    The current set of requirements under Regulation S-X, as well as 
the current practice of many funds \1354\ 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.\1355\ The parties that could be 
affected by the amendments to Regulation S-X include funds that file or 
will file reports with the Commission and update or will 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. We did not receive any specific 
comments on the proposed

[[Page 81983]]

economic baseline for the amendments to Regulation S-X.
---------------------------------------------------------------------------

    \1354\ As we discussed supra footnote 524, while ``funds'' are 
defined in the preamble as registered investment companies other 
than face-amount certificate companies and any separate series 
thereof--i.e., management companies and UITs, we note that our 
amendments to Regulation S-X apply to both registered investment 
companies and BDCs. See supra footnotes 699 and 700. Therefore, when 
discussing fund reporting requirements in the context of our 
amendments to Regulation S-X, we are also including changes to the 
reporting requirements for BDCs.
    \1355\ See discussion supra section II.C.1.
---------------------------------------------------------------------------

    Previously, Regulation S-X did not prescribe specific information 
to be disclosed 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.
    We expect that many of the economic effects from the amendments to 
Regulation S-X will largely result from an increase in investor ability 
to make investment decisions dependent on the more transparent 
disclosure in financial statements, as noted by commenters.\1356\ As 
discussed above, the total economic effects will depend on the extent 
to which the portfolios and investment practices of all investment 
companies become more transparent, and the ability of investors, and in 
particular individual investors, to utilize financial statements to 
compare funds and to make investment decisions. The economic effects 
will also depend on the extent to which investment companies already 
voluntarily provide disclosures that will be required by the 
amendments, and the extent to which the amendments to Regulation S-X 
standardize financial statements across funds. 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 amendments are quantified below.
---------------------------------------------------------------------------

    \1356\ See, e.g., PwC Comment Letter (''We believe that the 
Proposed Rule will generally provide investors with greater access 
to information relating to their investments and investment 
advisors.''); Deloitte Comment Letter.
---------------------------------------------------------------------------

2. Benefits
    The amendments to Regulation S-X will benefit investors by updating 
the information funds disclose in the financial statements of 
registration statements and shareholder reports. Several commenters 
noted that the amendments will benefit investors through increased 
transparency and comparability of fund financial statements, 
particularly for individual investors that we would not expect to use 
the information in Form N-PORT because of its structured data 
format.\1357\ In particular, the additional information that Regulation 
S-X will require for open option contracts both written and purchased, 
open futures contracts, open forward foreign currency contracts, open 
swap contracts, and other investments will increase the transparency of 
the fund's portfolio investments and risk exposures.\1358\
---------------------------------------------------------------------------

    \1357\ See PwC Comment Letter; EY Comment Letter.
    \1358\ See, e.g., EY Comment Letter and Morningstar Comment 
Letter for statements in support of these ideas, and MFS Comment 
Letter and ICI Comment Letter for statements against, as well as the 
discussion in Section II.C.2.
---------------------------------------------------------------------------

    Other amendments will also improve the transparency into the fund's 
investments. For example, we are requiring funds to identify each 
investment whose value was determined using significant unobservable 
inputs.\1359\ Likewise, we are requiring that funds separately identify 
restricted investments.\1360\ In addition, in a modification from the 
proposal, we are now including a requirement that should benefit 
investors and other users of the information by providing more 
transparency to a fund's investments in debt securities, and in 
particular variable rate securities. As discussed more fully below and 
in section II.C.3, in light of comments we received and in order to 
give investors both the ability to understand the investment's current 
return (through end-period rate) and to better understand how interest 
rate changes could affect the investment's future returns, we are 
adopting an instruction that would require a fund, for its investments 
in variable rate securities, to both describe the referenced rate and 
spread and provide the end of period interest rate for each investment, 
or include disclosure of each referenced rate at the end of the 
period.\1361\
---------------------------------------------------------------------------

    \1359\ See, e.g., rule 12-13, n. 7 of Regulation S-X; see also 
rules 12-13A, n. 5; 12-13B, n. 3; 12-13C, n. 6; and 12-13D, n. 7 of 
Regulation S-X.
    \1360\ See rule 12-13, n. 6 of Regulation S-X; see also rules 
12-13A, n. 4; 12-13B, n. 2; 12-13C, n. 5; and 12-13D, n. 6 of 
Regulation S-X.
    \1361\ See rules 12-12, n. 4 and 12-12B, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    In a change from the proposal and Form N-PORT, we are requiring 
funds to separately list the top 50 components and the components that 
represent more than 1% of the notional value of the referenced assets 
underlying swap and option contracts, rather than separately listing 
every component. We believe that this alteration benefits investors by 
making it easy for them to understand and evaluate the specific risk 
exposures of a fund from certain swap and option contracts, while 
simultaneously reducing the reporting burden for funds.
    We believe that the changes to the form and content of financial 
statements in Article 6 of Regulation S-X will similarly benefit 
investors, particularly individual investors who in general may not 
have the tools and resources possessed by institutional investors, 
through greater transparency in a fund's financial statements. For 
example, we are requiring funds to disclose their investments in 
derivatives in the financial statements, as opposed to in the notes to 
the financial statements.\1362\ To the extent funds do not do this 
already, we believe, and commenters agreed, 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), will benefit 
investors through increased visibility of fund investments in 
derivatives and comparability between funds.\1363\ Likewise, we are 
eliminating the financial statement disclosure of ``Total investments'' 
on the balance sheet under ``Assets''.\1364\ As we discuss in more 
detail in section II.C.6, recognizing that funds could present 
investments in derivatives under both assets and liabilities on the 
balance sheet, eliminating this disclosure will benefit investors by 
providing a more complete representation of the effect of these 
investments on a balance sheet.\1365\ Other parties that will 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 will primarily benefit investors and 
particularly individual investors, the Commission and other market 
participants could use the information reported in a fund's financial 
statements, and would benefit from an increase in transparency into a 
fund's financial statements. For example, Commission staff could 
utilize the information in a fund's financial statements during 
examinations.
---------------------------------------------------------------------------

    \1362\ See rule 6-10(a) of Regulation S-X; see also discussion 
supra section II.C.6; see also ICI Comment Letter (supporting the 
requirement to present derivatives schedules in the fund's financial 
statements).
    \1363\ See State Street Comment Letter; ICI Comment Letter.
    \1364\ See rule 6-04 of Regulation S-X; see also discussion 
supra section II.C.6.
    \1365\ See id.
---------------------------------------------------------------------------

    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 amendments to Regulation S-X, therefore, will 
effectively standardize the information that all funds disclose on 
financial statements, and make the schedule of investments and 
financial statement disclosures consistent and thus more comparable

[[Page 81984]]

across funds, as noted by commenters.\1366\ Similar to new Form N-PORT, 
the amendments to Regulation S-X, to the extent that they increase the 
transparency and consistency of shareholder reports across funds, could 
improve the ability of investors, particularly individual investors, to 
differentiate investment companies and make investment decisions either 
by themselves or by way of third-party information providers. An 
increase in the ability of investors to differentiate investment 
companies and allocate capital across reporting funds closer to their 
risk preferences will 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, we also believe 
that the introduction of Form N-PORT could also promote capital 
formation.
---------------------------------------------------------------------------

    \1366\ See, e.g., EY Comment Letter.
---------------------------------------------------------------------------

3. Costs
    We believe that registrants on average will likely incur minimal 
costs from our 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 will be required by the 
amendments to Regulation S-X in their financial statements.\1367\ The 
costs to a fund of complying with the new rules will depend upon the 
extent to which funds are already making such disclosures 
currently.\1368\ As discussed above, the Commission will require 
parallel disclosures in Form N-PORT, and funds will incur one set of 
costs, both one-time and ongoing, to obtain the information that will 
be disclosed in Form N-PORT and in financial statements. In addition, 
other costs that relate to the disclosure of portfolio investment 
information, including the ability of other investors to front-run, 
trade predatorily, and copycat/reverse engineer trading strategies of 
funds, will 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 data format as compared to the non-structured data 
format of portfolio investment information reported in financial 
statements.
---------------------------------------------------------------------------

    \1367\ In order to reduce burdens on funds, we also endeavored, 
where appropriate, to require consistent derivatives holdings 
disclosures between Form N-PORT and Regulation S-X.
    \1368\ Moreover, as we discussed above in section III.C.1, we 
expect minimal audit costs as a result of our amendments to 
Regulation S-X because many funds are already voluntarily providing 
this information in their audited financial statements.
---------------------------------------------------------------------------

    For example, as discussed above in section II.C.2.a, in response to 
commenters' concerns relating to the burdens associated with our 
proposed requirement that funds list all components underlying a 
nonpublic index or custom basket,\1369\ we are instead requiring funds 
to separately list the top 50 components and the components that 
represent more than 1% of the notional value of the referenced assets 
underlying swap \1370\ and option contracts.\1371\ Commenters noted, 
and we agree, that the potential volume of all of the components 
underlying nonpublic indexes and custom baskets were disclosed would 
make the fund's financial statements difficult to understand.\1372\ 
Thus requiring funds to report only the most significant components 
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.\1373\ Moreover, limiting the reporting of nonpublic 
indexes and custom baskets will reduce fund auditing costs by 
eliminating the burdens of requiring an auditor to verify every 
component of a nonpublic index, which could potentially include 
thousands of investments.
---------------------------------------------------------------------------

    \1369\ See, e.g., PwC Comment Letter; Oppenheimer Comment 
Letter; ICI Comment Letter; and AICPA Comment Letter.
    \1370\ See rule 12-13C, n. 3 of Regulation S-X; see also 
discussion supra section II.C.2.d.
    \1371\ See rule 12-13, n. 3 of Regulation S-X; see also 
discussion supra section II.C.2.a.
    \1372\ See AICPA Comment Letter; and PwC Comment Letter.
    \1373\ Id.
---------------------------------------------------------------------------

    We further believe this change provides the necessary benefit 
without being unduly burdensome. We understand that index providers 
might assert intellectual property rights to certain indexes, and these 
may be subject to licensing agreements between the index provider and 
the fund.\1374\ 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.\1375\ 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 nonpublic index may include costs to both the index 
provider, whose indexing strategy could be reverse-engineered, and the 
fund, whose rebalancing trades could be front-run.\1376\ Finally, the 
possibility exists that index providers will refuse to permit 
disclosure and the funds might not be able to use such indexes any 
longer. This could potentially drive up competition for index 
providers, in turn raising costs for funds. Requiring the disclosure of 
only those proprietary components that meet a materiality threshold 
could help alleviate some of these costs and concerns. However, the 
underlying components would be more accessible in Form N-PORT as a 
result of its structured data format as compared to the non-structured 
data format of the information in financial statements, so we believe 
that the costs of disclosing the information will therefore primarily 
relate to Form N-PORT, and reporting of components will be more 
comprehensive in Form N-PORT, as discussed in greater detail above.
---------------------------------------------------------------------------

    \1374\ See discussion supra sections II.A.2.g.iv and II.C.2.a.
    \1375\ See id.
    \1376\ See id.
---------------------------------------------------------------------------

    As another example, the amendments include an instruction to 
disclose the variable financing rates for swaps that pay or receive 
financing payments.\1377\ 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.\1378\ 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 thereby decreasing the fees 
paid by funds. Counterparties could also, however, choose not to 
transact with funds as a consequence of this disclosure, in which case 
competition for counterparties would increase and the fees paid by 
funds would rise. 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, will instead derive from

[[Page 81985]]

the similar requirements in Form N-PORT.\1379\
---------------------------------------------------------------------------

    \1377\ See rule 12-13C, n. 3 of Regulation S-X.
    \1378\ See, e.g., MFS Comment Letter; Invesco Comment Letter; 
and ICI Comment Letter (public benefit of disclosure does not 
outweigh potential competitive harm).
    \1379\ See Item C.11.f.i of Form N-PORT; see also discussion 
supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    In response to commenters concerns, we also made changes from the 
proposal to eliminate several disclosures. For example, we are amending 
our proposed instruction which would require funds to categorize the 
schedule by type of investment, the related industry, and the related 
country or geographic region.\1380\ We agreed with commenters that 
requiring categorization of both the industry and geographic region (as 
opposed to categorizing one) would add considerable length to the 
schedule of investments, which could ultimately undermine the 
schedule's usefulness to investors.\1381\ In the interest of reducing 
burdens for investors and making financial statements easier to review, 
we are not adopting this proposed requirement.
---------------------------------------------------------------------------

    \1380\ See supra section II.C.3.
    \1381\ See Oppenheimer Comment Letter; State Street Comment 
Letter; Vanguard Comment Letter; MFS Comment Letter; and BlackRock 
Comment Letter.
---------------------------------------------------------------------------

    We similarly determined to eliminate an instruction in Regulation 
S-X requiring funds to include tax basis disclosures. As discussed 
above in section II.C.4, this instruction is contained in current rules 
12-12, 12-12C, and 12-13 and we proposed to extend the instruction to 
proposed rules 12-12A, 12-13A, 12-13B, 12-13C, and 12-13D. We were, 
however, persuaded by commenters that this disclosure of tax basis by 
investment type would not provide meaningful disclosure to investors, 
while increasing the volume and complexity of financial 
statements.\1382\ In the interest of reducing burdens to both investors 
and funds, while making financial statements easier for investors to 
understand, we are eliminating the tax basis instruction from the 
current rules and not adopting it for the other rules.
---------------------------------------------------------------------------

    \1382\ See, e.g. PwC Comment Letter; EY Comment Letter; CRMC 
Comment Letter; State Street Comment Letter; and MFS Comment Letter.
---------------------------------------------------------------------------

    We also proposed to require funds to identify illiquid 
investments.\1383\ We received several comments noting that, among 
other things, this disclosure would be difficult and costly to audit, 
as auditors would be required to determine the validity of the fund's 
liquidity determinations for each investment.\1384\ We were persuaded 
by comments relating to the costs of auditing liquidity disclosures 
and, as discussed further in the Liquidity Adopting Release we are 
adopting concurrently, also believe that such position-level 
information regarding liquidity is better suited for nonpublic 
reporting to the Commission in Form N-PORT.
---------------------------------------------------------------------------

    \1383\ See supra section II.C.4.
    \1384\ See, e.g., PwC Comment Letter; ICI Comment Letter; and 
AICPA Comment Letter.
---------------------------------------------------------------------------

    Finally, in order to provide more transparency to a fund's 
investments in debt securities, we had proposed an instruction 
requiring a fund to disclose, for its investment in variable rate 
securities, the referenced rate and spread.\1385\ We received several 
comments supporting our proposal to provide the reference rate and 
spread for variable rate securities, reasoning that the disclosure of 
the components of the variable rate would be easier for investors and 
other interested parties to determine the investment's current rate at 
any given time (as opposed to the rate at the end of the reporting 
period).\1386\ However, another commenter suggested that the end-period 
interest rate is the most appropriate variable rate security disclosure 
for shareholders.\1387\ As discussed more fully in section II.C.3, in 
order to give investors both the ability to understand the investment's 
current return (through end-period rate) and to better understand how 
interest rate changes could affect the investment's future returns, we 
have made a change to the proposed instruction so that it now requires 
a fund to both describe the reference rate and spread and provide the 
end of period interest rate for each investment, or include disclosure 
of each reference rate at the end of the period.\1388\ Requiring a fund 
to disclose both the period-end rate and reference rate and spread will 
necessarily add costs relating to a fund's financial statement and 
auditing costs, albeit, we expect that cost to be minimal because these 
pieces of information are generally not difficult to obtain and verify 
as, based on staff experience, we believe that this information is 
currently collected by funds and commonly available in a fund's 
accounting system.
---------------------------------------------------------------------------

    \1385\ See proposed rule 12-12, n. 4; see also supra section 
II.C.3.
    \1386\ See State Street Comment Letter; see also Morningstar 
Comment Letter (Disclosure would allow investors to identify when 
cash flows associated with a fund's returns are fixed or variable).
    \1387\ See Wells Fargo Comment Letter.
    \1388\ See rules 12-12, n. 4 and 12-12B, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    Funds will 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 will incur 
one-time and ongoing costs to obtain the additional information that 
will be disclosed on shareholder reports and registration statements, 
and that will also not be disclosed on Form N-PORT; and funds will also 
incur one-time costs to format for presentation all additional 
information that will be reported in financial statements. In addition, 
we will 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.\1389\ Funds that do not currently present their 
schedule of investments in this manner will incur a one-time cost of 
modifying the presentation of their financial statements to conform to 
the amendments.
---------------------------------------------------------------------------

    \1389\ See rule 6-10 of Regulation S-X; see also discussion 
supra section II.C.6.
---------------------------------------------------------------------------

    Additionally, we proposed to add a new disclosure requirement that 
was designed to increase transparency into a fund's securities lending 
and cash collateral management activities.\1390\ Some commenters 
expressed concerns relating to the location of the required disclosure 
in the fund's financial statements in particular.\1391\ One commenter 
in particular noted that additional costs of auditing the disclosure of 
these fees ``would most likely outweigh any benefits of reporting this 
information.'' \1392\ While we continue to believe that investors and 
other interested parties will benefit from disclosures relating to a 
fund's securities lending and cash collateral management activities, 
after consideration of the issues raised by commenters, including the 
added auditing costs that funds would incur, we determined that it is 
more appropriate to require these disclosures be made in a fund's 
Statement of Additional Information (or, with respect to closed-end 
funds, a fund's reports on Form N-CSR) rather than to require their 
inclusion in its financial statements.\1393\
---------------------------------------------------------------------------

    \1390\ See proposed rule 6.03(m) of Regulation S-X; see also 
supra section II.C.6.
    \1391\ See Deloitte Comment Letter (noting that indirect fees 
``are typically a management's estimate that is imprecise''); EY 
Comment Letter (stating that ``the proposed disclosures would result 
in the presentation of detailed information with varying degrees of 
usefulness that could detract from other material information 
presented in the financial statements'' and recommending that ``the 
Commission use other reporting mechanisms more suited for that 
purpose'').
    \1392\ See Deloitte Comment Letter.
    \1393\ See supra section II.F.
---------------------------------------------------------------------------

    To the extent possible, we have attempted to quantify these costs. 
As discussed below in section IV.C, we estimate that management 
investment companies will incur certain one-time additional paperwork 
and other costs

[[Page 81986]]

associated with preparing, reviewing, and filing semi-annual reports in 
accordance with the amendments to Regulation S-X in the amount of 
approximately $1,911 per fund \1394\ and $22,662,549 in the 
aggregate.\1395\ We similarly estimate that management investment 
companies will incur certain ongoing paperwork and other costs 
associated with preparing, reviewing, and filing semi-annual reports in 
accordance with our amendments to Regulation S-X in the amount of 
approximately $683 per fund \1396\ and $8,099,697 in the 
aggregate.\1397\ Likewise, we estimate that UITs will incur certain 
one-time additional paperwork and other costs associated with 
preparing, reviewing, and filing semi-annual reports in accordance with 
the amendments to Regulation S-X in the amount of approximately $1,911 
per fund \1398\ and $1,377,831 in the aggregate.\1399\ We similarly 
estimate that UITs will incur certain ongoing paperwork and other costs 
associated with preparing, reviewing, and filing semi-annual reports in 
accordance with the amendments to Regulation S-X in the amount of 
approximately $683 per UIT \1400\ and $492,443 in the aggregate.\1401\
---------------------------------------------------------------------------

    \1394\ See infra footnote 1562 and accompanying text. The 
estimate is based upon the following calculations: ($1,911 = ($560 = 
3.5 hours x $160/hour for an Intermediate Accountant) + ($1,351 = 
3.5 hours x $386/hour for an Attorney)). The hourly wage figures in 
this and subsequent footnotes are from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits, and overhead.
    \1395\ See id. These estimates are based upon the following 
calculations: $22,662,549 = (11,859 funds x $1,911 per fund).
    \1396\ See id. The estimate is based upon the following 
calculations: ($683 = ($200 = 1.25 hours x $160/hour for an 
Intermediate Accountant) + ($483 = 1.25 hours x $386/hour for an 
Attorney). The hourly wage figures in this and subsequent footnotes 
are from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by Commission staff to account 
for an 1800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead.
    \1397\ See id. These estimates are based upon the following 
calculations: $8,099,697 = (11,859 funds x $683 per fund).
    \1398\ See infra footnote 1577 and accompanying text. The 
estimate is based upon the following calculations: ($1,911 = ($560 = 
3.5 hours x $160/hour for an Intermediate Accountant) + ($1,351= 3.5 
hours x $386/hour for an Attorney)). The hourly wage figures in this 
and subsequent footnotes are from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified by Commission 
staff to account for an 1800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
    \1399\ See id. These estimates are based upon the following 
calculations: $1,377,831 = (721 UITs x $1,911per UIT).
    \1400\ See id. The estimate is based upon the following 
calculations: ($683 = ($200 = 1.25 hours x $160/hour for an 
Intermediate Accountant) + ($483 = 1.25 hours x $386/hour for an 
Attorney). The hourly wage figures in this and subsequent footnotes 
are from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by Commission staff to account 
for an 1800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead.
    \1401\ See id. These estimates are based upon the following 
calculations: $492,443 = (721 UITs x $683 per UIT).
---------------------------------------------------------------------------

4. Alternatives
    The Commission has also explored other ways to modernize and 
improve the utility, quality, and consistency of the information that 
funds report to the Commission and to investors in the financial 
statements required in shareholder reports and other registration 
statements. Commission staff examined how the information funds provide 
to the Commission and to investors could be made more informative and 
more consistent across funds. Alternatives to the amendments to 
Regulation S-X relate to the compliance period to adhere to the new 
amendments and to the information that funds report in the financial 
statements.
    Funds will have 8 months after the effective date to comply with 
the amendments to Regulation S-X. An alternative would be to extend the 
compliance period, as suggested by several commenters.\1402\ We 
believe, however, that most entities would not need additional time to 
modify systems to adhere to the amendments to Regulation S-X because, 
with the exception of the disclosure of index components, the proposed 
amendments are largely consistent with current fund disclosure 
practices. As such, we do not expect that funds, intermediaries, or 
service providers will require significant amounts of time to modify 
systems or establish internal processes to prepare financial statements 
in accordance with our final amendments to Regulation S-X. Another 
alternative would be to provide a tiered compliance period to provide 
smaller fund complexes more time, as we do for Form N-PORT. However, we 
do not believe that smaller entities would relatively benefit from 
additional time, since while fixed costs in general are proportionately 
higher for smaller entities, the amendments to Regulation S-X do not 
add additional fixed costs, but rather the amendments are largely 
consistent with current disclosure practices. Extending the compliance 
period for all entities or for smaller entities, however, would delay 
the benefits to investors (and to the Commission and to other market 
participants) from the increased transparency and standardization of 
shareholder reports and other financial statements.
---------------------------------------------------------------------------

    \1402\ Fidelity Comment Letter; Oppenheimer Comment Letter; 
State Street Comment Letter; MFS Comment Letter; Invesco Comment 
Letter; SIFMA Comment Letter I; and Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    The amendments to Regulation S-X will update the information funds 
disclose in financial statements. Alternatives to the amendments to 
Regulation S-X include the disclosures of different information. For 
example, the amendments to Regulation S-X will require funds to report 
information describing derivative contracts including, in some 
instances, the components of reference indexes that surpass certain 
materiality thresholds. As alternatives, we could require funds to only 
disclose a brief description of the index, require a different 
threshold for identifying the components of the swap or options 
contract, or require the reporting of all components. Although the 
alternatives that would increase the reporting of the components of 
reference indexes would increase the transparency for investors into 
the assets underlying a swap or options contract including the 
underlying risks of the fund, these alternatives would increase the 
costs of funds to report the information. However, although the 
alternatives that would decrease the reporting of the components of 
reference indexes would decrease the costs to funds to report the 
information, these alternatives would decrease the ability of investors 
to understand fund portfolio investments. We believe that the 
amendments to Regulation S-X adopted today provide investors with 
sufficient information to broadly understand funds' investments without 
unduly burdening funds.
    Amendments to Regulation S-X will also not require funds to report 
information describing their securities lending activities in the 
financial statements, as proposed, but will instead require funds to 
report the information in the Statement of Additional Information (or, 
for closed-end funds, their reports on Form N-CSR). An alternative, 
similar to proposed rule 6.03(m), would be for funds to report 
information describing their securities lending activities as part of 
the financial statements. However, the requirement that securities 
lending information would be disclosed as part of financial statements 
would increase the costs to audit and report the information.\1403\ 
Another alternative

[[Page 81987]]

would be for funds to not provide the information altogether. However, 
we believe that the information is important to investors, the 
Commission, and other interested parties to understand the economic 
implications of a fund's securities lending activities. To the extent 
that investors utilize this information or that it benefits the 
Commission, we believe that the Statement of Additional Information 
(or, for closed-end funds, reports on Form N-CSR) is an appropriate 
place to disclose this information.
---------------------------------------------------------------------------

    \1403\ Deloitte Comment Letter.
---------------------------------------------------------------------------

    Similarly, amendments to Regulation S-X will also not require funds 
in their financial statements to identify illiquid securities, as was 
initially proposed. An alternative is to adopt the proposed approach 
and require funds in their financial statements to identify illiquid 
securities. The disclosure of the liquidity of securities on financial 
statements, however, could increase the costs to audit financial 
statements.\1404\ In addition, some commenters asserted the disclosure 
of security liquidity could cause investors, and in particular 
individual investors, to misinterpret the information as 
objective.\1405\ As discussed in the Liquidity Adopting Release, we are 
adopting portfolio-level liquidity reporting on Form N-PORT which we 
believe mitigates many of the commenters' concerns and is a more 
appropriate method of public reporting.\1406\ Accordingly, we are not 
adopting the proposed instructions in Regulation S-X relating to the 
liquidity of investments.
---------------------------------------------------------------------------

    \1404\ Deloitte Comment Letter; ICI Comment Letter; and AICPA 
Comment Letter.
    \1405\ PwC Comment Letter; Oppenheimer Comment Letter; MFS 
Comment Letter; Deloitte Comment Letter; Invesco Comment Letter; 
Schwab Comment Letter; ICI Comment Letter; and AICPA Comment Letter.
    \1406\ See discussion in section II.C.4.
---------------------------------------------------------------------------

    Lastly, amendments to Regulation S-X will include instructions to 
funds to make a separate disclosure for income from non-cash dividends 
and payment-in-kind interest on the statement of operations. Funds will 
report income from payment-in-kind interest or non-cash dividends only 
if the income exceeds 5 percent of the fund's investment income, as 
suggested by commenters who requested a materiality threshold, which is 
consistent with the other income disclosures under rule 6-07.1.\1407\ 
An alternative, similar to the proposal, would be for funds to make a 
separate disclosure for all income from payment-in-kind interest or 
non-cash dividends regardless of the amount.
---------------------------------------------------------------------------

    \1407\ Several commenters suggested the materiality threshold 
including MFS Comment Letter; PwC Comment Letter; State Street 
Comment Letter; ICI Comment Letter; and AICPA Comment Letter; see 
also section II.C.6.
---------------------------------------------------------------------------

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

1. Introduction and Economic Baseline
    Form N-CEN requires funds to report census information to the 
Commission on an annual basis. Although Form N-CEN includes many of the 
same data elements as the current census-type reporting form, Form N-
SAR, it replaces items that are outdated or no longer informative with 
items of greater importance for the oversight and examination of 
investment companies, and eliminates certain items that are also 
reported to the Commission in other forms. Investment companies will 
file reports on Form N-CEN in a structured, XML format to allow for 
easier aggregation and manipulation of the data. Form N-SAR will be 
rescinded.
    The current set of requirements for funds to file reports on Form 
N-SAR is the baseline from which we discuss the economic effects of 
Form N-CEN.\1408\ The parties that could be affected by the 
introduction of Form N-CEN and the rescission of Form N-SAR include 
funds that currently file reports on Form N-SAR and funds that will 
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.
---------------------------------------------------------------------------

    \1408\ Management companies must file reports on Form N-SAR 
semi-annually, and UITs must file reports on Form N-SAR annually. 
See current rule 30b1-1 for management companies, and see current 
rule 30a-1 for UITs.
---------------------------------------------------------------------------

    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. Likewise, the technology in which Form N-SAR is filed 
does not allow for certain validation checks, reducing the data quality 
of the information (e.g., the Form N-SAR application is unable to check 
related fields for arithmetic consistency) and therefore the ability of 
Commission staff to compare the information across funds is 
constrained.
    The economic effects from the introduction of new Form N-CEN and 
the rescission of Form N-SAR will largely result from an update to the 
format of the information reported, as well as the update to the census 
information that investment companies will report. The economic effects 
will 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 requires 
census information about the fund industry reported in a structured 
data format. However, while Form N-SAR information is also reported in 
a structured data format, Form N-CEN information will be reported in 
XML format, a much more modern and useful data format, and one that 
allows for more efficient data collection than does the baseline 
format, aggregation, manipulation, and rendering. Therefore, although 
the introduction of Form N-CEN will increase the transparency of the 
fund industry by making the information reported therein more readily 
available, more easily shared or retrieved, and more relevant, we 
cannot quantify the significance of its economic implications.
2. Benefits
    The Commission is rescinding Form N-SAR and replacing it with new 
Form N-CEN to improve the quality and the utility of the information 
investment companies report to the Commission. The improvement in the 
quality and utility of the information will 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 will improve the 
ability and efficiency of Commission staff to obtain and analyze the 
information. An improved structured data format could also promote 
additional efficiency to the extent that the new standardized reporting 
requirements encourage more automated report assembly, validation, and 
review processes for the disclosure and transmission of 
information.\1409\ In

[[Page 81988]]

ways similar to those discussed above in relation to Form N-PORT, an 
XML format also improves the quality of census information obtained by 
the Commission by providing constraints as to how information can be 
provided and by allowing for built-in validation.\1410\
---------------------------------------------------------------------------

    \1409\ See, e.g., CFA Comment Letter (noting that requiring 
information to be reported through a structured data format will 
allow better collection and analysis of information); see also XBRL 
US Comment Letter (expressing the belief that a structured data 
format will make data computer-readable, consistent and comparable 
across different reporting entities).
    \1410\ See, e.g., Morningstar Comment Letter (noting that the 
XML format will reduce the amount of defective reporting currently 
possible in Form N-SAR); see also XBRL US Comment Letter (while 
specifically recommending an XBRL structured format, noting that 
checking the validity of data may still be required but, with 
structured data, the process can be automated, thereby reducing 
costs and at the same time increasing the consistency of the data 
produced).
---------------------------------------------------------------------------

    Form N-CEN also modernizes the census information that funds 
provide and increases its utility to Commission staff, investors, and 
other interested parties by reflecting the changes to the fund industry 
in a structured data format. The Commission will 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.
    Along with the other information, Form N-CEN adds new requirements 
for information specifically relating to the ETF primary markets, 
including more detailed information on authorized participants and 
creation unit requirements.\1411\ We believe that the additional 
information on ETFs will allow the Commission to better understand and 
assess the ETF market and also inform the public about certain 
characteristics of the ETF primary markets.\1412\ Additionally, Form N-
CEN, like Form N-SAR, has particular sections for closed-end funds, 
SBICs, and UITs in order to obtain information about the particular 
characteristics of these entities to assist our staff in monitoring the 
activities of these funds and preparing for examinations.
---------------------------------------------------------------------------

    \1411\ See discussion supra section II.D.4.e.
    \1412\ Some commenters supported the inclusion of ETF-specific 
information in Form N-CEN. See supra footnote 1061 and accompanying 
text; but see infra footnote 1429 and accompanying text.
---------------------------------------------------------------------------

    Form N-CEN also adds 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.\1413\ We are also requiring the 
monthly average value of securities on loan, the net income from 
securities lending, and the monthly average net assets in the 
fund.\1414\ Together with the requirements on securities lending 
activities in Form N-PORT and in fund Statements of Additional 
Information,\1415\ this information will 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.\1416\
---------------------------------------------------------------------------

    \1413\ See Item C.6 of Form N-CEN.; see also discussion supra 
section II.D.4.c.iii.
    \1414\ The monthly average value of securities on loan and the 
net income from securities lending are being moved from Form S-X to 
Form N-CEN, while the monthly average net assets is a newly reported 
value, and while not specifically related to securities lending 
activity, it will facilitate the use of the monthly average value of 
securities on loan.
    \1415\ See supra section II.A.2.d; section II.A.2.g.v; and 
section II.F.
    \1416\ Some commenters expressed general support for reporting 
securities lending information on Form N-CEN; some commenters 
expressed certain concerns about particular proposed requirements 
and we have modified the securities lending requirements in certain 
respects after consideration of commenters' views. See supra section 
II.D.4.c.iii.
---------------------------------------------------------------------------

    We expect funds will also benefit from replacing Form N-SAR with 
Form N-CEN through reduced expenses. First, we estimate that Form 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 items on Form N-SAR that funds will not report 
on Form N-CEN. Second, funds that are management companies will 
experience a decrease in paperwork-related expenses from the decrease 
in the reporting frequency of census information from semi-annual to 
annual.\1417\ As discussed in detail below, we estimate that paperwork 
expenses associated with reporting on Form N-CEN will be, in the 
aggregate, about $14.6 million each year.\1418\ By contrast, we 
estimate that paperwork expenses associated with reporting on Form N-
SAR are about $25.5 million each year.\1419\ Accordingly, we estimate, 
on net, annual paperwork expense savings to funds associated with the 
adoption of Form N-CEN and rescission of Form N-SAR will be about $10.9 
million.\1420\ We recognize that these ongoing annual expense savings 
will be partially offset by one-time expenses in the first year to file 
reports on Form N-CEN. We estimate that these expenses would be, in the 
aggregate, about $20.2

[[Page 81989]]

million.\1421\ As indicated by commenters, the 75-day period to file 
Form N-CEN will also benefit funds by staggering the reports that funds 
file with the Commission at the end of each fiscal year.\1422\
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    \1417\ See supra notes 768-769 and accompanying text for a 
discussion of commenters' views on the filing frequency. See also 
ICI Comment Letter (stating that reporting this data on an annual, 
rather than a semi-annual basis, would significantly lessen 
reporting burdens for funds).
    \1418\ Below, we estimate that 3,113 funds will file reports on 
Form N-CEN each year. See infra footnote 1532. Below, we estimate 
that funds will, on average, incur 12.37 burden hours per fund per 
year to comply with the reporting requirements of Form N-CEN. See 
infra footnote 1532 and accompanying text. Therefore, in the 
aggregate, we estimate that such funds would incur about 38,508 
burden hours to comply with these requirements. This estimate is 
based on the following calculation: 3,113 funds x 12.37 hours per 
fund per year = 38,508 hours per year. The Commission estimates the 
wage rate associated with these burden hours based on salary 
information for the securities industry compiled by the Securities 
Industry and Financial Markets Association. The estimated wage 
figure is based on published rates for senior programmers and 
compliance attorneys, modified to account for an 1,800-hour work 
year; multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead; and adjusted to account for the effects of 
inflation, yielding effective hourly rates of $308 and $340, 
respectively. See Securities Industry and Financial Markets 
Association, Report on Management & Professional Earnings in the 
Securities Industry 2013. We estimate that senior programmers and 
compliance attorneys would divide their time equally, yielding an 
estimated hourly wage of $324. ($308 per hour for senior programmers 
+ $340 per hour for compliance attorneys) / 2 = $324 per hour. Based 
on the Commission's estimate of 38,508 burden hours per year and the 
estimated wage rate of $324 per hour, the total annual paperwork 
expenses for funds associated with the internal hour burden imposed 
by the reporting requirements of Form N-CEN are about $12,476,592. 
This estimate is based upon the following calculation: 38,508 hours 
per year x $324 per hour = $12,476,592. Below, we also estimate that 
funds will incur aggregate annual external costs of $2,088,176 to 
comply with the requirements of Form N-CEN. See infra footnote 1538 
and accompanying text. Thus the total estimated annual paperwork 
expenses associated with the reporting requirements of Form N-CEN 
are $14,564,768. This estimate is based upon the following 
calculation: $12,476,592 associated with internal burden + 
$2,088,176 external cost burden = $14,564,768.
    \1419\ Below, we estimate that, in the aggregate, funds 
currently incur about 78,561 burden hours to comply with the 
requirements of Form N-SAR. See infra footnote 1541 and accompanying 
text. The Commission estimates the wage rate associated with these 
burden hours based on salary information for the securities industry 
compiled by the Securities Industry and Financial Markets 
Association. The estimated wage figure is based on published rates 
for senior programmers and compliance attorneys, modified to account 
for an 1,800-hour work year; multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead; and adjusted to 
account for the effects of inflation, yielding effective hourly 
rates of $308 and $340, respectively. See Securities Industry and 
Financial Markets Association, Report on Management & Professional 
Earnings in the Securities Industry 2013. We estimate that senior 
programmers and compliance attorneys would divide their time 
equally, yielding an estimated hourly wage of $324. ($308 per hour 
for senior programmers + $340 per hour for compliance attorneys) / 2 
= $324 per hour. Based on the Commission's estimate of 78,561 burden 
hours and the estimated wage rate of $324 per hour, the total annual 
paperwork expenses for funds associated with the internal hour 
burden imposed by the reporting requirements of Form N-SAR are about 
$25,453,764. This estimate is based upon the following calculation: 
78,561 hours per year x $324 per hour = $25,453,764.
    \1420\ This estimate is based upon the following calculation: 
$25,453,764 in annual paperwork expenses associated with Form N-SAR 
- $14,564,768 in annual paperwork expenses associated with Form N-
CEN = $10,888,996 in annual paperwork expenses.
    \1421\ Below, we estimate that 3,113 funds will file reports on 
Form N-CEN each year. See infra footnote 1532. Below, we estimate 
that funds will, on average, incur 20 additional one-time burden 
hours per fund in the first year to comply with the reporting 
requirements of Form N-CEN. See infra footnote 1528 and accompanying 
text. Therefore, in the aggregate, we estimate that such funds would 
incur about 62,160 one-time burden hours to comply with these 
requirements. This estimate is based on the following calculation: 
3,113 funds x 20 one-time burden hours per fund = 62,260 one-time 
hours. The Commission estimates the wage rate associated with these 
burden hours based on salary information for the securities industry 
compiled by the Securities Industry and Financial Markets 
Association. The estimated wage figure is based on published rates 
for senior programmers and compliance attorneys, modified to account 
for an 1,800-hour work year; multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead; and adjusted to 
account for the effects of inflation, yielding effective hourly 
rates of $308 and $340, respectively. See Securities Industry and 
Financial Markets Association, Report on Management & Professional 
Earnings in the Securities Industry 2013. We estimate that senior 
programmers and compliance attorneys would divide their time 
equally, yielding an estimated hourly wage of $324. ($308 per hour 
for senior programmers + $340 per hour for compliance attorneys) / 2 
= $324 per hour. Based on the Commission's estimate of 62,260 one-
time burden hours and the estimated wage rate of $324 per hour, the 
total one-time paperwork expenses for funds associated with the 
internal hour burden imposed by the reporting requirements of Form 
N-CEN are about $20,172,240. This estimate is based on the following 
calculation: 60,260 one-time hours x $324 per hour = $20,172,240 
one-time expenses.
    \1422\ CAI Comment Letter; T. Rowe Price Comment Letter; Invesco 
Comment Letter; and ICI Comment Letter.
---------------------------------------------------------------------------

    The rescission of Form N-SAR and the introduction of Form N-CEN, to 
the extent relevant, could provide 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 data 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. However, individual investors may indirectly benefit from 
the increase in information to the extent that it becomes available 
through third-party information providers, as these information 
providers will likely have the capabilities to efficiently collect the 
data from Form N-CEN and present it for investors in user-friendly 
format. For certain investors and other potential users that would 
obtain and use the information that funds report in Form N-CEN 
directly, the update to the structure of the information should improve 
their ability to efficiently aggregate the information across all 
investment companies given the difficulty associated with extracting 
information from reports on Form N-SAR, due to its idiosyncratic 
reporting format.\1423\
---------------------------------------------------------------------------

    \1423\ See, e.g., Morningstar Comment Letter (noting that the 
XML format will provide more accessible data to the public).
---------------------------------------------------------------------------

    The changes to the reporting of census information, including the 
reporting of the information in a modern structured data 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. In addition, these changes could enhance the ability 
of investors to understand the investment risks and practices (for 
example, securities lending activities) of investment companies, and 
therefore could improve the ability of investors to efficiently 
allocate capital. Consequently, the reporting changes could promote 
capital formation.
3. Costs
    As discussed above, we expect the new Form N-CEN will be less 
costly to file than Form N-SAR has been, because Form N-CEN will be 
filed annually while Form N-SAR is filed semi-annually.\1424\ 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 than previously 
reported.\1425\ There could also be costs as a result of the change in 
the frequency of disclosure of census information. For example, the 
Commission will receive census information on an annual instead of 
semi-annual basis, and therefore to the extent that the information 
changes intra-annually the information will be more dated than if the 
information was reported to the Commission on a semi-annual 
basis.\1426\ As discussed above, we believe that the costs related to 
reducing the frequency of the information received on Form N-SAR are 
not significant as this information is unlikely to change frequently. 
Also, funds' reporting costs may be reduced by the elimination, in Form 
N-CEN, of certain items from Form N-SAR that are no longer needed by 
Commission staff or are outdated in their current form.\1427\ In 
addition, as discussed above, we are moving the change in independent 
public accountant attachment proposed on Form N-CEN to Form N-CSR so 
that an accountant's letter regarding a change in accountant will 
become available to the public semi-annually rather than 
annually,\1428\ which we expect will affect reporting and other costs 
only minimally. Additionally, we recognize that we are adding some 
additional information items from the proposal, such as average net 
assets and CRD numbers for directors, which will result in minor 
increases in reporting costs relative to the proposal.
---------------------------------------------------------------------------

    \1424\ See, e.g., Dreyfus Comment Letter (noting that the 
rescission of Form N-SAR and Form N-Q and replacement with Form N-
CEN would result in a net reduction of 504 filings annually for the 
company).
    \1425\ See supra section II.D.4.e for a discussion of the ETF 
requirements.
    \1426\ However, as discussed supra footnote 770, this cost is 
mitigated, in part, by the fact that certain items from Form N-SAR 
that the Commission staff has deemed necessary on a more frequent 
basis are included instead in reports on Form N-PORT.
    \1427\ See discussion supra section II.D.5. One commenter did, 
however, suggest we reconsider the exclusion of several of these 
items. Comment Letter of Morningstar, Inc. (July 20, 2015).
    \1428\ See supra section II.D.4.b.
---------------------------------------------------------------------------

    As discussed above, some commenters objected to the inclusion of 
the requirement for each ETF to report the dollar value of the ETF 
shares that each authorized participant purchased and redeemed from the 
ETF during the reporting period, expressing concerns that reporting 
authorized participant activities on Form N-CEN could discourage 
authorized participants from participating in the ETF market, leading 
to further concentration in the authorized participant community or 
authorized participants moving their ETF-related trading activities to 
banks or ``clearing'' authorized participants.\1429\ We expect that any 
effects of these reporting requirements on authorized participant 
participation in the ETF primary market will be minimal. We continue to 
believe, moreover, that 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, and we 
believe that adopting the new reporting requirements is appropriate in 
light of these benefits notwithstanding the possibility that public 
availability of the information might affect the ETF primary markets in 
the manner those commenters suggest.
---------------------------------------------------------------------------

    \1429\ See supra footnote 1072 and accompanying text.
---------------------------------------------------------------------------

    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

[[Page 81990]]

will not be included on Form N-CEN but would be available through other 
filings. The information that will not be included on Form N-CEN and 
that will not be available elsewhere will impose costs on investors and 
other potential users from a loss of information to the extent that the 
information is found to be useful.\1430\ One commenter expressed 
concern that obtaining this information from various sources would 
reduce its availability to investors and other interested parties, but 
could be available through third-party information providers.\1431\ We 
have attempted to mitigate the potential cost relating to the loss of 
information by eliminating only those items which are either available 
elsewhere, not frequently used by Commission staff, or provide minimal 
benefit relative to the burdens of reporting such information.
---------------------------------------------------------------------------

    \1430\ Some of the information that funds will no longer report 
on a census-form, such as loads paid to captive or unaffiliated 
brokers, has been found by interested third-parties, including 
researchers, to be important in their analysis of the fund industry. 
See, e.g., Susan E. K. Christoffersen, Richard Evans & David K. 
Musto, What do Consumers' Fund Flows Maximize? Evidence from Their 
Brokers' Incentives, 68 J. of Fin. 201 (2013). See discussion supra 
section II.D.5.
    \1431\ See, e.g., Morningstar Comment Letter.
---------------------------------------------------------------------------

4. Alternatives
    Similar to Form N-PORT, the Commission has explored other ways to 
modernize and improve the utility and the quality of the census 
information that funds provide to the Commission and to investors. 
Commission staff examined how census information reported to the 
Commission could be improved to assist the Commission in its oversight 
activities, as well as how the information could benefit investors and 
other potential users of the information. Alternatives to the filing of 
Form N-CEN and the reporting of census information relate to the timing 
and frequency of the reports, the public disclosure of the information, 
the information that Form N-PORT would request, and the rescission of 
Form N-SAR.
    Unlike Form N-SAR, on which management companies file reports on a 
semi-annual basis, management companies will report information on Form 
N-CEN on an annual basis. An alternative to the annual reporting of 
census information in Form N-CEN is a semi-annual reporting of the 
information similar to Form N-SAR. However, as we discussed above, the 
census-type nature of the information that we will collect from funds 
in Form N-CEN should not change as frequently as, for example, 
portfolio holdings information.\1432\ 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.
---------------------------------------------------------------------------

    \1432\ Unlike Form N-SAR, Form N-CEN will not require funds 
report information relating to fee and expense information. 
Morningstar Comment Letter suggested semi-annual reporting of Form 
N-CEN should fee and expense information be required on Form N-CEN.
---------------------------------------------------------------------------

    We also considered alternatives to extend or shorten the filing 
period of Form N-CEN from 75 days. While a shorter filing period, such 
as 60 days (similar to the proposal) would provide more timely 
information to the Commission,\1433\ it would also place a burden on 
funds that need time to collect, verify, and report the required 
information to the Commission. Several commenters supported extending 
the filing period to at least a 75-day period, arguing, among other 
things, that a longer time period would help stagger the filing 
deadline from other end-of-month filing requirements, ensure that all 
accounting-related questions could be addressed more completely, and 
allow the appropriate time needed to update systems to report 
information in an XML format.\1434\ As discussed above, we have been 
persuaded by commenters to adopt a filing period of 75 days after the 
fiscal year-end (for management companies) and calendar year-end (for 
UITs). We believe that the 75-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.
---------------------------------------------------------------------------

    \1433\ Several commenters supported the 60-day filing period 
(Carol Singer Comment Letter and State Street), other commenters 
supported a longer filing period (MFS Comment Letter; CAI Comment 
Letter; T. Rowe Price Comment Letter; Invesco Comment Letter; and 
ICI Comment Letter). One justification for a longer filing period 
provided by commenters is the time needed to update systems to 
report information in an XML format (MFS Comment Letter; Invesco 
Comment Letter; and ICI Comment Letter).
    \1434\ MFS Comment Letter; CAI Comment Letter; T. Rowe Price 
Comment Letter; Invesco Comment Letter; and ICI Comment Letter.
---------------------------------------------------------------------------

    Funds will have 18 months after the effective date to comply with 
the new reporting requirements for Form N-CEN. An alternative would be 
to tier the compliance period, similar to the compliance period for 
Form N-PORT, dependent on entity size. However, as discussed above, we 
believe that it is less likely that smaller entities would need 
additional time to file Form N-CEN because the requirement to file Form 
N-CEN is similar to the current requirement to file Form N-SAR, and we 
expect that filers will prefer the updated, more efficient filing 
format of Form N-CEN.\1435\ An additional alternative would be to 
extend the compliance period. Some commenters suggested that the 
compliance period be extended to the later of 30 months after adoption 
of Form N-CEN, or 18 months after the effective date of amendments 
requiring funds to report liquidity information on Form N-CEN.\1436\ 
Given that much of the information that will be reported on Form N-CEN 
is currently already reported by funds on Form N-SAR, funds should 
already have processes and procedures in place to reduce the risk of 
inadvertent errors. In addition, filings on Form N-CEN are not expected 
to be as technically complex nor present comparable challenges in terms 
of reporting and data validation as filings on Form N-PORT. As such, we 
expect that eighteen months will 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 Form N-CEN 
with the Commission.
---------------------------------------------------------------------------

    \1435\ No commenters expressed an opinion specifically related 
to the filing format of N-CEN versus N-SAR.
    \1436\ See, e.g., Fidelity Comment Letter (suggesting a 
compliance date of 30 months after the adoption of Form N-CEN); MFS 
Comment Letter (same); CAI Comment Letter (same); IDC Comment Letter 
(same); ICI Comment Letter (suggesting the later of 30 months after 
the adoption of Form N-CEN or 18 months after the adoption of 
amendments requiring funds to report liquidity information on Form 
N-CEN).
---------------------------------------------------------------------------

    Funds will be required to report to the Commission information in 
Form N-CEN that will provide staff an ability to identify investment 
risks and engage in further outreach as necessary. Not requiring the 
information would substantially reduce the ability of the Commission to 
oversee the fund industry. In addition, the information reported on 
Form N-CEN could be important to investors to differentiate investment 
companies. An alternative to adopting Form N-CEN would be to revise 
Form N-SAR. The Commission believes, however, that the outdated 
technology associated with Form N-SAR requires the introduction of a 
new form in order to increase the benefits from the changes made to the 
reporting of census information. In addition, there were no commenters 
who explicitly stated that Form N-SAR should not be replaced by Form N-
CEN.
    The information that funds report on Form N-CEN will be made 
publicly available. Additional alternatives include making some or all 
of the

[[Page 81991]]

census information reported on the form nonpublic. Specific information 
that could be made nonpublic includes securities lending 
information,\1437\ service provider information,\1438\ and ETF 
authorized participant information.\1439\ Making more information 
reported on Form N-CEN nonpublic would reduce the amount of information 
available to investors and therefore reduce the ability of investors to 
differentiate investment companies. For example, one commenter 
recommended that details concerning indemnification protection should 
be made nonpublic.\1440\ Nonetheless, we continue to believe that 
public reporting is a necessary part of improving transparency 
regarding a fund's securities lending activities. Specifically, we 
believe that the information regarding indemnification provisions is 
relevant to investors evaluating the risks associated with securities 
lending and comparing those risks across funds.
---------------------------------------------------------------------------

    \1437\ Some commenters suggested that certain securities lending 
information be kept non-public, including information describing 
third-party lending arrangements (Fidelity Comment Letter).
    \1438\ Some commenters suggested that certain service provider 
information be kept non-public, including the identities of the 
pricing services used (Interactive Data Comment Letter) and the 
compensation and other fee and expense arrangements (IDC Comment 
Letter).
    \1439\ Some commenters suggested that disclosure of information 
on authorized participants could discourage APs from participating 
in the ETF market (Invesco Comment Letter and BlackRock Comment 
Letter), while others suggested that disclosure of the creation and 
redemption activity of each AP is not helpful and is confusing to 
investors (BlackRock Comment Letter). See supra footnote 1429 and 
accompanying text.
    \1440\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    One set of alternatives is to require funds to report additional 
information on Form N-CEN, including additional new information that is 
not currently reported on Form N-SAR.\1441\ Another set of alternatives 
is to require funds to report less information on Form N-CEN. For 
example, commenters expressed concern about providing new information 
related to securities lending, service providers, and ETF authorized 
participants, and one alternative is to not require this information to 
be provided.\1442\ One commenter, however, expressed concern about the 
exclusion from Form N-CEN of particular items on Form N-SAR.\1443\ As 
discussed above, the adoption of Form N-CEN and the rescission of Form 
N-SAR will improve the quality and utility of the information 
investment companies report to the Commission. Although additional 
information could further increase the benefits of Form N-CEN to 
Commission staff, investors, and other interested parties, the benefits 
may not justify the initial and ongoing costs for investment companies 
to report the information because the Commission believes that the 
information we are requesting strikes an appropriate balance between 
the current information needs of Commission staff as well as the 
developments in the fund industry and the reduction of reporting 
burdens for registrants, particularly where information may be 
similarly disclosed or reported elsewhere.\1444\
---------------------------------------------------------------------------

    \1441\ Morningstar Comment Letter expressed concern that some of 
the information that would have been eliminated under the proposal 
would decrease the availability of the information for investors and 
other interested parties.
    \1442\ See, e.g., Fidelity Comment Letter; Interactive Data 
Comment Letter; and BlackRock Comment Letter; supra footnote 1429 
and accompanying text.
    \1443\ Morningstar Comment Letter expressed concern that the 
exclusion of several Form N-SAR items would then require a manual 
aggregation of information that would put comprehensive analysis of 
the information out of reach for investors and fund boards unless 
they were using services from third-party providers that could 
aggregate such data.
    \1444\ See, e.g., supra footnotes 941, 968, 989, 1000-1003 and 
accompanying text.
---------------------------------------------------------------------------

E. Amendments to Forms Regarding Securities Lending Activities

1. Introduction and Economic Baseline
    We are also adopting amendments to Forms N-1A and N-3 to require 
certain disclosures in fund Statements of Additional Information 
regarding securities lending activities, as well as amendments to Form 
N-CSR to require the same information from closed-end funds.\1445\ We 
proposed that similar requirements be included in fund financial 
statements as part of the proposed amendments to Regulation S-X in 
order to allow investors to better understand the income generated 
from, as well as the expenses associated with, a fund's securities 
lending activities.\1446\ Some commenters stated that some of the 
proposed requirements would yield estimates that may be costly to 
audit, and that lengthy disclosure concerning securities lending 
activity in a fund's financial statements could detract from other 
financial statement disclosures.\1447\ After consideration of these 
issues raised by commenters, we are adopting these disclosure 
requirements as amendments to the fund registration forms (viz., Forms 
N-1A and N-3) or, in the case of closed-end funds, as amendments to 
Form N-CSR, rather than as amendments to Regulation S-X.\1448\
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    \1445\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; Item 
12 of Form N-CSR; see also supra section II.F.
    \1446\ The proposed requirements would have included disclosure 
in the fund's financial statements 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 fund 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 fund 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 fund 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. See proposed 
rule 6-03(m) of Regulation S-X; Proposing Release, supra footnote 7, 
at 33624.
    \1447\ See Deloitte Comment Letter; EY Comment Letter.
    \1448\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; Item 
12 of Form N-CSR.
---------------------------------------------------------------------------

    The final rules will require funds to disclose gross and net income 
from securities lending activities, fees and compensation in total and 
broken out by enumerated types, and a description of the services 
provided to the fund by the securities lending agent. The quantitative 
disclosure requirements are discussed above in section II.F and also 
illustrated in Table 2 below.

[[Page 81992]]

[GRAPHIC] [TIFF OMITTED] TR18NO16.013

    Modifications from the proposed rule include, for example, 
replacing the proposed requirement that funds disclose the terms 
governing the compensation of the securities lending agent--including 
any revenue split--with a requirement to report actual fees paid during 
the fund's prior fiscal year,\1449\ because commenters persuaded us 
that backward-looking dollar-based requirements would yield clearer 
disclosure than would the proposed requirements and may also enhance 
disclosure comparability across funds for investors and reduce 
preparation complexity for funds. Additionally, as discussed above, 
while the proposed requirements would have included disclosure of all 
fees and/or compensation paid for securities lending and related 
services, we have determined that it is appropriate to clarify in the 
final rules the specific categories of fees and/or compensation that 
are required to be disclosed.\1450\
---------------------------------------------------------------------------

    \1449\ Compare proposed rule 6-03(m)(4) of Regulation S-X with 
Item 19(i)(1)(ii) of Form N-1A; Item 21(j)(i)(B) of Form N-3 (same); 
Item 12(a)(1) of Form N-CSR.
    \1450\ Compare proposed rule 6-03(m)(2) with Item 19(i)(1)(ii) 
of Form N-1A; Item 21(j)(i)(B) of Form N-3; and Item 12(a)(1) of 
Form N-CSR.
---------------------------------------------------------------------------

    The current set of fund registration statement and reporting 
requirements under Forms N-1A, N-3, and N-CSR (for closed-end funds) is 
the baseline from which we discuss the economic effects of today's 
amendments. The parties that could be affected by these amendments 
include funds that file or will file or update registration statements 
with the Commission (and closed-end funds that file or will file 
reports on Form N-CSR), the Commission itself, current and future 
investors of investment companies, and other market participants that 
could be affected by the increase in the disclosure of fund securities 
lending activity information.
    We expect that many of the economic effects from the amendments to 
Forms N-1A, N-3, and N-CSR will largely result from an increase in 
investor ability to make investment decisions dependent on the more 
transparent disclosure in fund Statements of Additional Information (or 
in Form N-CSR for closed-end funds), and the extent to which this 
transparency enhances the ability of the Commission to utilize the 
updated disclosures. As discussed above, the economic effects will 
depend on the extent to which the securities lending practices of all 
investment companies become more transparent, and the ability of 
investors--and, in particular, individual investors--to utilize 
Statements of Additional Information (and reports on Form N-CSR for 
closed-end funds) to compare funds and to make investment decisions. As 
a result of these factors, some of which are unquantifiable, the 
discussion below is largely qualitative.
2. Benefits
    The amendments to Forms N-1A, and N-3, and N-CSR will benefit 
investors by enhancing the information funds disclose in the Statements 
of Additional Information (and reports on Form N-CSR for closed-end 
funds). We continue to believe that because net earnings from 
securities lending can contribute to the investment performance of a 
fund, the Commission, investors and others would benefit from the 
additional transparency of securities lending fees on the income from 
these activities. We further believe that the benefits of this 
additional transparency justify the potential unintended consequences, 
highlighted by commenters and discussed above, of public disclosure of 
certain information.\1451\
---------------------------------------------------------------------------

    \1451\ See supra footnotes 1212-1219 and accompanying text.
---------------------------------------------------------------------------

    We have made modifications from the proposed requirements designed 
to, among other things, enhance comparability of the disclosed 
information and potentially ameliorate some concerns commenters 
expressed about the proposed required public disclosure of the terms 
governing compensation of the securities lending agent. A commenter 
suggested that we could facilitate comparability by specifying the fees 
for particular services that must be disclosed,\1452\ and we agree. We 
believe that these clarifications will enhance comparability of the 
disclosed fees and compensation across funds, and indirectly benefit 
investors to the extent that other entities, including investment 
advisers and broker-dealers, utilize the

[[Page 81993]]

information to help investors make more informed investment decisions.
---------------------------------------------------------------------------

    \1452\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    The comparability of the disclosed fee and expense information may 
also depend on the nature of the services provided to a particular fund 
in connection with its securities lending activities. Accordingly, to 
further enhance the comparability of the disclosed information and 
allow users to better assess fee and expense information, we have 
determined to specify that this information should be provided on the 
basis of the services actually provided to the fund in its most recent 
fiscal year and the discussion above provides some examples of the 
types of services that could be enumerated to illustrate such 
services.\1453\
---------------------------------------------------------------------------

    \1453\ Item 19(i)(2) of Form N-1A (requiring disclosure of the 
services provided to the fund by the securities lending agent (for 
example and as applicable, locating borrowers, monitoring daily the 
value of the loaned securities and collateral, requiring additional 
collateral as necessary, cash collateral management, qualified 
dividend management, negotiation of loan terms, selection of 
securities to be loaned, recordkeeping and account servicing, 
monitoring dividend activity and material proxy votes relating to 
loaned securities, and arranging for return of loaned securities to 
the fund at loan termination)); Item 21(j)(ii) of Form N-3 (same); 
Item 12(b) of Form N-CSR (same).
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    As mentioned above, we are persuaded that backward-looking dollar-
based requirements would yield clearer disclosure than would the 
proposed requirements and may also enhance disclosure comparability 
across funds for investors and reduce preparation complexity for funds. 
This change from the proposal allows investors and others to derive the 
informational benefit from the disclosure without any potentially 
sensitive negotiated contractual terms being made public.
3. Costs
    We believe that registrants on average will likely incur minimal 
costs from our amendments to Forms N-1A and N-3, including certain 
paperwork and other expenses discussed below.\1454\
---------------------------------------------------------------------------

    \1454\ See infra footnotes 1460-1461 and accompanying text. See 
also supra section III.B.3 for related cost analysis associated with 
amendments to Form N-CSR.
---------------------------------------------------------------------------

    Several commenters expressed concern that the proposed disclosure 
requirements could yield information that would suggest, inaptly, that 
fees and expenses related to securities lending activities among funds 
are readily compared and contrasted.\1455\ While there is the potential 
for investor confusion with any disclosure, we believe we have 
mitigated these concerns through changes that we are making from the 
proposal, such as switching from terms of compensation to backward-
looking dollar based requirements and providing clarification in the 
final rules as to the types of fees and/or compensation that must be 
enumerated.
---------------------------------------------------------------------------

    \1455\ See MFS Comment Letter; PwC Comment Letter.
---------------------------------------------------------------------------

    Another commenter expressed concerns that the proposed fee and 
expense information could be used to evaluate the terms of a fund's 
lending arrangements and could, without access to additional 
information, result in potentially inappropriate conclusions that a 
fund negotiated its arrangements poorly or was otherwise disadvantaged 
in its negotiations.\1456\ That commenter noted that the revenue split 
can depend on numerous factors, including the range, amount, and 
attractiveness of the securities a fund complex as a whole may make 
available for loan.\1457\ We believe that the modifications we have 
made from the proposal, discussed above in Section II.F.2, help 
ameliorate these concerns.
---------------------------------------------------------------------------

    \1456\ PwC Comment Letter (particularly with respect to the 
proposed terms of compensation disclosure requirement); see also RMA 
Comment Letter (concerning borrower rebates).
    \1457\ PwC Comment Letter.
---------------------------------------------------------------------------

    Commenters also expressed concerns with the proposed requirements 
based on the currently nonpublic character of some of the information 
that would be required to be disclosed publicly, particularly the 
proposed requirement to disclose the terms governing compensation of 
the securities lending agent.\1458\ Commenters argued that some funds 
currently enjoy privately negotiated competitive advantages with 
securities lending services or counterparties that could be jeopardized 
should their arrangements with their securities lending agents be made 
public.\1459\ First, we note that, as discussed herein, we have 
modified the rule from the proposal and are no longer requiring certain 
pieces of information be disclosed--specifically, the terms of the 
revenue split and the terms governing the compensation of the 
securities lending agent more generally. We acknowledge, as these 
commenters have asserted, that enhanced transparency into securities 
lending arrangements could put funds at a competitive disadvantage by 
affecting the relative negotiating posture of funds that procure 
securities lending services, or dissuade counterparties from engaging 
in securities lending altogether, which could drive up the costs of 
lending services for funds. We believe, however, that the modifications 
to the proposed requirements that we are making today eliminate the 
disclosures from the proposed requirements that some commenters 
indicated could be the most sensitive while retaining the required 
information that we think will be most useful to investors in 
understanding the expenses associated with fund securities lending 
activities. This dollar-based requirement would also eliminate the 
requirement that potentially sensitive negotiated contractual terms be 
disclosed.
---------------------------------------------------------------------------

    \1458\ See AICPA Comment Letter (particularly with respect to 
the terms governing the compensation of the securities lending 
agent); Fidelity Comment Letter (particularly with respect to the 
revenue split); ICI Comment Letter; Invesco Comment Letter; MFS 
Comment Letter; SIFMA Comment Letter I; Simpson Thacher Comment 
Letter (particularly with respect to the revenue split); Wells Fargo 
Comment Letter.
    \1459\ See AICPA Comment Letter; Fidelity Comment Letter; ICI 
Comment Letter; Invesco Comment Letter; MFS Comment Letter; SIFMA 
Comment Letter I; Simpson Thacher Comment Letter; Wells Fargo 
Comment Letter.
---------------------------------------------------------------------------

    As mentioned above, we are persuaded that backward-looking dollar-
based requirements would yield clearer disclosure than would the 
proposed requirements, thus mitigating potential costs related to 
misinterpretation or a false sense of precision by investors. In 
addition, this switch from terms of compensation to backward-looking 
dollar-based requirements could yield a cost savings for filers by 
possibly reducing preparation complexity relative to the proposal.
    We expect that funds would incur certain paperwork and other 
expenses in connection with the new requirements. For funds that file 
registration statements on Forms N-1A and N-3, as discussed in detail 
below, we estimate that these paperwork expenses would be, in the 
aggregate, about $1.3 million each year.\1460\ Funds

[[Page 81994]]

would also incur initial one-time costs associated with establishing 
systems and procedures for compliance. We estimate that these expenses 
would be, in the aggregate, about $3.9 million.\1461\ For closed-end 
funds that file annual reports on Form N-CSR, we estimate that the new 
requirements will increase the hour burden associated with the 
paperwork costs of Form N-CSR for closed-end funds by an additional 2 
burden hours with an additional internal cost burden of $648 per fund 
in the first year,\1462\ and an additional 0.5 hours with an additional 
internal cost burden of $162 per fund for filings in subsequent 
years.\1463\
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    \1460\ Below, we estimate that 9,502 and 16 funds per year could 
file registration statements on Forms N-1A and N-3, respectively. 
See infra text following footnote 1591. Below, we estimate that 
funds will, on average, incur 0.5 burden hours per fund per year to 
comply with the new registration statement requirements. See id. 
Therefore, in the aggregate, we estimate that such funds would incur 
about 5,038 burden hours to comply with these requirements. (9,502 
funds + 16 funds) x 0.5 burden hours per fund per year = 4,759 
burden hours per year. The Commission estimates the wage rate 
associated with these burden hours based on salary information for 
the securities industry compiled by the Securities Industry and 
Financial Markets Association. The estimated wage figure is based on 
published rates for intermediate accountants and attorneys, modified 
to account for an 1,800-hour work year; multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead; and 
adjusted to account for the effects of inflation, yielding effective 
hourly rates of $160 and $386, respectively. See Securities Industry 
and Financial Markets Association, Report on Management & 
Professional Earnings in the Securities Industry 2013. We estimate 
that intermediate accountants and attorneys would divide their time 
equally, yielding an estimated hourly wage of $273 per hour. ($160 
per hour for intermediate accountants + $386 per hour for attorneys) 
/ 2 = $273 per hour. Based on the Commission's estimate of 4,759 
burden hours per year and the estimated wage rate of $273 per hour, 
the total annual paperwork expenses for funds associated with the 
new registration statement requirements are approximately 
$1,299,207. 4,759 hours per year x $273 per hour = $1,299,207 per 
year.
    \1461\ Below, we estimate that funds will, on average, incur 1.5 
one-time burden hours in the first year to comply with the new 
registration statement requirements. See infra text following 
footnote 1591. Therefore, in the aggregate, we estimate that such 
funds will incur about 15,114 one-time burden hours to comply with 
these requirements. (9,502 funds + 16 funds) x 1.5 one-time burden 
hours = 14,277 one-time burden hours. Based on the Commission's 
estimate of 14,277 one-time burden hours and the estimated wage rate 
of $273 per hour, the total one-time paperwork expenses for funds 
associated with the new registration statement requirements are 
approximately $3,897,621. 14,277 one-time burden hours x $273 per 
hour = $3,897,621.
    \1462\ See infra footnote 1610 and accompanying text; see also 
infra section IV.D.7.
    \1463\ See infra footnote 1611 and accompanying text; see also 
infra section IV.D.7.
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4. Alternatives
    The Commission has also explored other ways to modernize and 
improve the utility, quality, and consistency of the information that 
funds report to the Commission and to investors in the financial 
statements required in shareholder reports and other registration 
statements. Commission staff examined how the information funds provide 
to the Commission and to investors could be made more informative and 
more consistent across funds. Alternatives to the amendments to Forms 
N-1A, N-3, and N-CSR to require certain disclosures relate to 
information that funds report and the location in which the information 
is reported.
    One alternative would be simply to not adopt any new securities 
lending disclosure amendments. We believe, however, that information 
regarding securities lending activities can provide investors with 
insights into fund activities, foster comparability across funds, and 
contribute to investors making informed investment decisions.
    We are adopting amendments to Forms N-1A, N-3, and Form N-CSR to 
require certain disclosures regarding securities lending activities. 
Alternatively, we could require these disclosures to be made in the 
financial statements, in Form N-PORT, or in Form N-CEN. Given that our 
objective was to make this information available to investors and other 
users of the data, after consideration of comments we have decided that 
the Statement of Additional Information (and, with respect to closed-
end funds, reports on Form N-CSR) is an appropriate place for funds to 
be required to disclose this information.
    Finally, we could adopt different reporting requirements. For 
example, we could, as proposed, have required funds to disclose the 
terms of compensation in securities lending agreements rather than the 
backward-looking, dollar-based values. However, as discussed 
previously, commenters suggested, that doing so could result in the 
loss of privately negotiated competitive advantages or a decrease in 
the number of counterparties willing to participate in the securities 
lending market, and we believe that the requirements, as adopted 
eliminate the disclosures from the proposed requirements that 
commenters indicated could be the most sensitive while retaining the 
required information that we think will be most useful to investors in 
understanding the expenses associated with fund securities lending 
activities. Hence, we have decided against such an alternative.

F. Other Alternatives to the Reporting Requirements

    The Commission has explored additional ways to modernize and 
improve the utility and the quality of the information that funds 
provide to the Commission and to investors. The Commission has 
considered many alternatives to the individual elements contained in 
new Form N-PORT, amendments to Regulation S-X, and new Form N-CEN; 
alternatives specific to each of the new reporting requirements are 
discussed above. The following discussion addresses other significant 
alternatives which involve aspects of fund reporting that pertain to 
more than one of the new reporting requirements.
    The Commission considered the information that will 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 reporting of information on a more frequent basis imposes 
additional costs on funds, Commission staff believes the information 
that will 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. Commission staff also considered the benefits of 
identification information to link information between forms and with 
other sources of information, with the costs to funds to obtain and 
report the identification information on the new forms.
    The Commission is requiring that investment companies file Form N-
PORT and Form N-CEN in an XML structured data 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 with which the information investment companies provide can 
be compiled and aggregated. Commission staff believes that the affected 
parties would experience substantially less benefit from the reporting 
of investment company information if the information is not structured 
because of the time it would take to parse the information and the 
potential for errors in data due to the fact that unstructured data 
cannot be validated during the filing process. In addition, based on 
the Commission's understanding of current practices, it is likely that 
many investment companies and third party service providers have 
systems in place to accommodate the use of XML. Furthermore, based on 
our experiences with Forms N-MFP and PF, both of which require filers 
to report information in an XML format, we continue to believe that 
requiring funds to report information on Forms N-PORT and N-CEN in an 
XML format will provide the information that we seek in a timely and 
cost-effective manner. Therefore, requiring information in a format 
such as XML should impose minimal costs. The Commission will 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 
data format. The Commission 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.

[[Page 81995]]

    The technology used to structure the data could affect the benefits 
and costs associated with the adopted rules, and we have therefore 
considered alternative formats for structuring the data.\1464\ Some 
commenters suggested XBRL, a tagged system that is based on XML and was 
created specifically for the purpose of reporting financial and 
business information,\1465\ so as to leverage existing data definitions 
and reduce implementation costs.\1466\ However, as noted earlier we 
believe that requiring funds to report information on Form N-PORT in 
XML will be both efficient and cost-effective for funds. Sending a data 
file from a sender to a recipient requires many conditions to be 
satisfied, and among those of crucial importance to regulatory data 
collection are compact transmission and efficient validation. XML 
Schema provides a widely used validation framework for XML, and is 
supported in all modern programming languages. The nature of the 
information we are collecting also lends itself to XML schema for 
almost all validation,\1467\ and the arithmetic validations not 
supported natively in XML Schema are straightforwardly expressible in 
any number of languages. For this data set, the additional flexibility 
offered by a broader XML based framework such as XBRL incurs data 
volume and processing overhead with little incremental benefit; for 
example, the information funds will report will be as of a single 
reporting date, the units of measurement are predetermined or are 
constrained by the data type, and there is little value in customizing 
the content or presentation.
---------------------------------------------------------------------------

    \1464\ One commenter suggested a pre-formatted web portal or web 
form as well as the further development of inline structured data to 
ease reporting burdens (Schnase Comment Letter). We believe, 
however, that the volume of data for a fund to report on Form N-PORT 
would not lend itself to a manual entry approach, although we are 
considering the possibility of providing an online form for filers 
to use at their option for filing Form N-CEN, as we have with some 
other Commission Forms, such as Form 13F.
    \1465\ See, e.g., XBRL US Comment Letter; Deloitte Comment 
Letter; but see Morningstar Comment Letter (``Extensible Business 
Reporting Language has had very limited success, and certain aspects 
of the standard are too lenient for regular data validation.'').
    \1466\ For example, public companies currently use XBRL 
taxonomies to file reports with the SEC, including investment 
companies that voluntarily file structured data on Form N-CSR.
    \1467\ Some commenters discussed the additional benefits from 
the types of validation that can be conducted with XBRL (XBRL US 
Comment Letter and AICPA Comment Letter).
---------------------------------------------------------------------------

    Finally, one commenter stated that we should not require funds to 
directly report information on their own behalf, but instead require 
other entities such as transfer agents and custodians to report 
information on behalf of funds.\1468\ Given our expertise and 
experience in regulating, examining, and overseeing funds, including 
fund reporting, recordkeeping, and compliance, we continue to believe 
that obtaining such information directly from funds is appropriate.
---------------------------------------------------------------------------

    \1468\ See Federated Comment Letter (``It would also reduce the 
reporting burden on funds for the Commission to acquire information 
directly from custodians and transfer agents, which are proficient 
in maintaining and reporting portfolio holdings and other 
information.'').
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    New forms Form N-CEN and Form N-PORT contain ``collections of 
information'' within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\1469\ In addition, the amendments to Articles 6 and 12 of 
Regulation S-X will impact the collections of information under rules 
30e-1 and 30e-2 of the Investment Company Act,\1470\ and the amendments 
to Forms N-1A, N-2, N-3, N-4, N-6, and N-CSR under the Investment 
Company Act and Securities Act will impact the collections of 
information under those forms. Furthermore, implementation of new Forms 
N-PORT and N-CEN will coincide with rescission of Forms N-Q and N-SAR, 
thus eliminating the collections of information associated with those 
forms and impacting the collections of information under Form N-CSR.
---------------------------------------------------------------------------

    \1469\ 44 U.S.C. 3501 through 3521.
    \1470\ The paperwork burden from Regulation S-X is imposed by 
the rules and forms that relate to Regulation S-X and, thus, is 
reflected in the analysis of those rules and forms. To avoid a PRA 
inventory reflecting duplicative burdens and for administrative 
convenience, we have previously assigned a one-hour burden to 
Regulation S-X.
---------------------------------------------------------------------------

    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); \1471\ ``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); ``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). 
The titles for the new collections of information are: ``Form N-CEN 
Under the Investment Company Act, Annual Report for Registered 
Investment Companies'' (OMB Control No. 3235-0729 for N-CEN) and ``Form 
N-PORT Under the Investment Company Act, Monthly Portfolio Investments 
Report'' (OMB Control No. 3235-0730).
---------------------------------------------------------------------------

    \1471\ Currently, there is a collection of information 
associated with rule 30b1-5 under the Investment Company Act. See 
rule 30b1-5, `Quarterly Report' Originally submitted and approved as 
Proposed Rule 30b1-4 under the Investment Company Act of 1940, 
`Quarterly Report' '' (OMB Control No. 3235-0577). Rule 30b1-5 is 
the rule that requires certain funds to file Form N-Q. Among other 
things, we are rescinding Form N-Q and requiring certain funds to 
file Form N-PORT pursuant to new rule 30b1-9. With this in mind, we 
are discontinuing the information collection for rule 30b1-5.
---------------------------------------------------------------------------

    We published notice soliciting comments on the collection of 
information requirements in the Proposing Release and submitted the 
proposed collections of information to the Office of Management and 
Budget (``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 adopting new forms Form N-CEN and Form N-PORT 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

[[Page 81996]]

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
    Certain funds will be required to file an electronic monthly report 
on Form N-PORT within thirty days after the end of each month. Form N-
PORT is intended to improve transparency of information about funds' 
portfolio holdings and facilitate oversight of funds. The information 
required by Form N-PORT will be data-tagged in XML format. The 
respondents to Form N-PORT will be management investment companies 
(other than money market funds and small business investment companies) 
and UITs that operate as ETFs. Compliance with Form N-PORT will be 
mandatory for all such funds. Responses to the reporting requirements 
will be kept confidential for reports filed with respect to the first 
two months of each quarter; the third month of the quarter will not be 
kept confidential, but made public sixty days after the quarter end.
    In the Proposing Release, we estimated that 10,710 funds \1472\ 
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 
structured data filings, we estimated 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 estimated that 35% of 
funds (3,749 funds) would license a software solution and file reports 
on proposed Form N-PORT in house.\1473\ We further estimated 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 \1474\ and an average of 
approximately 14 burden hours for subsequent filings.\1475\ Therefore, 
we estimated the per fund average annual hour burden associated with 
proposed Form N-PORT for 3,749 fund filers would be 198 hours for the 
first year\1476\ and 168 hours for each subsequent year.\1477\ 
Amortized over three years, the average aggregate annual hour burden 
would be 178 hours per fund.\1478\
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    \1472\ This estimate includes 8,731 mutual funds (excluding 
money market funds), 1,411 ETFs and 568 closed-end funds and is 
based on ICI statistics as of December 31, 2014, available at https://www.ici.org/research/stats.
    \1473\ See Money Market Fund Reform 2014 Release, supra footnote 
33, at 47945 (adopting amendments to Form N-MFP and noting that 
approximately 35% of money market funds that report information on 
Form N-MFP license a software solution from a third party that is 
used to assist the funds to prepare and file the required 
information).
    \1474\ We anticipated that these funds would use the same 
software that was used to generate reports on Form N-Q and that the 
software vendor offering the Form N-Q software would likely offer an 
update to that software to handle reports on Form N-PORT. 
Accordingly, we estimated the burden associated with information 
that is currently filed on Form N-Q and that would also be filed on 
Form N-PORT to generally be the same--10.5 hours per filing. With 
respect to new data that would be required by Form N-PORT that was 
not required by Form N-Q, we generally estimated that it would 
initially take up to 10 hours to connect the software to the new 
data points. However, because we understand risk metrics data may be 
located on a different system than portfolio holdings data and 
because current reporting requirements do not require funds to have 
a process in place for these two systems to work together, with 
respect to the new risk metrics data that would be required by Form 
N-PORT, we estimated that it would initially take up to 15 hours to 
connect the risk metrics data to the software and that, once 
connected, it would take 5 hours to program the risk metrics 
software to output the required data to the Form N-PORT software. 
Additionally, we added another 3.5 hours to our estimated initial 
burden to account for the increased amount of information that would 
be required to be reported on Form N-PORT, but that is not currently 
required by Form N-Q. See infra footnote 1475 (discussing the 
additional 30% burden added to the current Form N-Q estimate). We 
also noted that funds that are part of a larger fund complex may 
realize certain economies of scale when preparing and filing reports 
on proposed Form N-PORT. For purposes of our analysis, however, we 
took a conservative approach and did not account for such potential 
economies of scale.
    \1475\ We anticipated that most of the burden associated with 
licensing a software solution, as discussed above, would be a one-
time burden. Accordingly, we estimated approximately 14 hours per 
fund for subsequent filings. This estimate is based on the 10.5 
hours currently estimated for filings on Form N-Q, plus 30% to 
account for the amount of additional information that would be 
required to be filed on Form N-PORT. Additionally, because we 
believe that the required information is generally maintained by 
funds pursuant to other regulatory requirements or in the ordinary 
course of business, for the purposes of our analysis, we did not 
ascribed any time to collecting the required information. See also 
supra footnote 1474 (noting that our estimates do not account for 
economies of scale).
    \1476\ The estimate is based on the following calculation: (1 
filing x 44 hours) + (11 filings x 14 hours) = 198 burden hours in 
the first year.
    \1477\ This estimate is based on the following calculation: 12 
filings x 14 hours = 168 burden hours in each subsequent year.
    \1478\ The estimate is based on the following calculation: (198 
+ (168 x 2))/3 = 178.
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    In the Proposing Release, we further estimated 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.\1479\ 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 anticipated that funds and 
their third-party service providers would 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 estimated 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 \1480\ and an average of approximately 9 burden hours 
for subsequent filings.\1481\ Therefore, we

[[Page 81997]]

estimated 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 \1482\ and 108 hours for each subsequent year.\1483\ Amortized 
over three years, the average aggregate annual hour burden would be 125 
hours per fund.\1484\
---------------------------------------------------------------------------

    \1479\ See Money Market Fund Reform 2014 Release, supra footnote 
33, at 47945 (adopting amendments to Form N-MFP and noting that 
approximately 65% of money market funds that report information on 
Form N-MFP retain the services of a third party to provide data 
aggregation and validation services as part of the preparation and 
filing of reports on Form N-MFP).
    \1480\ In order to be able to automate the process of 
communicating data to a third-party service provider so that it can 
be reported on Form N-PORT, we estimated that it would initially 
take a fund 60 hours to either procure software and integrate it 
into its systems or, alternatively, to write its own software. For 
those funds that already have an automated portfolio reporting 
process in place, we estimated that they would initially incur the 
same burden as those funds that license a software solution and file 
reports on proposed Form N-PORT in house. For these latter funds, 
however, we used the higher burden hours estimated for using a third 
party service provider in order to be conservative in our estimates 
because we lacked data on the number of funds that currently have an 
automated portfolio reporting process in place. See supra footnote 
1474 (discussing the burdens associated with licensing a software 
solution and filing reports on proposed Form N-PORT in house); see 
also supra footnote 1474 (noting that our estimates did not account 
for economies of scale).
    \1481\ We anticipated that most of the burden associated with 
third-party aggregation and validation would be the result of 
creating an automated process, as discussed above, and thus would be 
a one-time burden. Accordingly, we estimated approximately 9 hours 
per fund for subsequent filings. This estimate was based on the 10.5 
hours currently estimated for filings on Form N-Q, plus 30% to 
account for the amount of additional information that would be 
required to be filed on Form N-PORT, and subtracting 5 hours in 
recognition of the use of a third-party service provider to assist 
in the preparation and filing of reports on the form. Additionally, 
because we believe that the required information is generally 
maintained by funds pursuant to other regulatory requirements or in 
the ordinary course of business, for the purposes of our analysis, 
we did not ascribe any time to collecting the required information. 
See also supra footnote 1474 (noting that our estimates did not 
account for economies of scale).
    \1482\ The estimate is based on the following calculation: (1 
filing x 60 hours) + (11 filings x 9 hours) = 159 burden hours per 
year.
    \1483\ The estimate is based on the following calculation: 12 
filings x 9 hours = 108.
    \1484\ The estimate is based on the following calculation: (159 
+ (108 x 2))/3 = 125.
---------------------------------------------------------------------------

    In sum, we estimated that filing reports on proposed Form N-PORT 
would impose an average total annual hour burden of 1,537,572 on 
applicable funds.\1485\
---------------------------------------------------------------------------

    \1485\ The estimate is based on the following calculation: 
(3,749 x 178 hours) + (6,962 x 125 hours) = 1,537,572.
---------------------------------------------------------------------------

    In the Proposing Release, we noted that 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 structured data filings, we 
estimated 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.\1486\ In 
addition, we estimated 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.\1487\ In sum, we estimated that all applicable funds would 
incur on average, in the aggregate, external annual costs of 
$97,674,221.\1488\
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    \1486\ We estimated that money market funds that file reports on 
Form N-MFP in house license a third-party software solution for 
approximately $3,696 per fund per year. Due to the increased volume 
and complexity of the information that will be filed in reports 
pursuant to proposed Form N-PORT, we increased our external cost 
estimate for funds filing in house on proposed Form N-PORT by 30% 
(or $1,109).
    \1487\ We estimated that money market funds that file reports on 
Form N-MFP through a third-party service provider pay approximately 
$8,800 per fund per year. Due to the increased volume and complexity 
of the information that will be filed in reports pursuant to 
proposed Form N-PORT, we increased our estimate for funds filing 
through a third-party service provider on proposed Form N-PORT by 
30% (or $2,640).
    \1488\ This estimate is based on the following calculation: 
(3,749 funds that will file reports on proposed Form N-PORT in house 
x $4,809 per fund, per year) + (6,962 funds that will file reports 
on proposed Form N-PORT using a third-party service provider x 
$11,440 per fund, per year) = $97,674,221.
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    We received two comments on proposed Form N-PORT's estimated hour 
and costs burdens. One commenter, who submitted a comment letter on 
behalf of certain asset management firms focused on alternative 
investment strategies, stated that the proposed estimates of hours and 
costs were not realistic.\1489\ The commenter stated that, based on its 
outreach, several firms were currently spending more than 198 hours per 
year on investment company quarterly reporting. \1490\ This commenter 
additionally noted that Form N-PORT requires more information than 
current quarterly reports, particularly for funds that implement 
``alternative'' strategies, and must be filed monthly. The commenter 
also indicated that at least one firm they reached out to anticipated 
hiring one or more full-time equivalents to handle the reporting 
requirements. We do not agree with the commenter's suggestion that the 
burden estimates it compiled based on outreach to firms regarding their 
current time spent on quarterly reporting is necessarily inconsistent 
with the burden estimates we proposed. We understand that the burden 
will vary across funds depending on the size of the fund, the size of 
the fund complex, and the complexity of the portfolio, among other 
factors. The burden for some funds will exceed our estimate, and the 
burden for others will be less due to the nature of the fund. Also, 
while it is true that Form N-PORT will require more frequent reporting 
and information not currently required for quarterly reporting, not all 
requirements for quarterly reporting, such as reporting on a T + 0 
basis, will be required on Form N-PORT. Thus, the commenter's 
estimates, which revolved around alternative strategy funds, appear to 
be within, but on the high end of the Commission's estimates.
---------------------------------------------------------------------------

    \1489\ See Simpson Thacher Comment Letter.
    \1490\ See id. The commenter noted that in the Proposing Release 
that we estimated 198 burden hours in the first year, and 168 hours 
thereafter ``for each investment company.'' As noted in the 
proposing release, 168 hours was the Commission's ``per fund'' 
burden hour estimate for the first year for funds preparing and 
filing the reports in house, where ``fund'' is a registered 
management investment company and any separate series thereof. It is 
not clear from the comment letter whether firms that provided 
estimates to the commenter were providing estimated burdens for 
quarterly reporting per fund series, per investment company, or per 
fund complex. For purposes of the PRA, however, we conservatively 
assume it is per fund series.
---------------------------------------------------------------------------

    Another commenter suggested that complying with Form N-PORT 
reporting requirements could cost $800,000 to $1,500,000 for the fund 
complex (of approximately 250 funds).\1491\ The commenter specified 
that the initial burden associated with the proposed requirements would 
be over 6000 hours in total to conduct analysis, develop and test newly 
created interfaces between the reporting solution and internal and 
external data sources in an attempt to automate the collection, 
aggregation, and validation of data reported on Form N-PORT. The 
commenter further asserted that ongoing reporting requirements on Form 
N-PORT may require a support team of up to 10-15 members. The 
commenter's estimates of initial burden hours are therefore 
approximately 24 hours, based on a complex of 250 funds, lower than our 
proposed estimated initial filing burden of 44 hours per fund for fund 
filers filing in-house, and 60 hours per fund for fund filers retaining 
a third party service provider. Assuming the support team was 15 
members (i.e., the high end of the range set forth by the commenter), 
and a 2,000 hours work year, the commenter's annual estimated burden to 
file reports on Form N-PORT would be approximately 120 hours per 
fund.\1492\ This is in the range of our proposed annual estimate of 168 
hours per year for fund filers filing in house and 108 hours per year 
for fund filers retaining a third-party service provider. Finally, 
assuming that the dollar estimates that the commenter cited of between 
$800,000 to $1,500,000 were additional external costs of reporting on 
Form N-PORT, the commenter's estimated external costs would be between 
$3,200 and $6,000 per fund. These are in the range of our estimated 
external costs per fund (not including monetization of internal burden 
hours) of $4,805 per year for fund filers filing in house, and $11,440 
per year for fund filers using a service provider.
---------------------------------------------------------------------------

    \1491\ See Invesco Comment Letter.
    \1492\ 15 members x 2000 hours = 30,000 hours. 30,000 hours/250 
funds = 120 hours.
---------------------------------------------------------------------------

    As discussed above, our adoption includes some modifications from 
the proposal that address concerns raised by commenters and that are 
intended, in part, to decrease reporting and implementation burdens 
relative to the proposal.\1493\ We believe that our modifications from 
the proposal will reduce the estimated initial burden hours associated 
with implementation of Form N-PORT reporting requirements, relative to 
the proposal, particularly for funds that will be required to report 
risk metrics or custom derivatives transactions but will not affect 
external costs or ongoing burden hours. Based on our review of funds 
and the new reporting requirements, we

[[Page 81998]]

believe that, on average, the initial burden to file reports on Form N-
PORT will decrease by 0.5 hours, resulting in an initial burden of 43.5 
hours per fund for the 35% of funds that choose to file reports on Form 
N-PORT in-house, and 59.5 hours for the 65% of funds that choose to 
retain a third-party service provider.\1494\
---------------------------------------------------------------------------

    \1493\ See supra section III.B.2.
    \1494\ See supra footnotes 1474 (estimating an initial burden of 
44 hours per fund in the Proposing Release for the 35% of funds that 
choose to file reports on Form N-PORT in-house) and 1480 (estimating 
an initial burden of 60 hours per fund in the Proposing Release for 
the 65% of funds that choose to retain a third-party service 
provider).
---------------------------------------------------------------------------

    We have revised our estimate of the number of funds that will file 
Form N-PORT upward from 10,710 funds to 11,382 funds to reflect updates 
to the industry data figures that were utilized in the Proposing 
Release.\1495\ We continue to estimate that 35% of funds (3,984 funds, 
updated from 3,749 in our proposal) will license a software solution 
and file reports on Form N-PORT in house, and 65% of funds (7,398 
funds, updated from 6,962 funds in our proposal) will 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 
Form N-PORT.\1496\ The Commission estimates that, on an annual basis, 
funds generally will incur in the aggregate 1,959,423 burden hours in 
the first year and an additional 1,468,296 burden hours for filings in 
subsequent years in order to comply with Form N-PORT filing 
requirements.\1497\ Amortized over three years, the total annual hour 
burden of filing reports on Form N-PORT will be 1,632,005 hours, with 
an average annual hour burden of 143 hours per fund.\1498\
---------------------------------------------------------------------------

    \1495\ This estimate of 11,382 funds includes 9,039 mutual funds 
(excluding money market funds), 1,594 ETFs (including eight ETFs 
organized as UITs and 1,586 ETFs that are management investment 
companies), and 749 closed-end funds (excluding SBICs). Based on 
data obtained from the ICI and reports filed by registrants on Form 
N-SAR. See supra footnote 1259 and accompanying and following text; 
see also 2016 ICI Fact Book, supra footnote 2, at 22, 176.
    \1496\ These estimates are based on the following calculations: 
3,749 funds = 11,382 funds x 0.35. 7,398 funds = 11,382 funds x 
0.65.
    \1497\ These estimates are based on the following calculations: 
1,959,423 hours in the first year = (3,984 funds x 43.5 hours for 
the first filing for funds filing in-house) + (3,984 funds x 14 
hours for each subsequent filing x 11 filings) + (7,398 funds x 59.5 
hours for the first filing for funds retaining a third-party service 
provider) + (7,398 funds x 9 hours for each subsequent filing x 11 
filings). 1,468,296 hours in subsequent years = (3,984 funds filing 
in-house x 14 hours x 12 filings) + (7,398 funds retaining a third-
party service provider x 9 hours x 12 filings).
    \1498\ These estimates are based on the following calculations: 
1,632,005 hours amortized over three years = (1,959,423 hours + 
(1,468,296 hours x 2))/3. 143 hours per fund = 1,632,005 hours/
11,382 funds.
---------------------------------------------------------------------------

    We further estimate the total annual external cost burden of 
compliance with the information collection requirements of Form N-PORT 
will be $103,787,680, or $9,118 per fund.\1499\
---------------------------------------------------------------------------

    \1499\ These estimates are based on the following calculations: 
$103,776,240 = (3,984 funds x $4,805) + 7,398 funds x $11,440). 
$9,118 per fund = $103,787,680/11,382 funds.
---------------------------------------------------------------------------

2. Rescission of Form N-Q
    In connection with our adoption of Form N-PORT, and as proposed, 
our reforms will rescind Form N-Q in order to eliminate unnecessarily 
duplicative reporting requirements. The rescission of Form N-Q will 
affect all management investment companies required to file reports on 
the form.
    In our proposal, we estimated 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.\1500\ We received no comments on this estimate.
---------------------------------------------------------------------------

    \1500\ This estimate is based on the following calculation: 
219,513 hours per year = 10,453 funds x 10.5 hours x 2 filings per 
year. Management investment companies currently are required to file 
a quarterly report on Form N-Q after the close of the first and 
third quarters of each fiscal year.
---------------------------------------------------------------------------

    We have revised our estimate of the number of funds that would file 
Form N-Q upward from 10,453 funds to 11,863 funds to reflect updates to 
the industry data figures that were utilized in the Proposing 
Release.\1501\ Accordingly, we estimate that, in the aggregate, our 
rescission would eliminate 249,123 annual burden hours that would be 
associated with filing Form N-Q.\1502\ Additionally, we estimate that 
there are no external costs associated with the certification 
requirement or with preparation of reports on Form N-Q in general.
---------------------------------------------------------------------------

    \1501\ This estimate of 11,863 funds includes 9,520 mutual funds 
(including money market funds), 1,594 ETFs, and 749 closed-end funds 
(excluding SBICs). Based on data obtained from the ICI and reports 
filed by registrants on Form N-SAR. See supra footnote 1259 and 
accompanying and following text; see also 2016 ICI Fact Book, supra 
footnote 2, at 22, 176.
    \1502\ This estimate is based on the following calculation: 
249,123 hours per year = 11,863 funds x 10.5 hours x 2 filings per 
year.
---------------------------------------------------------------------------

B. Census Reporting

1. Form N-CEN
    As amended, rule 30a-1 will require all funds to file reports on 
Form N-CEN with the Commission on an annual basis.\1503\ Similar to 
current Form N-SAR, Form N-CEN requires reporting with the Commission 
of certain census-type information. However, unlike Form N-SAR, which 
requires semi-annual reporting for all management investment companies, 
Form N-CEN requires annual reporting.\1504\ Form N-CEN will 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 will be mandatory for all 
funds, and responses will not be kept confidential.
---------------------------------------------------------------------------

    \1503\ For purposes of the PRA analysis, the burdens associated 
with amended rule 30a-1 are included in the collection of 
information estimates of Form N-CEN.
    \1504\ UITs are only required to file Form N-SAR on an annual 
basis. See rule 30a-1.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that the Commission would 
receive an average of 3,146 reports per year, based on the number of 
existing Form N-SAR filers.\1505\ We estimated that management 
investment companies would each spend as much as 13.35 hours annually, 
preparing and filing reports on proposed Form N-CEN.\1506\ The 
Commission further estimated 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.\1507\
---------------------------------------------------------------------------

    \1505\ This estimate was based on 2,419 management companies and 
727 UITs filing reports on Form N-SAR as of December 31, 2014.
    \1506\ Our estimate included the hourly burden associated with 
registering/maintaining LEIs for the registrant/funds, which would 
be required to be included in reports on Form N-CEN.
    \1507\ See Proposing Release, supra footnote 7, at 33675.
---------------------------------------------------------------------------

    As discussed below, we estimated that management investment 
companies each spend as much as 15.35 hours preparing and filing each 
report on Form N-SAR. We noted that we 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, we noted that 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 noted our belief that reports in XML on proposed Form 
N-CEN would 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.\1508\ As such, we estimated that the

[[Page 81999]]

annual hour burden for management companies would be 13.35 per report 
on proposed Form N-CEN, down from 15.35 hours per report for Form N-
SAR.
---------------------------------------------------------------------------

    \1508\ We note that reports on Form N-CEN would be filed 
annually, rather than semi-annually as in the case of reports on 
Form N-SAR. Thus, while we estimated that the burden associated with 
each report on Form N-CEN for management companies would be two 
hours less than the burden associated with each report on Form N-
SAR, we estimated that the annual Form N-CEN burden for management 
companies would actually be 17.35 hours less than that associated 
with Form N-SAR. This estimate is based on the following 
calculation: 15.35 Form N-SAR burden hours x 2 reports) - 13.35 Form 
N-CEN burden hours = 17.35 hours.
---------------------------------------------------------------------------

    In the Proposing Release, we also noted that UITs may, however, 
experience an increase in the hour burden associated with census-type 
reporting if proposed Form N-CEN were 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 
increased the estimated annual hour burden for each UIT from 7.11 hours 
in the currently approved collection for Form N-SAR to 9.11 hours for 
proposed Form N-CEN.
    We also noted our belief that, in the first year reports on the 
form are filed, funds may require additional time to prepare and file 
reports. We estimated that, for the first year, each fund would each 
require 20 additional hours.\1509\ Accordingly, we estimated that 
management investment companies would each require 33.35 annual burden 
hours in the first year \1510\ and 13.35 annual burden hours in each 
subsequent year for preparing and filing reports on proposed Form N-
CEN. Additionally, we estimated that UITs would each require 29.11 
annual burden hours in the first year \1511\ and 9.11 annual burden 
hours in each subsequent year for preparing and filing reports on 
proposed Form N-CEN.
---------------------------------------------------------------------------

    \1509\ This additional time may be attributable to, among other 
things, reviewing and collecting new or revised data pursuant to the 
Form N-CEN requirements or changing the software currently used to 
generate reports on Form N-SAR in order to output similar data in a 
different format.
    \1510\ This estimate is based on the following calculation: 
13.35 hours for each filing + 20 additional hours for the first 
filing = 33.35 hours.
    \1511\ This estimate was based on the following calculation: 
9.11 hours for each filing + 20 additional hours for the first 
filing = 29.11 hours.
---------------------------------------------------------------------------

    In the Proposing Release, we further estimated that the average 
annual hour burden per response for proposed Form N-CEN for the first 
year would be 32.37 hours \1512\ and 12.37 hours in subsequent 
years.\1513\ Amortizing the burden over three years, we estimated that 
the average annual hour burden per fund per year would be 19.04 \1514\ 
and the total aggregate annual hour burden would be 59,900.\1515\
---------------------------------------------------------------------------

    \1512\ This estimate was based on the following calculation: 
((2,419 management investment companies x 33.35 hours) + (727 UITs x 
29.11 hours)) / 3,146 total funds = 32.37 hours.
    \1513\ This estimate was based on the following calculation: 
((2,419 management investment companies x 13.35 hours) + (727 UITs x 
9.11 hours)) / 3,146 total funds = 12.37 hours.
    \1514\ This estimate was based on the following calculation: 
(32.37 hours per management company in first year + (12.37 in each 
year thereafter x 2 years)) / 3 years = 19.04 hours per year.
    \1515\ This estimate was based on the following calculation: 
3,146 funds x 19.04 hours per fund per year = 59,900 hours per year.
---------------------------------------------------------------------------

    With respect to the initial filing of a report on Form N-CEN, we 
estimated an external cost of $220 per fund and, with respect to 
subsequent filings, we estimated an annual external cost of $120 per 
fund.\1516\ We estimated the amortized annual external cost per fund 
would be $153.\1517\ We also estimated that no external cost burden was 
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.\1518\ In sum, we estimated that all applicable funds 
would incur, in the aggregate, external annual costs of 
$1,748,637.\1519\
---------------------------------------------------------------------------

    \1516\ See Proposing Release, supra footnote 7, at n.766 
(discussing the costs associated with registering and maintaining an 
LEI).
    \1517\ This estimate was based on the following calculation: 
($220 in first year + (2 years x $120 each subsequent year)) / 3 
years = $153 per year.
    \1518\ See Item B.1.d and Item C.1.c of Form N-CEN (requiring 
LEI for the registrant and each series of a management company).
    \1519\ This estimate was based on the following calculation: 
$153 per year per fund x 11,429 funds = $1,748,637 per year.
---------------------------------------------------------------------------

    One commenter expressed the general belief that requiring census-
type data on Form N-CEN on an annual basis, rather than on a semi-
annual basis on Form N-SAR, would significantly lessen reporting 
burdens for funds and lower costs for fund shareholders when compared 
to the status quo.\1520\ We agree and continue to believe the estimated 
hour and cost burdens associated with Form N-CEN estimated in the 
Proposing Release reflect this reduction in burdens and costs. With the 
exception of this comment, we did not receive comments on the estimated 
hour and costs burdens discussed above associated with reporting 
census-type information on Form N-CEN.
---------------------------------------------------------------------------

    \1520\ See ICI Comment Letter.
---------------------------------------------------------------------------

    As discussed above, our adoption of Form N-CEN includes a number of 
modifications or clarifications from the proposal that address concerns 
raised by commenters and that are intended, in part, to decrease 
reporting and implementation burdens relative to the proposal. For 
example, we have extended the filing period for Form N-CEN from 60 
days, as proposed, to 75 days to, in part, respond to commenters' 
concerns that 60 days would not provide funds the time necessary to 
collect, verify, and report information on Form N-CEN.\1521\ We also 
have modified the proposal by moving the management's statement 
regarding a change in independent public accountant originally filed on 
Form N-SAR from an attachment to Form N-CEN, as proposed, to an exhibit 
to Form N-CSR, thereby shifting burden associated with this exhibit 
filing from Form N-CEN to Form N-CSR. However, we recognize a few 
reporting items and sub-items have been added to the form that were not 
contemplated in the burden hours and costs we estimated in the 
Proposing Release. For example, we are adopting a requirement that a 
fund (other than a money market fund) provide its monthly average net 
assets during the reporting period,\1522\ and we are also requiring the 
reporting of CRD numbers for directors.\1523\
---------------------------------------------------------------------------

    \1521\ See supra section II.D.3.
    \1522\ See supra footnotes 1016-1021 and accompanying and 
following text.
    \1523\ See supra footnotes 823-824 and accompanying text.
---------------------------------------------------------------------------

    We believe that certain of the modifications from and 
clarifications to the proposal that we are adopting today will 
generally reduce the estimated burden hours and costs associated with 
implementation of Form N-CEN reporting requirements relative to the 
proposal, while a few others will increase those estimates. For these 
reasons, we believe that the net effect of such modifications from the 
proposal will not have a net impact on the estimated burden hours and 
costs stated in the Proposing Release. Accordingly, we are not 
estimating a change to the proposed per-fund estimates as a result of 
the modifications we have made to the proposed requirements. The 
Commission, however, has modified the estimated increase in aggregate 
annual burden hours and external costs that will result from reporting 
requirements on Form N-CEN in light of updated data regarding the 
number of management investment companies and UITs.
    We have revised our estimate of the number of reports on Form N-CEN 
per year downward from 3,146 reports to 3,113 reports to reflect 
updates to the industry data figures that were utilized

[[Page 82000]]

in the Proposing Release.\1524\ We continue to estimate that management 
investment companies will each spend as much as 13.35 hours annually, 
preparing and filing reports on Form N-CEN.\1525\ The Commission also 
continues to estimate that UITs, including separate account UITs, will 
each spend as much as 9.11 hours annually, preparing and filing reports 
on Form N-CEN, since a UIT will be required to respond to fewer 
reporting items.\1526\
---------------------------------------------------------------------------

    \1524\ This estimate is based on 2,392 management companies and 
721 UITs filing reports on Form N-SAR as of December 31, 2015.
    \1525\ Our estimate includes the hourly burden associated with 
registering/maintaining LEIs for the registrant/funds, which would 
be required to be included in reports on Form N-CEN.
    \1526\ See id.
---------------------------------------------------------------------------

    We continue to estimate that management investment companies 
currently spend as much as 15.35 hours preparing and filing each report 
on Form N-SAR, and note that we generally have sought to simplify and 
decrease the census-type reporting burdens placed on registrants by 
current Form N-SAR in adopting Form N-CEN. For example, Form N-CEN, as 
adopted, will 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 continue to believe that 
reports in XML on 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 
continue to believe that the estimated hour burden for filing reports 
on Form N-CEN should be a reduced burden from the hour burden 
associated with Form N-SAR.\1527\ As such, we continue to estimate that 
the annual hour burden for management companies will be 13.35 per 
report on Form N-CEN, down from 15.35 hours per report for Form N-SAR.
---------------------------------------------------------------------------

    \1527\ We note that reports on Form N-CEN will be filed 
annually, rather than semi-annually as in the case of reports on 
Form N-SAR. Thus, while we estimate that the burden associated with 
each report on Form N-CEN for management companies will be two hours 
less than the burden associated with each report on Form N-SAR, we 
estimate that the annual Form N-CEN burden for management companies 
will actually be 17.35 hours less than that associated with Form N-
SAR. This estimate is based on the following calculation: (15.35 
Form N-SAR burden hours per report x 2 reports per year) - 13.35 
Form N-CEN burden hours per year = 17.35 hours per year.
---------------------------------------------------------------------------

    We continue to believe that UITs may, however, experience an 
increase in the hour burden associated with census-type reporting on 
Form N-CEN because UITs will 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 will be required to provide certain background 
information and attachments in their reports on Form N-CEN, which they 
are not currently required to provide in their reports on Form N-SAR. 
As a result, we continue to estimate an increase in the annual hour 
burden for UITs from 7.11 hours in the currently approved collection 
for Form N-SAR to 9.11 hours for Form N-CEN.
    In addition, we continue to believe that, in the first year reports 
on the form are filed, funds may require additional time to prepare and 
file reports. Therefore, we continue to estimate that, for the first 
year, each fund will require 20 additional hours.\1528\ Accordingly, we 
estimate that each management investment company will require 33.35 
annual burden hours in the first year \1529\ and 13.35 annual burden 
hours in each subsequent year for preparing and filing reports on Form 
N-CEN. Furthermore, we estimate that each UIT will require 29.11 annual 
burden hours in the first year \1530\ and 9.11 annual burden hours in 
each subsequent year for preparing and filing reports on Form N-CEN.
---------------------------------------------------------------------------

    \1528\ This additional time may be attributable to, among other 
things, reviewing and collecting new or revised data pursuant to the 
Form N-CEN requirements or changing the software currently used to 
generate reports on Form N-SAR in order to output similar data in a 
different format.
    \1529\ This estimate is based on the following calculation: 
13.35 hours for filings + 20 additional hours for the first filing = 
33.35 hours.
    \1530\ This estimate is based on the following calculation: 9.11 
hours for filings + 20 additional hours for the first filing = 29.11 
hours.
---------------------------------------------------------------------------

    We also continue to estimate (after rounding to the nearest 
hundredth of an hour) that the average annual hour burden per response 
for Form N-CEN for the first year will be 32.37 hours \1531\ and 12.37 
hours in subsequent years.\1532\ Amortizing the burden over three 
years, we estimate that the average annual hour burden per fund per 
year will be 19.04 hours \1533\ and the total aggregate annual hour 
burden will be 59,272 hours.\1534\
---------------------------------------------------------------------------

    \1531\ This estimate is based on the following calculation: 
((2,392 management investment companies x 33.35 hours per management 
investment company in the first year) + (721 UITs x 29.11 hours per 
UIT in the first year)) / 3,113 total funds = 32.37 hours in the 
first year.
    \1532\ This estimate is based on the following calculation: 
((2,392 management investment companies x 13.35 hours per subsequent 
year) + (721 UITs x 9.11 hours per subsequent year)) / 3,113 total 
funds = 12.37 hours per subsequent year.
    \1533\ This estimate is based on the following calculation: 
(32.37 hours in first year + (12.37 per subsequent year x 2 years)) 
/ 3 years = 19.04 hours per year.
    \1534\ This estimate is based on the following calculation: 
3,113 funds x 19.04 hours per year = 59,272 hours per year.
---------------------------------------------------------------------------

    External costs include the cost of goods and services, which with 
respect to reports on Form N-CEN, will include the costs of registering 
and maintaining an LEI for the registrant/funds.\1535\ We estimate an 
external cost of $219, rather than $220 per fund with respect to the 
initial filing of a report on Form N-CEN, and we estimate an annual 
external cost of $119, rather than $120 per fund with respect to 
subsequent filings, reflecting updates to the industry data figures 
that were utilized in the Proposing Release.\1536\ Accordingly, we 
estimate the amortized annual external cost per registrants and fund 
will be $152 per year, rather than $153 per year as proposed.\1537\ In 
sum, we estimate that all applicable funds will incur, in the 
aggregate, external annual costs of $2,088,176, rather than $1,748,637, 
reflecting updates to the industry data figures that were utilized in 
the Proposing Release.\1538\
---------------------------------------------------------------------------

    \1535\ See Item B.1.d and Item C.1.c of Form N-CEN (requiring 
LEI for the registrant and each management company).
    \1536\ See supra footnote 63 (discussing the costs associated 
with registering and maintaining an LEI).
    \1537\ This estimate is based on the following calculation: 
($219 in the first year + ($119 per subsequent year x 2 years)) / 3 
years = $152 per year.
    \1538\ This estimate is based on the following calculation: $152 
per registrant or fund per year x (3,113 investment company 
registrants + 9,039 mutual funds (which reflects the number of 
mutual fund series, but excludes money market funds, which would 
have already obtained LEIs pursuant to the requirements of Form N-
MFP) + 1,586 ETFs (excluding 8 UITs that are not ETFs)) = $152 per 
fund per year x 13,738 registrants and funds = $2,088,176 per year.
---------------------------------------------------------------------------

2. Rescission of Form N-SAR
    In connection with our adoption of new Form N-CEN, we are 
rescinding Form N-SAR in order to eliminate unnecessarily duplicative 
reporting requirements. This rescission will affect all management 
investment companies and UITs.
    We received no comments on the estimates put forward in our 
proposal. Thus, as proposed, we estimate that the average annual hour 
burden per response for Form N-SAR is 15.35 hours for a management 
investment company and 7.11 hours for a UIT, since a UIT is required to 
answer fewer items.\1539\ We have revised our estimate of the weighted 
average annual burden per response to about 14.27 hours to reflect 
updates to the industry data figures that were utilized in the 
Proposing Release.\1540\ We therefore

[[Page 82001]]

estimate an aggregate annual hour burden of about 78,561 hours.\1541\
---------------------------------------------------------------------------

    \1539\ See Proposing Release, supra footnote 7, at n.724.
    \1540\ This estimate is based on the following calculation: 
(15.35 hours per management investment company per response x 2,392 
management investment companies x 2 responses per year + 7.11 hours 
per UIT per response x 721 UITs) / (2,392 management companies x 2 
responses per management company per year + 721 UITs x 1 response 
per management company per year) = 78,561 hours / 5,505 responses 
per year = ~14.27 hours per response. The numbers of management 
investment companies and UITs are based on data obtained from the 
ICI and reports filed by registrants on Form N-SAR.  See supra 
footnotes 2 and 1259 and accompanying and following text; see also 
2016 ICI Fact Book, supra footnote 2, at 22, 176.
    \1541\ This estimate is based on the following calculation: 
~14.27 hours per response x (2,392 management companies x 2 
responses per management company per year + 721 UITs x 1 response 
per management company per year) = ~14.27 hours per response x 5,505 
responses per year = ~78,561 hours per year.
---------------------------------------------------------------------------

    Accordingly, we estimate that, in the aggregate, the rescission 
will eliminate the 78,561 annual burden hours that would be associated 
with filing Form N-SAR. Additionally, we estimate that there are no 
external costs associated with preparation of reports on Form N-SAR.

C. Amendments to Regulation S-X

    As discussed above, we are adopting certain amendments to Articles 
6 and 12 of Regulation S-X. As outlined in section 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 contracts; (2) 
update the disclosures for other investments and investments in and 
advances to affiliates, 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.\1542\
---------------------------------------------------------------------------

    \1542\ 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. See supra section 
II.C.
---------------------------------------------------------------------------

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.\1543\ 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.\1544\ 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.\1545\
---------------------------------------------------------------------------

    \1543\ Section 30(e).
    \1544\ Rule 30e-1.
    \1545\ See Item 27 of Form N-1A; and Item 24 of Form N-2.
---------------------------------------------------------------------------

    Rule 30e-1 also permits, under certain conditions, delivery of a 
single shareholder report to investors who share an address 
(``householding'').\1546\ 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.
---------------------------------------------------------------------------

    \1546\ See rule 30e-1(f).
---------------------------------------------------------------------------

    Compliance with the disclosure requirements of rule 30e-1 is 
mandatory. Responses to the disclosure requirements are not kept 
confidential.
    Based on staff conversations with fund representatives, we 
previously estimated 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 
previously total estimated annual hour burden of responding to rule 
30e-1 was approximately 898,968 hours.\1547\
---------------------------------------------------------------------------

    \1547\ This estimate is based on the following calculation: 84 
hours per fund x 10,702 funds (the estimated number of portfolios 
the last time the rule's information collections were submitted for 
PRA renewal in 2015) = 898,968 hours.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that 11,230 management 
companies would have to comply with these amendments.\1548\ In 
addition, we estimated that the 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 
estimated that, on an annual basis, funds generally would incur an 
additional 9 burden hours in the first year \1549\ and an additional 3 
burden hours for filings in subsequent years in order to comply with 
the proposed amendments.\1550\ Amortized over three years, we estimated 
that the average annual hour burden associated with the amendments for 
Regulation S-X would be 5 hours per fund.\1551\ Accordingly, we 
estimated a total annual average hour burden associated with the 
amendments would be 56,150.\1552\
---------------------------------------------------------------------------

    \1548\ See Proposing Release, supra footnote 7, at n. 777. As 
noted in the Proposing Release, this estimate included 9,259 mutual 
funds (including money market funds), 1,403 ETFs (1,411 ETFs - 8 UIT 
ETFs) and 568 closed-end funds.
    \1549\ With respect to the amendments to Article 6 of Regulation 
S-X, we estimated that each fund would spend an average of 5 hours 
to initially comply with the amendments. For example, amendments to 
Article 6-07.1 would likely require funds to identify non-cash 
income and put a process in place to capture it in the financial 
statements. In addition, some funds would also likely move their 
schedules from financial statement notes to the financial statements 
themselves. With respect to the amendments requiring disclosure of 
the components of a custom basket/index, some funds voluntarily 
provide this disclosure now, but others do not; we recognized that 
funds would be affected by this requirement differently depending on 
their investments.
    With respect to the amendments to Article 12 of Regulation S-X, 
we estimated each fund would spend an average of four hours to 
initially comply with the amendments. For example, while accounting 
guidance already requires funds to identify the level of each 
security (such as Level 3 securities), we estimated there will be an 
increased burden in adding another note to the financial statements. 
This increased burden would vary depending on the information 
already reported by funds in their financial statements. Likewise, 
while many funds voluntarily identify illiquid securities in their 
schedule of investments, the funds that do not make this disclosure 
would bear an initial burden to comply with these amendments.
    \1550\ With respect to the amendments to Article 6 of Regulation 
S-X, we estimated each fund would require two hours to comply with 
the requirements in each subsequent year. We likewise estimated that 
each fund would require one hour to comply with the requirements of 
the proposed amendments to Article 12 in each subsequent year.
    \1551\ Proposing Release, supra footnote 7, at n. 780. The 
estimate was based on the following calculation: (9 hours + (3 hours 
x 2))/3 = 5.
    \1552\ See id., at n. 781. The estimate was based on the 
following calculation: 5 hours x 11,230 management investment 
companies = 56,150.
---------------------------------------------------------------------------

    We also estimated an annual external cost burden of compliance with 
the information collection requirements of rule 30e-1, which is 
currently $31,061 per fund, would not change as a result of the 
proposed amendments to

[[Page 82002]]

Regulation S-X.\1553\ We further estimated that the total annual 
external cost burden for rule 30e-1 would be $348,815,030.\1554\ 
External costs included, for example, the costs for funds to prepare, 
print, and mail the reports.
---------------------------------------------------------------------------

    \1553\ Because the proposed amendments would largely reorganize 
information currently reported by funds in their financial 
statements, either voluntarily or because it is required, we did not 
believe the external costs, such as printing and mailing costs, 
would increase as a result of the amendments.
    \1554\ See Proposing Release, supra footnote 7, at n. 783. This 
estimate was based on the following calculation: 11,230 funds x 
$31,061 = $348,815,030. The total annual cost burden of rule 30e-1 
was $333,905,750, which reflected the higher estimated number of 
funds subject to rule 30e-1 at the time of the last renewal for the 
rule.
---------------------------------------------------------------------------

    We did not receive any comments on the estimated hour and costs 
burdens relating to our proposed amendments to Regulation S-X. As 
discussed above, our adoption includes numerous modifications or 
clarifications from the proposal that address concerns raised by 
commenters and that are intended, in part, to decrease reporting and 
implementation burdens relative to the proposal. For example, we are 
limiting the requirement for nonpublic indexes to require funds to only 
report the top 50 components of the index or custom basket and any 
components that represent more than one percent of the notional value 
of the index or custom basket.\1555\ In order to eliminate the 
unnecessary disclosure of immaterial amounts of non-cash income, we 
adopted a 5 percent de minimis reporting threshold for reporting non-
cash income, such as payment-in-kind interest.\1556\ We also eliminated 
our proposed securities lending disclosures in fund financial 
statements in favor of disclosures that would be made in a fund's 
Statement of Additional Information (or, for closed-end funds, reports 
on Form N-CSR) and in Form N-CEN.\1557\ In Article 12 of Regulation S-
X, in response to commenter concerns, and as more fully discussed above 
in section II.C.4, we eliminated proposed disclosure requirements 
relating to the liquidity of securities and federal income tax 
basis.\1558\ We also eliminated a proposal to require funds to 
categorize the schedule of securities by type of investment, the 
related industry, and the related country, or geographic region.\1559\
---------------------------------------------------------------------------

    \1555\ See supra sections II.C.2.a and II.C.2.d.
    \1556\ See supra section II.C.6
    \1557\ Id.
    \1558\ See supra section II.C.4.
    \1559\ See supra section II.C.3.
---------------------------------------------------------------------------

    However, for variable rate securities, we are now requiring funds 
to provide disclosure of both a description of reference rate and 
spread and the end of period interest rate, rather than just the 
reference rate that we proposed, which may add additional burdens on 
funds.\1560\
---------------------------------------------------------------------------

    \1560\ See id.
---------------------------------------------------------------------------

    For these and other reasons, we believe that our modifications from 
and clarifications to the proposal will, on a net basis, generally 
reduce the burden hours and costs associated with implementation of 
Regulations-X's reporting requirements relative to the proposal. 
However, although we did not receive any comments specifically 
addressing the burden estimates for our proposed amendments to 
Regulation S-X, we recognize that several commenters, although they did 
not provide quantitative estimates, suggested that implementation of 
the proposed new reporting requirements, generally would be 
costly.\1561\ Based, in part, on the shifting of the securities lending 
disclosures to the Statement of Additional Information (or, for closed-
end funds, reports on Form N-CSR) and Form N-CEN, as well as the other 
modification discussed above, we estimate that funds will incur a 
reduction of 2 burden hours in the first year and a reduction of .5 
hours for filings in subsequent years from our proposed estimates.
---------------------------------------------------------------------------

    \1561\ See, e.g., Simpson Thacher Comment Letter; and Fidelity 
Comment Letter.
---------------------------------------------------------------------------

    The Commission has also modified the estimated increase in annual 
burden hours and total time costs that will result from the amendments 
based on updated industry data. We have revised our estimate of the 
number of management companies that will have to comply with the 
amendments to Regulation S-X upward from 11,230 management companies to 
11,859 management companies to reflect updates to the industry data 
figures that were utilized in the Proposing Release.\1562\ The 
Commission now estimates that, on an annual basis, funds generally will 
incur an additional 7 burden hours in the first year and an additional 
2.5 burden hours for filings in subsequent years in order to comply 
with the proposed amendments. Amortized over three years, the average 
aggregate annual hour burden associated with the amendments for 
Regulation S-X will be 4 hours per fund.\1563\ We therefore estimate an 
average total annual hour burden associated with the amendments of 
47,436.\1564\
---------------------------------------------------------------------------

    \1562\ This estimate included 9,520 mutual funds (including 
money market funds), 1,589 ETFs (1,594, ETFs - 5 UIT ETFs) and 750 
closed-end funds and was based on internal SEC data as well as ICI 
statistics as of December 31, 2015, available at https://www.ici.org/research/stats.
    \1563\ The estimate is based on the following calculation: (7 
hours + (2.5 hours x 2))/3 = 4.
    \1564\ The estimate is based on the following calculation: 4 
hours x 11,859 management investment companies = 47,436.
---------------------------------------------------------------------------

    We continue to estimate an 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.\1565\ We further estimate that 
the total annual external cost burden for rule 30e-1 will be 
$368,352,399.\1566\
---------------------------------------------------------------------------

    \1565\ We continue to believe that amendments will largely 
reorganize information currently reported by funds in their 
financial statements, either voluntarily or because it is required 
and will therefore not result in an increase of external costs, such 
as printing and mailing costs.
    \1566\ This estimate is based on the following calculation: 
11,859 funds x $31,061 = $368,352,399.
---------------------------------------------------------------------------

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.\1567\ 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.\1568\ 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.\1569\
---------------------------------------------------------------------------

    \1567\ Rule 30e-2.
    \1568\ As discussed above, rule 30e-1 (together with Forms N-1A 
and N-2) essentially requires management investment companies to 
transmit to their shareholders, at least semi-annually, reports 
containing the financial statements required by Regulation S-X.
    \1569\ See rule 30e-2(b); see also supra footnote 1546 and 
accompanying text.
---------------------------------------------------------------------------

    Compliance with the disclosure requirements of rule 30e-2 is 
mandatory. Responses to the disclosure requirements are not kept 
confidential.
    As noted in the Proposing Release, the Commission previously 
estimates that the annual burden associated with rule 30e-2, including 
the householding requirements, was 121 hours per respondent. The 
Commission further estimated the total annual hour burden was 
approximately 91,960 hours.\1570\
---------------------------------------------------------------------------

    \1570\ This estimate is based on the following calculations: 700 
UITs (the estimated number of UITs the last time the rule's 
information collections were submitted for PRA renewal in 2015) x 
121 hours per UIT = 84,700.
---------------------------------------------------------------------------

    As discussed above, we are adopting certain amendments to Articles 
6 and 12

[[Page 82003]]

of Regulation S-X that will increase the time spent preparing, 
reviewing and certifying reports.\1571\ The extent to which a UIT's 
burden increases as a result of the adopted amendments will depend on 
the extent to which an underlying fund invests in the instruments 
covered by many of the amendments.
---------------------------------------------------------------------------

    \1571\ As discussed above, the amendments will: (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 contracts; (2) update the disclosures 
for other investments and investments in and advances to affiliates, 
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. In addition, our amendments 
will 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.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that there were 727 UITs 
that may be subject to the proposed amendments.\1572\ We also estimated 
that, on an annual basis, UITs generally would incur an additional 9 
burden hours in the first year and an additional 3 burden hours for 
filings in subsequent years in order to comply with the proposed 
amendments. Amortized over three years, we estimated that the average 
annual hour burden associated with the proposed amendments would be 5 
hours per fund.\1573\ Accordingly, we estimated that the total average 
annual hour burden associated with the proposed amendments to 
Regulation S-X would be 3,635 hours.\1574\
---------------------------------------------------------------------------

    \1572\ See Proposing Release, supra footnote 7, at n. 789. This 
estimate was based on the number of UITs that filed Form N-SAR with 
the Commission as of December 31, 2014.
    \1573\ The estimate was based on the following calculation: (9 
hours + (3 hours x 2))/3 = 5.
    \1574\ The estimate was based on the following calculation: 5 
hours x 727 UITs = 3,635.
---------------------------------------------------------------------------

    In addition, we estimated that the annual external cost burden of 
compliance with the information collection requirements of rule 30e-2, 
which are currently $20,000 per respondent, would not change as a 
result of the proposed amendments to Regulation S-X.\1575\ We further 
estimated that the total annual external cost burden for rule 30e-2 
would be $14,540,000.\1576\ External costs include, for example, the 
costs for the funds to prepare, print, and mail the reports.
---------------------------------------------------------------------------

    \1575\ See supra footnote 1553.
    \1576\ This estimate is based on the following calculation: 727 
UITs x $20,000 = $14,540,000. The current total annual cost burden 
of rule 30e-2 is $15,200,000, which reflects the higher estimated 
number of UITs at the time of the last renewal for the rule. See 
supra footnote 1570.
---------------------------------------------------------------------------

    We did not receive any comments on the estimated hour and costs 
burdens. For the reasons discussed above, we now estimate that funds 
will incur a reduction of 2 burden hours in the first year and a 
reduction of .5 hours for filings in subsequent years from our proposed 
costs. The Commission has also modified the estimated increase in 
annual burden hours and total time costs that will result from the 
amendments based on updated industry data. We have revised our estimate 
of the number of UITs that will have to comply with the amendments to 
Regulation S-X downward from 727 UITs to 721 UITs to reflect updates to 
the industry data figures that were utilized in the Proposing.\1577\ 
For the reasons discussed above, we now estimate that, on an annual 
basis, UITs generally will incur an additional 7 burden hours in the 
first year \1578\ and an additional 2.5 burden hours for filings in 
subsequent years in order to comply with the amendments to Regulation 
S-X.\1579\ Amortized over three years, we now estimate that the average 
annual hour burden associated with the amendments will be 4 hours per 
fund.\1580\ We therefore estimate a total average annual hour burden 
associated with the amendments to Regulation S-X will be 2,884 
hours.\1581\
---------------------------------------------------------------------------

    \1577\ This estimate is based on the number of UITs that filed 
Form N-SAR with the Commission as of December 31, 2015.
    \1578\ See supra footnotes 1562-1563 and accompanying text.
    \1579\ See id.
    \1580\ The estimate is based on the following calculation: (7 
hours + (2.5 hours x 2))/3 = 4.
    \1581\ The estimate is based on the following calculation: 4 
hours x 721 UITs = 2,884.
---------------------------------------------------------------------------

    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 amendments to Regulation S-X.\1582\ We further estimate that the 
total annual external cost burden for rule 30e-2 will be 
$14,420,000.\1583\
---------------------------------------------------------------------------

    \1582\ See supra footnote 1553.
    \1583\ This estimate is based on the following calculation: 721 
UITs x $20,000 = $14,420,000. The current total annual cost burden 
of rule 30e-2 is $15,200,000, which reflects the higher estimated 
number of UITs at the time of the last renewal for the rule.
---------------------------------------------------------------------------

D. Amendments to Registration Statement Forms

    As discussed above, we are amending Forms N-1A, N-2, N-3, N-4, and 
N-6.\1584\ We are adopting amendments to Forms N-1A and N-3 to require 
certain disclosures in fund Statements of Additional Information 
regarding securities lending activities.\1585\ We are also amending 
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 Form N-CEN.\1586\
---------------------------------------------------------------------------

    \1584\ See supra section II.F; footnotes 807-809 and 
accompanying text.
    \1585\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; see 
also supra section II.F. We proposed similar requirements be 
included in fund financial statements as part of the proposed 
amendments to Regulation S-X. See proposed rule 6-03(m) of 
Regulation S-X; Proposing Release, supra footnote 7, at 33624.
    \1586\ See footnotes 807-809 and accompanying text.
---------------------------------------------------------------------------

    Form N-1A is the form used by open-end management investment 
companies to register under the Investment Company Act and/or register 
their securities under the Securities Act. Form N-2 is the form used by 
closed-end management investment companies to register under the 
Investment Company act and register their securities under the 
Securities Act. Form N-3 is the form used by separate accounts offering 
variable annuity contracts which are organized as management investment 
companies to register under the Investment Company Act and/or register 
their securities under the Securities Act. Form N-4 is the form used by 
insurance company separate accounts organized as unit investment trusts 
that offer variable annuity contracts to register under the Investment 
Company Act and/or register their securities under the Securities Act. 
Form N-6 is the form used by insurance company separate accounts 
organized as unit investment trusts that offer variable life insurance 
policies to register under the Investment Company Act and/or register 
their securities under the Securities Act. Compliance with the 
disclosure requirements of Forms N-1A, N-2, N-3, N-4, and N-6 is 
mandatory. Responses to the disclosure requirements are not kept 
confidential.
    Currently, we estimate the following total hour burden for each of 
the relevant forms:

[[Page 82004]]

[GRAPHIC] [TIFF OMITTED] TR18NO16.014

    In the Proposing Release, we estimated that 11,957 funds would have 
to comply with the proposed amendments to Regulation S-X, including, 
among other things, the proposed new disclosure in the notes to 
financial statements relating to a fund's securities lending 
activities.\1587\
---------------------------------------------------------------------------

    \1587\ We estimated in the Proposing Release that 11,230 
management companies would be required to comply with the 
amendments. Proposing Release, supra footnote 7, at 33676. We also 
estimated that 727 UITs may be subject to the proposed amendments. 
Proposing Release, supra footnote 7, at 33677. 11,230 management 
companies + 727 UITs = 11,957.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that the total hour burden 
for each respective form would not change as a result of the proposed 
amendments concerning books and records disclosures.\1588\ We 
estimated, however, that the amendments to Regulation S-X--including 
the new required disclosures in the notes to the financial statements 
concerning the fund's securities lending activities, but also a number 
of other amendments--would result in funds incurring an additional 9 
burden hours in the first year and an additional 3 burden hours for 
filings in subsequent years.\1589\ Amortized over three years, the 
average additional annual hour burden was estimated to be 5 hours per 
fund.\1590\ Accordingly, we estimated that the total annual average 
hour burden associated with the amendments would be 59,785 hours.\1591\ 
We did not receive any comments on the estimated hour burden.
---------------------------------------------------------------------------

    \1588\ Proposing Release, supra footnote 7, at 33681.
    \1589\ Proposing Release, supra footnote 7, at 33676-77.
    \1590\ 9 hours in first year + (3 hours per year thereafter x 2 
years) = 9 hours + 6 hours = 15 hours total. 15 hours total / 3 
years = 5 hours per year.
    \1591\ 11,957 funds x 5 hours per fund = 59,785.
---------------------------------------------------------------------------

    We continue to estimate no change in burden hours as a result of 
the books and records disclosures. However, we now estimate that those 
forms--viz., Forms N-1A and N-3--that include the new disclosure 
requirements concerning securities lending activities would impose 
part, but not all, of the additional hour burden previously estimated 
for Regulation S-X as funds may need to collect, collate, tabulate, 
present, and review the information in order to prepare the required 
Statement of Additional Information disclosures. We estimate that 9,502 
and 16 funds per year could file registration statements or amendments 
to registration statements on Forms N-1A and N-3, respectively. We 
estimate that funds will incur an additional 2 burden hours in the 
first year and an additional 0.5 hours for filings in subsequent years. 
Amortized over three years, the average additional annual hour burden 
will therefore be 1 hour per fund.\1592\ Accordingly, we estimate that 
the total annual average hour burden associated with the amendments to 
Forms N-1A and N-3 is, respectively, 9,504,\1593\ and 16 hours.\1594\ 
For Forms N-4 and N-6, to which the securities lending activity 
disclosure requirement amendments do not apply, we continue to estimate 
total annual hour burden of 343,117 hours and 85,269 hours, 
respectively.
---------------------------------------------------------------------------

    \1592\ 2 hours in first year + (0.5 hours per year thereafter x 
2 years) = 2 hours + 1 hour = 3 hours total. 3 hours total / 3 years 
= 1 hour per year.
    \1593\ 1 hour per fund x 9,504 funds per year = 9,504 hours per 
year.
    \1594\ 1 hour per fund x 16 funds per year = 16 hours per year.
---------------------------------------------------------------------------

    In the Proposing Release, for both the books and records amendments 
and the Regulation S-X requirement, of which the securities lending 
requirements were a part, we estimated that there would be no changes 
to the annual external cost burden per fund as a result of the 
amendments, and accordingly estimated no change to the current 
estimated total external cost burden associated with the forms.\1595\ 
We did not receive any comments on the estimated external cost burden. 
We therefore continue to estimate no change to the external cost burden 
as a result of the amendments, and so we continue to estimate the total 
cost burden for each of the respective forms as follows:
---------------------------------------------------------------------------

    \1595\ Proposing Release, supra footnote 7, at 33677, 33681.
    [GRAPHIC] [TIFF OMITTED] TR18NO16.015
    
E. Amendments to Form N-CSR

    As previously discussed above, we are adopting, as proposed, the 
rescission of Form N-Q.\1596\ In connection with the rescission of Form 
N-Q, we also are adopting, as proposed, amendments to Form N-CSR, the 
reporting form used by management companies to file certified 
shareholder reports under the Investment Company Act and the Exchange 
Act.\1597\ Form N-Q currently

[[Page 82005]]

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.\1598\ The rescission of Form N-Q adopted today eliminates 
these certifications.
---------------------------------------------------------------------------

    \1596\ See supra section III.B.
    \1597\ See Proposing Release, supra footnote 7, at section V.E.
    \1598\ See supra footnote 521 and accompanying text.
---------------------------------------------------------------------------

    Form N-CSR requires similar certification with respect to the 
fund's second and fourth fiscal quarters. As a result of the rescission 
of Form N-Q adopted today, we are also adopting amendments to 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.\1599\ 
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 
will cover the first and second fiscal quarters and third and fourth 
fiscal quarters, respectively, will fill the gap in certification 
coverage that would otherwise occur once the rescission of Form N-Q is 
effective. As proposed, compliance with the amended certification 
requirements will be mandatory and responses are not kept confidential.
---------------------------------------------------------------------------

    \1599\ See Item 11(b) of Form N-CSR; paragraph 5(b) of 
certification exhibit of Item 11(a)(2) of Form N-CSR.
---------------------------------------------------------------------------

    In addition, as discussed above, we are moving the change in 
independent public accountant attachment proposed on Form N-CEN to Form 
N-CSR so that an accountant's letter regarding a change in accountant 
will become available to the public semi-annually rather than 
annually.\1600\ We are also adopting amendments to require closed-end 
funds to report on Form N-CSR certain disclosures regarding securities 
lending activities.\1601\
---------------------------------------------------------------------------

    \1600\ See supra section II.D.4.b.
    \1601\ See Item 12 of Form N-CSR; see also supra footnote 1181 
and accompanying text.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that the current annual 
burden associated with Form N-CSR is 14.42 hours per fund \1602\ and 
that the current total annual time burden for Form N-CSR is 177,799 
hours.\1603\ We noted 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 to the certification requirements of 
Form N-CSR and that funds likely already have policies and procedures 
in place to assist officers in their certifications of this 
information. Accordingly, we estimated that the proposed amendments to 
the certification requirements of Form N-CSR would not change the 
annual hour burden associated with Form N-CSR and, thus, we continued 
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 estimated 161,937 hours.\1604\ We noted that this decrease 
in the current total annual hour burden was a result of the decrease in 
the number of funds estimated to file Form N-CSR.
---------------------------------------------------------------------------

    \1602\ This estimate accounted for two filings per year. In 
addition, we noted that the estimate did not separately account for 
the certifications on Form N-CSR.
    \1603\ This estimate was based on the following calculation: 
14.42 hours x 12,330 funds (the estimated number of funds the last 
time the rule's information collections were submitted for PRA 
renewal in 2013)).
    \1604\ This estimate was based on the following calculation: 
11,230 funds x 14.42 hours = 161,937. See supra footnote 1548 
(calculating the estimate for 11,230 funds).
---------------------------------------------------------------------------

    In addition, in the Proposing Release, we also estimated that the 
current annual cost of outside services associated with Form N-CSR is 
approximately $129 per fund. \1605\ We noted our belief that external 
costs would include the cost of goods and services purchased to prepare 
and update filings on Form N-CSR. We also expressed our belief that 
those costs would not change as a result of the proposed amendments to 
the certification requirements of Form N-CSR and, thus, continued to 
estimate a current external cost burden of $129 per fund to file Form 
N-CSR. In the Proposing Release, we further estimated that the total 
annual external cost burden for Form N-CSR would be $2,897,340.\1606\
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    \1605\ We estimated that the external costs associated with Form 
N-CSR would not include the external costs associated with the 
shareholder report. The external costs associated with the 
shareholder report are accounted for under the collections of 
information related to rules 30e-1 and 30e-2 under the Investment 
Company Act.
    \1606\ This estimate was based on the following calculation: 
11,230 funds x $129 = $1,448,670; $1,448,670 x 2 times per year = 
$2,897,340. We noted that the current total annual cost burden of 
Form N-CSR at the time of the Proposing Release was $3,189,771, 
which reflected the higher estimated number of filers for Form N-CSR 
at the time of the last renewal for the form. See supra footnote 
1603.
---------------------------------------------------------------------------

    We did not receive any comments on the estimated hour and cost 
burdens associated with our proposed amendments to the certification 
requirements of Form N-CSR. As discussed above, we are adopting 
amendments to modify Form N-CSR so that an accountant's letter 
regarding a change in accountant will become available to the public 
semi-annually pursuant to an exhibit filing on Form N-CSR rather than 
annually as an attachment to Form N-CEN, as proposed.\1607\ We believe 
that this modification from the proposal will increase the hour burden 
associated with Form N-CSR by one-tenth of an hour \1608\ with an 
additional internal cost burden of $32.40 per fund.\1609\ In addition, 
as noted above, we are adopting an amendment to require closed-end 
funds include in their annual reports on Form N-CSR information 
concerning securities lending activities. We estimate that this 
amendment will increase the hour burden associated with Form N-CSR for 
closed-end funds by an additional 2 burden hours with an additional 
internal cost burden of $648 per fund in the first year,\1610\ and an 
additional 0.5 hours with an additional internal cost burden of $162 
per fund for filings in subsequent years.\1611\ We have modified the 
estimated increase in annual burden hours and total time costs that 
will result from amendments to Form N-CSR adopted today in light of 
these modifications and updated data on industry earnings estimates.
---------------------------------------------------------------------------

    \1607\ See supra section III.B.3.
    \1608\ Paralleling this modification, we believe that the 
modification to move the change in independent public accountant 
exhibit from Form N-CEN as proposed to Form N-CSR will also reduce 
the hour burden requirement associated with Form N-CEN by one-tenth 
of an hour. See supra section IV.B.1.
    \1609\ This estimate is based on the following calculation: 0.10 
hour x $324 (blended hourly rate for compliance attorney ($340) and 
senior programmer ($308) = $32.40.
    \1610\ This estimate is based on the following calculation: 2 
hours x $324 (blended hourly rate for compliance attorney ($340) and 
senior programmer ($308) = $648.
    \1611\ This estimate is based on the following calculation: 0.5 
hour x $324 (blended hourly rate for compliance attorney ($340) and 
senior programmer ($308) = $162.
---------------------------------------------------------------------------

    For purposes of the PRA analysis, we estimate that the annual 
burden associated with Form N-CSR is 14.52 hours per fund.\1612\ For 
closed-end funds, we estimate that the annual burden associated with 
Form N-CSR is 16.52 hours per fund in the first year and 15.02 for 
filings in subsequent

[[Page 82006]]

years.\1613\ Amortized over three years, the average additional annual 
hour burden will therefore be 1 hour per closed-end fund.\1614\ 
Accordingly, we estimate that, for closed-end funds, the total annual 
average hour burden associated with the amendments to Form N-CSR 
related to securities lending activities is 750 hours.\1615\ We have 
revised our estimate of the total annual hour burden downward from 
177,799 hours to 172,899 hours to reflect updates to the industry data 
figures that were utilized in the Proposing Release as well as the 
increase in the hour burdens resulting from the amendments.\1616\ This 
decrease in the total annual hour burden is a result of the decrease in 
the number of funds estimated to file Form N-CSR, from our estimate of 
12,330 funds in the Proposing Release to our current estimate of 11,856 
funds.
---------------------------------------------------------------------------

    \1612\ This estimate is based on the following calculation: 
14.52 = 14.42 + 0.10. This estimate accounts for two filings per 
year. We note that this estimate does not separately account for the 
certifications on Form N-CSR or the securities lending activities 
information annual reporting requirement for closed-end funds on 
Form N-CSR.
    \1613\ This estimate is based on the following calculation: 
16.52 = 14.52 + 2. 15.02 = 14.52 + 0.5.
    \1614\ This estimate is based on the following calculation: 2 
hours in first year + (0.5 hours per year thereafter x 2 years) = 2 
hours + 1 hour = 3 hours total. 3 hours total / 3 years = 1 hour per 
year.
    \1615\ This estimate is based on the following calculation: 1 
hour per fund x 750 closed-end funds per year = 750 hours per year.
    \1616\ This estimate is based on the following calculation: 
172,899 = (750 hours (closed-end funds)) + (172,149 hours (14.52 
hours x (1,594 exchange-traded funds--eight organized as UITs + 750 
closed-end funds + 481 money market funds + 9,039 other mutual 
funds))). See supra footnote 1259 and accompanying and following 
text.
---------------------------------------------------------------------------

    In addition, as stated in the Proposing Release, we continue to 
estimate that the annual cost of outside services associated with Form 
N-CSR is approximately $129 per fund.\1617\ Based on updated statistics 
regarding the number of funds, we estimate that the total annual 
external cost burden for Form N-CSR will be $3,058,848, rather than 
$2,897,340 as we estimated in the Proposing Release.\1618\
---------------------------------------------------------------------------

    \1617\ We estimate that the external costs associated with Form 
N-CSR will not include the external costs associated with the 
shareholder report. The external costs associated with the 
shareholder report are accounted for under the collections of 
information related to rules 30e-1 and 30e-2 under the Investment 
Company Act.
    \1618\ This estimate is based on the following calculation: 
11,856 funds x $129 = $1,529,424; $1,529,424 x 2 times per year = 
$3,058,848. See supra footnote 1603.
---------------------------------------------------------------------------

V. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with section 4(a) of the Regulatory Flexibility 
Act (``RFA'').\1619\ It relates to new Form N-PORT and new Form N-CEN 
and amendments to Form N-CSR, amendments to Regulation S-X, the 
rescission of Forms N-Q and N-SAR, and amendments to Forms N-1A, N-2, 
N-3, N-4, and N-6. An Initial Regulatory Flexibility Analysis 
(``IRFA'') was prepared in accordance with the RFA and included in the 
Proposing Release.\1620\
---------------------------------------------------------------------------

    \1619\ 5 U.S.C. 603.
    \1620\ See Proposing Release, supra footnote 7, at section VI.
---------------------------------------------------------------------------

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

    The Commission collects certain information about the funds that it 
regulates. The Commission is adopting new rules, rule amendments, and 
new forms and form amendments that will 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 these new rules, rule amendments, and new forms and 
form amendments will improve the information that funds report to their 
shareholders and the Commission. In addition, the new forms will 
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 will be improved by requiring 
enhanced information from funds.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on every aspect of 
the IRFA, including the number of small entities that would be affected 
by the proposed amendments, the existence or nature of the potential 
impact of the proposals on small entities discussed in the analysis and 
how to quantify the impact of the proposed rules.
    One commenter noted that the rulemaking will place an ``undue work 
and financial burden'' on small closed-end funds.\1621\ The commenter 
also noted that a closed-end fund that is not listed on an exchange, a 
small number of assets under management, and limited holdings should be 
required to file reports on Form N-PORT quarterly, as opposed to 
monthly.\1622\ Commenters also generally noted the high cost of the 
rulemaking.\1623\ Other commenters generally requested more time in 
order to comply with the new forms, rules, and rule amendments.\1624\
---------------------------------------------------------------------------

    \1621\ See Carol Singer Comment Letter.
    \1622\ Id.; see also Schnase Comment Letter (noting that monthly 
reporting on Form N-PORT would be particularly burdensome on smaller 
funds).
    \1623\ See, e.g., Schnase Comment Letter (``I am not convinced 
this is a cost better or more efficiently borne by the fund rather 
than the data users and sellers, particularly for smaller funds 
already struggling to meet costly filing requirements.''); Wahh 
Comment Letter; Carol Singer Comment Letter.
    \1624\ See, e.g., Simpson Thacher Comment Letter (``With respect 
to the Commission's proposed compliance dates for the new reporting 
requirements, we are concerned that the timeline outlined in the 
Release is too aggressive for smaller investment company 
complexes.'').
---------------------------------------------------------------------------

    As we noted above,\1625\ we believe that, in order to ensure that 
the Commission and its staff receive timely information, it is 
appropriate to require that funds file reports on Form N-PORT within 30 
days of month-end. Although reports on Form N-MFP are required to be 
filed within 5 days of month end, we recognize that preparing reports 
on Form N-PORT will initially require a significant effort by 
funds.\1626\ Therefore, we have determined to require a 30-day filing 
period for reports on Form N-PORT in order to balance the Commission's 
need for timely information with the operational burdens of reporting. 
Moreover, lag times of more than 30 days would make monthly reporting 
impractical, as reports would overlap with preparation time.\1627\ We 
also note that several commenters noted that reporting on the same 
basis used to calculate NAV (generally a T+1 basis), which the Form now 
explicitly requires, as opposed to a T+0 basis, which is used for 
financial reporting, will reduce the estimated time to gather the 
information.\1628\ As a result, we are adopting our requirement for 
reports on Form N-PORT to be filed with the Commission within 30 days 
of month-end.\1629\ Moreover, given the nature and frequency of filings 
on Form

[[Page 82007]]

N-PORT, we are adopting a delayed compliance period for small entities 
that will file reports on Form N-PORT.\1630\ Specifically, 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), we 
are providing for an extra 12 months (or 30 months after the effective 
date) to comply with the new reporting requirements.
---------------------------------------------------------------------------

    \1625\ See supra section II.A.3.
    \1626\ See supra section III.B.3.
    \1627\ Dreyfus Comment Letter (advocating for bi-monthly or 
quarterly reporting, with 45-60 days to file reports on Form N-
PORT).
    \1628\ See Schwab Comment Letter (reporting that converting from 
T+1 to T+0 accounting would add approximately 6-10 days to the 
process of compiling data for Form N-PORT). While commenters 
acknowledged that reporting holdings on a T+1 basis would save time 
vis a vis compiling data for month-end reporting, they still noted 
that they would need more than 30 days after month-end to file 
reports on Form N-PORT. See Invesco Comment Letter; but see SIFMA 
Comment Letter I (requesting that funds be given the option to 
report on either a T+0 or T+1 basis).
    \1629\ See General Instruction A of proposed Form N-PORT.
    \1630\ See supra section II.H.1.
---------------------------------------------------------------------------

    Apart from commenter concerns discussed above regarding the costs 
and financial burdens associated with the overall rulemaking, 
commenters did not raise specific concerns about the impact of new Form 
N-CEN or the rescission of Form N-SAR on small entities. One commenter 
expressed the belief that annual filings on Form N-CEN would be 
appropriate but that some of the requested information on the form 
probably would not be applicable to small closed-end funds with certain 
characteristics.\1631\ As discussed above, Form N-CEN reporting 
requirements depend on the type of registrant filing the report.\1632\ 
For example, all funds, including small entities, will be required to 
complete Parts A, B, and G of the form (as applicable), and all 
management companies, except for SBICs, will be required to complete 
Part C. On the other hand, only closed-end funds and SBICs will be 
required to complete Part D and only ETFs and UITs will be required to 
complete Parts E and F, respectively. Thus, certain reporting 
requirements on Form N-CEN may or may not be applicable to small 
entities depending on the type of registrant.
---------------------------------------------------------------------------

    \1631\ See Carol Singer Comment Letter.
    \1632\ See supra section II.D.2.
---------------------------------------------------------------------------

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.\1633\ Commission staff estimates that, as of 
December 2015, approximately 129 registered investment companies, 
including 117 open and closed-end funds (including one SBIC) and 12 
UITs are small entities. The Commission staff further estimates that, 
as of December 2015, approximately 34 BDCs are small entities. Since 
the new forms and form amendments and new rules and rule amendments, 
pertain to all registered funds (subject to the limitations discussed 
in section V.D, below), all entities, including small entities, will be 
subject to the adopted rules. Specific reporting, recordkeeping, and 
other compliance requirements, in addition to the estimated number of 
small entities subject to the form and form amendments and rule and 
rule amendments, are discussed below.
---------------------------------------------------------------------------

    \1633\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The 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 adopting new Form N-PORT on 
which funds, other than MMFs, UITs, and SBICs, will be required to 
report portfolio holdings information and information related to 
liquidity, derivatives, securities lending, purchases and redemptions, 
and counterparty exposure each month. Funds will be required to file 
reports on 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 will 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 will include small entities, we are providing an extra 12 months 
(or 30 months after the effective date) to comply with the new Form N-
PORT reporting requirements.
    We received no comments on the IRFA analysis of new Form N-PORT or 
the estimated costs discussed above in sections III.B.3 and IV.A.1. 
Therefore, based on our experience with other structured data filings, 
we estimate that funds will 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 Form N-PORT on behalf of the fund. 
We estimate that approximately 117 open and closed-end funds (other 
than money market funds and SBICs), are small entities that will file, 
on a monthly basis, a complete report on 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 will cost $56,682 for each fund, including small 
entities, in its first year of reporting and $47,465 per year for each 
subsequent year.\1634\ 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 will 
cost $55,492 for each fund, including small entities, in its first year 
of reporting, and $39,214 per year for each subsequent year.\1635\ We 
received no comments on the IRFA analysis of Form N-PORT, but discuss 
in detail comments received on our cost estimates in sections III.B.3 
and IV.A.1 above.
---------------------------------------------------------------------------

    \1634\ See supra footnotes 1300-1301 and accompanying text.
    \1635\ See supra footnotes 1302-1303 and accompanying text.
---------------------------------------------------------------------------

2. Rescission of Form N-Q
    Our proposal will rescind Form N-Q in order to eliminate 
unnecessarily duplicative reporting requirements. The rescission of 
Form N-Q will affect all management investment companies required to 
file reports on the form. We expect that approximately 117 open and 
closed-end funds are small entities that will be affected by the 
rescission of Form N-Q.
    We received no comments on the IRFA analysis of the rescission of 
Form N-Q or the projected costs savings from rescinding Form N-Q. As 
discussed above, we estimate that the rescission of Form N-Q will save 
$6,804 per year for each fund, including small entities.\1636\
---------------------------------------------------------------------------

    \1636\ The estimated cost is based upon the following 
calculations: ($6,804 = 21 hours/fund x $324/hour compensation for 
professionals commonly used in preparation of Form N-Q filings.) 
$324 = $308 per hour for Senior Programmers + $340 per hour for 
compliance attorneys/2), as we believe these employees would 
commonly be responsible for completing reports on Form N-Q.
---------------------------------------------------------------------------

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.\1637\ The

[[Page 82008]]

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.
---------------------------------------------------------------------------

    \1637\ See rule 30b1-1 and rule 30a-1.
---------------------------------------------------------------------------

    Because of these limitations, the Commission is replacing Form N-
SAR with new Form N-CEN. This new form will streamline and update the 
required data items to reflect current Commission staff needs. Where 
possible, we have endeavored to exclude items from Form N-CEN that are 
disclosed or reported pursuant to other Commission forms, or are 
otherwise available; however, in some limited cases, we are collecting 
information on Form N-CEN that may be similarly disclosed or reported 
elsewhere because we believe it will be useful to have such information 
in a structured format to facilitate comparisons across funds. We also 
believe this format will 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 requiring 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 received no comments on the IRFA analysis of Form N-CEN, but 
discuss in detail comments received on our cost estimates in sections 
III.D.2, III.D.3, and IV.B.1, above. Therefore, we estimate that 
approximately 129 registered investment companies, including 117 open 
and closed-end funds (including one SBIC) and 12 UITs, are small 
entities that will 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 will increase 
because UITs will 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 Commission estimates that Form N-CEN 
filers, including small entities, would incur additional costs of $14.6 
million each year and $20.2 million in one-time costs as a result of 
the form's reporting requirements.\1638\
---------------------------------------------------------------------------

    \1638\ See supra section III.D.2. However, as discussed below, 
the annual costs of reporting on Form N-CEN would be offset by the 
rescission of Form N-SAR. See id.
---------------------------------------------------------------------------

4. Rescission of Form N-SAR
    Our proposal will rescind Form N-SAR in order to eliminate 
unnecessarily duplicative reporting requirements. We estimate that 
approximately 129 registered investment companies that are small 
entities, including 117 open and closed-end funds (including one SBIC) 
and 12 UITs would be affected by the rescission of Form N-SAR.
    As discussed above, the Commission estimates that rescinding Form 
N-SAR will save current Form N-SAR filers, including small entities, 
about $25.5 million per year.\1639\ We received no comments on the IRFA 
analysis of the rescission of Form N-SAR or the projected expense 
savings from rescinding Form N-SAR.
---------------------------------------------------------------------------

    \1639\ See supra section III.D.2. However, as discussed above, 
the annual savings from the rescission of Form N-SAR would be 
partially offset by the reporting requirements of Form N-CEN. See 
id.
---------------------------------------------------------------------------

5. Regulation S-X Amendments
    The Commission is also amending 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 adopting 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 will benefit from our amendments because 
increased disclosure and standardization of fund holdings will 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 will 
benefit the industry, while any additional burdens will be reduced 
since similar disclosures will be required on Form N-PORT.
    We received no comments on the IRFA analysis of the Regulation S-X 
amendments, which included the proposed securities lending activity 
disclosures, or on the estimated costs discussed above in section 
III.C.3
    We therefore expect that approximately 129 registered investment 
companies, including 117 open and closed-end funds (including one SBIC) 
and 12 UITs and, approximately 34 BDCs, are small entities that will be 
affected by the amendments to Regulation S-X. As discussed above, we 
estimate that amending Regulation S-X will cost $1,911 for each fund, 
including small entities, in its first year of reporting, and $683 per 
year for each subsequent year.\1640\ As discussed above, we further 
estimate that amending Regulation S-X will cost $1,911 for each UIT, 
including small entities, in its first year of reporting, and $683 per 
year for each subsequent year.\1641\
---------------------------------------------------------------------------

    \1640\ See supra section III.C.3.
    \1641\ See id.
---------------------------------------------------------------------------

6. Amendments to Registration Statement Forms
    We are amending 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.\1642\ 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 will 
increase our efficiency in preparing for exams as well as our ability 
to identify current industry trends and practices and, therefore, are 
requiring that it be reported on Form N-CEN. We are also adopting 
amendments to Forms N-1A and N-3 to require certain disclosures in fund 
Statements of Additional Information regarding securities lending 
activities.\1643\ We believe that investors and others will benefit 
from the additional transparency into the economic effects of fund 
securities lending activities that these requirements will yield.
---------------------------------------------------------------------------

    \1642\ See supra footnotes 807-809 and accompanying text.
    \1643\ See supra section II.F.
---------------------------------------------------------------------------

    As discussed above, in sections III.E and IV.D, we did not receive 
any comments on the estimated hour and cost burdens or quantitatively 
estimated economic benefits or costs associated with our amendments to 
fund registration statement forms, or on their IRFA analysis or our 
IRFA analysis of securities lending disclosures. We expect that 
approximately 90 registered investment companies, including 78 open-end 
funds and 12 UITs, and approximately 34 BDCs, are small entities that 
would be required to file registration statements on the amended forms. 
As discussed above, the Commission estimates that Form N-1A and N-3 
filers, including small entities, would incur additional costs of $1.3 
million each year and $3.9 million in

[[Page 82009]]

one-time costs as a result of the amendments to those forms.\1644\
---------------------------------------------------------------------------

    \1644\ See supra section III.E.3.
---------------------------------------------------------------------------

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 expanding the SOX certification for Form N-CSR to six months to 
maintain coverage for the entire fiscal year. As discussed above, in 
section IV.E, we did not receive any comments on the estimated hour and 
cost burdens associated with our proposed amendments to the 
certification requirements of Form N-CSR. In addition, we also are 
moving the change in independent public accountant attachment proposed 
on Form N-CEN to Form N-CSR so that an accountant's letter regarding a 
change in accountant will become available to the public semi-annually 
rather than annually.\1645\
---------------------------------------------------------------------------

    \1645\ See supra section II.D.4.b.
---------------------------------------------------------------------------

    As discussed above, in sections III.B.3 and IV.E, we did not 
receive any comments on the estimated hour and cost burdens associated 
with our amendments to Form N-CSR or its IRFA analysis.
    Therefore, we expect that approximately 129 registered investment 
companies, including 78 open-end funds, 39 closed-end funds (including 
one SBIC) and 12 UITs, are small entities that will 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 will 
change for funds, including small entities, as a result of the 
amendments to the certification requirements associated with Form N-CSR 
adopted today.\1646\ We do estimate that the annual burden associated 
with filing reports on Form N-CSR will increase from 14.42 to 14.52 per 
registrant in light of moving the change in independent public 
accountant attachment proposed on Form N-CEN to Form N-CSR.\1647\ In 
addition, we estimate that the amendment to require closed-end funds to 
report on Form N-CSR certain disclosures regarding securities lending 
activities will increase the hour burden associated with Form N-CSR for 
closed-end funds by an additional 2 burden hours in the first year and 
an addition 0.5 hours for filings in subsequent years.\1648\
---------------------------------------------------------------------------

    \1646\ See supra section III.B.3.
    \1647\ See supra footnote 1612 and accompanying text.
    \1648\ See supra footnote section IV.E.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    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 forms and form amendments and rules and rule 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 adopting a delayed 
compliance period for small entities that will file reports on Form N-
PORT.

VI. Statutory Authority

    We are adopting 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.

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 Part 232

    Administrative practice and procedure, Incorporation by reference, 
Reporting and recordkeeping requirements, Securities.

17 CFR Part 239

    Investment companies, 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.

    For reasons set forth in the preamble, title 17, chapter II of the 
Code of Federal Regulations is amended as follows:

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

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

0
1. The authority citation for part 200 subpart N continues to read as 
follows:

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


0
2. Effective June 1, 2018, Sec.  200.800 in paragraph (b) is amended 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:


Sec.  200.800   OMB control numbers assigned pursuant to the Paperwork 
Reduction Act.

* * * * *
    (b) * * *

[[Page 82010]]



------------------------------------------------------------------------
                                          17 CFR part or
                                           section where    Current OMB
   Information collection requirement     identified and    control No.
                                             described
------------------------------------------------------------------------
 
                              * * * * * * *
Form N-CEN..............................         274.101       3235-0729
 
                              * * * * * * *
Form N-PORT.............................         274.150       3235-0730
 
                              * * * * * * *
------------------------------------------------------------------------

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

0
3. The authority citation for part 210 continues to read as follows:

    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, 78l, 78m, 78n, 
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30, 
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, unless otherwise 
noted.


0
4. Effective January 17, 2017, revise Sec.  210.6-01 and the 
undesignated heading preceding it to read as follows:

Registered Investment Companies and Business Development Companies


Sec.  210.6-01   Application of Sec. Sec.  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.

0
5. Effective January 17, 2017, revise Sec.  210.6-03 to read as 
follows:


Sec.  210.6-03   Special rules of general application to registered 
investment companies and business development companies.

    The financial statements filed for persons to which Sec. Sec.  
210.6-01 to 210.6-10 are applicable shall be prepared in accordance 
with the following special rules in addition to the general rules in 
Sec. Sec.  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 Sec. Sec.  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 
Sec. Sec.  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, other than issuers of face-amount certificates, 
and business development companies, shall reflect all investments at 
value, with the aggregate cost of each category of investment reported 
under Sec. Sec.  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 Sec.  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 Sec. Sec.  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 (15 U.S.C. 77a et seq.) (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

[[Page 82011]]

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 Sec.  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. (1) 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.
    (2) State the following amounts based on cost for Federal income 
tax purposes:
    (i) Aggregate gross unrealized appreciation for all investments in 
which there is an excess of value over tax cost;
    (ii) The aggregate gross unrealized depreciation for all 
investments in which there is an excess of tax cost over value;
    (iii) The net unrealized appreciation or depreciation; and
    (iv) The aggregate cost of investments for Federal income tax 
purposes.
    (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 is 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 3\1/2\ 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 3\1/2\ 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 Sec. Sec.  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.

0
6. Effective January 17, 2017, revise Sec.  210.6-04 to read as 
follows:


Sec.  210.6-04   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 Sec.  210.6-05, and issuers of face-amount 
certificates which are subject to the special provisions of Sec.  
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.

[[Page 82012]]

    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 Sec. Sec.  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 Sec.  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 Sec. Sec.  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 Sec. Sec.  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.
    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 Sec.  210.5-
02.19(b) regarding unused lines of credit for short-term financing and 
Sec.  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.

0
7. Effective January 17, 2017, revise Sec.  210.6-05 to read as 
follows:


Sec.  210.6-05   Statements of net assets.

    In lieu of the balance sheet otherwise required by Sec.  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 Sec.  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 Sec.  210.6-04.3 and Sec. Sec.  
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) Sec.  210.6-04.16, (ii) Sec.  
210.6-04.17 and (iii) Sec.  210.6-04.18 shall be furnished in a note to 
the financial statements.

0
8. Effective January 17, 2017, revise Sec.  210.6-07 to read as 
follows:


Sec.  210.6-07   Statements of operations.

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

Statements of Operations

    1. Investment income. State separately income from: (a) Dividends; 
(b) interest on securities; and (c) other income. Any other category of 
income which exceeds five percent of the total shown under this caption 
(e.g. income from non-cash dividends, income from payment-in-kind 
interest) shall be stated separately. 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 
income from non-cash dividends or payment in kind interest are included 
in income, the bases of recognition and measurement used in

[[Page 82013]]

respect to such amounts shall be disclosed.
    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 under 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.

0
9. Effective January 17, 2017, revise Sec.  210.6-10 to read as 
follows:


Sec.  210.6-10   What schedules are to be filed.

    (a) When information is required in schedules for both the person 
and its subsidiaries consolidated, it may be presented in the form of a 
single schedule, provided that items pertaining to the registrant are 
separately shown and that such single schedule affords a properly 
summarized presentation of the facts.
    (b) The schedules shall be examined by an independent accountant if 
the related financial statements are so examined.
    (c) 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 Sec.  210.12-12 shall be filed in support of 
caption 1 of each balance sheet.

[[Page 82014]]

    Schedule II--Investments in and advances to affiliates. The 
schedule prescribed by Sec.  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 Sec.  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 Sec.  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 
Sec.  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 Sec.  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 Sec.  
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 
Sec. Sec.  210.12-12, 12-12A, 12-12B, 12-13, 12-13A, 12-13B and 12-13C. 
The schedule prescribed by Sec.  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 Sec.  210.12-12B may 
be filed in support of caption 1 of each balance sheet.
    (d) 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 
Sec.  210.12-12 shall be filed in support of caption 1 of each balance 
sheet (Sec.  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 
series 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.
    (e) 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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 
Sec.  210.12-27 shall be filed in support of the information required 
by caption 4 of Sec.  210.6-06 as to total amount of qualified assets 
on deposit.
    Schedule VI--Certificate reserves. The schedule prescribed by Sec.  
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 Sec.  210.12-09 shall be filed in support of all other 
reserves included in the balance sheet.

0
10. Effective January 17, 2017, revise Sec.  210.12-12 to read as 
follows:

For Management Investment Companies


Sec.  210.12-12  Investments in securities of unaffiliated issuers.

[[Page 82015]]



               [For management investment companies only]
------------------------------------------------------------------------
           Col. A                    Col. B                Col. C
------------------------------------------------------------------------
Name of issuer and title of   Balance held at       Value of each item
 issue 1 2 3 4.                close of period.      at close of
                               Number of shares--    period.5 6 8 9 10
                               principal amount of
                               bonds and notes \7\.
------------------------------------------------------------------------
\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 statement, application, or annual report or otherwise
  made available to the public. If any securities are listed as
  ``Miscellaneous securities,'' briefly explain in a footnote what the
  term represents.
\2\ Categorize the schedule by (i) the type of investment (such as
  common stocks, preferred stocks, convertible securities, fixed income
  securities, government securities, options purchased, warrants, loan
  participations and assignments, commercial paper, bankers'
  acceptances, certificates of deposit, short-term securities,
  repurchase agreements, other investment companies, and so forth); and
  (ii) the related industry, country, or geographic region of the
  investment. Short-term debt instruments (i.e., debt instruments whose
  maturities or expiration dates at the time of acquisition are one year
  or less) of the same issuer may be aggregated, in which case the range
  of interest rates and maturity dates shall be indicated. For issuers
  of periodic payment plan certificates and unit investment trusts, list
  separately: (i) Trust shares in trusts created or serviced by the
  depositor or sponsor of this trust; (ii) trust shares in other trusts;
  and (iii) securities of other investment companies. Restricted
  securities shall not be combined with unrestricted securities of the
  same issuer. Repurchase agreements shall be stated separately showing
  for each the name of the party or parties to the agreement, the date
  of the agreement, the total amount to be received upon repurchase, the
  repurchase date and description of securities subject to the
  repurchase agreements.
\3\ For options purchased, all information required by Sec.   210.12-13
  for options contracts written should be shown. Options on underlying
  investments where the underlying investment would otherwise be
  presented in accordance with Sec.  Sec.   210.12-12, 12-13A, 12-13B,
  12-13C, or 12-13D should include the description of the underlying
  investment as would be required by Sec.  Sec.   210.12-12, 12-13A, 12-
  13B, 12-13C, or 12-13D as part of the description of the option.
\4\ Indicate the interest rate or preferential dividend rate and
  maturity date, as applicable, for preferred stocks, convertible
  securities, fixed income securities, government securities, loan
  participations and assignments, commercial paper, bankers'
  acceptances, certificates of deposit, short-term securities,
  repurchase agreements, or other instruments with a stated rate of
  income. For variable rate securities, indicate a description of the
  reference rate and spread and: (1) The end of period interest rate or
  (2) disclose the end of period reference rate for each reference rate
  described in the Schedule in a note to the Schedule. For securities
  with payment in kind income, disclose the rate paid in kind.
\5\ The subtotals for each category of investments, subdivided both by
  type of investment and industry, country or geographic region, shall
  be shown together with their percentage value compared to net assets.
  (Sec.  Sec.   210.6-04.19 or 210.6-05.4.)
\6\ Column C shall be totaled. The total of Column C shall agree with
  the correlative amounts shown on the related balance sheet.
\7\ Indicate by an appropriate symbol each issue of securities which is
  non-income producing. Evidences of indebtedness and preferred shares
  may be deemed to be income producing if, on the respective last
  interest payment date or date for the declaration of dividends prior
  to the date of the related balance sheet, there was only a partial
  payment of interest or a declaration of only a partial amount of the
  dividends payable; in such case, however, each such issue shall be
  indicated by an appropriate symbol referring to a note to the effect
  that, on the last interest or dividend date, only partial interest was
  paid or partial dividends declared. If, on such respective last
  interest or dividend date, no interest was paid or no cash or in kind
  dividends declared, the issue shall not be deemed to be income
  producing. Common shares shall not be deemed to be income producing
  unless, during the last year preceding the date of the related balance
  sheet, there was at least one dividend paid upon such common shares.
\8\ Indicate by an appropriate symbol each issue of restricted
  securities. State the following in a footnote: (a) As to each such
  issue: (1) Acquisition date, (2) carrying value per unit of investment
  at date of related balance sheet, e.g., a percentage of current market
  value of unrestricted securities of the same issuer, etc., and (3) the
  cost of such securities; (b) as to each issue acquired during the year
  preceding the date of the related balance sheet, the carrying value
  per unit of investment of unrestricted securities of the same issuer
  at: (1) The day the purchase price was agreed to; and (2) the day on
  which an enforceable right to acquire such securities was obtained;
  and (c) the aggregate value of all restricted securities and the
  percentage which the aggregate value bears to net assets.
\9\ Indicate by an appropriate symbol each issue of securities whose
  value was determined using significant unobservable inputs.
\10\ Indicate by an appropriate symbol each issue of securities held in
  connection with open put or call option contracts, loans for short
  sales, or where any portion of the issue is on loan.


0
11. Effective January 17, 2017, revise Sec.  210.12-12A to read as 
follows:


Sec.  210.12-12A  Investments--securities sold short.

               [For management investment companies only]
------------------------------------------------------------------------
             Col. A                     Col. B              Col. C
------------------------------------------------------------------------
Name of issuer and title of       Balance of short    Value of each open
 issue 1 2 3.                      position at close   short position 4
                                   of period (number   5 6
                                   of shares).
------------------------------------------------------------------------
\1\ Each issue shall be listed separately.
\2\ Categorize the schedule as required by instruction 2 of Sec.
  210.12-12.
\3\ Indicate the interest rate or preferential dividend rate and
  maturity date, as applicable, for preferred stocks, convertible
  securities, fixed income securities, government securities, loan
  participations and assignments, commercial paper, bankers'
  acceptances, certificates of deposit, short-term securities,
  repurchase agreements, or other instruments with a stated rate of
  income. For variable rate securities, indicate a description of the
  reference rate and spread and: (1) The end of period interest rate or
  (2) disclose the end of period reference rate for each reference rate
  described in the Schedule in a note to the Schedule. For securities
  with payment in kind income, disclose the rate paid in kind.
\4\ The subtotals for each category of investments, subdivided both by
  type of investment and industry, country, or geographic region, shall
  be shown together with their percentage value compared to net assets.
\5\ Column C shall be totaled. The total of Column C shall agree with
  the correlative amounts shown on the related balance sheet.
\6\ Indicate by an appropriate symbol each issue of securities whose
  value was determined using significant unobservable inputs.


0
12. Effective January 17, 2017, revise Sec.  210.12-12B to read as 
follows:


Sec.  210.12-12B  Summary schedule of investments in securities of 
unaffiliated issuers.

[[Page 82016]]



----------------------------------------------------------------------------------------------------------------
               Column A                        Column B                 Column C                 Column D
----------------------------------------------------------------------------------------------------------------
Name of issuer and title of issue 1 3  Balance held at close    Value of each item at    Percentage value
 4 5 6 7 8.                             of period. Number of     close of period 2 9 11   compared to net
                                        shares--principal        12 13.                   assets.
                                        amount of bonds and
                                        notes \10\.
----------------------------------------------------------------------------------------------------------------
\1\ Categorize the schedule by (a) the type of investment (such as common stocks, preferred stocks, convertible
  securities, fixed income securities, government securities, options purchased, warrants, loan participations
  and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities,
  repurchase agreements, other investment companies, and so forth); and (b) the related industry, country or
  geographic region of the investment.
\2\ The subtotals for each category of investments, subdivided both by type of investment and industry, country,
  or geographic region, shall be shown together with their percentage value compared to net assets.
\3\ Indicate the interest rate or preferential dividend rate and maturity date, as applicable, for preferred
  stocks, convertible securities, fixed income securities, government securities, loan participations and
  assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities,
  repurchase agreements, or other instruments with a stated rate of income. For variable rate securities,
  indicate a description of the reference rate and spread and: (1) The end of period interest rate or (2)
  disclose the end of period reference rate for each reference rate described in the Schedule in a note to the
  Schedule. For securities with payment in kind income, disclose the rate paid in kind.
\4\ Except as provided in note 6, list separately the 50 largest issues and any other issue the value of which
  exceeded one percent of net asset value of the registrant as of the close of the period. For purposes of the
  list (including, in the case of short-term debt instruments, the first sentence of note 4), aggregate and
  treat as a single issue, respectively, (a) short-term debt instruments (i.e., debt instruments whose
  maturities or expiration dates at the time of acquisition are one year or less) of the same issuer (indicating
  the range of interest rates and maturity dates); and (b) fully collateralized repurchase agreements (indicate
  in a footnote the range of dates of the repurchase agreements, the total purchase price of the securities, the
  total amount to be received upon repurchase, the range of repurchase dates, and description of securities
  subject to the repurchase agreements). Restricted and unrestricted securities of the same issue should be
  aggregated for purposes of determining whether the issue is among the 50 largest issues, but should not be
  combined in the schedule. For purposes of determining whether the value of an issue exceeds one percent of net
  asset value, aggregate and treat as a single issue all securities of any one issuer, except that all fully
  collateralized repurchase agreements shall be aggregated and treated as a single issue. The U.S. Treasury and
  each agency, instrumentality, or corporation, including each government-sponsored entity, that issues U.S.
  government securities is a separate issuer.
\5\ For options purchased, all information required by Sec.   210.12-13 for options contracts written should be
  shown. Options on underlying investments where the underlying investment would otherwise be presented in
  accordance with Sec.  Sec.   210.12-12, 12-13A, 12-13B, 12-13C, or 12-13D should include the description of
  the underlying investment as would be required by Sec.  Sec.   210.12-12, 12-13A, 12-13B, 12-13C, or 12-13D as
  part of the description of the option.
\6\ If multiple securities of an issuer aggregate to greater than one percent of net asset value, list each
  issue of the issuer separately (including separate listing of restricted and unrestricted securities of the
  same issue) except that the following may be aggregated and listed as a single issue: (a) Fixed-income
  securities of the same issuer which are not among the 50 largest issues and whose value does not exceed one
  percent of net asset value of the registrant as of the close of the period (indicating the range of interest
  rates and maturity dates); and (b) U.S. government securities of a single agency, instrumentality, or
  corporation, which are not among the 50 largest issues and whose value does not exceed one percent of net
  asset value of the registrant as of the close of the period (indicating the range of interest rates and
  maturity dates). For each category identified pursuant to note 1, group all issues that are neither separately
  listed nor included in a group of securities that is listed in the aggregate as a single issue in a sub-
  category labeled ``Other securities,'' and provide the information for Columns C and D.
\7\ Any securities that would be required to be listed separately or included in a group of securities that is
  listed in the aggregate as a single issue may be listed in one amount as ``Miscellaneous securities,''
  provided the securities so listed are eligible to be, and are, categorized as ``Miscellaneous securities'' in
  the registrant's Schedule of Investments in Securities of Unaffiliated Issuers required under Sec.   210.12-
  12. However, if any security that is included in ``Miscellaneous securities'' would otherwise be required to
  be included in a group of securities that is listed in the aggregate as a single issue, the remaining
  securities of that group must nonetheless be listed as required by notes 4 and 5 even if the remaining
  securities alone would not otherwise be required to be listed in this manner (e.g., because the combined value
  of the security listed in ``Miscellaneous securities'' and the remaining securities of the same issuer exceeds
  one percent of net asset value, but the value of the remaining securities alone does not exceed one percent of
  net asset value).
\8\ If any securities are listed as ``Miscellaneous securities'' pursuant to note 6 or ``Other securities''
  pursuant to note 5, briefly explain in a footnote what those terms represent.
\9\ Total Column C. The total of Column C should equal the total shown on the related balance sheet for
  investments in securities of unaffiliated issuers.
\10\ Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of
  indebtedness and preferred shares may be deemed to be income producing if, on the respective last interest
  payment date or date for the declaration of dividends prior to the date of the related balance sheet, there
  was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in
  such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the
  effect that, on the last interest or dividend date, only partial interest was paid or partial dividends
  declared. If, on such respective last interest or dividend date, no interest was paid or no cash or in kind
  dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to
  be income producing unless, during the last year preceding the date of the related balance sheet, there was at
  least one dividend paid upon such common shares.
\11\ Indicate by an appropriate symbol each issue of restricted securities. State the following in a footnote:
  (a) As to each such issue: (1) Acquisition date, (2) carrying value per unit of investment at date of related
  balance sheet, e.g., a percentage of current market value of unrestricted securities of the same issuer, etc.,
  and (3) the cost of such securities; (b) as to each issue acquired during the year preceding the date of the
  related balance sheet, the carrying value per unit of investment of unrestricted securities of the same issuer
  at: (1) The day the purchase price was agreed to; and (2) the day on which an enforceable right to acquire
  such securities was obtained; and (c) the aggregate value of all restricted securities and the percentage
  which the aggregate value bears to net assets.
\12\ Indicate by an appropriate symbol each issue of securities whose value was determined using significant
  unobservable inputs.
\13\ Indicate by an appropriate symbol each issue of securities held in connection with open put or call option
  contracts, loans for short sales, or where any portion of the issue is on loan.

Sec.  210.12-12C  [Removed and Reserved].

0
13. Effective January 17, 2017, remove and reserve Sec.  210.12-12C.

0
14. Effective January 17, 2017, revise Sec.  210.12-13 to read as 
follows:


Sec.  210.12-13  Open option contracts written.



[[Page 82017]]



                                                       [For management investment companies only]
--------------------------------------------------------------------------------------------------------------------------------------------------------
             Col. A                     Col. B              Col. C              Col. D              Col. E              Col. F              Col. G
--------------------------------------------------------------------------------------------------------------------------------------------------------
Description 1 2 3...............  Counterparty \4\..  Number of           Notional amount...  Exercise price....  Expiration date...  Value.6 7 8
                                                       contracts \5\.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Information as to put options shall be shown separately from information as to call options.
\2\ Options where descriptions, counterparties, exercise prices or expiration dates differ shall be listed separately.
\3\ Options on underlying investments where the underlying investment would otherwise be presented in accordance with Sec.  Sec.   210.12-12, 12-13A, 12-
  13B, 12-13C, or 12-13D should include the description of the underlying investment as would be required by Sec.  Sec.   210.12-12, 12-13A, 12-13B, 12-
  13C, or 12-13D as part of the description of the option.
If the underlying investment is an index or basket of investments, and the components are publicly available on a Web site as of the balance sheet date,
  identify the index or basket. If the underlying investment is an index or basket of investments, the components are not publicly available on a Web
  site as of the balance sheet date, and the notional amount of the option contract does not exceed one percent of the net asset value of the registrant
  as of the close of the period, identify the index or basket. If the underlying investment is an index or basket of investments, the components are not
  publicly available on a Web site as of the balance sheet date, and the notional amount of the option contract exceeds one percent of the net asset
  value of the registrant as of the close of the period, provide a description of the index or custom basket and list separately: (i) The 50 largest
  components in the index or custom basket and (ii) any other components where the notional value for that components exceeds 1% of the notional value
  of the index or custom basket. For each investment separately listed, include the description of the underlying investment as would be required by
  Sec.  Sec.   210.12-12, 12-13, 12-13A, 12-13B, or 12-13D as part of the description, the quantity held (e.g. the number of shares for common stocks,
  principal amount for fixed income securities), the value at the close of the period, and the percentage value when compared to the custom basket's net
  assets.
\4\ Not required for exchange traded or centrally cleared options.
\5\ If the number of shares subject to option is substituted for number of contracts, the column name shall reflect that change.
\6\ Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment.
\7\ Indicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs.
\8\ Column G shall be totaled and shall agree with the correlative amount shown on the related balance sheet.


0
15. Effective January 17, 2017, add Sec.  210.12-13A to read as 
follows:


Sec.  210.12-13A  Open futures contracts.



                                                       [For management investment companies only]
--------------------------------------------------------------------------------------------------------------------------------------------------------
               Col. A                        Col. B                  Col. C                  Col. D                 Col. E                 Col. F
--------------------------------------------------------------------------------------------------------------------------------------------------------
Description 1 2 3 4 5..............  Number of contracts...  Expiration date.......  Notional amount \6\..  Value................  Unrealized
                                                                                                                                    appreciation/
                                                                                                                                    depreciation.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Information as to long purchases of futures contracts shall be shown separately from information as to futures contracts sold short.
\2\ Futures contracts where descriptions or expiration dates differ shall be listed separately.
\3\ Description should include the name of the reference asset or index.
\4\ Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment.
\5\ Indicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs.
\6\ Notional amount shall be the current notional amount at close of period.


0
16. Effective January 17, 2017, add Sec.  210.12-13B to read as 
follows:


Sec.  210.12-13B  Open forward foreign currency contracts.



                                   [For management investment companies only]
----------------------------------------------------------------------------------------------------------------
             Col. A                     Col. B              Col. C              Col. D              Col. E
----------------------------------------------------------------------------------------------------------------
Amount and description of         Amount and          Counterparty......  Settlement date...  Unrealized
 currency to be purchased \1\.     description of                                              appreciation/
                                   currency to be                                             depreciation.2 3 4
                                   sold \1\.
----------------------------------------------------------------------------------------------------------------
\1\ Forward foreign currency contracts where description of currency purchased, description of currency sold,
  counterparty, or settlement dates differ shall be listed separately.
\2\ Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions
  applicable to the investment.
\3\ Indicate by an appropriate symbol each investment whose value was determined using significant unobservable
  inputs.
\4\ Column E shall be totaled and shall agree with the total of correlative amount(s) shown on the related
  balance sheet.


0
17. Effective January 17, 2017, add Sec.  210.12-13C to read as 
follows:


Sec.  210.12-13C   Open swap contracts.



[[Page 82018]]



                                                                           [For management investment companies only]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
              Col. A                      Col. B                Col. C                Col. D                Col. E               Col. F                   Col. G                    Col. H
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Description and terms of payments  Description and       Counterparty \4\....  Maturity date.......  Notional amount....  Value..............     Upfront payments/receipts  Unrealized
 to be received from another        terms of payments                                                                                                                         appreciation/
 party 1 2 3.                       to be paid to                                                                                                                            depreciation.5 6 7
                                    another party 1 2 3.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ List each major category of swaps by descriptive title (e.g., credit default swaps, interest rate swaps, total return swaps). Credit default swaps where protection is sold shall be listed
  separately from credit default swaps where protection is purchased.
\2\ Swaps where description, counterparty, or maturity dates differ shall be listed separately within each major category.
\3\ Description should include information sufficient for a user of financial information to understand the terms of payments to be received and paid. (e.g. For a credit default swap,
  including, among other things, description of reference obligation(s) or index, financing rate to be paid or received, and payment frequency. For an interest rate swap, this may include,
  among other things, whether floating rate is paid or received, fixed interest rate, floating interest rate, and payment frequency. For a total return swap, this may include, among other
  things, description of reference asset(s) or index, financing rate, and payment frequency.) If the reference instrument is an index or basket of investments, and the components are publicly
  available on a Web site as of the balance sheet date, identify the index or basket.If the reference instrument is an index or basket of investments, the components are not publicly available
  on a Web site as of the balance sheet date, and the notional amount of the swap contract does not exceed one percent of the net asset value of the registrant as of the close of the period,
  identify the index or basket. If the reference instrument is an index or basket of investments, the components are not publicly available on a Web site as of the balance sheet date, and the
  notional amount of the swap contract exceeds one percent of the net asset value of the registrant as of the close of the period provide a description of the index or custom basket and list
  separately: (i) The 50 largest components in the index or custom basket and (ii) any other components where the notional value for that components exceeds 1% of the notional value of the
  index or custom basket. For each investment separately listed, include the description of the underlying investment as would be required by Sec.  Sec.   210.12-12, 210.12-13, 210.12-13A,
  210.12-13B, or 210.12-13D as part of the description, the quantity held (e.g., the number of shares for common stocks, principal amount for fixed income securities), the value at the close
  of the period, and the percentage value when compared to the custom basket's net assets.
\4\ Not required for exchange-traded or centrally cleared swaps.
\5\ Indicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment.
\6\ Indicate by an appropriate symbol each investment whose value was determined using significant unobservable inputs.
\7\ Columns G and H shall be totaled and shall agree with the total of correlative amount(s) shown on the related balance sheet.


0
18. Effective January 17, 2017, add Sec.  210.12-13D to read as 
follows:


Sec.  210.12-13D  Investments other than those presented in Sec. Sec.  
210.12-12, 12-12A, 12-12B, 12-13, 12-13A, 12-13B, and 12-13C.

               [For management investment companies only]
------------------------------------------------------------------------
             Col. A                     Col. B              Col. C
------------------------------------------------------------------------
Description 1 2 3...............  Balance held at     Value of each item
                                   close of period--   at close of
                                   quantity 4 5.       period.6 7 8 9
------------------------------------------------------------------------
\1\ Each investment where any portion of the description differs shall
  be listed separately.
\2\ Categorize the schedule by (i) the type of investment (such as real
  estate, commodities, and so forth); and, as applicable, (ii) the
  related industry, country, or geographic region of the investment.
\3\ Description should include information sufficient for a user of
  financial information to understand the nature and terms of the
  investment, which may include, among other things, reference security,
  asset or index, currency, geographic location, payment terms, payment
  rates, call or put feature, exercise price, expiration date, and
  counterparty for non-exchange-traded investments.
\4\ If practicable, indicate the quantity or measure in appropriate
  units.
\5\ Indicate by an appropriate symbol each investment which is non-
  income producing.
\6\ Indicate by an appropriate symbol each investment which cannot be
  sold because of restrictions or conditions applicable to the
  investment.
\7\ Indicate by an appropriate symbol each investment whose value was
  determined using significant unobservable inputs.
\8\ Indicate by an appropriate symbol investment subject to option.
  State in a footnote: (a) The quantity subject to option, (b) nature of
  option contract, (c) option price, and (d) dates within which options
  may be exercised.
\9\ Column C shall be totaled and shall agree with the correlative
  amount shown on the related balance sheet.


0
19. Effective January 17, 2017, revise Sec.  210.12-14 to read as 
follows:


Sec.  210.12-14  Investments in and advances to affiliates.



[[Page 82019]]



                                                       [For management investment companies only]
--------------------------------------------------------------------------------------------------------------------------------------------------------
               Col. A                        Col. B                  Col. C                  Col. D                 Col. E                 Col. F
--------------------------------------------------------------------------------------------------------------------------------------------------------
Name of issuer and title of issue    Number of shares--      Net realized gain or    Net increase or        Amount of dividends    Value of each item at
 or nature of indebtedness 1 2 3.     principal amount of     loss for the period 4   decrease in            or interest 4 6.       close of period.4 5
                                      bonds, notes and        6.                      unrealized            (1) Credited to         7 8 9
                                      other indebtedness                              appreciation or        income.
                                      held at close of                                depreciation for the  (2) Other............
                                      period.                                         period 4 6.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ (a) List each issue separately and group (1) Investments in majority-owned subsidiaries; (2) other controlled companies; and (3) other affiliates.
  (b) If during the period there has been any increase or decrease in the amount of investment in and advance to any affiliate, state in a footnote (or
  if there have been changes to numerous affiliates, in a supplementary schedule) (1) name of each issuer and title of issue or nature of indebtedness;
  (2) balance at beginning of period; (3) gross additions; (4) gross reductions; (5) balance at close of period as shown in Column E. Include in the
  footnote or schedule comparable information as to affiliates in which there was an investment at any time during the period even though there was no
  investment at the close of the period of report.
\2\ Categorize the schedule as required by instruction 2 of Sec.   210.12-12.
\3\ Indicate the interest rate or preferential dividend rate and maturity date, as applicable, for preferred stocks, convertible securities, fixed
  income securities, government securities, loan participations and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-
  term securities, repurchase agreements, or other instruments with a stated rate of income. For variable rate securities, indicate a description of the
  reference rate and spread and: (1) The end of period interest rate or (2) disclose the end of period reference rate for each reference rate described
  in the Schedule in a note to the Schedule. For securities with payment in kind income, disclose the rate paid in kind.
\4\ Columns C, D, E, and F shall be totaled. The totals of Column F shall agree with the correlative amount shown on the related balance sheet.
\5\ (a) Indicate by an appropriate symbol each issue of restricted securities. The information required by instruction 8 of Sec.   210.12-12 shall be
  given in a footnote. (b) Indicate by an appropriate symbol each issue of securities subject to option. The information required by Sec.   210.12-13
  shall be given in a footnote.
\6\ (a) Include in Column E (1) as to each issue held at the close of the period, the dividends or interest included in caption 1 of the statement of
  operations. In addition, show as the final item in Column E (1) the aggregate of dividends and interest included in the statement of operations in
  respect of investments in affiliates not held at the close of the period. The total of this column shall agree with the correlative amount shown on
  the related statement of operations.
(b) Include in Column E (2) all other dividends and interest. Explain in an appropriate footnote the treatment accorded each item.
(c) Indicate by an appropriate symbol all non-cash dividends and interest and explain the circumstances in a footnote.
(d) Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of indebtedness and preferred shares may be
  deemed to be income producing if, on the respective last interest payment date or date for the declaration of dividends prior to the date of the
  related balance sheet, there was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in such case,
  however, each such issue shall be indicated by an appropriate symbol referring to a note to the effect that, on the last interest or dividend date,
  only partial interest was paid or partial dividends declared. If, on such respective last interest or dividend date, no interest was paid or no cash
  or in kind dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to be income producing unless,
  during the last year preceding the date of the related balance sheet, there was at least one dividend paid upon such common shares.
(e) Include in Column C (1) as to each issue held at the close of the period, the realized gain or loss included in Sec.   210.6-07.7 of the statement
  of operations. In addition, show as the final item in Column C (1) the aggregate of realized gain or loss included in the statement of operations in
  respect of investments in affiliates not held at the close of the period. The total of this column shall agree with the correlative amount shown on
  the related statement of operations.
(f) Include in Column D (1) as to each issue held at the close of the period, the net increase or decrease in unrealized appreciation or depreciation
  included in Sec.   210.6-07 .7 of the statement of operations. In addition, show as the final item in Column D (1) the aggregate of increase or
  decrease in unrealized appreciation or depreciation included in the statement of operations in respect of investments in affiliates not held at the
  close of the period. The total of this column shall agree with the correlative amount shown on the related statement of operations.
\7\ The subtotals for each category of investments, subdivided both by type of investment and industry, country, or geographic region, shall be shown
  together with their percentage value compared to net assets.
\8\ Indicate by an appropriate symbol each issue of securities whose value was determined using significant unobservable inputs.
\9\ Indicate by an appropriate symbol each issue of securities held in connection with open put or call option contracts, loans for short sales, or
  where any portion of the issue is on loan.

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
20. The authority citation for part 232 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, and 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *


Sec.  232.105   [Amended]

0
21. Effective June 1, 2018, amend Sec.  232.105 by removing and 
reserving paragraph (a).


Sec.  232.301   [Amended]

0
22. Effective June 1, 2018, amend Sec.  232.301 by removing the fourth 
sentence ``Additional provisions applicable to Form N-SAR filers are 
set forth in the EDGAR Filer Manual, Volume III: ``N-SAR Supplement,'' 
Version 5 (September 2015).''


Sec.  232.401   [Amended]

0
23. Effective August 1, 2019, amend Sec.  232.401 paragraph (d)(2)(iii) 
by removing the phrase ``, N-CSR (Sec.  274.128 of this chapter) or N-Q 
(Sec.  274.130 of this chapter)'' and adding in its place ``or N-CSR 
(Sec.  274.128 of this chapter)''.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
24. The authority citation for part 239 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-
3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7, 78o-7 note, 78u-5, 
78w(a), 78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 
80a-24, 80a-26, 80a-29, 80a-30, 80a-37, and Sec. 71003 and Sec. 
84001, Public Law 114-94, 129 Stat. 1312, unless otherwise noted.

* * * * *


Sec.  239.23   [Amended]

0
25. Effective January 17, 2017, amend Form N-14 (referenced in Sec.  
239.23) Item 14, subpart 1(ii) by removing the phrase ``the following 
schedules in support of the most recent balance sheet: (A) Columns C 
and D of Schedule III [17 CFR 210.12-14]; and (B) Schedule IV [17 CFR 
210.12-03];'' and adding in its place ``columns C and D of Schedule III 
[17 CFR 210.12-14] in support of the most recent balance sheet''.

[[Page 82020]]

PART 240 -- GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT 
OF 1934

0
26. The authority citation for part 240 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq. and 8302; 
7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Public 
Law 111-203, 939A, 124 Stat. 1376 (2010); and Public Law 112-106, 
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *


Sec.  240.10A-1   [Amended]

0
27. Effective June 1, 2018, amend Sec.  240.10A-1 paragraph (a)(4)(i) 
by removing the phrase ``Form N-SAR, Sec.  274.101'' and adding in its 
place ``Form N-CSR, Sec.  274.128''.


Sec.  240.12b-25   [Amended]

0
28. Effective June 1, 2018, amend Sec.  240.12b-25 by:
0
a. In the section heading, removing ``N-SAR'' and adding in its place 
``N-CEN'';
0
b. In paragraph (a), removing ``Form N-SAR'' and adding in its place 
``Form N-CEN''; and
0
c. In paragraph (b)(2)(ii), removing ``N-SAR,'' and adding in its place 
``N-CEN,''.


Sec.  240.13a-10   [Amended]

0
29. Effective June 1, 2018, amend Sec.  240.13a-10 by:
0
a. In paragraph (h), removing the phrase ``Rule 30b1-1 (Sec.  270.30b1-
1 of this chapter)'' and adding in its place ``Rule 30a-1 (Sec.  
270.30a-1 of this chapter)'';
0
b. In Note 1, removing ``Sec.  270.30b1-1'' and adding in its place 
``Sec.  270.30a-1''.


Sec.  240.13a-11   [Amended]

0
30. Effective June 1, 2018, amend Sec.  240.13a-11 paragraph (b) 
introductory text by removing ``Sec.  270.30b1-1'' and adding in its 
place ``Sec.  270.30a-1''.


Sec.  240.13a-13   [Amended]

0
31. Effective June 1, 2018, amend Sec.  240.13a-13 paragraph (b)(1) by 
removing ``Sec.  270.30b1-1'' and adding in its place ``Sec.  270.30a-1 
of this chapter''.


Sec.  240.13a-16   [Amended]

0
32. Effective June 1, 2018, amend Sec.  240.13a-16 paragraph (a)(1) by 
removing the phrase ``Rule 30b1-1 (17 CFR 270.30b1-1)'' and adding in 
its place ``Sec.  270.30a-1 of this chapter''.


Sec.  240.15d-10   [Amended]

0
33. Effective June 1, 2018, amend Sec.  240.15d-10 paragraph (h) by 
removing the phrase ``Rule 30b1-1 (Sec.  270.30b1-1 of this chapter)'' 
and adding in its place ``Rule 30a-1 (Sec.  270.30a-1 of this 
chapter)''.


Sec.  240.15d-11   [Amended]

0
34. Effective June 1, 2018, amend Sec.  240.15d-11 paragraph (b) 
introductory text by removing ``Sec.  270.30b1-1'' and adding in its 
place ``Sec.  270.30a-1''.


Sec.  240.15d-13   [Amended]

0
35. Effective June 1, 2018, amend Sec.  240.15d-13 paragraph (b)(1) by 
removing ``Sec.  270.30b1-1'' and adding in its place ``Sec.  270.30a-1 
of this chapter''.


Sec.  240.15d-16   [Amended]

0
36. Effective June 1, 2018, amend Sec.  240.15d-16 paragraph (a)(1) by 
removing the phrase ``Rule 30b1-1 [17 CFR 270.30b1-1]'' and adding in 
its place ``Sec.  270.30a-1 of this chapter''.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
37. The general authority citation for part 249 continues to read, and 
effective January 17, 2017, the sectional authority for Sec.  249.330 
is revised to read as follows:

    Authority:  15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; and 18 U.S.C. 1350; Sec. 953(b), Public Law 111-203, 
124 Stat. 1904; Sec. 102(a)(3), Public Law 112-106, 126 Stat. 309 
(2012); Sec. 107, Public Law 112-106, 126 Stat. 313 (2012), and Sec. 
72001, Public Law 114-94, 129 Stat. 1312 (2015), unless otherwise 
noted.

* * * * *

Section 249.330 is also issued under 15 U.S.C. 80a-29(a).

* * * * *


Sec.  249.322   [Amended]

0
38. Effective June 1, 2018, amend Sec.  249.322 in the first sentence 
of paragraph (a) by removing the phrase ``a semi-annual, annual, or 
transition report on Form N-SAR (Sec. Sec.  249.330; 274.101) or'' and 
adding in its place ``an annual report on Form N-CEN (Sec. Sec.  
249.330; 274.101) or a semi-annual or annual report on''.

0
39. Effective June 1, 2018, Sec.  249.330 is revised to read as 
follows:


Sec.  249.330   Form N-CEN, annual report of registered investment 
companies.

    This form shall be used by registered unit investment trusts and 
small business investment companies for annual reports to be filed 
pursuant to Sec.  270.30a-1 of this chapter in satisfaction of the 
requirement of section 30(a) of the Investment Company Act of 1940 (15 
U.S.C. 80a-29(a)) that every registered investment company must file 
annually with the Commission such information, documents, and reports 
as investment companies having securities registered on a national 
securities exchange are required to file annually pursuant to section 
13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and the 
rules and regulations thereunder.

    Note:  The text of Form N-CEN will not appear in the Code of 
Federal Regulations.

Sec.  249.332   [Removed and Reserved]

0
40. Effective August 1, 2019, Sec.  249.332 is removed and reserved.

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
41. The authority citation for part 270 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
and Public Law 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.

* * * * *


Sec.  270.8b-16   [Amended]

0
42. Effective June 1, 2018, amend Sec.  270.8b-16 paragraph (a) by 
removing the phrase ``a semi-annual report on Form N-SAR, as prescribed 
by rule 30b1-1 (17 CFR 270.30b1-1)'' and adding in its place ``an 
annual report on Form N-CEN, as prescribed by Sec.  270.30a-1 of this 
chapter''.


Sec.  270.8b-33   [Amended]

0
43. Effective August 1, 2019, amend Sec.  270.8b-33 by:
0
a. In the first sentence, removing the phrase ``, Form N-CSR 
(Sec. Sec.  249.331 and 274.128 of this chapter), or Form N-Q 
(Sec. Sec.  249.332 and 274.130 of this chapter)'' and adding in its 
place the phrase ``or Form N-CSR (Sec. Sec.  249.331 and 274.128 of 
this chapter)''; and
0
b. In the third sentence, removing the phrase ``or Form N-Q''.


Sec.  270.10f-3   [Amended]

0
44. Effective June 1, 2018, amend Sec.  270.10f-3 by removing and 
reserving paragraph (c)(9).

0
45. Effective June 1, 2018, revise Sec.  270.30a-1 to read as follows:


Sec.  270.30a-1   Annual report for registered investment companies.

    Every management investment company must file an annual report on 
Form N-CEN (Sec.  274.101 of this chapter) at least every twelve months 
and not

[[Page 82021]]

more than seventy-five calendar days after the close of each fiscal 
year. Every unit investment trust must file an annual report on Form N-
CEN (Sec.  274.101 of this chapter) at least every twelve months and 
not more than seventy-five calendar days after the close of each 
calendar year. A registered investment company that has filed a 
registration statement with the Commission registering its securities 
for the first time under the Securities Act of 1933 is relieved of this 
reporting obligation with respect to any reporting period or portion 
thereof prior to the date on which that registration statement becomes 
effective or is withdrawn.


Sec.  270.30a-2   [Amended]

0
46. Effective August 1, 2019, amend Sec.  270.30a-2 by:
0
a. In the section heading, removing the phrase ``and Form N-Q''; and
0
b. In the first sentence of paragraph (a), removing the phrases ``or 
Form N-Q (Sec. Sec.  249.332 and 274.130 of this chapter)'' and ``or 
Item 3 of Form N-Q, as applicable,''.


Sec.  270.30a-3   [Amended]

0
47. Effective August 1, 2019, amend Sec.  270.30a-3 by:
0
a. In paragraph (b), removing the phrase ``and Form N-Q (Sec. Sec.  
249.332 and 274.130 of this chapter)''.
0
b. In the first sentence of paragraph (c), removing the phrase ``and 
Form N-Q (Sec. Sec.  249.332 and 274.130 of this chapter)''.
0
c. In the second sentence of paragraph (c), removing the phrase ``and 
Form N-Q''.

0
48. Effective June 1, 2018, Sec.  270.30a-4 is added to read as 
follows:


Sec.  270.30a-4   Annual report for wholly-owned registered management 
investment company subsidiary of registered management investment 
company.

    Notwithstanding the provisions of Sec.  270.30a-1, a registered 
management investment company that is a wholly-owned subsidiary of a 
registered management investment company need not file an annual report 
on Form N-CEN if financial information with respect to that subsidiary 
is reported in the parent's annual report on Form N-CEN.


Sec.  270.30b1-1   [Removed and Reserved]

0
49. Effective June 1, 2018, Sec.  270.30b1-1 is removed and reserved.


Sec.  270.30b1-2   [Removed and Reserved]

0
50. Effective June 1, 2018, Sec.  270.30b1-2 is removed and reserved.


Sec.  270.30b1-3   [Removed and Reserved]

0
51. Effective June 1, 2018, Sec.  270.30b1-3 is removed and reserved.


Sec.  270.30b1-5   [Removed and Reserved]

0
52. Effective August 1, 2019, Sec.  270.30b1-5 is removed and reserved.

0
53. Effective January 17, 2017, Sec.  270.30b1-9 is added to read as 
follows:


Sec.  270.30b1-9   Monthly report.

    Each registered management investment company or exchange-traded 
fund organized as a unit investment trust, or series thereof, other 
than a registered open-end management investment company that is 
regulated as a money market fund under Sec.  270.2a-7 or a small 
business investment company registered on Form N-5 (Sec. Sec.  239.24 
and 274.5 of this chapter), must file a monthly report of portfolio 
holdings on Form N-PORT (Sec.  274.150 of this chapter), current as of 
the last business day, or last calendar day, of the month. A registered 
investment company that has filed a registration statement with the 
Commission registering its securities for the first time under the 
Securities Act of 1933 is relieved of this reporting obligation with 
respect to any reporting period or portion thereof prior to the date on 
which that registration statement becomes effective or is withdrawn. 
Reports on Form N-PORT must be filed with the Commission no later than 
30 days after the end of each month.


Sec.  270.30d-1   [Amended]

0
54. Effective August 1, 2019, amend Sec.  270.30d-1 by removing the 
phrase ``and Form N-Q (Sec. Sec.  249.332 and 274.130 of this 
chapter)''.

0
55. Effective June 1, 2018, Section 270.30d-1 is further amended by 
removing the phrase ``Form N-SAR'' and adding in its place ``Form N-
CEN''.
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
56. The general authority citation for part 274 continues to read as 
follows, and effective January 17, 2017, the sectional authorities for 
Sec. Sec.  274.101 and 274.130 are removed:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Public Law 111-203, 
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.

* * * * *


Sec. Sec.  239.15A and 274.11A   [Amended]

0
57. Effective August 1, 2019, Form N-1A (referenced in Sec. Sec.  
239.15A and 274.11A) is amended as follows:
0
a. In Item 16(f), Instruction 3(b), remove the phrase ``N-Q'' and add 
in its place ``N-PORT for the last month of the Fund's first or third 
fiscal quarters''; and
0
b. In Item 27(d)(1), revise Instruction 4.
    The additions and revisions read as follows:
Note: The text of Form N-1A does not, and this amendment will not, 
appear in the Code of Federal Regulations.

Form N-1A

* * * * *
Item 27. Financial Statements
* * * * *
    (d) * * *
    (1) * * *
Instructions
    * * *
    4. ``Statement Regarding Availability of Quarterly Portfolio 
Schedule. A statement that: (i) The Fund files its complete schedule of 
portfolio holdings with the Commission for the first and third quarters 
of each fiscal year as an exhibit to its reports on Form N-PORT; (ii) 
the Fund's Form N-PORT reports are available on the Commission's Web 
site at https://www.sec.gov; and (iii) if the Fund makes the information 
on Form N-PORT available to shareholders on its Web site or upon 
request, a description of how the information may be obtained from the 
Fund.
* * * * *

0
58. Effective January 17, 2017, Form N-1A (referenced in Sec. Sec.  
239.15A and 274.11A) is further amended as follows:
0
a. In Item 19, add paragraph (i) to Item 19;
0
b. In Item 27(b)(1), Instruction 1, remove the phrase ``Schedule VI'' 
and adding in its place ``Schedule IX'', and remove the phrase ``[17 
CFR 210.12-12C]'' and adding in its place ``[17 CFR 210.12-12B]'';
0
c. In Item 27(b)(1), Instruction 2, removing the phrase ``[17 CFR 
210.12-12C]'' and adding in its place ``17 CFR 210.12-12B]''; and
0
d. In Item 33, add an instruction.
    The additions and revisions read as follows:

    Note:  The text of Form N-1A does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *

[[Page 82022]]

Item 19. Investment Advisory and Other Services
* * * * *
    (i) Securities Lending.
    (1) Provide the following dollar amounts of income and fees/
compensation related to the securities lending activities of each 
Series during its most recent fiscal year:
    (i) Gross income from securities lending activities, including 
income from cash collateral reinvestment;
    (ii) All fees and/or compensation for each of the following 
securities lending activities and related services: Any share of 
revenue generated by the securities lending program paid to the 
securities lending agent(s) (``revenue split''); fees paid for cash 
collateral management services (including fees deducted from a pooled 
cash collateral reinvestment vehicle) that are not included in the 
revenue split; administrative fees that are not included in the revenue 
split; fees for indemnification that are not included in the revenue 
split; rebates paid to borrowers; and any other fees relating to the 
securities lending program that are not included in the revenue split, 
including a description of those other fees;
    (iii) The aggregate fees/compensation disclosed pursuant to 
paragraph (ii); and
    (iv) Net income from securities lending activities (i.e., the 
dollar amount in paragraph (i) minus the dollar amount in paragraph 
(iii)).
    Instruction. If a fee for a service is included in the revenue 
split, state that the fee is ``included in the revenue split.''
    (2) Describe the services provided to the Series by the securities 
lending agent in the Series' most recent fiscal year.
* * * * *
Item 33. Location of Accounts and Records
* * * * *
Instructions.
    * * *
    3. A Fund may omit this information to the extent it is provided in 
its most recent report on Form N-CEN [17 CFR 274.101].
* * * * *

0
59. Effective August 1, 2019, Form N-2 (referenced in Sec. Sec.  239.14 
and 274.11a-1) is amended by revising paragraph (b) in Item 24, 
Instruction 6.
    The additions and revisions read as follows:

    Note:  The text of Form N-2 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-2

* * * * *
Item 24. Financial Statements
* * * * *
    Instructions
* * * * *
    6. * * *
    (b) ``Statement Regarding Availability of Quarterly Portfolio 
Schedule. A statement that: (i) The Registrant files its complete 
schedule of portfolio holdings with the Commission for the first and 
third quarters of each fiscal year as an exhibit to its reports on Form 
N-PORT; (ii) the Registrant's Form N-PORT reports are available on the 
Commission's Web site at https://www.sec.gov; (iii) if the Registrant 
makes the information on Form N-PORT available to shareholders on its 
Web site or upon request, a description of how the information may be 
obtained from the Registrant.'';
* * * * *

0
60. Effective January 17, 2017, Form N-2 (referenced in Sec. Sec.  
239.14 and 274.11a-1) is further amended as follows:
0
a. In Item 24, Instruction 7, remove the phrase ``Schedule VI'' and add 
in its place ``Schedule IX'', and remove the phrase ``[17 CFR 210.12-
12C]'' and add in its place ``17 CFR 210.12-12B]''; and
0
b. In Item 32, add an instruction.
    The additions and revisions read as follows:

    Note:  The text of Form N-2 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-2

* * * * *
Item 32. Location of Accounts and Records
* * * * *
    Instruction. The Registrant may omit this information to the extent 
it is provided in its most recent report on Form N-CEN [17 CFR 
274.101].
* * * * *

0
61. Effective August 1, 2019, Form N-3 (referenced in Sec. Sec.  
239.17a and 274.11b) is amended as follows:
0
a. In Item 19(e)(ii), Instruction 3(b), remove the phrase ``N-Q'' and 
add in its place ``N-PORT for the Registrant's first or third fiscal 
quarters'';
0
b. In Item 28(a), revise Instruction 6, paragraph (ii).
    The additions and revisions read as follows:

    Note:  The text of Form N-3 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-3

* * * * *
Item 28. Financial Statements
* * * * *
    (a) * * *
    Instructions. * * *
    6. * * *
    (ii) Statement Regarding Availability of Quarterly Portfolio 
Schedule. A statement that: (i) The Registrant files its complete 
schedule of portfolio holdings with the Commission for the first and 
third quarters of each fiscal year as an exhibit to its reports on Form 
N-PORT; (ii) the Registrant's Form N-PORT reports are available on the 
Commission's Web site at https://www.sec.gov; and (iii) if the 
Registrant makes the information on Form N-PORT available to contract 
owners on its Web site or upon request, a description of how the 
information may be obtained from the Fund;
* * * * *

0
62. Effective January 17, 2017, Form N-3 (referenced in Sec. Sec.  
239.17a and 274.11b) is further amended as follows:
0
a. In Item 21, add paragraph (j); In Item 28(a), Instruction 7(i), 
remove the phrase ``Schedule VI'' and add in its place ``Schedule IX'', 
and remove the phrase ``[17 CFR 210.12-12C]'' and add in its place 
``[17 CFR 210.12-12B]'';
0
b. In Item 28(a), Instruction 7(i), remove the phrase ``[17 CFR 210.12-
12C]'' and add in its place ``17 CFR 210.12-12]''; and
0
c. In Item 36, add an instruction.
    The additions and revisions read as follows:

    Note: The text of Form N-3 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-3

* * * * *
Item 21. Investment Advisory and Other Services
* * * * *
    (j) Securities Lending.
    (i) Provide the following dollar amounts of income and fees/
compensation related to the securities lending activities of each 
series of the Registrant during its most recent fiscal year:
    (A) Gross income from securities lending activities;
    (B) All fees and/or compensation for each of the following 
securities lending activities and related services: Any share of 
revenue generated by the securities lending program paid to the 
securities lending agent(s) (``revenue split''); fees paid for cash 
collateral management services (including fees

[[Page 82023]]

deducted from a pooled cash collateral reinvestment vehicle) that are 
not included in the revenue split; administrative fees that are not 
included in the revenue split; fees for indemnification that are not 
included in the revenue split; rebates paid to borrowers; and any other 
fees relating to the securities lending program that are not included 
in the revenue split, including a description of those other fees;
    (C) The aggregate fees/compensation disclosed pursuant to paragraph 
(B); and
    (D) Net income from securities lending activities (i.e., the dollar 
amount in paragraph (A) minus the dollar amount in paragraph (C)).
    Instruction. If a fee for a service is included in the revenue 
split, state that the fee is ``included in the revenue split.''
    (ii) Describe the services provided to the series of the Registrant 
by the securities lending agent in the series of the Registrant's most 
recent fiscal year.
* * * * *
Item 36. Location of Accounts and Records
* * * * *
    Instruction. The Registrant may omit this information to the extent 
it is provided in its most recent report on Form N-CEN [17 CFR 
274.101].
* * * * *

0
63. Effective January 17, 2017, Form N-4 (referenced in Sec. Sec.  
239.17b and 274.11c) is amended by adding an instruction to Item 30 to 
read as follows:

Form N-4

* * * * *
Item 30. Location of Accounts and Records
* * * * *
    Instruction. The Registrant may omit this information to the extent 
it is provided in its most recent report on Form N-CEN [17 CFR 
274.101].
* * * * *

0
64. Effective January 17, 2017, Form N-6 (referenced in Sec. Sec.  
239.17c and 274.11d) is amended by adding an instruction to Item 31 to 
read as follows:

Form N-6

* * * * *
Item 31. Location of Accounts and Records
* * * * *
    Instruction. The Registrant may omit this information to the extent 
it is provided in its most recent report on Form N-CEN [17 CFR 
274.101].
* * * * *

0
65. Effective June 1, 2018, Sec.  274.101 is revised to read as 
follows:


Sec.  274.101  Form N-CEN, annual report of registered investment 
companies.

    This form shall be used by registered investment companies for 
annual reports to be filed pursuant to 17 CFR 270.30a-1.

    Note: The text of Form N-CEN will not appear in the Code of 
Federal Regulations.

BILLING CODE 8011-01-P

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BILLING CODE 8011-01-P

0
66. Effective January 17, 2017, Form N-CSR (referenced in Sec.  
274.128) is amended as follows:
0
a. In Item 2(c) and 2(f), remove the phrase ``Item 12(a)(1)'' and add 
in its place ``Item 13(a)(1)'';
0
b. In Item 11(b), remove the phrase ``the second fiscal quarter of'';
0
c. Revise the instruction to Item 11(b);
0
d. Redesignate Item 12 as Item 13;
0
e. Add new Item 12;
0
f. In paragraph 4(d) of the certification exhibits listed in Item 13, 
remove the phrase ``the second fiscal quarter of the'';
0
g. In Item 13, revise the instruction to paragraph (a)(2);
0
h. In Item 13, add paragraph (a)(4).
    The additions and revisions read as follows:

    Note: The text of Form N-CSR does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form N-CSR

* * * * *
Item 11. Controls and Procedures.
    (b) * * *
    Instruction to paragraph (b). Until the date that the registrant 
has filed its first report on Form N-PORT [17 CFR 270.150], the 
registrant's disclosures required by this Item are limited to any 
change in the registrant's internal control over financial reporting 
that occurred during the registrant's last fiscal quarter that has 
materially affected, or is reasonably likely to materially affect, the 
registrant's internal control over financial reporting.
* * * * *
Item 12. Disclosure of Securities Lending Activities for Closed-End 
Management Investment Companies
    (a) If the registrant is a closed-end management investment 
company, provide the following dollar amounts of income and fees/
compensation related to the securities lending activities of the 
registrant during its most recent fiscal year:
    (1) Gross income from securities lending activities;
    (2) All fees and/or compensation for each of the following 
securities lending activities and related services: Any share of 
revenue generated by the securities lending program paid to the 
securities lending agent(s) (``revenue split''); fees paid for cash 
collateral management services (including fees deducted from a pooled 
cash collateral reinvestment vehicle) that are not included in the 
revenue split; administrative fees that are not included in the revenue 
split; fees for indemnification that are not included in the revenue 
split; rebates paid to borrowers; and any other fees relating to the 
securities lending program that are not included in the revenue split, 
including a description of those other fees;
    (3) The aggregate fees/compensation disclosed pursuant to paragraph 
(2); and
    (4) Net income from securities lending activities (i.e., the dollar 
amount in paragraph (1) minus the dollar amount in paragraph (3)).
    Instruction to paragraph (a). If a fee for a service is included in 
the revenue split, state that the fee is ``included in the revenue 
split.''
    (b) If the registrant is a closed-end management investment 
company, describe the services provided to the registrant by the 
securities lending agent in the registrant's most recent fiscal year.
* * * * *
Item 13. Exhibits.
    (a) * * *
    (2) * * *
    Instruction to paragraph (a)(2). Until the date that the registrant 
has filed its first report on Form N-PORT [17 CFR 270.150], in the 
certification required by Item 13(a)(2), the registrant's certifying 
officers must certify that they have disclosed in the report any change 
in the registrant's internal control over financial reporting that 
occurred during the registrant's most recent fiscal quarter that has 
materially affected, or is reasonably likely to materially affect, the 
registrant's internal control over financial reporting.
* * * * *
    (4) Change in the registrant's independent public accountant. 
Provide the information called for by Item 4 of Form 8-K under the 
Exchange Act (17 CFR 249.308). Unless otherwise specified by Item 4, or 
related to and necessary for a complete understanding of information 
not previously disclosed, the information should relate to events 
occurring during the reporting period.


Sec.  274.130  [Removed and Reserved]

0
67. Effective August 1, 2019, Sec.  274.130 is removed and reserved.

0
68. Effective January 17, 2017, Sec.  274.150 is added to read as 
follows:


Sec.  274.150  Form N-PORT, Monthly portfolio holdings report.

    (a) Except as provided in paragraph (b) of this section, this form 
shall be used by registered management investment companies or 
exchange-traded funds organized as unit investment trusts, or series 
thereof, to file reports pursuant to Sec.  270.30b1-9 of this chapter 
not later than 30 days after the end of each month.
    (b) Form N-PORT shall not be filed by a registered open-end 
management investment company that is regulated as a money market fund 
under Sec.  270.2a-7 of this chapter or a small business investment 
company registered on Form N-5 (Sec. Sec.  239.24 and 274.5 of this 
chapter), or series thereof.

    Note:  The text of Form N-PORT will not appear in the Code of 
Federal Regulations.


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0
69. Effective June 1, 2018, Form N-8F (referenced in Sec.  274.218) is 
amended by revising Instruction 6 to read as follows:

Form N-8F

* * * * *
Instructions for using Form N-8F
* * * * *
    6. Funds are reminded of the requirement to timely file a final 
Form N-CEN with the Commission. See rule 30a1-1 under the Act [17 CFR 
270.30a1-1]; Form N-CEN [17 CFR 274.101].

    By the Commission.

    Dated: October 13, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-25349 Filed 11-17-16; 8:45 am]
BILLING CODE 8011-01-C

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