Investment Company Liquidity Disclosure, 11905-11921 [2018-05511]

Download as PDF Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to small airplanes, gliders, balloons, airships, domestic business jet transport airplanes, and associated appliances to the Director of the Policy and Innovation Division. (b) Affected ADs Regulatory Findings (e) Reason We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government. For the reasons discussed above, I certify this proposed regulation: (1) Is not a ‘‘significant regulatory action’’ under Executive Order 12866, (2) Is not a ‘‘significant rule’’ under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979), (3) Will not affect intrastate aviation in Alaska, and (4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. This AD was prompted by mandatory continuing airworthiness information (MCAI) originated by an aviation authority of another country to identify and address an unsafe condition on an aviation product. The MCAI describes the unsafe condition as an incorrect part number for the rudder trim actuator is referenced in the Airworthiness Limitations section of the FAA-approved maintenance program (e.g., maintenance manual) and the life limit for that part may not be properly applied in service. We are issuing this AD to prevent failure of the rudder trim actuator, which could cause the rudder control system to fail. This failure could result in reduced control of the airplane. List of Subjects in 14 CFR Part 39 Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety. The Proposed Amendment Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows: PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: ■ Authority: 49 U.S.C. 106(g), 40113, 44701. sradovich on DSK3GMQ082PROD with PROPOSALS § 39.13 [Amended] 2. The FAA amends § 39.13 by adding the following new AD: ■ Costruzioni Aeronautiche Tecnam srl: Docket No. FAA–2018–0204; Product Identifier 2018–CE–003–AD. (a) Comments Due Date We must receive comments by May 3, 2018. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 None. (c) Applicability This AD applies to Costruzioni Aeronautiche Tecnam srl Model P2006T airplanes, all serial numbers that do not incorporate design change TECNAM modification (Mod) 2006/322 at production, certificated in any category. (d) Subject Air Transport Association of America (ATA) Code 27: Flight Controls. (f) Actions and Compliance Unless already done, do the following actions in paragraphs (f)(1) through (3) of this AD. The hours time-in-service (TIS) specified in paragraph (f)(1) of this AD are those accumulated on the rudder trim actuator, P/N B6–7T, since first installed on an airplane. If the total hours TIS are unknown, the hours TIS on the airplane must be used. (1) Initially replace the rudder trim actuator, part number (P/N) B6–7T, at the compliance time in paragraphs (f)(1)(i) or (ii) of this AD that occurs later: (i) Before accumulating 1,000 hours TIS; or (ii) Within the next 25 hours TIS after the effective date of this AD or within the next 30 days after the effective date of this AD, whichever occurs first. (2) After the initial replacement required in paragraph (f)(1) of this AD, repetitively thereafter replace the rudder trim actuator, P/ N B6–7T at intervals not to exceed 1,000 hours TIS. (3) Within the next 12 months after the effective date of this AD, revise the Airworthiness Limitations section of the FAA-approved maintenance program (e.g., maintenance manual) incorporating the 1,000-hour life limit for the rudder trim actuator, P/N B6–7T, as specified in Costruzioni Aeronautiche Tecnam srl (TECNAM) Service Bulletin No. SB 285–CS– Ed 1, Revision 2, dated February 2, 2018. (g) Credit for Actions Done Following Previous Service Information This AD allows credit for compliance with paragraph (f)(3) of this AD if done before the effective date of this AD using TECNAM Service Bulletin No. SB 285–CS–Ed 1, Revision 1, dated November 7, 2017. PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 11905 (h) Other FAA AD Provisions The following provisions also apply to this AD: (1) Alternative Methods of Compliance (AMOCs): The Manager, Small Airplane Standards Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. Send information to ATTN: Albert Mercado, Aerospace Engineer, FAA, Small Airplane Standards Branch, 901 Locust, Room 301, Kansas City, Missouri 64106; telephone: (816) 329–4119; fax: (816) 329–4090; email: albert.mercado@faa.gov. Before using any approved AMOC on any airplane to which the AMOC applies, notify your appropriate principal inspector (PI) in the FAA Flight Standards District Office (FSDO), or lacking a PI, your local FSDO. (i) Related Information Refer to MCAI European Aviation Safety Agency (EASA) AD No. 2018–0029, dated January 31, 2018; and Costruzioni Aeronautiche Tecnam srl Service Bulletin No. SB 285–CS–Ed 1, Revision 1, dated November 7, 2017, for related information. You may examine the MCAI on the internet at https://www.regulations.gov by searching for and locating Docket No. FAA–2018–0204. For service information related to this AD, contact Costruzioni Aeronautiche Tecnam srl, Via Tasso, 478, 80127 Napoli, Italy, phone: +39 0823 620134, fax: +39 0823 622899, email: airworthiness@tecnam.com, internet: https://www.tecnam.com/us/ support/. You may review this referenced service information at the FAA, Policy and Innovation Division, 901 Locust, Kansas City, Missouri 64106. For information on the availability of this material at the FAA, call (816) 329–4148. Issued in Kansas City, Missouri, on March 7, 2018. Pat Mullen, Acting Deputy Director, Policy & Innovation Division, Aircraft Certification Service. [FR Doc. 2018–05138 Filed 3–16–18; 8:45 am] BILLING CODE 4910–13–P SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 274 [Release No. IC–33046; File No. S7–04–18] RIN 3235–AM30 Investment Company Liquidity Disclosure Securities and Exchange Commission. ACTION: Proposed rule. AGENCY: The Securities and Exchange Commission is proposing amendments to its forms designed to improve the reporting and disclosure of liquidity information by registered open-end investment companies. The Commission is proposing a new requirement that SUMMARY: E:\FR\FM\19MRP1.SGM 19MRP1 11906 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules funds disclose information about the operation and effectiveness of their liquidity risk management program in their annual reports to shareholders. The Commission in turn is proposing to rescind the current requirement in Form N–PORT under the Investment Company Act of 1940 that funds publicly disclose aggregate liquidity classification information about their portfolios, in light of concerns about the usefulness of that information for investors. In addition, the Commission is proposing amendments to Form N– PORT that would allow funds classifying the liquidity of their investments pursuant to their liquidity risk management programs required by rule 22e–4 under the Investment Company Act of 1940 to report on Form N–PORT multiple liquidity classification categories for a single position under certain specified circumstances. Finally, the Commission is proposing to add to Form N–PORT a new requirement that funds and other registrants report their holdings of cash and cash equivalents. DATES: Comments should be received on or before May 18, 2018. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/proposed.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 04–18 on the subject line; or sradovich on DSK3GMQ082PROD with PROPOSALS Paper Comments • Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–04–18. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/rules/ proposed.shtml). Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission’s website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman, Senior Counsel, or Thoreau Bartmann, Senior Special Counsel, at (202) 551–6792, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–8549. The Securities and Exchange Commission (the ‘‘Commission’’) is proposing for public comment amendments to Form N–PORT [referenced in 17 CFR 274.150] under the Investment Company Act of 1940 [15 U.S.C. 80a–1 et seq.] (‘‘Investment Company Act’’ or ‘‘Act’’) and amendments to Form N–1A [referenced in 17 CFR 274.11A] under the Investment Company Act and the Securities Act of 1933 (‘‘Securities Act’’) [15 U.S.C. 77a et seq.]. SUPPLEMENTARY INFORMATION: Contents I. Background II. Discussion A. Proposed Amendments to Liquidity Public Reporting and Disclosure Requirements B. Proposed Amendments to Liquidity Reporting Requirements C. Compliance Dates III. Economic Analysis A. Introduction B. Economic Baseline C. Economic Impacts D. Reasonable Alternatives E. Request for Comment IV. Paperwork Reduction Act A. Introduction B. Form N–PORT C. Form N–1A D. Request for Comments V. Initial Regulatory Flexibility Analysis A. Reasons for and Objectives of the Proposed Actions B. Legal Basis C. Small Entities Subject to the Proposed Liquidity Regulations D. Projected Reporting, Recordkeeping, and Other Compliance Requirements E. Duplicative, Overlapping, or Conflicting Federal Rule F. Significant Alternatives G. General Request for Comment VI. Consideration of Impact on the Economy VII. Statutory Authority Text of Rules and Forms PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 I. Background On October 13, 2016, the Commission adopted 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 (‘‘funds’’),1 including information about the liquidity of funds’ portfolios.2 In particular, the Commission adopted new Form N– PORT, which requires mutual funds and exchange traded funds (‘‘ETFs’’) to electronically file with the Commission monthly portfolio investment information on Form N–PORT, a structured data reporting form.3 On the same day, the Commission also adopted rule 22e–4, a new form, and related rule and form amendments to enhance the regulatory framework for liquidity risk management of funds.4 Among other things, rule 22e–4 requires a fund to classify each portfolio investment into one of four defined liquidity categories, sometimes referred to as ‘‘buckets.’’ 5 In connection with the liquidity classification requirement of rule 22e–4, a fund is also required to report confidentially to the Commission the liquidity classification assigned to each of the fund’s portfolio investments on 1 The term ‘‘funds’’ used in this release includes open-end management companies, including exchange-traded funds (‘‘ETFs’’) and excludes money market funds. 2 Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] (‘‘Reporting Modernization Adopting Release’’). See also Investment Company Liquidity Risk Management Programs, Investment Company Act Release No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18, 2016)] (‘‘Liquidity Adopting Release’’). 3 Registered money market funds and small business investment companies are exempt from Form N–PORT reporting requirements. 4 Specifically, we adopted rules 22e–4 and 30b1– 10, new Form N–LIQUID, as well as amendments to Forms N–1A, N–PORT and N–CEN. See Liquidity Adopting Release, supra footnote 2. 5 Rule 22e–4 requires each fund to adopt and implement a written liquidity risk management program reasonably designed to assess and manage the fund’s liquidity risk. A fund’s liquidity risk management program must incorporate certain specified elements, including, among others, the requirement that funds classify the liquidity of each of the fund’s portfolio investments into one of four defined liquidity categories: Highly liquid investments, moderately liquid investments, less liquid investments, and illiquid investments (‘‘classification’’). This classification is based on the number of days in which a fund reasonably expects an investment would be convertible to cash (or, in the case of the less-liquid and illiquid categories, sold or disposed of) without the conversion significantly changing the market value of the investment. Rule 22e–4 also requires funds to establish a highly liquid investment minimum, and includes requirements related to policies and procedures on redemptions in kind and evaluation of the liquidity of new unit investment trusts. Rule 22e–4 also includes other required elements, such as limits on purchases of illiquid investments, reporting to the board, and recordkeeping. E:\FR\FM\19MRP1.SGM 19MRP1 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules Form N–PORT.6 Each portfolio holding must be assigned to a single classification bucket. A fund must also publicly report on Form N–PORT the aggregate percentage of its portfolio investments that falls into each of the four liquidity classification categories noted above.7 This aggregate information would be disclosed to the public only for the third month of each fiscal quarter with a 60-day delay. Form N–PORT does not currently require funds to report the cash they hold.8 We designed rule 22e–4 and the related rules and forms to promote effective liquidity risk management throughout the fund industry and to enhance disclosure regarding fund liquidity and redemption practices.9 As discussed in detail below, since we adopted these requirements, Commission staff has engaged in extensive outreach with funds and other interested parties as they have sought to design the new systems and processes necessary to implement the new rules. As a complement to that engagement process, we have received letters 10 raising concerns that the public disclosure of a fund’s aggregate liquidity classification information on Form N– PORT may not achieve our intended purpose and may confuse and mislead investors.11 These letters detail the methodologies that fund groups are designing and implementing to conduct sradovich on DSK3GMQ082PROD with PROPOSALS 6 Item C.7 of Form N–PORT. 7 Item B.8.a of Form N–PORT. Form N–PORT also requires public reporting of the percentage of a fund’s highly liquid investments that it has segregated to cover, or pledged to satisfy margin requirements in connection with, derivatives transactions that are classified as moderately liquid, less liquid, or illiquid investments. Item B.8.b of Form N–PORT. 8 Although the requirements of rule 22e–4 and Form N–PORT discussed above are in effect, the compliance date has not yet occurred. Accordingly, no funds are yet reporting this liquidity-related information on Form N–PORT. In another release issued earlier, among other things, we extended the current compliance date for certain classificationrelated provisions of rule 22e–4 and their associated Form N–PORT reporting requirements by six months. See Investment Company Liquidity Risk Management Programs; Commission Guidance for In-Kind ETFs, Investment Company Act Release No IC–33010; (Feb. 22, 2018) [83 FR 8342 Feb. 27, 2018)] (‘‘Liquidity Extension Release’’). 9 See Liquidity Adopting Release, supra footnote 2, at n.112 and accompanying text. 10 These letters (File No. S7–04–18) are available at https://www.sec.gov/comments/s7-04-18/ s70418.htm. 11 See, e.g., Letter from SIFMA AMG to Chairman Jay Clayton, Commissioner Stein, and Commissioner Piwowar (Sept. 12, 2017) (‘‘SIFMA AMG Letter’’); Letter from Nuveen, LLC on Investment Company Liquidity Risk Management Programs (Nov. 20, 2017) (‘‘Nuveen letter’’) (urging the SEC not to publicly disclose the liquidity classification information submitted via new Form N–PORT); Letter from TCW to Chairman Jay Clayton, Commissioner Stein, and Commissioner Piwowar (Sept. 15, 2017) (‘‘TCW Letter’’). VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 the liquidity classification, the disparate assumptions that underlie them, and the variability in classification that can occur as a result.12 As we discuss further in section II.A below, these letters have caused us to question whether the current approach of disclosing aggregate liquidity fund profiles through Form N–PORT is the most accessible or useful way to facilitate public understanding of fund liquidity.13 Specifically, when the new rules take effect, the Commission will receive more granular position-level liquidity classification information and can request the fund’s methodologies and assumptions underlying their classification, while investors would have access only to the aggregate information on Form N–PORT without the necessary context. However, the Commission continues to believe, as it articulated when it adopted the final rule, that it is important for investors to receive information about a fund’s liquidity, which can help investors better understand the risks they may be assuming through an investment in the fund. In light of the comments we have received, we preliminarily believe that providing different information to investors via a different form would more effectively achieve the Commission’s policy goal of promoting investor understanding of the liquidity risks of the funds in which they have invested, while minimizing risks of investor confusion. Accordingly, we are proposing to replace the requirement for a fund to publicly report to the Commission on Form N–PORT the aggregate liquidity portfolio classification information on a quarterly basis with new disclosure in the fund’s annual shareholder report that provides a narrative discussion of the operation and effectiveness of the fund’s liquidity 12 See, e.g., Letter from the Investment Company Institute to The Honorable Jay Clayton (July 20, 2017) (‘‘ICI Letter I’’); Supplemental Comments on Investment Company Liquidity Risk Management Programs from the Investment Company Institute (Nov. 3, 2017) (‘‘ICI Letter II’’); Letter from Invesco Advisers, Inc. on Investment Company Liquidity Risk Management Programs (Nov. 8, 2017); Letter from Vanguard on Investment Company Liquidity Risk Management Programs (Nov. 8, 2017); Letter from John Hancock on Investment Company Liquidity Risk Management Programs (Nov. 10, 2017): Letter from T. Rowe Price Associates, Inc. on Investment Company Liquidity Risk Management Programs (Nov. 10, 2017); Letter from Federated Investors, Inc. on Liquidity Risk Management Rule 22e–4 (Feb. 6, 2018) (‘‘Federated Letter’’). 13 See infra text following footnote 18. Funds may also choose to provide additional context nonpublicly to the Commission in the explanatory notes section (Part E of Form N–PORT). PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 11907 risk management program over the reporting period.14 Second, we are proposing additional amendments to Form N–PORT that would allow a fund to report a single portfolio holding in multiple classification buckets under certain defined circumstances. Currently, a fund is required to choose only one classification bucket, even in circumstances where splitting that holding up into multiple classification buckets may better reflect the actual liquidity characteristics of that position. We believe that permitting funds to split a single portfolio holding into multiple buckets under circumstances where we believe that such reporting would be more or equally accurate, and in some cases less burdensome, would provide us with equal or better information at lower cost to funds (and thus, to fund shareholders). Third, we are proposing to require funds and other registrants 15 to report holdings of cash and cash equivalents on Form N–PORT so that we may monitor trends in the use of cash and cash equivalents and, in the case of funds, more accurately assess the composition of a fund’s highly liquid investment minimum (‘‘HLIM’’). II. Discussion A. Proposed Amendments to Liquidity Public Reporting and Disclosure Requirements Today we are proposing to replace the requirement in Form N–PORT that a fund publicly disclose on an aggregate basis the percentage of its investments that it has allocated to each liquidity classification category with a new narrative discussion in the fund’s annual report regarding its liquidity risk management program. The narrative discussion would include disclosure about the operation and effectiveness of the fund’s implementation of its required liquidity risk management program during the most recently 14 As discussed below, we also are proposing a related change to make non-public (but not eliminate) the disclosure required under Item B.8 of Form N–PORT about the percentage of a fund’s highly liquid investments segregated to cover or pledged to satisfy margin requirements in connection with certain derivatives transactions, given that this information is only relevant when viewed together with full liquidity classification information. 15 The term ‘‘registrants’’ refers to entities required to file Form N–PORT, including all registered management investment companies, other than money market funds and small business investment companies, and all ETFs (regardless of whether they operate as UITs or management investment companies). See rule 30b1–9. E:\FR\FM\19MRP1.SGM 19MRP1 11908 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules completed fiscal year.16 A fund already is required to disclose a summary of the principal risks of investing in the fund, including liquidity risk if applicable, in its prospectus.17 Therefore, in combination, these disclosures will provide new and existing investors with information about the expected liquidity risk of the fund and ongoing disclosure to existing shareholders (and to new investors to the extent that they have access to annual reports) regarding how the fund continues to manage that risk, along with other factors affecting the fund’s performance. This revised approach is designed to provide accessible and useful disclosure about liquidity risk management to investors, with appropriate context, so that investors may understand its nature and relevance to their investments. sradovich on DSK3GMQ082PROD with PROPOSALS 1. Concerns With Public Aggregate Liquidity Profile As noted above, since the Commission adopted rule 22e–4 and the related rule and form amendments, Commission staff has engaged extensively with interested parties regarding progress toward implementation. As a complement to that engagement process, we have received letters from industry participants discussing the complexities of the classification process.18 These commenters raised three general types of concerns that informed this proposal’s revised approach to public fund liquidity-related disclosure. First, commenters described how variations in methodologies and assumptions used to conduct liquidity classification can significantly affect the classification information reported on Form N–PORT in ways that investors may not understand (‘‘subjectivity’’). Second, the commenters suggested that Form N– PORT may not be the most accessible and useful way to communicate information about liquidity risk and may not provide the necessary context for investors to understand how the fund’s classification results relate to its liquidity risk and risk management (‘‘lack of context’’). Third, the commenters argued that because this reporting item on Form N–PORT singles out liquidity risk, and does not place it in a broader context of the risks and 16 See proposed amendments to Item B.8 of Form N–PORT and proposed Item 27(b)(7)(iii) of Form N– 1A. 17 See Item 4(b) of Form N–1A. In addition, Item 9(c) of Form N–1A requires a fund to disclose all principal risks of investing in the fund, including the risks to which the fund’s particular portfolio as a whole is expected to be subject and the circumstances reasonably likely to affect adversely the fund’s net asset value, yield, or total return. 18 See supra footnotes 10–12. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 factors affecting a fund’s risk, returns, and performance, it may inappropriately focus investors on one investing risk over others (‘‘liquidity risk in isolation’’). Below we discuss these considerations—and why we preliminarily believe the proposed revisions to disclosure requirements on Form N–1A address these concerns while satisfying our public disclosure goals, including the need to provide shareholders and other users with improved information about funds’ liquidity risk profile.19 Subjectivity Commenters emphasized that classification is a subjective process.20 It is based on underlying data, assumptions, measurement periods, and complex statistical algorithms that can vary significantly. Accordingly, different managers classifying the same investment may vary in the way they weigh these factors and come to different classification conclusions, which would be consistent with our intent in adopting the rule.21 Commenters stated, however, that presenting liquidity classification information in a standard format—as the final rule requires—inaccurately implies to investors that the classifications for all funds were formed through a uniform process and that the resulting classifications would be comparable across funds.22 Commenters suggested that, because of the lack of such uniformity of classification, using a fund’s liquidity profile to make comparisons between funds may mislead investors and could lead to investors basing investment decisions on inappropriate grounds.23 19 See Liquidity Adopting Release, supra footnote 2, at text following n.626. 20 See, e.g., TCW Letter (stating that many different managers weighing different factors and using disparate data can result in different liquidity classification results across managers for the same security). See also SIFMA AMG Letter. 21 See Liquidity Adopting Release, supra footnote 2, at n. 596 and accompanying text. (‘‘We recognize that liquidity classifications, similar to valuationand pricing-related matters, inherently involve judgment and estimations by funds. We also understand that the liquidity classification of an asset class or investments may vary across funds depending on the facts and circumstances relating to the funds and their trading practices.’’). 22 See, e.g., SIFMA AMG Letter. We note that in the Liquidity Adopting Release, we considered certain proposed uniform approaches to liquidity classification that would have less subjective inputs, and discussed why we believed that the approach we adopted most effectively achieves our goals. This is in part because such approaches that do not include subjective inputs may not have resulted in liquidity classification data that is informed by fund advisers’ actual trading experience. See, e.g., Liquidity Adopting Release, supra footnote 2, at section III.C. 23 See SIFMA AMG Letter and Nuveen Letter. See also Kristin Grind, Tom McGinty, and Sarah PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 Commenters suggested that this subjectivity and seeming appearance of uniformity in content may have a variety of other pernicious effects. For example, commenters suggested investors may, in choosing between two funds that are have similar investment objectives, pick the fund that appears to have more highly liquid investments (and potentially, thereby, a lower liquidity risk) without understanding the subjectivity that underlies the classification process.24 As a result, the public disclosure of liquidity profiles may provide funds an incentive to classify their securities as more liquid in order to make their funds appear more attractive to investors, further increasing the risk of investor confusion.25 Such incentive to classify assets as more liquid, if widespread, could undermine the Commission’s objectives for the fund’s proper management of its liquidity risks through its liquidity risk management program and its monitoring efforts. One commenter also suggested that the size of the fund may have disproportionate effects on its liquidity classification results, and thus the fund’s overall aggregate liquidity profile.26 As a result, they argued that investors may be confused by, or unaware of the causes of, the differences in results between large and small portfolios’ liquidity profiles, and may inappropriately believe that smaller portfolios have less liquidity risk.27 Krouse, The Morningstar Mirage, The Wall Street Journal, (Oct. 25, 2017), available at https:// www.wsj.com/articles/the-morningstar-mirage1508946687 (discussing issues with investors basing investing decisions on evaluations of funds without necessarily understanding the bases of those evaluations or their limitations). 24 See TCW Letter (‘‘Investors could flock to more apparently liquid funds, only to discover too late that classifications did not actually provide comparable liquidity data’’); see also Nuveen Letter (‘‘[T]he classification information that will be reported via Form N–PORT may lead the public to draw inappropriate conclusions about a fund’s liquidity. . . . [I]nvestors, intermediaries, and financial advisers may be misled as to the value of such information, and use it as the basis for investment decisions despite this lack of understanding.’’). 25 See SIFMA AMG Letter. We acknowledged in the Liquidity Adopting Release that the classification status of a security ‘‘inherently involve[s] judgment and estimations by funds’’ and that ‘‘the liquidity classification of an asset class or investments may vary across funds depending on the facts and circumstances relating to the funds and their trading practices.’’ See Liquidity Adopting Release, supra footnote 2, at text accompanying n.596. 26 See ICI Letter II, at Appendix C. 27 ICI Letter II (providing a liquidity analysis of a variety of investments, which found that smaller portfolios nearly always appeared to have a highly liquid aggregate profile, while larger portfolios holding the same positions appeared to have a less liquid profile). E:\FR\FM\19MRP1.SGM 19MRP1 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules Lack of Context Commenters suggested that the format of the Form N–PORT disclosure does not give funds the opportunity to explain to the public the underlying assumptions for their classification, nor can they tailor the disclosure to their specific risks. One commenter asserted that, because the aggregate liquidity profile is to be reported on Form N– PORT, the information will only be understandable by sophisticated users or intermediaries.28 They argued that for investors to have a sufficient understanding of the role classification plays in a fund’s liquidity risks, investors need contextual information regarding the underlying subjective assumptions and methodologies used by the fund in its classification process.29 They noted that Form N–PORT does not provide context or additional information that would help investors understand the assumptions and methodologies used for liquidity-related information.30 Liquidity Risk in Isolation sradovich on DSK3GMQ082PROD with PROPOSALS One commenter also suggested that the information publicly disclosed on Form N–PORT singles out liquidity risk, and that focusing on liquidity risk in isolation, presented through an 28 SIFMA AMG Letter (asserting that Form N– PORT aggregate classification disclosure puts less sophisticated investors at a disadvantage because ‘‘[u]nlike securities traded in the secondary markets, in which all market participants can be expected to benefit from publicly available information through the efficient market pricing mechanism, mutual fund shares are purchased and sold directly with the fund at net asset value per share. Thus, there is no automatic market mechanism for sophisticated investors’ superior understanding of the liquidity information and its limitations to be transmitted to less sophisticated investors.’’). 29 See generally SIFMA AMG Letter (arguing that the classification process ‘‘relies heavily on judgments from portfolio managers and others, based on predictions and extrapolation of data, which are then combined with other judgments from other sources based on similar assumptions .* .* *. For the investing public, which will see only quarterly percentages 60–151 days after the fact [on Form N–PORT], without context or explanation, this information will be at best meaningless and more likely misleading.’’); see also Nuveen Letter (similarly arguing that classification information that will be reported via Form N–PORT may lead the public to draw inappropriate conclusions about a fund’s liquidity and that this information ‘‘will also be inherently subjective, as the classification process relies heavily on judgments from portfolio managers and other sources based on a series of assumptions that may vary among firms and even within firms.’’). 30 SIFMA AMG Letter. This commenter also noted that because the aggregate liquidity profile would be a backward looking review of a fund’s liquidity presented only quarterly, with a 60 day delay, it may be inappropriate and misleading if investors were to base investing decisions on this information without being provided context about its potential staleness. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 unexplained aggregate liquidity profile of a fund, may encourage investors to focus overly on liquidity risk, compared to other risks that may be far more important to their long-term investment goals.31 An investor choosing between two funds with comparable investment objectives and performance may choose a fund that appears to have more highly liquid investments, without adequately considering other risks of their investment and how they relate to liquidity risk. For example, an isolated focus on liquidity risk may result in investors not evaluating whether such a fund is achieving comparable performance despite maintaining lowyielding assets through use of derivatives or other leverage, and whether the investor is comfortable with the trade-off of liquidity versus leverage risks. 2. New Approach to Liquidity Risk Disclosure We continue to believe it is im{ant for investors to understand the liquidity risks of the funds they hold and how those risks are managed. However, we appreciate commenters’ concerns that public dissemination of the aggregate classification information, without an accompanying explanation to investors of the underlying subjectivity, methodological decisions, and assumptions that shape this information, and other relevant context, may be potentially misleading to investors.32 As discussed above, in light of the variability of the classification process under rule 22e–4, we do not believe it is appropriate to adapt Form N–PORT to provide the level of detail and narrative context necessary for investors to effectively appreciate the fund’s liquidity risk profile.33 We also believe that it may take significant detailed disclosure and nuanced explanation to effectively inform investors about the subjectivity and limitations of aggregate liquidity classification information so as to allow 31 SIFMA AMG Letter (concerned that the focus on liquidity risk in isolation would encourage investors to exaggerate the importance of liquidity risk relative to other risks that may be far more important to their long-term investment goals.). 32 The Commission has access to the more granular position-level liquidity classification information as well as funds’ methodologies and assumptions, and thus does not face these same challenges in interpreting the classification data. 33 We believe that due to the variability and subjective inputs required to engage in liquidity classification under rule 22e–4, providing effective information about liquidity classifications under that rule to investors poses difficult and different challenges than the other data that is publicly disclosed on Form N–PORT, which is more objective and less likely to vary between funds based on their particular facts and circumstances. PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 11909 them to properly make use of the information. Such lengthy disclosure may not be the most accessible and useful way to accomplish the Commission’s goals. To the extent that such disclosure would need to be granular and detailed to effectively explain the process, it may also not be consistent with the careful balancing of investor interests that the Commission performed in determining to require disclosure of sensitive granular information, including position-level data, only on a non-public basis.34 We also appreciate how the public dissemination of the aggregate classification information could create perverse incentives to classify investments as more liquid, and may inappropriately single out liquidity risk compared to other risks of the fund. Additionally, we are concerned that disclosing funds’ aggregate liquidity profile may potentially create risks of coordinated investment behavior, if, for example, funds were to create more correlated portfolios by purchasing investments that they believed third parties, such as investors or regulators, may view as ‘‘more liquid.’’ 35 Such risks may both increase the possibility of correlated market movements in times of stress, and may potentially reduce the utility of the classification data reported to us. We now preliminarily believe that effective disclosure of liquidity risks may be better achieved through another disclosure vehicle, rather than Form N– PORT, which would not present the potential drawbacks discussed above. Accordingly, as discussed previously, we are proposing to replace the requirement for funds to disclose their aggregate liquidity profile on a quarterly basis on Form N–PORT with a new requirement for funds to discuss briefly the operation and effectiveness of a fund’s liquidity risk management program in the fund’s annual report to shareholders, as part of its management discussion of fund performance (‘‘MDFP’’).36 This disclosure would complement existing liquidity risk disclosure that funds provide in their prospectus (if it is a principal investment risk of the fund). 34 As discussed in the Liquidity Adopting Release, we determined that liquidity classification data on individual securities was necessary for our monitoring efforts, but not appropriate or in the public interest to be disclosed to investors or other market participants in light of the inherent variability of the classification process and the potential for predatory trading using such granular information.’’ See Liquidity Adopting Release, supra footnote 2, at text accompanying nn.613–615. 35 See ICI Letter I. 36 Proposed Item 27(b)(7)(iii) of Form N–1A. E:\FR\FM\19MRP1.SGM 19MRP1 11910 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules The proposed amendments to Form N–1A would require funds to ‘‘briefly discuss the operation and effectiveness of the Fund’s liquidity risk management program during the most recently completed fiscal year.’’ 37 To satisfy this requirement, a fund generally should provide information about the operation and effectiveness of the program, and insight into how the program functioned over the past year.38 This discussion should provide investors with enough detail to appreciate the manner in which a fund manages its liquidity risk, and could, but would not be required to, include discussion of the role of the classification process, the 15% illiquid investment limit, and the HLIM in the fund’s liquidity risk management process.39 For example, as part of this new disclosure, a fund might opt to discuss the particular liquidity risks that it faced over the past year, such as significant redemptions, changes in the overall market liquidity of the investments the fund holds, or other liquidity risks, and explain how those risks were managed and addressed, and whether those risks affected fund performance. If the fund faced any significant liquidity challenges in the past year, it could opt to discuss how those challenges affected the fund and how they were addressed. Funds may also wish to provide context and other supplemental information about how liquidity risk is managed in relation to other investing risks of the fund. We note that this new disclosure 37 Proposed Item 27(b)(7)(iii) of Form N–1A. considered whether to require funds to disclose specific elements of their liquidity risk management program, but we believe that such a requirement would unnecessarily limit the fund’s ability to provide the appropriate level of context it believes necessary for investors to understand the fund’s liquidity risks. We believe that a principlesbased approach to this disclosure requirement would better achieve our goal of promoting investor understanding of fund liquidity risks, without risking investor confusion. Furthermore, we believe that a principles-based approach, rather than a prescriptive one, will give a fund the flexibility to disclose its approach to liquidity risk management in a manner most appropriate for the fund as part of its broader discussion of the fund’s risks without placing undue emphasis on liquidity risks. We also believe that the approach we are proposing today is less likely to result in standardized boilerplate disclosure because it will allow funds to tailor disclosure to their particular liquidity risks and how they manage them. 39 We note that rule 22e–4(b)(2)(iii) requires a fund board to review, no less frequently than annually, a report prepared by the program administrator that addresses the operation of the program over the last year and its adequacy and effectiveness. Because funds will already need to prepare a report on the program for these purposes, we expect that the disclosure requirement we are proposing today would be unlikely to create significant additional burdens as the conclusions in this report may be largely consistent with the overall conclusions disclosed to investors in the annual report. sradovich on DSK3GMQ082PROD with PROPOSALS 38 We VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 would not require a fund to disclose any specific classification information, either security specific or in the aggregate, although a fund could do so if it wished. Also, consistent with the current rule, it would not require a fund to disclose publicly the level of its HLIM, any shortfalls or changes to it, or any breaches of the 15% illiquid investment limit.40 We expect that this disclosure should allow funds to provide context and an accessible and useful explanation of the fund’s liquidity risk in relation to its management practices and other investment risks as appropriate. Because the proposal would eliminate public disclosure of a fund’s aggregate liquidity classification information, we would also re-designate reporting about the percentage of a fund’s highly liquid investments that are segregated to cover, or pledged to satisfy margin requirements in connection with, derivatives transactions that are classified as Moderately Liquid Investments, Less Liquid Investments and Illiquid Investments to the nonpublic portion of the Form.41 We believe public disclosure of this percentage of a fund’s highly liquid investments would be of limited to no utility to investors without broader context and, therefore, may be confusing. However, we believe that funds should report this item to us on a non-public basis because we would otherwise be unable to determine the percentage of a fund’s highly liquid investments that is actually unavailable to meet redemptions.42 We believe that these proposed amendments will provide effective disclosure that better informs investors of how the fund’s liquidity risk and liquidity risk management practices affect their investment than the current Form N–PORT public liquidity risk 40 Under rule 22e–4 and related rules and forms, funds are not required to publicly disclose any shortfalls or changes to their HLIM or breaches of the 15% illiquid investment limit. 41 We are proposing to do this by renumbering current Item B.8.b of Form N–PORT as Item B.8 and making this item non-public. This item requires public reporting of the percentage of a fund’s highly liquid investments that it has segregated to cover, or pledged to satisfy margin requirements in connection with, derivatives transactions that are classified as moderately liquid, less liquid, or illiquid investments. Item B.8.b of Form N–PORT. We originally required this disclosure in order to avoid misleading investors about the actual availability of investments that are highly liquid investments to meet redemptions. See Liquidity Adopting Release, supra footnote 2, at n.623 and accompanying text. 42 For these reasons, we find that it is neither necessary nor appropriate in the public interest or for the protection of investors to make this reporting about the percentage of a fund’s highly liquid investments that is segregated to cover less liquid derivatives transactions publicly available. PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 profile.43 The annual report disclosure provides a fund the opportunity to tailor its disclosure to the fund’s specific risks. This would provide funds the opportunity to explain the level of subjectivity involved in liquidity assessment, and give a narrative description of these risks and how they are managed within the context of the fund’s own investment strategy. This annual report disclosure should provide funds the ability to give sufficient context on these risks, in a way that the current Form N–PORT liquidity disclosure does not. In addition, because funds deliver annual reports to their shareholders each year, the annual report may be a better vehicle for certain existing investors to gain access to liquidity risk information if they prefer to base their decisions partially on information delivered to them, versus information that they would need to seek out on Form N–PORT, whether directly from the Commission or via a third party service.44 Moreover, third party services, in repackaging this information, may potentially use additional assumptions about the value or proper presentation of liquidity profiles, thereby introducing further subjectivity and variability about which investors may not be aware.45 The proposed annual report disclosure also 43 As an alternative to this new proposed narrative disclosure requirement, we considered moving the aggregate liquidity profile from Form N–PORT to the fund’s annual report, which might allow funds to provide additional context and explanation of their methodology. However, we believe that such an approach might not address the concerns discussed above, as investors may still use the liquidity profile to compare funds despite its inherent subjectivity and variability. 44 Although investors would be provided liquidity information only annually under our proposal (rather being able to access it quarterly through Form N–PORT), as discussed above we believe that investors may be more likely to access and appreciate liquidity information provided in the context of the annual report, rather than seeking out liquidity information on Form N–PORT or through third parties. Accordingly, we believe that the annual report is a more appropriate venue for providing liquidity information, even though it is updated less frequently than Form N–PORT. 45 We recognize that third party service providers who provide tools that assist funds engaging in the classification process may have some insight into the methodologies and assumptions used by the funds they service which, if they were to repackage and distribute fund liquidity profile data, may allow them to provide context about such information. However, these service providers also may provide public information about funds they do not service, even if their insight into classification methodologies and assumptions may be inapplicable to these funds. Further, even when a third party service provider does assist a fund, that fund may not share all of the assumptions and methods that it ultimately uses in classification with its service provider, further limiting the utility of any such insight in providing context about the variability and lack of comparability of fund liquidity profiles. E:\FR\FM\19MRP1.SGM 19MRP1 sradovich on DSK3GMQ082PROD with PROPOSALS Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules would allow a fund to discuss liquidity risk as one among several risks, and does not require funds to provide any security or portfolio specific classification information. As a result, liquidity risk should not be inappropriately singled out among the other risks of the fund. Finally, because many funds deliver annual reports in conjunction with an annual delivery of the summary prospectus, investors may be able to evaluate the summary of the principal risks of investing in the fund contained in the summary prospectus, including liquidity risk if applicable, in conjunction with the liquidity risk management program disclosure we are proposing to include in the annual report. This may facilitate a more comprehensive understanding of the fund’s liquidity risks and its management of these risks for investors. To further assist in providing investors with information about fund liquidity, the staff anticipates that publishing aggregated and anonymized information about the fund industry’s liquidity may be beneficial. We note that, since October 2015, Commission staff has published a periodic report that contains highly-aggregated and anonymized private fund industry statistics derived from Form PF data. This staff report is designed to enhance public understanding of the private fund industry and facilitate Commission staff participation in meetings and discussions with industry professionals, investors, and other regulators.46 Publishing a similar staff report on the aggregated liquidity of funds may provide similar benefits as the Form PF report. We expect that the staff would publish the report periodically and that the report would discuss aggregated and anonymized liquidity data of all funds or funds in certain categories, but would not identify the specific liquidity profile of any individual fund. Staff from the Division of Investment Management as well as staff from the Division of Economic and Risk Analysis have also published ad hoc papers on data drawn from Form PF to help inform the public as to the staff’s analyses of that data. We would anticipate a similar approach to the fund liquidity data.47 In addition to interim public reporting of aggregate, anonymized liquidity information, staff from the Divisions of 46 See Annual Staff Report Related to the Use of Form PF Data, available at https://www.sec.gov/ files/im-private-fund-annual-report-101617.pdf. 47 See Liquidity Adopting Release, supra footnote 2, at n.617 and accompanying text; see also Investment Company Reporting Modernization, Investment Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)] at text accompanying nn.13–15. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 Investment Management and Economic and Risk Analysis will conduct a review of the granular fund-specific liquidity classification data that the Commission will begin receiving on a confidential basis in June 2019.48 The staff will provide an analysis of the data to the Commission and present to the Commission by June 2020 a recommendation addressing whether and, if so, how there should be public dissemination of fund-specific liquidity classification information. Finally, in its 2017 Asset Management and Insurance Report, the Department of Treasury highlighted the importance of robust liquidity risk management programs, but recommended that the Commission embrace a ‘‘principlesbased approach to liquidity risk management rulemaking and any associated bucketing requirements.’’49 Today, we are proposing to modify certain aspects of our liquidity framework. We note that market participants will continue to gather insights as liquidity risk management programs are implemented, and can provide comments to the Commission as they do so. The staff will monitor the information received and report to the Commission what steps, if any, the staff recommends in light of commenter experiences. 3. Comment Request We request comment on the proposed elimination of the aggregate liquidity profile public disclosure requirement of Form N–PORT and our proposed replacement with a requirement that funds discuss the operation and effectiveness of their liquidity risk management program as part of their annual reports to shareholders. • Should we eliminate this public disclosure of funds’ aggregate liquidity profiles? Why or why not? • To what extent would investors have relied on a fund’s aggregate liquidity profile in making investment decisions? Is it likely that this disclosure would have been informative rather than confusing to investors in making these decisions? • If, as proposed, we were to eliminate the requirement that funds publicly disclose their aggregate liquidity profile, would investors have sufficient information about a fund’s 48 See Liquidity Extension Release supra footnote 8. 49 See A financial System That Creates Economic Opportunities; Asset Management and Insurance, U.S. Department of the Treasury, Oct. 2017 available at https://www.treasury.gov/press-center/ press-releases/Documents/A-Financial-SystemThat-Creates-Economic-Opportunities-Asset_ Management-Insurance.pdf. PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 11911 liquidity risk to make an informed investment decision? • Should we retain the public disclosure of a fund’s aggregate liquidity profile and otherwise seek to address the concerns discussed above? For example, would making the disclosure more frequent (i.e., monthly), reducing the lag on public disclosure, providing funds the opportunity to publicly provide additional context and explanation on the Form or elsewhere, or other changes address the concerns discussed above? Should we permit funds to choose to make any explanatory notes related to liquidity disclosures in Part E of Form N–PORT publicly available? • Instead of eliminating the public disclosure of a fund’s aggregate liquidity profile as proposed, should we instead make the profile non-public for some additional period of time (e.g., 2 to 3 years) to allow us to evaluate the quality of the information provided and its potential impact on investors? • Should we make current Item B.8.b of Form N–PORT (highly liquid investments segregated to cover less liquid derivatives) non-public as proposed? If it was retained as public, would investors understand it without accompanying classification information? Alternatively, should we rescind the requirement entirely? • Should we require a fund to provide a discussion of the operation and effectiveness of its liquidity risk management program, as we are proposing? Why or why not? Should we instead require disclosure about the extent to which and the manner in which the fund took liquidity risk and managed liquidity risk during the period in question and how those risks and management affected fund performance? • As part of this proposed disclosure, should we require a fund to discuss specific elements of the fund’s liquidity risk program such as the 15% illiquid investment limit, HLIM, classification process or specific liquidity risk observations? Why or why not? • Should we require a fund to include a discussion of any relevant changes made to its liquidity risk management over the course of the reporting period? • What additional information would be relevant to investors regarding liquidity risks that we should require funds to disclose? • Should we require this liquidity risk disclosure to be included in the annual report? Should it instead be included in another disclosure document such as the fund’s statutory prospectus, summary prospectus, or statement of additional information? If E:\FR\FM\19MRP1.SGM 19MRP1 11912 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules so, under what item should it be included? • Are there alternative approaches to providing relevant liquidity information to investors? If so, what are they, and why should we use them? • Are there advantages to the approach that Treasury recommends? If so, what additional steps, if any, should we consider to shift toward a principlesbased approach? To what extent have funds already implemented the existing liquidity classification requirement? B. Proposed Amendments to Liquidity Reporting Requirements We are also proposing to make certain changes to Form N–PORT related to the liquidity data reported on Form N– PORT. As discussed below, we believe these changes enhance the liquidity data reported to us. In addition, for some funds, these proposed changes may also reduce cost burdens as they comply with the rule. sradovich on DSK3GMQ082PROD with PROPOSALS 1. Multiple Classification Categories We are proposing amendments to Form N–PORT to allow funds the option of splitting a fund’s holding into more than one classification category in three specified circumstances.50 Today, Form N–PORT requires a fund to classify each holding into a single liquidity bucket. The staff has engaged in discussions with funds regarding questions that have arisen in implementing the liquidity rule and related requirements. These discussions have led us to propose these changes today. First, some funds have explained that the requirement to classify each entire position into one classification category poses difficulties for certain holdings and may not accurately reflect the liquidity of that holding. In these cases, even though the holding may nominally be a single security, different liquidityaffecting features may justify the fund treating the holding as two or more separate investments for liquidity classification purposes (‘‘differences in liquidity characteristics’’). For example, a fund might hold an asset that includes a put option on a percentage (but not all) of the fund’s holding of the asset.51 Such a feature may significantly affect 50 See proposed Item C.7.b of Form N–PORT and Instructions. 51 For example, if 30% of a holding is subject to a liquidity feature such as a put, and the other 70% is not, pursuant to the proposed Instructions to Item C.7 of Form N–PORT, a fund may split the position, evaluate the sizes it reasonably anticipates trading for each portion of the holding that is subject to the different liquidity characteristics, and classify each separate portion differently, as appropriate. The fund in such a case would use the classification process laid out in the final rule, but would apply it separately to each portion of the holding that exhibits different liquidity characteristics. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 the liquidity characteristics of the portion of the asset subject to the feature, such that the fund believes that the two portions of the asset should be classified into different buckets.52 Second, some funds suggested that in cases of sub-advisers managing different portions or ‘‘sleeves’’ of a fund’s portfolio, differences may arise between sub-advisers as to their views of the liquidity classification of a single holding that may be held in multiple sleeves. They noted it would avoid the need for costly reconciliation—and may provide useful information to the Commission on each sub-adviser’s determination about the asset’s liquidity—to be able to report each subadviser’s classification of the proportional holding it manages instead of putting the entire holding into a single category.53 Finally, some funds indicated that for internal risk management purposes they currently classify their holdings proportionally across buckets, based on an assumed sale of the entire position (‘‘proportionality’’).54 In such cases, they argued that allowing a fund to have the option of proportionally reporting the position on Form N–PORT would be 52 As another example, a fund might have purchased a portion of an equity position through a private placement that makes those shares restricted (and therefore illiquid) while also purchasing additional shares of the same security on the open market. In that case, certain shares of the same holding may have very different liquidity characteristics depending on the specific shares being evaluated. 53 Similar to the ‘‘differences in liquidity characteristics’’ examples discussed above, under the proposed amendments to the liquidity classification reporting on Form N–PORT the fund effectively would be treating the portions of the holding managed by different sub-advisers as if they were two separate and distinct securities, and bucketing them accordingly. See Instructions to Item C.7 of Form N–PORT. 54 We initially proposed to require that funds classify each portfolio position based on the amount of time it would take to convert the entire position, or portions thereof, to cash (‘‘proportionality approach’’). 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)], at n.172 and accompanying text. Multiple commenters expressed concern about the proposed requirement, arguing, among other things, that a fund generally would not need to liquidate an entire large position unexpectedly. Rule 22e–4 as adopted, requires a fund, when classifying an investment, to instead determine whether trading varying portions of a position in a particular portfolio investment, in sizes that the fund would reasonably anticipate trading, is reasonably expected to significantly affect the liquidity characteristics of that investment (i.e., market-depth). These market-depth considerations were adopted as a substitute for the proposed proportionality approach. See Liquidity Adopting Release, supra footnote 2, at n.439 and accompanying text. PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 more efficient and less costly.55 We believe that in such cases, this form of reporting would not impair the Commission’s monitoring and oversight efforts as compared to our approach of classifying based on ‘‘sizes that the fund would reasonably anticipate trading.’’ 56 Further, we believe the approach we are proposing today, which allows, but does not require, funds to use the proportionality approach in specified circumstances, would maintain the quality of the information reported to us and be potentially less costly than either our previously proposed or adopted approaches.57 We agree that we should permit funds to report liquidity classifications in these ways as they may equally, or more accurately, reflect their liquidity and in some cases may be less burdensome. In addition, we believe that allowing funds to proportionally report the liquidity classification of securities under the three circumstances we discussed here will enhance our monitoring efforts, as it will allow for a more precise view of the liquidity of these securities. Because funds that choose to classify across multiple categories under this approach would be required to indicate which of the three circumstances led to the split classification, we will be able to monitor more effectively the liquidity of a fund’s portfolio and determine the circumstances leading to the classification. Therefore, we are proposing to amend Item C.7 of Form N–PORT to provide funds the option of splitting the classification categories reported for their investments on a percentage basis, if done for one of these 55 Effectively, these funds requested the option to use the position size bucketing approach that was originally proposed (analyzing the entirety of a fund’s position and splitting it among buckets), rather than bucketing the entire holding into a single category based on the sizes they reasonably anticipate trading, as required under the final rule. 56 Under the proposed Instructions to Item C.7 of Form N–PORT, a fund taking the proportionality approach would use a method similar to that described in the proposal, and split the entire holding among the four classification categories. For example, a fund holding $100 million in Asset A could determine that it would be able to convert to cash $30 million of it in 1–3 days, but could only convert the remaining $70 million to cash in 3–7 days. This fund could choose to split the liquidity classification of the holding on Form N–PORT and report an allocation of 30% of Asset A in the Highly Liquid category and 70% of Asset A in the Moderately Liquid category. Such a fund would not use sizes that it reasonably anticipates trading when engaging in this analysis, but instead would assume liquidation of the whole position. 57 As discussed in the economic analysis below, allowing classification in multiple categories may be less costly if it better aligns with current fund systems or allows funds to avoid incurring costs related to the need to develop systems and processes to allocate each holding to exactly one classification bucket. E:\FR\FM\19MRP1.SGM 19MRP1 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules sradovich on DSK3GMQ082PROD with PROPOSALS three reasons.58 We are also proposing new Instructions to Item C.7 that explain the specified circumstances where a fund may split classification categories. In addition, we are proposing new Item C.7.b, which would require funds taking advantage of the option to attribute multiple classifications to a holding to note which of the three circumstances led the fund to split the classifications of the holdings.59 We seek comment on our proposal to allow, but not require, funds to classify a single holding in multiple categories on Form N–PORT. • Should we allow funds to split holdings among different liquidity categories in three specified circumstances as we are proposing today? 60 Why or why not? • Should we require funds to use a consistent approach to classification for all of their investments for purposes of Form N–PORT reporting? For example, should we require a fund that attributes multiple classifications for a holding because it uses a full liquidation analysis on one position to do so consistently for all of its positions? • Are there circumstances other than the ones discussed in the proposed Form N–PORT Instructions to Item C.7 when funds may wish to classify the same security into multiple categories? If so, what are they and why should we permit classification splitting in those cases? • Instead of requiring funds to note the circumstance that led them to split classification of a position on new Item C.7.b as proposed, should we instead require them to note the circumstance in the explanatory notes section of the Form? Should we not require them to note the circumstance leading to the splitting at all? Why or why not? • Should we allow a fund using the proportionality approach to not classify the liquidity of a holding based on an assumed liquidation of the whole position, but instead classify it by evaluating different portions of the sizes it reasonably anticipates trading and bucketing the entire position 58 Proposed revisions to Item C.7 and its Instructions of Form N–PORT. Funds that choose not to take advantage of this proportional splitting approach may continue to use the approach laid out in the final rule of bucketing an entire position based on the liquidity of the sizes the fund would reasonably anticipate trading. 59 Proposed Item C.7.b of Form N–PORT. A fund may also choose to provide (but is not required to) additional context on its process for classifying portions of the same holding differently in the explanatory notes section of Form N–PORT. See Part E of Form N–PORT. 60 Proposed Instructions to Item C.7 to Form N– PORT. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 accordingly? 61 Would this result in misleading or incorrect liquidity classifications? 2. Proposed Disclosure of Cash and Cash Equivalents We are also proposing to add to Form N–PORT an additional disclosure relating to a registrant’s holdings of cash and cash equivalents not reported in Parts C and D of the Form.62 This disclosure would be made publicly available each quarter.63 Form N–PORT currently does not require registrants to specifically report the amount of cash and cash equivalents held by the registrant. For example, as we noted in the Reporting Modernization Adopting Release, we designed Part C of Form N– PORT to require registrants to report certain information on an investmentby-investment basis about each investment held by the registrant.64 However, cash and certain cash equivalents are not considered an investment on Form N–PORT, and therefore registrants are not required to report them in Part C of the Form as an investment. Similarly, Part B.1 of Form N–PORT (assets and liabilities) will require information about a registrant’s assets and liabilities, but does not require specific disclosure of a registrant’s holdings of cash and cash equivalents.65 Cash held by a fund is a highly liquid investment under rule 22e–4 and would have been included in the aggregate liquidity profile that we are proposing to eliminate. Without the aggregate liquidity profile, we may not be able to effectively monitor whether a fund is 61 For example, under this alternate approach, a fund with a $100 million position in a security with a reasonably anticipated trading size of $10 million might determine that it could convert $4 million to cash in 1–3 days and $6 million in 4–7 days. The fund might then bucket $40 million as highly liquid and $60 million as moderately liquid, even though the fund has previously determined that it could only convert $4 million into cash in 1–3 days. We believe this approach would potentially result in inaccurate classifications that may not fully reflect the liquidity of a fund’s investments, but has been suggested to our staff as a potential method of splitting classifications in some circumstances. 62 See supra footnote 15 (noting that the term ‘‘registrant’’ refers to entities required to file Form N–PORT, including all registered management investment companies, other than money market funds and small business investment companies, and all ETFs (regardless of whether they operate as UITs or management investment companies). 63 See proposed Item B.2.f. of Form N–PORT. 64 See Reporting Modernization Adopting Release, supra footnote 2. 65 We understand that, in addition to cash, a registrant’s disclosure of total assets on Part B.1.a. could also include certain non-cash assets that are not investments of the registrant, such as receivables for portfolio investments sold, interest receivable on portfolio investments, and receivables for shares of the registrant. PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 11913 compliant with its HLIM unless we know the amount of cash held by the fund. The additional disclosure of cash and certain cash equivalents by funds will also provide more complete information that will be useful in analyzing a fund’s HLIM, as well as trends regarding the amount of cash being held, which also correlates to other activities the fund is experiencing, including net inflows and outflows. As a result, we are proposing to amend Item B.2. of Form N–PORT (certain assets and liabilities) to include a new Item B.2.f. which would require registrants to report ‘‘cash and cash equivalents not reported in Parts C and D.’’ Current U.S. Generally Accepted Accounting Principles (‘‘GAAP’’) define cash equivalents as ‘‘short-term, highly liquid investments that . . . are . . . [r]eadily convertible to known amounts of cash . . . [and that are] [s]o near their maturity that they present insignificant risk of changes in value because of changes in interest rates.’’ 66 However, we understand that certain categories of investments currently reported on Part C of Form N–PORT (schedule of portfolio investments) could be reasonably considered by some registrants as cash equivalents. For example, Item C.4. of Form N–PORT will require registrants to identify asset type, including ‘‘short-term investment vehicle (e.g., money market fund, liquidity pool, or other cash management vehicle),’’ which could reasonably be categorized by some registrants as a cash equivalent. Therefore, in order to ensure the amount reported under proposed Item B.2.f is accurate and does not double count items that are more appropriately reported in Parts C (Schedule of portfolio investments) and D (Miscellaneous securities) of Form N– PORT, we are proposing to require registrants to only include the cash and cash equivalents not reported in those sections.67 We seek comment on our proposal to require registrants to report cash and cash equivalents on Form N–PORT. • Should we require registrants to report cash and cash equivalents? 66 See FASB Accounting Standards Codification Master Glossary. 67 We also are proposing other amendments to Form N–PORT. In particular, we are proposing to amend General Instruction F (Public Availability) to remove the phrase ‘‘of this form’’ from parenthetical references to Item B.7 and Part D for consistency with other parenthetical cross references in the Form. We also are proposing to amend Part F (Exhibits) to fix a typographical error in the citation to Regulation S–X. In addition, for consistency with the amendments we are proposing today and we are proposing to add Item B.8 (Derivative Transactions) to General Instruction F. E:\FR\FM\19MRP1.SGM 19MRP1 11914 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules Should we require a different formulation for cash? For example, should we require registrants to report separately pledged or segregated cash? • Should we require registrants to provide more detailed information on cash, rather than reporting cash and cash equivalents together? For example, should we require registrants to report cash separately from cash equivalents in Part C of Form N–PORT? If so, should we require cash to be reported separately for different currencies? sradovich on DSK3GMQ082PROD with PROPOSALS If the amendments we propose to Forms N–PORT and N–1A related to liquidity risk disclosure are adopted, we would expect to provide for a tiered set of compliance dates based on asset size.68 Specifically, we are proposing to align the compliance date for our proposed amendments to Forms N– PORT and N–1A with the revised compliance date we previously adopted for Form N–PORT.69 We believe that aligning the compliance date for all liquidity-related reporting requirements will allow funds to holistically implement all liquidity reporting and disclosure requirements at the same time and may make the requirements less burdensome. We request comment on the compliance dates discussed above. • Should we align the compliance dates for the amendments with the general compliance date for Form N– PORT? Alternatively, should we align the compliance date for the proposed amendments with the compliance date for the other liquidity-related requirements of rule 22e–4 and Form N– PORT? 68 ‘‘Larger entities’’ are defined as funds that, together with other investment companies in the same ‘‘group of related investment companies,’’ have net assets of $1 billion or more as of the end of the most recent fiscal year of the fund. ‘‘Smaller entities’’ are defined as 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 its most recent fiscal year. See Liquidity Adopting Release, supra footnote 2, at n.997. We adopted this tiered set of compliance dates based on asset size because we anticipated that smaller groups would benefit from this extra time to comply and from the lessons learned by larger investment companies, and we believe the same rationale applies to the changes we are proposing today. See Liquidity Adopting Release, supra footnote 2, at nn.999 and 1008 and accompanying text. 69 See Investment Company Reporting Modernization, Investment Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)]. These compliance dates would apply to all Form N–PORT filings after the relevant date and to funds subject to these proposed requirements that file initial registration statements on Form N–1A, or that file post-effective amendments that are annual updates to effective registration statements on Form N–1A, after these proposed compliance dates. 16:06 Mar 16, 2018 III. Economic Analysis A. Introduction C. Compliance Dates VerDate Sep<11>2014 • Should we provide a longer compliance period for these proposed changes? For example, should we provide an additional six months or one year beyond the compliance dates for the liquidity-related requirements of rule 22e–4 and Form N–PORT? Should we provide a different compliance period for the Form N–PORT changes and the Form N–1A changes? If so, why and how long? Jkt 244001 The Commission is sensitive to the potential economic effects of the proposed amendments to Form N–PORT and Form N–1A. These effects include the benefits and costs to funds, their investors and investment advisers, issuers of the portfolio securities in which funds invest, and other market participants potentially affected by fund and investor behavior as well as any effects on efficiency, competition, and capital formation. B. Economic Baseline The costs and benefits of the proposed amendments as well as any impact on efficiency, competition, and capital formation are considered relative to an economic baseline. For the purposes of this economic analysis, the baseline is the regulatory framework and liquidity risk management practices currently in effect, and any expected changes to liquidity risk management practices, including any systems and processes that funds have already implemented in order to comply with the liquidity rule and related requirements as adopted. The baseline also includes the economic effects anticipated in the Liquidity Adopting Release and the Liquidity Extension Release.70 The economic baseline’s regulatory framework consists of the liquidity rule’s requirements adopted by the Commission on October 13, 2016. Under the baseline, larger entities must comply with some of the liquidity rule’s requirements, such as the establishment of a liquidity risk management program, by December 1, 2018 and must comply with other requirements, such as the classification of portfolio holdings, by June 1, 2019.71 Similarly, smaller entities must comply with some of the liquidity rule’s requirements by June 1, 70 See supra footnotes 2 and 8. supra footnote 68 for a detailed description of large and small entities. The compliance date for some of the requirements related to portfolio holding classification is being delayed. See the Liquidity Extension Release, supra footnote 8, for a more detailed discussion of the requirements that are being delayed. 71 See PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 2019 and other requirements by December 1, 2019. The primary SEC-regulated entities affected by these proposed amendments would be mutual funds and ETFs. As of the end of 2016, there were 9,090 mutual funds managing assets of approximately $16 trillion,72 and there were 1,716 ETFs managing assets of approximately $2.5 trillion.73 Other potentially affected parties include investors, investment advisers that advise funds, issuers of the securities in which these funds invest, and other market participants that could be affected by fund and investor behavior. C. Economic Impacts We are mindful of the costs and benefits of the proposed amendments to Form N–PORT and Form N–1A. The Commission, where possible, has sought to quantify the benefits and costs, and effects on efficiency, competition and capital formation expected to result from these amendments. However, as discussed below, the Commission is unable to quantify certain of the economic effects because it lacks information necessary to provide reasonable estimates. The economic effects of the amendments fall into two categories: (1) Effects stemming from changes to public disclosure on Form N–PORT and Form N–1A; (2) effects stemming from changes to non-public disclosure on Form N–PORT. Changes to Public Disclosure The proposed amendments to Form N–PORT and Form N–1A alter the public disclosure of information about fund liquidity in three ways. First, the proposed amendments rescind the requirement that funds publicly disclose their aggregate liquidity profile on a quarterly basis with a 60-day delay in structured format on Form N–PORT.74 Second, the proposed amendments require a fund to provide a narrative description of the fund’s liquidity risk management program’s operation and effectiveness in unstructured format on Form N–1A. Finally, the proposed amendments require funds and other 72 See 2017 ICI Fact Book, available at https:// www.ici.org/pdf/2017_factbook.pdf, at 22, 170, 174. The number of mutual funds includes funds that primarily invest in other mutual funds but excludes 421 money-market funds. 73 See 2017 ICI Fact Book, available at https:// www.ici.org/pdf/2017_factbook.pdf, at 180, 181. 74 See supra footnote 1 for a definition of ‘‘funds.’’ The requirement to publicly disclose aggregate liquidity profiles does not apply to funds that are In-Kind ETFs under the baseline, so it is only being proposed to be rescinded for funds that are not InKind ETFs. In-Kind ETFs are included as funds that would provide a narrative description of their liquidity risk management program on Form N–1A under this proposal. E:\FR\FM\19MRP1.SGM 19MRP1 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules sradovich on DSK3GMQ082PROD with PROPOSALS registrants to report to the Commission on a non-public basis the amount of cash and cash equivalents in their portfolio on Form N–PORT on a monthly basis and to publicly disclose this amount on a quarterly basis with a 60-day delay through EDGAR.75 Funds and other registrants would experience benefits and costs associated with proposed changes to public disclosures on Form N–PORT. Funds 76 would no longer incur the one-time and ongoing costs associated with preparing the portion of Form N–PORT associated with the aggregate liquidity profile, which would likely constitute a small portion of the aggregate one-time costs of $158 million and the ongoing costs of $3.9 million for Form N–PORT that we estimated in the Liquidity Adopting Release.77 At the same time, funds and other registrants would also incur additional costs, relative to the baseline, associated with the requirement that they report their holdings of cash and cash equivalents on Form N–PORT.78 Because funds and other registrants are already preparing Form N–PORT, and already need to keep track of their cash and cash equivalents for valuation purposes, we expect that these additional costs will not be significant. In aggregate, we expect any additional costs associated with the requirement that funds and other registrants disclose their holdings of cash and cash equivalents to be offset by the savings associated with funds no longer having to report an aggregate liquidity profile. Therefore, we expect that funds and other registrants will not experience a significant net economic effect associated with the direct costs of filing Form N–PORT.79 Additionally, to the extent that any risk of herding or correlated trading would exist if funds executed trades in order to make their aggregate liquidity profiles appear more liquid to investors, rescinding the requirement that funds publicly disclose an aggregate liquidity profile would mitigate such risk.80 Relative to the baseline, funds would incur costs associated with preparing an annual narrative discussion of their liquidity risk management programs on Form N–1A. We estimate that funds would incur aggregate one-time costs of approximately $18 million and aggregate ongoing costs of approximately $8.9 million in association with preparing this narrative discussion.81 Investors also would experience costs and benefits as a result of the proposed amendments to the public disclosure requirements on Form N–PORT and Form N–1A. To the extent that aggregate liquidity profiles on Form N–PORT would help certain investors make more informed investment choices that match their liquidity risk preferences, rescinding the aggregate liquidity profile requirement will reduce an investor’s ability to make more informed investment choices. However, to the extent that aggregate liquidity profiles are not comparable across funds because portfolio holding classifications incorporate subjective factors that may be interpreted differently by different funds, rescinding the aggregate liquidity profile requirement may not reduce these investors’ ability to make informed investment choices. Rather, the amendments may reduce the likelihood that investors make investment choices based on any confusion about how the fund’s liquidity risk profile should be interpreted.82 Additionally, the annual narrative discussion in Form N–1A may mitigate any reduction in their ability to make more informed investment choices, though this disclosure would be less frequent than the quarterly public disclosure of aggregate liquidity profiles as adopted and would provide information about a fund’s liquidity risk management rather than the fund’s aggregate liquidity profile of investments. 75 The Commission will continue to receive nonpublic position level liquidity information on Form N–PORT. See supra footnote 32. 76 See supra footnote 73. 77 See Liquidity Adopting Release, supra footnote 2, at nn.1188–1191. We estimated the total one-time costs associated with the rule’s disclosure and reporting requirements on Form N–PORT as being approximately $55 million for funds that will file reports on Form N–PORT in house and approximately $103 million for funds that will use a third-party service provider. Similarly, we estimated the total ongoing annual costs as being approximately $1.6 million for funds filing reports in house and $2.3 million for funds that will use a third-party service provider. 78 See supra footnote 15. 79 See text following infra footnote 98. 80 See supra footnote 35 and surrounding discussion. 81 See infra footnotes 102 and 105. We estimate funds will incur an additional aggregate one-time of burden of 53,990 hours and an additional aggregate annual burden of 26,995 hours. Assuming a blended hourly rate of $329 for a compliance attorney ($345) and a senior officer ($313), that translate to an additional aggregate one-time burden of $17,7627,710 = 53,990 × $329 and an additional aggregate annual burden of $8,881,355 = 26,995 × $329. 82 Even if aggregate liquidity profiles are not comparable across funds, they may be comparable across time for a given fund, which might provide useful information to investors. This would be the case if a fund maintains a consistent position classification process over time. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 11915 If certain investors prefer to base their investment decisions on information that is delivered to them directly, those investors would be more likely to use the narrative discussion of a fund’s liquidity risk management program on Form N–1A than to have used the aggregate liquidity profile on Form N– PORT to inform their investment decisions. However, if certain other investors could more easily access, reuse, and compare the information about a fund’s liquidity risk if included within a structured format on Form N– PORT, those investors would have a reduced ability to make as timely and accurate an analysis when that information is provided to them in the unstructured format of an annual report. To the extent that certain investors rely on third parties to provide them with information for analysis, there may be an increased burden on these thirdparty providers to search, aggregate and analyze the unstructured information in funds’ annual reports. Finally, the proposed amendment to Form N–PORT that requires funds and other registrants to publicly disclose their holdings of cash and cash equivalents on a quarterly basis with a 60-day delay gives investors some potentially useful information about the most liquid assets that a fund previously had available to, for example, meet its redemption obligations. Changes to Non-Public Disclosure In addition to the proposed amendments to public disclosures of liquidity information discussed above, the proposed amendments to Form N– PORT give funds the option to split a given holding into portions that may have different liquidity classifications on their non-public reports on Form N– PORT. Funds may benefit from the proposed amendment because it gives them the option to either include an entire holding within a classification bucket or to allocate portions of the holding across classification buckets. This could benefit a fund if a more granular approach to classification that assigns portions of a portfolio holding to separate classification buckets is more consistent with the fund’s preferred approach to liquidity risk management, and reduces the need for funds to develop systems and processes to allocate each holding to exactly one classification bucket.83 In addition, to 83 For example, funds that use multiple subadvisers to manage different sleeves of a portfolio might have to establish more complex systems and processes for combining the classifications of individual sub-advisers into a single classification for the portfolio’s aggregate holding of a given E:\FR\FM\19MRP1.SGM Continued 19MRP1 11916 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules the extent that providing the option to choose the position classification method most suitable to a given fund results in disclosures on Form N–PORT that more accurately reflect the fund’s liquidity profile, the proposed amendments may improve the Commission’s ability to monitor liquidity risks in markets and protect investors from liquidity-related developments. However, we acknowledge that providing funds with this option does add an additional subjective decision to the portfolio holding classification process. Thus the proposed amendments could result in classification profiles that are less comparable across funds relative to the baseline.84 Efficiency, Competition, and Capital Formation sradovich on DSK3GMQ082PROD with PROPOSALS The proposed amendments have several potential impacts on efficiency, competition, and capital formation. First, if publicly disclosed aggregate liquidity profiles created an incentive for a fund to classify its holdings in a manner that led to a relatively more liquid aggregate liquidity profile in order to attract investors, the proposed amendments remove any such incentive and potentially reduce the likelihood that funds compete based on their aggregate liquidity profiles. To the extent that a fund or other registrant’s cash and cash equivalent holdings are interpreted by investors as being associated with lower liquidity risk, funds and other registrants may still have some incentive to compete based on their holdings of cash and cash equivalents under the proposed amendments.85 We do not expect the proposed amendments to Form N–1A to have a significant competitive effect. Second, to the extent that publicly disclosed aggregate liquidity profiles would have helped investors more accurately evaluate fund liquidity risk and make more informed investment security under the rule as adopted. The ability to split a portfolio holding across multiple classification buckets provides funds with a straightforward way of combining the classifications of different sub-advisers. 84 Portfolio classifications on Form N–PORT will include CUSIPs or other identifiers that allow Commission staff to identify when different funds classify the same investment using different classification methods. However, comparing such classifications will require some method of adjustment between classifications based on, for example, reasonably anticipated trade size and those based splitting a position into proportions that are assigned to different classification buckets. 85 However, because cash and cash equivalent holdings do not generate significant returns relative to other holdings, funds and other registrants may have an incentive to shift to non-cash or cash equivalent holdings that generate higher returns. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 decisions, the proposed amendments could reduce allocative efficiency. However, to the extent that aggregate liquidity profiles on Form N–PORT would have increased the likelihood of investors making investment choices based on any confusion about a fund’s liquidity risk profile, which would have harmed the efficient allocation of capital, the proposed amendments could increase allocative efficiency. The proposed annual discussion of a fund’s liquidity risk management program on Form N–1A and the proposed requirement that funds and other registrants publicly disclose their holdings of cash and cash equivalents on Form N–PORT potentially mitigate this reduction in allocative efficiency, but only to the extent that these proposed requirements provide information that helps investors evaluate fund liquidity risk. Finally, to the extent that the information provided by aggregate liquidity profiles would have promoted increased investment in certain funds, and the assets those funds invest in, rescinding the aggregate liquidity profile requirement could reduce capital formation. At the same time, we note that the new public disclosure requirements we are proposing could offset any reduction in capital formation. In summary, we note that all of the impacts described above are conditioned upon the usefulness to investors of information that we propose to no longer require relative to the usefulness of additional proposed disclosures. We cannot estimate the aggregate effect on efficiency, competition, or capital formation that will result from the new amendments because we do not know the extent to which aggregate liquidity risk profiles, narrative discussion of a fund’s liquidity risk management program, or the amount of cash and cash equivalents held by a fund and other registrants are useful to investors in making more informed investment choices. D. Reasonable Alternatives The Commission considered several alternatives to the proposed amendments to funds public and nonpublic disclosure requirements. First, in order to address any potential issues with the interpretation of a fund’s aggregate liquidity profile by investors, we could have maintained the public disclosure of this profile on Form N– PORT and added a requirement that funds publicly disclose on Form N– PORT additional information providing context and clarification regarding how their aggregate liquidity profile were PO 00000 Frm 00014 Fmt 4702 Sfmt 4702 generated and should be interpreted. This alternative would have provided investors with some of the benefits of the additional context provided by the proposed narrative discussion on Form N–1A, and, to the extent that it increased investors’ understanding of a fund’s aggregate liquidity profile, could allow them to make more informed investment choices relative to the baseline. However, to the extent that some investors believe that they can more easily obtain information in a fund’s annual report compared to information in the fund’s N–PORT filings because annual reports are delivered directly to them, and the investors are not as interested in being able to access, reuse, and compare the information if included in a structured format on Form N–PORT, this alternative would require investors to seek out this additional information on EDGAR instead of having it delivered directly to them in an annual report. Similarly, we could have required funds to disclose an aggregate liquidity profile in their annual report along with additional information providing context and clarification regarding how its aggregate liquidity profile was generated and should be interpreted. If such disclosure increased investors’ understanding of a fund’s aggregate liquidity profile, this would allow them to make more informed investment choices relative to the baseline, though they would receive this information at an annual rather than quarterly frequency. Second, instead of requiring a fund to briefly discuss the operation and effectiveness of its liquidity risk management program in the MDFP section of its annual report, we could have required a more specific discussion of the fund’s exposure to liquidity risk over the preceding year, how the fund managed that risk, and how the fund’s returns were affected over the preceding year. This alternative could have provided investors with a more in-depth understanding of both a fund’s liquidity risk and the fund’s approach to managing that risk, which might allow them to make more informed investment decisions compared to the proposed discussion of the fund’s liquidity risk management program. However, we preliminarily believe that this alternative would be more costly for funds to implement than the proposed narrative discussion on Form N–1A because it might require funds to perform a more detailed analysis of their liquidity risk over the past year. Third, we could have amended both Form N–PORT and rule 22e–4 to E:\FR\FM\19MRP1.SGM 19MRP1 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules prescribe an objective approach to classification in which the Commission would specify more precise criteria and guidance regarding how funds should classify different categories of investments. Such an approach could permit consistent comparisons of different funds’ aggregate liquidity profiles, allowing investors to make more informed investment decisions without requiring funds to provide additional contextual discussion of their liquidity risk management programs. However, as discussed in the Liquidity Adopting Release, the Commission may not be able to respond as quickly as market participants to dynamic market conditions that might necessitate changes to such criteria and guidance, and would be unable to account for determinants of investment liquidity that rule 22e–4 treats as fund-specific.86 Finally, we could have required that if funds chose to split the classification of any of their portfolio holdings across liquidity buckets when reporting them on the non-public portion of Form N– PORT, they do so for all of their portfolio holdings. This would have ensured that all of the portfolio holdings within a given fund could be interpreted more consistently for any monitoring purposes by the Commission. However, to the extent that being able to choose the classification approach appropriate to each portfolio holding more accurately reflects a manager’s judgment of that portfolio holding’s liquidity, any reduction in the consistency of portfolio classifications under the proposed amendment could be offset by a more accurate assessment of fund liquidity risk. sradovich on DSK3GMQ082PROD with PROPOSALS E. Request for Comment We request comment on our analysis of the likely economic effects of the proposed form amendments. We also request comment on the following: • To what extent will investors rely on the annual narrative discussion of a fund’s liquidity risk management program’s effectiveness in making investment decisions? • To what extent will investors rely on the quarterly disclosure of a fund or other registrant’s holdings of cash and cash equivalents in making investment decisions? • Will investors find the new proposed public disclosures more or less informative than an aggregate liquidity profile in making investment choices? Would investors be better off if both types of disclosures were required? 86 See Liquidity Adopting Release, supra footnote 2, at n.1143 and accompanying text. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 • How much would it cost a fund to discuss the extent and manner in which the fund took liquidity risk, the way that risk was managed, and the effects of these on the fund’s performance over the past year in the MDFP section of its annual report? Would it be more costly than the proposed narrative discussion of the fund’s liquidity risk management program in its annual report? If so, how much more costly would it be? Are there other benefits of this alternative to funds, investors, and other market participants that we should consider? • Do investors have a reason to access, reuse, or compare the narrative information? If so, would investors’ ease of access and usability of the information improve if the information were provided in a structured format (e.g., XML, XBRL, Inline XBRL)? If so, which structured format would be most useful and why? • To the extent that certain investors prefer to have information about a fund’s liquidity risk management delivered to them rather than having to seek out that information on EDGAR, would investors prefer that information on Form N–PORT pertaining to aggregate liquidity risk profiles be delivered to them as a separate disclosure in paper or electronic form? • Are there any other reasonable alternative with significant economic impacts that we should consider? IV. Paperwork Reduction Act A. Introduction The proposed amendments to Form N–PORT and Form N–1A contain ‘‘collections of information’’ within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).87 The title for the existing collections of information are: ‘‘Rule 30b1–9 and Form N–PORT’’ (OMB Control No. 3235– 0730); and ‘‘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). The Commission is submitting these 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 proposing to amend Form N–PORT and Form N– 1A. The proposed amendments are designed to improve the reporting and 87 44 PO 00000 U.S.C. 3501 through 3521. Frm 00015 Fmt 4702 Sfmt 4702 11917 disclosure of liquidity information by funds. We discuss below the collection of information burdens associated with these amendments. B. Form N–PORT As discussed above, on October 13, 2016, the Commission adopted new Form N–PORT, which requires all registered management investment companies, other than money market funds and small business investment companies, and unit investment trusts (‘‘UITs’’) that operate as ETFs to report information about their monthly portfolio holdings to the Commission in a structured data format.88 On the same day, the Commission adopted amendments to Form N–PORT requiring a fund to publicly report on Form N– PORT the aggregate percentage of its portfolio investments that falls into each of the four liquidity classification categories noted above.89 Today, the Commission is proposing amendments to rescind the requirement that funds publicly disclose their aggregate liquidity profile on a quarterly basis with a 60-day delay. The Commission also is proposing to require funds and other registrants to report to the Commission on a non-public basis the amount of cash and cash equivalents in their portfolio on Form N–PORT on a monthly basis and to publicly disclose this amount on a quarterly basis with a 60 day delay.90 Finally, the Commission is proposing to allow funds the option of splitting a fund’s holding into more than one liquidity classification category in certain specified circumstances.91 As of the end of 2016, there were 9,090 mutual funds managing assets of approximately $16 trillion, and there were 1,716 ETFs managing assets of approximately $2.5 trillion.92 Preparing a report on Form N– PORT is mandatory and is a collection of information under the PRA, and the information required by Form N–PORT will be data-tagged in XML format. 88 Reporting Modernization Adopting Release, supra footnote 2. 89 Item B.8.a of Form N–PORT. Form N–PORT also requires public reporting of the percentage of a fund’s highly liquid investments that it has segregated to cover, or pledged to satisfy margin requirements in connection with, derivatives transactions that are classified as moderately liquid, less liquid, or illiquid investments. Item B.8.b of Form N–PORT. 90 See supra footnote 15 (noting that the term ‘‘registrant’’ refers to entities required to file Form N–PORT, including all registered management investment companies, other than money market funds and small business investment companies, and all ETFs (regardless of whether they operate as UITs or management investment companies). 91 See Proposed Item C.7.b of Form N–PORT and Instructions. 92 See supra footnote 73 and accompanying text. E:\FR\FM\19MRP1.SGM 19MRP1 11918 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules sradovich on DSK3GMQ082PROD with PROPOSALS Except for certain reporting items specified in the form,93 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 Liquidity Adopting Release, we estimate that, for the 35% of funds that would file reports on Form N–PORT in house, the per fund average aggregate annual hour burden will be 144 hours per fund, and the average cost to license a third-party software solution will be $4,805 per fund per year.94 For the remaining 65% of funds that would retain the services of a third party to prepare and file reports on Form N– PORT on the fund’s behalf, we estimate that the average aggregate annual hour burden will be 125 hours per fund, and each fund will pay an average fee of $11,440 per fund per year for the services of third-party service provider. In sum, we estimate that filing liquidityrelated information on Form N–PORT will impose an average total annual hour burden of 144 hours on applicable funds, and all applicable funds will incur on average, in the aggregate, external annual costs of $103,787,680, or $9,118 per fund.95 Today, we are proposing amendments to Form N–PORT to rescind the requirement that a fund report the aggregate percentage of the fund’s portfolio representing each of the four liquidity categories. As discussed above, we are rescinding this requirement because we believe that Form N–PORT may not be the most accessible and useful way to convey to the public information about a fund’s liquidity risks and the fund’s approach to liquidity risk management. Because there would no longer be public disclosure of a fund’s aggregate liquidity classification information, we would also re-designate reporting about the amount of a fund’s highly liquid investments that are segregated or pledged to cover less liquid derivatives transactions to the non-public portion of the form. We believe that public 93 These items include information reported with respect to a fund’s Highly Liquid Investment Minimum (Item B.7), derivatives transactions (Item B.8), country of risk and economic exposure (Item C.5.b), delta (Items C.9.f.v, C.11.c.vii, or C.11.g.iv), liquidity classification for portfolio investments (Item C.7), or miscellaneous securities (Part D), or explanatory notes related to any of those topics (Part E) that is identifiable to any particular fund or adviser. See Proposed General Instruction F of Form N–PORT. 94 See Liquidity Adopting Release, supra footnote 2, at n.1237 and accompanying text. 95 See Liquidity Adopting Release, supra footnote 2, at n.1238 and accompanying text. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 disclosure of this information would be of limited to no utility to investors without broader context and, therefore, may be confusing. However, because we would otherwise be unable to determine the amount of a fund’s highly liquid investments that is actually unavailable to meet redemptions, we believe that funds should continue to report this item to us, on a non-public basis. Finally, we are proposing other amendments to Form N–PORT to add an additional disclosure requirement relating to the fund’s and other registrant’s holdings of cash and cash equivalents not reported in Parts C and D of the Form 96 and to allow funds the option of splitting a fund’s holding into more than one classification category in three specified circumstances.97 We believe these additional amendments enhance, the liquidity data reported to the Commission.98 In addition, for some funds, these proposed changes may also reduce cost burdens as they comply with the rule. Based on Commission staff experience, we believe that our proposal to rescind the requirement that funds publicly report the aggregate classification information on Form N– PORT will reduce the estimated burden hours and costs associated with Form N–PORT by approximately one hour. We believe, however, that this reduction in cost will be offset by the increase in cost associated with the other proposed amendments to Form N–PORT, which we also estimate to be one hour. Therefore, we believe that there will be no substantive modification to the existing collection of information for Form N–PORT. As a result, the Commission believes that the current PRA burden estimates for the existing collection of information requirements remain appropriate. C. Form N–1A Form N–1A is the registration form used by open-end investment companies. The respondents to the amendments to Form N–1A adopted today are open-end management investment companies registered or registering with the Commission. Compliance with the disclosure requirements of Form N–1A is mandatory, and the responses to the disclosure requirements are not confidential. In our most recent Paperwork Reduction Act submission 96 See proposed Item B.2.f. of Form N–PORT. proposed Instructions to Form N–PORT Item C.7. 98 See Liquidity Adopting Release, supra footnote 2, at n.293 and accompanying text (discussing the Commission’s need for the information reported on Form N–PORT). 97 See PO 00000 Frm 00016 Fmt 4702 Sfmt 4702 for Form N–1A, we estimated for Form N–1A a total hour burden of 1,602,751 hours, and the total annual external cost burden is $131,139,208.99 The Commission is proposing to amend Form N–1A to require funds to discuss certain aspects of their liquidity risk management program as part of their annual reports to shareholders. Specifically we are proposing to require a fund to discuss briefly the operation and effectiveness of the fund’s liquidity risk management program in the fund’s annual report to shareholders, as part of its MDFP.100 We believe that this proposed amendment will provide effective disclosure that better informs investors of how the fund’s liquidity risk and liquidity risk management practices affect their investment than the Form N–PORT public liquidity risk profile. Form N–1A generally imposes two types of reporting burdens on investment companies: (i) The burden of preparing and filing the initial registration statement; and (ii) the burden of preparing and filing posteffective amendments to a previously effective registration statement (including post-effective amendments filed pursuant to rule 485(a) or 485(b) under the Securities Act, as applicable). We estimate that each fund would incur a one-time burden of an additional five hours,101 to draft and finalize the required disclosure and amend its registration statement. In aggregate, we estimate that funds would incur a onetime burden of an additional 53,990 hours,102 to comply with the proposed Form N–1A disclosure requirements. Amortizing the one-time burden over a three-year period results in an average annual burden of an additional 17,996.7 hours.103 Based on Commission staff expertise and experience in reviewing registration 99 This estimate is based on the last time the rule’s information collection was submitted for PRA renewal in 2018. 100 Proposed Item 27(b)(7)(iii) of Form N–1A. 101 This estimate is based on the following calculation: 5 hours (3 hours for the compliance attorney to consult with the liquidity risk management program administrator and other investment personnel in order to produce an initial draft of the MDFP disclosure + 2 hours for senior officers to familiarize themselves with the new disclosure and certify the annual report). These calculations stem from the Commission’s understanding of the time it takes to draft and review MDFP disclosure and to update a fund’s registration statement. 102 This estimate is based on the following calculations: 5 hours × 10,798 open-end funds (excluding money market funds and ETFs organized as UITs, and including ETFs that are management investment companies) = 53,990 hours. 103 This estimate is based on the following calculation: 53,990 hours ÷ 3 = 17,996.7 average annual burden hours. E:\FR\FM\19MRP1.SGM 19MRP1 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules statements, we estimate that each fund would incur an ongoing burden of an additional 2.5 hours each year to review and update the required disclosure and amend its registration statement.104 In aggregate, we estimate that funds would incur an annual burden of an additional 26,995 hours,105 to comply with the proposed Form N–1A disclosure requirements. Amortizing these one-time and ongoing hour and cost burdens over three years results in an average annual increased burden of approximately 3.3 hours per fund.106 In total, we estimate that funds would incur an average annual increased burden of approximately 44,991.7 hours,107 to comply with the proposed Form N–1A disclosure requirements. sradovich on DSK3GMQ082PROD with PROPOSALS D. Request for Comments We request comment on whether our estimates for burden hours and any external costs as described above are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (i) Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (ii) evaluate the accuracy of the Commission’s estimate of the burden of the proposed collections of information; (iii) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (iv) determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology. The agency is submitting the proposed collections of information to OMB for approval. Persons wishing to submit comments on the collection of 104 This estimate is based on the following calculation: 2.5 hours (2 hours for the compliance attorney to consult with the liquidity risk management program administrator and other investment personnel in order to produce an initial draft of the MDFP disclosure + .5 hours for senior officers to certify the annual report). These calculations stem from the Commission staff’s understanding of the time it takes to review MDFP disclosure and to update a fund’s registration statement. 105 This estimate is based on the following calculation: 2.5 hours × 10,798 open-end funds (excluding money market funds and ETFs organized as UITs, and including ETFs that are management investment companies) = 26,995 hours. 106 This estimate is based on the following calculation: 5 burden hours (year 1) + 2.5 burden hours (year 2) + 2.5 burden hours (year 3) ÷ 3 = 3.3. 107 This estimate is based on the following calculation: 17,996.7 hours + 26,995 hours = 44,991.7 hours. VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 information requirements of the proposed amendments should direct them to the Office of Management and Budget, Attention Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should send a copy to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090, with reference to File No. S7–04–18. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this release; therefore, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days after publication of this release. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7–04–18, and be submitted to the Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549–2736. V. Initial Regulatory Flexibility Analysis The Commission has prepared the following Initial Regulatory Flexibility Analysis in accordance with section 3(a) of the Regulatory Flexibility Act (‘‘RFA’’).108 It relates to proposed amendments to Form N–PORT and proposed amendments to Form N–1A. A. Reasons for and Objectives of the Proposed Actions The Commission adopted rule 22e–4 and related rule and form amendments to enhance the regulatory framework for liquidity risk management of funds.109 In connection with rule 22e–4, a fund is required to publicly report on Form N– PORT the aggregate percentage of its portfolio investments that falls into each of the liquidity categories enumerated in rule 22e–4. This requirement was designed to enhance public disclosure regarding fund liquidity and redemption practices. However, since we adopted these requirements, we have received letters raising concerns that the public disclosure of a fund’s aggregate liquidity classification information on Form N– PORT may not achieve our intended purpose and may confuse and mislead investors. As we discuss further in section II.A above, these letters have led us to believe that the approach of disclosing liquidity information to the public through Form N–PORT may not be the most accessible and useful way to convey fund liquidity information to 108 5 U.S.C. 603(a). supra section I. 109 See PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 11919 the public, given that only the Commission, and not the public, would have access to the more granular information and can request information regarding the fund’s methodologies and assumptions that would provide needed context to understand this reporting.110 B. Legal Basis The Commission is proposing amendments to Form N–1A and Form N–PORT under the authority set forth in the Securities Act, particularly section 19 thereof [15 U.S.C. 77a et seq.], the Exchange Act, particularly sections 10, 13, 15, and 23, and 35A thereof [15 U.S.C. 78a et seq.], and the Investment Company Act, particularly, sections 8, 30, and 38 thereof [15 U.S.C. 80a et seq.]. C. Small Entities Subject to the Proposed Liquidity Regulations 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.111 Commission staff estimates that, as of June 31, 2017, there were 64 open-end investment companies (within 60 fund complexes) that would be considered small entities. This number includes open-end ETFs.112 D. Projected Reporting, Recordkeeping, and Other Compliance Requirements We are proposing amendments to Form N–1A and Form N–PORT to enhance fund disclosure regarding a fund’s liquidity risk management practices. Specifically, the proposed amendments to Form N–PORT 113 would rescind the requirement that funds publicly disclose aggregate liquidity classification information about their portfolios and proposed amendments to Form N–1A would require funds to discuss certain aspects of their liquidity risk management program as part of their annual reports to shareholders.114 In addition, we are proposing amendments to Form N– PORT to allow funds to report multiple classification categories for a single 110 See supra section II.A.1 at text following footnote 18. 111 See rule 0–10(a) under the Investment Company Act. 112 This estimate is derived from an analysis of data obtained from Morningstar Direct as well as data reported on Form N–SAR filed with the Commission for the period ending June 30, 2017. 113 See proposed amendments to Item B.8 of Form N–PORT. 114 See proposed amendments to Item 27(b)(7)(iii) of Form N–1A. E:\FR\FM\19MRP1.SGM 19MRP1 11920 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules sradovich on DSK3GMQ082PROD with PROPOSALS position in certain cases 115 and require funds and other registrants to report their holdings of cash and cash equivalents.116 All funds would be subject to the proposed disclosure and reporting requirements, including funds that are small entities. We estimate that 64 funds (comprising 60 fund complexes) are small entities that would be required to comply with the proposed disclosure and reporting requirements. As discussed above, we do not believe that our proposed amendments will change Form N–PORT’s estimated burden hours and costs.117 We estimate that each fund would incur a one-time burden of an additional five hours,118 each year to draft and finalize the required Form N– 1A disclosure and amend its registration statement. For purposes of this analysis, Commission staff estimates, based on outreach conducted with a variety of funds, that small fund groups will incur approximately the same initial and ongoing costs as large fund groups. Therefore, in the aggregate, we estimate that funds that are small entities would incur a one-time burden of an additional 320 hours,119 to comply with the proposed Form N–1A disclosure requirements. Amortizing the one-time burden over a three-year period results in an average annual burden of an additional 106.7 hours.120 We estimate that each fund would incur an ongoing burden of an additional 2.5 hours each year to review and update the required Form N–1A disclosure and amend its registration statement.121 Therefore, we estimate that funds that are small 115 See proposed Item C.7.b of Form N–PORT and Instructions. 116 See proposed Item B.2.f. of Form N–PORT. 117 See supra text accompanying footnote 79. 118 See supra footnote 101 (noting that this estimate is based on the Commission staff’s understanding of the time it takes to draft and review MDFP disclosure and to update a fund’s registration statement, including the time it takes for the compliance attorney to consult with the liquidity risk management program administrator and other investment personnel in order to produce an initial draft of the MDFP disclosure as well as the time it takes for senior officers to familiarize themselves with the new disclosure and certify the annual report). 119 This estimate is based on the following calculations: 5 hours × 64 = 320 hours. 120 This estimate is based on the following calculation: 320 hours ÷ 3 = 106.7 average annual burden hours. 121 See supra footnote 104 and accompanying text (noting that this estimate is based on the Commission staff’s understanding of the time it takes to review MDFP disclosure and to update a fund’s registration statement, including the time it takes for the compliance attorney to consult with the liquidity risk management program administrator and other investment personnel in order to produce an initial draft of the MDFP disclosure as well as the time it takes for senior officers to certify the annual report). VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 entities will incur an ongoing burden of an additional 160 hours to comply with the proposed Form N–1A disclosure requirements.122 Amortizing these one-time and ongoing hour and cost burdens over three years results in an average annual increased burden of approximately 4.2 hours per fund.123 In total, we estimate that funds that are small entities would incur an average annual increased burden of approximately 266.7 hours, to comply with the proposed Form N–1A disclosure requirements. E. Duplicative, Overlapping, or Conflicting Federal Rules The Commission has not identified any federal rules that duplicate, overlap, or conflict with the proposed liquidity regulations. F. Significant Alternatives The RFA directs the Commission to consider significant alternatives that would accomplish our stated objectives, while minimizing any significant economic impact on small entities. We considered the following alternatives for small entities in relation to the proposed liquidity disclosure requirements: (i) Exempting funds that are small entities from the proposed disclosure requirements on Form N–1A, or establishing different disclosure or reporting requirements, or different disclosure frequency, to account for resources available to small entities; (ii) clarifying, consolidating, or simplifying the compliance requirements under the amendments for small entities; (iii) using performance rather than design standards; and (iv) exempting funds that are small entities from other proposed amendments to Form N–PORT. We do not believe that exempting any subset of funds, including funds that are small entities, from the proposed amendments would permit us to achieve our stated objectives. Nor do we believe that clarifying, consolidating or simplifying the proposed amendments for small entities would satisfy those objectives. In particular, we do not believe that the interest of investors would be served by these alternatives. We believe that all fund investors, including investors in funds that are small entities, would benefit from accessible and useful disclosure about liquidity risk, with appropriate context, so that investors may understand its nature and relevance to their investments.124 We also believe that all fund investors would benefit from the other proposed amendments to Form N– PORT that would preserve, and in some cases enhance, the liquidity data reported to the Commission by allowing funds to more accurately reflect their liquidity.125 We note that the current disclosure requirements for reports on Forms N–1A and N–PORT do not distinguish between small entities and other funds. Finally, we determined to use performance rather than design standards for all funds, regardless of size, because we believe that providing funds with the flexibility to determine how to design their MDFP disclosures allows them the opportunity to tailor their disclosure to their specific risk profile. By contrast, we determined to use design standards for our proposed amendments to Form N–PORT because we believe information reported to the Commission on the Form must be uniform to the extent practicable in order for the Commission to carry out its oversight and monitoring responsibilities. G. General Request for Comment The Commission requests comments regarding this analysis. We request comment on the number of small entities that would be subject to the proposed form amendments and whether the proposed form amendments would have any effects on small entities that have not been discussed. We request that commenters describe the nature of any effects on small entities subject to the proposed form amendments and provide empirical data to support the nature and extent of such effects. We also request comment on the estimated compliance burdens of the proposed form amendments and how they would affect small entities. VI. Consideration of Impact on the Economy For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or ‘‘SBREFA,’’ 126 we must advise OMB whether a proposed regulation constitutes a ‘‘major’’ rule. Under SBREFA, a rule is considered ‘‘major’’ where, if adopted, it results in or is likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers or individual industries; or 124 See 122 This estimate is based on the following calculations: 2.5 hours × 64 = 160 hours. 123 This estimate is based on the following calculations: (160 hours + 106.7 hours) ÷ 64 funds = 4.2 hours. PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 supra text accompanying footnote 96. supra section IV.B at text accompanying footnote 98. 126 Public Law 104–121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601). 125 See E:\FR\FM\19MRP1.SGM 19MRP1 Federal Register / Vol. 83, No. 53 / Monday, March 19, 2018 / Proposed Rules (3) significant adverse effects on competition, investment or innovation. We request comment on the potential impact of the proposed amendments on the potential effect on the economy on an annual basis; any potential increase in costs or prices for consumers or individual industries; and any potential effect on competition, investment, or innovation. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. VII. Statutory Authority The Commission is proposing amendments to Form N–1A and Form N–PORT under the authority set forth in the Securities Act, particularly section 19 thereof [15 U.S.C. 77a et seq.], the Exchange Act, particularly sections 10, 13, 15, and 23, and 35A thereof [15 U.S.C. 78a et seq.], and the Investment Company Act, particularly, sections 8, 30 and 38 thereof [15 U.S.C. 80a et seq.]. List of Subjects in 17 CFR Part 274 Investment companies, Reporting and recordkeeping requirements, Securities. Text of Rules and Forms For the reasons set out in the preamble, title 17, chapter II of the Code of Federal Regulations is amended as follows: PART 274—FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940 1. The authority citation for part 274 continues to read, in part, 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 Pub. L. 111– 203, sec 939A, 124 Stat. 1376 (2010), unless otherwise noted. * * * * * 2. Amend Form N–1A (referenced in 274.11A) by: ■ a. In Item 27 adding new paragraph (b)(7)(iii). The addition reads as follows: Form N–1A sradovich on DSK3GMQ082PROD with PROPOSALS * * * Item 27. Financial Statements (a) * * * (b) * * * (7) Management’s Discussion of Fund Performance. * * * * * (iii) Briefly discuss the operation and effectiveness of the Fund’s liquidity risk VerDate Sep<11>2014 16:06 Mar 16, 2018 Jkt 244001 Form N–Port—Monthly Portfolio Investments Report * * * * * F. Public Availability * * * * * 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 respect to a Fund’s Highly Liquid Investment Minimum (Item B.7), Derivatives Transactions (Item B.8), country of risk and economic exposure (Item C.5.b), delta (Items C.9.f.v, C.11.c.vii, or C.11.g.iv), liquidity classification for portfolio investments (Item C.7), or miscellaneous securities (Part D), 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. * * * * * * Note: The text of Form N–1A does not, and this amendment will not, appear in the Code of Federal Regulations. * Note: The text of Form N–PORT does not, and this amendment will not, appear in the Code of Federal Regulations. Part B: Information About the Fund ■ * management program during the most recently completed fiscal year. * * * * * ■ 3. Amend Form N–PORT (referenced in § 274.150) by: ■ a. In the General Instructions, revising the second paragraph of F. Public Availability; ■ b. In Part B, amending Item B.2 by adding Item B.2.f; ■ c. In Part B, revising Item B.8; ■ d. In Part C, revising Item C.7; and ■ e. Revising Part F. The revisions read as follows: * * * * Item B.2.f Cash and cash equivalents not reported in Parts C and D. * * * * * Item B.8 Derivatives Transactions. For portfolio investments of open-end management investment companies, provide the percentage of the Fund’s Highly Liquid Investments that it has segregated to cover or pledged to satisfy margin requirements in connection with derivatives transactions that are classified among the following categories as specified in rule 22e–4 [17 CFR 270.22e–4]: 1. Moderately Liquid Investments 2. Less Liquid Investments 3. Illiquid Investments * * * * * PO 00000 Frm 00019 Fmt 4702 Sfmt 9990 11921 Part C: Schedule of Portfolio Investments * * * * * Item C.7.a Liquidity classification information. For portfolio investments of open-end management investment companies, provide the liquidity classification(s) for each portfolio investment among the following categories as specified in rule 22e–4 [17 CFR 270.22e–4]. For portfolio investments with multiple liquidity classifications, indicate the percentage amount attributable to each classification. i. Highly Liquid Investments ii. Moderately Liquid Investments iii. Less Liquid Investments iv. Illiquid Investments Item C.7.b If attributing multiple classification categories to the holding, indicate which of the three circumstances listed in the Instructions to Item C.7 is applicable. Instructions to Item C. 7 Funds may choose to indicate the percentage amount of a holding attributable to multiple classification categories only in the following circumstances: (1) If a fund has multiple sub-advisers with differing liquidity views; (2) if portions of the position have differing liquidity features that justify treating the portions separately; or (3) if the fund chooses to classify the position through evaluation of how long it would take to liquidate the entire position (rather than basing it on the sizes it would reasonably anticipated trading). In (1) and (2), a fund would classify using the reasonably anticipated trade size for each portion of the position. * * * * * Part F: Exhibits For reports filed for the end of the first and third quarters of the Fund’s fiscal year, attach no later than 60 days after the end of the reporting period the Fund’s complete portfolio holdings as of the close of the period covered by the report. These portfolio holdings must be presented in accordance with the schedules set forth in §§ 210.12–12— 210.12–14 of Regulation S–X [17 CFR 210.12–12—210.12–14]. * * * * * By the Commission. Dated: March 14, 2018 Brent J. Fields, Secretary. [FR Doc. 2018–05511 Filed 3–16–18; 8:45 a.m.] BILLING CODE P E:\FR\FM\19MRP1.SGM 19MRP1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 53 (Monday, March 19, 2018)]
[Proposed Rules]
[Pages 11905-11921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05511]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 274

[Release No. IC-33046; File No. S7-04-18]
RIN 3235-AM30


Investment Company Liquidity Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing amendments 
to its forms designed to improve the reporting and disclosure of 
liquidity information by registered open-end investment companies. The 
Commission is proposing a new requirement that

[[Page 11906]]

funds disclose information about the operation and effectiveness of 
their liquidity risk management program in their annual reports to 
shareholders. The Commission in turn is proposing to rescind the 
current requirement in Form N-PORT under the Investment Company Act of 
1940 that funds publicly disclose aggregate liquidity classification 
information about their portfolios, in light of concerns about the 
usefulness of that information for investors. In addition, the 
Commission is proposing amendments to Form N-PORT that would allow 
funds classifying the liquidity of their investments pursuant to their 
liquidity risk management programs required by rule 22e-4 under the 
Investment Company Act of 1940 to report on Form N-PORT multiple 
liquidity classification categories for a single position under certain 
specified circumstances. Finally, the Commission is proposing to add to 
Form N-PORT a new requirement that funds and other registrants report 
their holdings of cash and cash equivalents.

DATES: Comments should be received on or before May 18, 2018.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/proposed.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-04-18 on the subject line; or

Paper Comments

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

All submissions should refer to File Number S7-04-18. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
internet website (https://www.sec.gov/rules/proposed.shtml). Comments 
are also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549, on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
All comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman, Senior Counsel, or 
Thoreau Bartmann, Senior Special Counsel, at (202) 551-6792, 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 proposing for public comment amendments to Form N-
PORT [referenced in 17 CFR 274.150] under the Investment Company Act of 
1940 [15 U.S.C. 80a-1 et seq.] (``Investment Company Act'' or ``Act'') 
and amendments to Form N-1A [referenced in 17 CFR 274.11A] under the 
Investment Company Act and the Securities Act of 1933 (``Securities 
Act'') [15 U.S.C. 77a et seq.].

Contents

I. Background
II. Discussion
    A. Proposed Amendments to Liquidity Public Reporting and 
Disclosure Requirements
    B. Proposed Amendments to Liquidity Reporting Requirements
    C. Compliance Dates
III. Economic Analysis
    A. Introduction
    B. Economic Baseline
    C. Economic Impacts
    D. Reasonable Alternatives
    E. Request for Comment
IV. Paperwork Reduction Act
    A. Introduction
    B. Form N-PORT
    C. Form N-1A
    D. Request for Comments
V. Initial Regulatory Flexibility Analysis
    A. Reasons for and Objectives of the Proposed Actions
    B. Legal Basis
    C. Small Entities Subject to the Proposed Liquidity Regulations
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rule
    F. Significant Alternatives
    G. General Request for Comment
VI. Consideration of Impact on the Economy
VII. Statutory Authority
Text of Rules and Forms

I. Background

    On October 13, 2016, the Commission adopted 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 
(``funds''),\1\ including information about the liquidity of funds' 
portfolios.\2\ In particular, the Commission adopted new Form N-PORT, 
which requires mutual funds and exchange traded funds (``ETFs'') to 
electronically file with the Commission monthly portfolio investment 
information on Form N-PORT, a structured data reporting form.\3\ On the 
same day, the Commission also adopted rule 22e-4, a new form, and 
related rule and form amendments to enhance the regulatory framework 
for liquidity risk management of funds.\4\ Among other things, rule 
22e-4 requires a fund to classify each portfolio investment into one of 
four defined liquidity categories, sometimes referred to as 
``buckets.'' \5\
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    \1\ The term ``funds'' used in this release includes open-end 
management companies, including exchange-traded funds (``ETFs'') and 
excludes money market funds.
    \2\ Investment Company Reporting Modernization, Investment 
Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 
2016)] (``Reporting Modernization Adopting Release''). See also 
Investment Company Liquidity Risk Management Programs, Investment 
Company Act Release No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18, 
2016)] (``Liquidity Adopting Release'').
    \3\ Registered money market funds and small business investment 
companies are exempt from Form N-PORT reporting requirements.
    \4\ Specifically, we adopted rules 22e-4 and 30b1-10, new Form 
N-LIQUID, as well as amendments to Forms N-1A, N-PORT and N-CEN. See 
Liquidity Adopting Release, supra footnote 2.
    \5\ Rule 22e-4 requires each fund to adopt and implement a 
written liquidity risk management program reasonably designed to 
assess and manage the fund's liquidity risk. A fund's liquidity risk 
management program must incorporate certain specified elements, 
including, among others, the requirement that funds classify the 
liquidity of each of the fund's portfolio investments into one of 
four defined liquidity categories: Highly liquid investments, 
moderately liquid investments, less liquid investments, and illiquid 
investments (``classification''). This classification is based on 
the number of days in which a fund reasonably expects an investment 
would be convertible to cash (or, in the case of the less-liquid and 
illiquid categories, sold or disposed of) without the conversion 
significantly changing the market value of the investment. Rule 22e-
4 also requires funds to establish a highly liquid investment 
minimum, and includes requirements related to policies and 
procedures on redemptions in kind and evaluation of the liquidity of 
new unit investment trusts. Rule 22e-4 also includes other required 
elements, such as limits on purchases of illiquid investments, 
reporting to the board, and recordkeeping.
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    In connection with the liquidity classification requirement of rule 
22e-4, a fund is also required to report confidentially to the 
Commission the liquidity classification assigned to each of the fund's 
portfolio investments on

[[Page 11907]]

Form N-PORT.\6\ Each portfolio holding must be assigned to a single 
classification bucket. A fund must also publicly report on Form N-PORT 
the aggregate percentage of its portfolio investments that falls into 
each of the four liquidity classification categories noted above.\7\ 
This aggregate information would be disclosed to the public only for 
the third month of each fiscal quarter with a 60-day delay. Form N-PORT 
does not currently require funds to report the cash they hold.\8\
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    \6\ Item C.7 of Form N-PORT.
    \7\ Item B.8.a of Form N-PORT. Form N-PORT also requires public 
reporting of the percentage of a fund's highly liquid investments 
that it has segregated to cover, or pledged to satisfy margin 
requirements in connection with, derivatives transactions that are 
classified as moderately liquid, less liquid, or illiquid 
investments. Item B.8.b of Form N-PORT.
    \8\ Although the requirements of rule 22e-4 and Form N-PORT 
discussed above are in effect, the compliance date has not yet 
occurred. Accordingly, no funds are yet reporting this liquidity-
related information on Form N-PORT. In another release issued 
earlier, among other things, we extended the current compliance date 
for certain classification-related provisions of rule 22e-4 and 
their associated Form N-PORT reporting requirements by six months. 
See Investment Company Liquidity Risk Management Programs; 
Commission Guidance for In-Kind ETFs, Investment Company Act Release 
No IC-33010; (Feb. 22, 2018) [83 FR 8342 Feb. 27, 2018)] 
(``Liquidity Extension Release'').
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    We designed rule 22e-4 and the related rules and forms to promote 
effective liquidity risk management throughout the fund industry and to 
enhance disclosure regarding fund liquidity and redemption 
practices.\9\ As discussed in detail below, since we adopted these 
requirements, Commission staff has engaged in extensive outreach with 
funds and other interested parties as they have sought to design the 
new systems and processes necessary to implement the new rules. As a 
complement to that engagement process, we have received letters \10\ 
raising concerns that the public disclosure of a fund's aggregate 
liquidity classification information on Form N-PORT may not achieve our 
intended purpose and may confuse and mislead investors.\11\ These 
letters detail the methodologies that fund groups are designing and 
implementing to conduct the liquidity classification, the disparate 
assumptions that underlie them, and the variability in classification 
that can occur as a result.\12\ As we discuss further in section II.A 
below, these letters have caused us to question whether the current 
approach of disclosing aggregate liquidity fund profiles through Form 
N-PORT is the most accessible or useful way to facilitate public 
understanding of fund liquidity.\13\ Specifically, when the new rules 
take effect, the Commission will receive more granular position-level 
liquidity classification information and can request the fund's 
methodologies and assumptions underlying their classification, while 
investors would have access only to the aggregate information on Form 
N-PORT without the necessary context. However, the Commission continues 
to believe, as it articulated when it adopted the final rule, that it 
is important for investors to receive information about a fund's 
liquidity, which can help investors better understand the risks they 
may be assuming through an investment in the fund.
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    \9\ See Liquidity Adopting Release, supra footnote 2, at n.112 
and accompanying text.
    \10\ These letters (File No. S7-04-18) are available at https://www.sec.gov/comments/s7-04-18/s70418.htm.
    \11\ See, e.g., Letter from SIFMA AMG to Chairman Jay Clayton, 
Commissioner Stein, and Commissioner Piwowar (Sept. 12, 2017) 
(``SIFMA AMG Letter''); Letter from Nuveen, LLC on Investment 
Company Liquidity Risk Management Programs (Nov. 20, 2017) (``Nuveen 
letter'') (urging the SEC not to publicly disclose the liquidity 
classification information submitted via new Form N-PORT); Letter 
from TCW to Chairman Jay Clayton, Commissioner Stein, and 
Commissioner Piwowar (Sept. 15, 2017) (``TCW Letter'').
    \12\ See, e.g., Letter from the Investment Company Institute to 
The Honorable Jay Clayton (July 20, 2017) (``ICI Letter I''); 
Supplemental Comments on Investment Company Liquidity Risk 
Management Programs from the Investment Company Institute (Nov. 3, 
2017) (``ICI Letter II''); Letter from Invesco Advisers, Inc. on 
Investment Company Liquidity Risk Management Programs (Nov. 8, 
2017); Letter from Vanguard on Investment Company Liquidity Risk 
Management Programs (Nov. 8, 2017); Letter from John Hancock on 
Investment Company Liquidity Risk Management Programs (Nov. 10, 
2017): Letter from T. Rowe Price Associates, Inc. on Investment 
Company Liquidity Risk Management Programs (Nov. 10, 2017); Letter 
from Federated Investors, Inc. on Liquidity Risk Management Rule 
22e-4 (Feb. 6, 2018) (``Federated Letter'').
    \13\ See infra text following footnote 18. Funds may also choose 
to provide additional context non-publicly to the Commission in the 
explanatory notes section (Part E of Form N-PORT).
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    In light of the comments we have received, we preliminarily believe 
that providing different information to investors via a different form 
would more effectively achieve the Commission's policy goal of 
promoting investor understanding of the liquidity risks of the funds in 
which they have invested, while minimizing risks of investor confusion. 
Accordingly, we are proposing to replace the requirement for a fund to 
publicly report to the Commission on Form N-PORT the aggregate 
liquidity portfolio classification information on a quarterly basis 
with new disclosure in the fund's annual shareholder report that 
provides a narrative discussion of the operation and effectiveness of 
the fund's liquidity risk management program over the reporting 
period.\14\
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    \14\ As discussed below, we also are proposing a related change 
to make non-public (but not eliminate) the disclosure required under 
Item B.8 of Form N-PORT about the percentage of a fund's highly 
liquid investments segregated to cover or pledged to satisfy margin 
requirements in connection with certain derivatives transactions, 
given that this information is only relevant when viewed together 
with full liquidity classification information.
---------------------------------------------------------------------------

    Second, we are proposing additional amendments to Form N-PORT that 
would allow a fund to report a single portfolio holding in multiple 
classification buckets under certain defined circumstances. Currently, 
a fund is required to choose only one classification bucket, even in 
circumstances where splitting that holding up into multiple 
classification buckets may better reflect the actual liquidity 
characteristics of that position. We believe that permitting funds to 
split a single portfolio holding into multiple buckets under 
circumstances where we believe that such reporting would be more or 
equally accurate, and in some cases less burdensome, would provide us 
with equal or better information at lower cost to funds (and thus, to 
fund shareholders).
    Third, we are proposing to require funds and other registrants \15\ 
to report holdings of cash and cash equivalents on Form N-PORT so that 
we may monitor trends in the use of cash and cash equivalents and, in 
the case of funds, more accurately assess the composition of a fund's 
highly liquid investment minimum (``HLIM'').
---------------------------------------------------------------------------

    \15\ The term ``registrants'' refers to entities required to 
file Form N-PORT, including all registered management investment 
companies, other than money market funds and small business 
investment companies, and all ETFs (regardless of whether they 
operate as UITs or management investment companies). See rule 30b1-
9.
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II. Discussion

A. Proposed Amendments to Liquidity Public Reporting and Disclosure 
Requirements

    Today we are proposing to replace the requirement in Form N-PORT 
that a fund publicly disclose on an aggregate basis the percentage of 
its investments that it has allocated to each liquidity classification 
category with a new narrative discussion in the fund's annual report 
regarding its liquidity risk management program. The narrative 
discussion would include disclosure about the operation and 
effectiveness of the fund's implementation of its required liquidity 
risk management program during the most recently

[[Page 11908]]

completed fiscal year.\16\ A fund already is required to disclose a 
summary of the principal risks of investing in the fund, including 
liquidity risk if applicable, in its prospectus.\17\ Therefore, in 
combination, these disclosures will provide new and existing investors 
with information about the expected liquidity risk of the fund and 
ongoing disclosure to existing shareholders (and to new investors to 
the extent that they have access to annual reports) regarding how the 
fund continues to manage that risk, along with other factors affecting 
the fund's performance. This revised approach is designed to provide 
accessible and useful disclosure about liquidity risk management to 
investors, with appropriate context, so that investors may understand 
its nature and relevance to their investments.
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    \16\ See proposed amendments to Item B.8 of Form N-PORT and 
proposed Item 27(b)(7)(iii) of Form N-1A.
    \17\ See Item 4(b) of Form N-1A. In addition, Item 9(c) of Form 
N-1A requires a fund to disclose all principal risks of investing in 
the fund, including the risks to which the fund's particular 
portfolio as a whole is expected to be subject and the circumstances 
reasonably likely to affect adversely the fund's net asset value, 
yield, or total return.
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1. Concerns With Public Aggregate Liquidity Profile
    As noted above, since the Commission adopted rule 22e-4 and the 
related rule and form amendments, Commission staff has engaged 
extensively with interested parties regarding progress toward 
implementation. As a complement to that engagement process, we have 
received letters from industry participants discussing the complexities 
of the classification process.\18\ These commenters raised three 
general types of concerns that informed this proposal's revised 
approach to public fund liquidity-related disclosure. First, commenters 
described how variations in methodologies and assumptions used to 
conduct liquidity classification can significantly affect the 
classification information reported on Form N-PORT in ways that 
investors may not understand (``subjectivity''). Second, the commenters 
suggested that Form N-PORT may not be the most accessible and useful 
way to communicate information about liquidity risk and may not provide 
the necessary context for investors to understand how the fund's 
classification results relate to its liquidity risk and risk management 
(``lack of context''). Third, the commenters argued that because this 
reporting item on Form N-PORT singles out liquidity risk, and does not 
place it in a broader context of the risks and factors affecting a 
fund's risk, returns, and performance, it may inappropriately focus 
investors on one investing risk over others (``liquidity risk in 
isolation''). Below we discuss these considerations--and why we 
preliminarily believe the proposed revisions to disclosure requirements 
on Form N-1A address these concerns while satisfying our public 
disclosure goals, including the need to provide shareholders and other 
users with improved information about funds' liquidity risk 
profile.\19\
---------------------------------------------------------------------------

    \18\ See supra footnotes 10-12.
    \19\ See Liquidity Adopting Release, supra footnote 2, at text 
following n.626.
---------------------------------------------------------------------------

Subjectivity
    Commenters emphasized that classification is a subjective 
process.\20\ It is based on underlying data, assumptions, measurement 
periods, and complex statistical algorithms that can vary 
significantly. Accordingly, different managers classifying the same 
investment may vary in the way they weigh these factors and come to 
different classification conclusions, which would be consistent with 
our intent in adopting the rule.\21\
---------------------------------------------------------------------------

    \20\ See, e.g., TCW Letter (stating that many different managers 
weighing different factors and using disparate data can result in 
different liquidity classification results across managers for the 
same security). See also SIFMA AMG Letter.
    \21\ See Liquidity Adopting Release, supra footnote 2, at n. 596 
and accompanying text. (``We recognize that liquidity 
classifications, similar to valuation- and pricing-related matters, 
inherently involve judgment and estimations by funds. We also 
understand that the liquidity classification of an asset class or 
investments may vary across funds depending on the facts and 
circumstances relating to the funds and their trading practices.'').
---------------------------------------------------------------------------

    Commenters stated, however, that presenting liquidity 
classification information in a standard format--as the final rule 
requires--inaccurately implies to investors that the classifications 
for all funds were formed through a uniform process and that the 
resulting classifications would be comparable across funds.\22\ 
Commenters suggested that, because of the lack of such uniformity of 
classification, using a fund's liquidity profile to make comparisons 
between funds may mislead investors and could lead to investors basing 
investment decisions on inappropriate grounds.\23\
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    \22\ See, e.g., SIFMA AMG Letter. We note that in the Liquidity 
Adopting Release, we considered certain proposed uniform approaches 
to liquidity classification that would have less subjective inputs, 
and discussed why we believed that the approach we adopted most 
effectively achieves our goals. This is in part because such 
approaches that do not include subjective inputs may not have 
resulted in liquidity classification data that is informed by fund 
advisers' actual trading experience. See, e.g., Liquidity Adopting 
Release, supra footnote 2, at section III.C.
    \23\ See SIFMA AMG Letter and Nuveen Letter. See also Kristin 
Grind, Tom McGinty, and Sarah Krouse, The Morningstar Mirage, The 
Wall Street Journal, (Oct. 25, 2017), available at https://www.wsj.com/articles/the-morningstar-mirage-1508946687 (discussing 
issues with investors basing investing decisions on evaluations of 
funds without necessarily understanding the bases of those 
evaluations or their limitations).
---------------------------------------------------------------------------

    Commenters suggested that this subjectivity and seeming appearance 
of uniformity in content may have a variety of other pernicious 
effects. For example, commenters suggested investors may, in choosing 
between two funds that are have similar investment objectives, pick the 
fund that appears to have more highly liquid investments (and 
potentially, thereby, a lower liquidity risk) without understanding the 
subjectivity that underlies the classification process.\24\ As a 
result, the public disclosure of liquidity profiles may provide funds 
an incentive to classify their securities as more liquid in order to 
make their funds appear more attractive to investors, further 
increasing the risk of investor confusion.\25\ Such incentive to 
classify assets as more liquid, if widespread, could undermine the 
Commission's objectives for the fund's proper management of its 
liquidity risks through its liquidity risk management program and its 
monitoring efforts. One commenter also suggested that the size of the 
fund may have disproportionate effects on its liquidity classification 
results, and thus the fund's overall aggregate liquidity profile.\26\ 
As a result, they argued that investors may be confused by, or unaware 
of the causes of, the differences in results between large and small 
portfolios' liquidity profiles, and may inappropriately believe that 
smaller portfolios have less liquidity risk.\27\
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    \24\ See TCW Letter (``Investors could flock to more apparently 
liquid funds, only to discover too late that classifications did not 
actually provide comparable liquidity data''); see also Nuveen 
Letter (``[T]he classification information that will be reported via 
Form N-PORT may lead the public to draw inappropriate conclusions 
about a fund's liquidity. . . . [I]nvestors, intermediaries, and 
financial advisers may be misled as to the value of such 
information, and use it as the basis for investment decisions 
despite this lack of understanding.'').
    \25\ See SIFMA AMG Letter. We acknowledged in the Liquidity 
Adopting Release that the classification status of a security 
``inherently involve[s] judgment and estimations by funds'' and that 
``the liquidity classification of an asset class or investments may 
vary across funds depending on the facts and circumstances relating 
to the funds and their trading practices.'' See Liquidity Adopting 
Release, supra footnote 2, at text accompanying n.596.
    \26\ See ICI Letter II, at Appendix C.
    \27\ ICI Letter II (providing a liquidity analysis of a variety 
of investments, which found that smaller portfolios nearly always 
appeared to have a highly liquid aggregate profile, while larger 
portfolios holding the same positions appeared to have a less liquid 
profile).

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[[Page 11909]]

Lack of Context
    Commenters suggested that the format of the Form N-PORT disclosure 
does not give funds the opportunity to explain to the public the 
underlying assumptions for their classification, nor can they tailor 
the disclosure to their specific risks. One commenter asserted that, 
because the aggregate liquidity profile is to be reported on Form N-
PORT, the information will only be understandable by sophisticated 
users or intermediaries.\28\ They argued that for investors to have a 
sufficient understanding of the role classification plays in a fund's 
liquidity risks, investors need contextual information regarding the 
underlying subjective assumptions and methodologies used by the fund in 
its classification process.\29\ They noted that Form N-PORT does not 
provide context or additional information that would help investors 
understand the assumptions and methodologies used for liquidity-related 
information.\30\
---------------------------------------------------------------------------

    \28\ SIFMA AMG Letter (asserting that Form N-PORT aggregate 
classification disclosure puts less sophisticated investors at a 
disadvantage because ``[u]nlike securities traded in the secondary 
markets, in which all market participants can be expected to benefit 
from publicly available information through the efficient market 
pricing mechanism, mutual fund shares are purchased and sold 
directly with the fund at net asset value per share. Thus, there is 
no automatic market mechanism for sophisticated investors' superior 
understanding of the liquidity information and its limitations to be 
transmitted to less sophisticated investors.'').
    \29\ See generally SIFMA AMG Letter (arguing that the 
classification process ``relies heavily on judgments from portfolio 
managers and others, based on predictions and extrapolation of data, 
which are then combined with other judgments from other sources 
based on similar assumptions .* .* *. For the investing public, 
which will see only quarterly percentages 60-151 days after the fact 
[on Form N-PORT], without context or explanation, this information 
will be at best meaningless and more likely misleading.''); see also 
Nuveen Letter (similarly arguing that classification information 
that will be reported via Form N-PORT may lead the public to draw 
inappropriate conclusions about a fund's liquidity and that this 
information ``will also be inherently subjective, as the 
classification process relies heavily on judgments from portfolio 
managers and other sources based on a series of assumptions that may 
vary among firms and even within firms.'').
    \30\ SIFMA AMG Letter. This commenter also noted that because 
the aggregate liquidity profile would be a backward looking review 
of a fund's liquidity presented only quarterly, with a 60 day delay, 
it may be inappropriate and misleading if investors were to base 
investing decisions on this information without being provided 
context about its potential staleness.
---------------------------------------------------------------------------

Liquidity Risk in Isolation
    One commenter also suggested that the information publicly 
disclosed on Form N-PORT singles out liquidity risk, and that focusing 
on liquidity risk in isolation, presented through an unexplained 
aggregate liquidity profile of a fund, may encourage investors to focus 
overly on liquidity risk, compared to other risks that may be far more 
important to their long-term investment goals.\31\ An investor choosing 
between two funds with comparable investment objectives and performance 
may choose a fund that appears to have more highly liquid investments, 
without adequately considering other risks of their investment and how 
they relate to liquidity risk. For example, an isolated focus on 
liquidity risk may result in investors not evaluating whether such a 
fund is achieving comparable performance despite maintaining low-
yielding assets through use of derivatives or other leverage, and 
whether the investor is comfortable with the trade-off of liquidity 
versus leverage risks.
---------------------------------------------------------------------------

    \31\ SIFMA AMG Letter (concerned that the focus on liquidity 
risk in isolation would encourage investors to exaggerate the 
importance of liquidity risk relative to other risks that may be far 
more important to their long-term investment goals.).
---------------------------------------------------------------------------

2. New Approach to Liquidity Risk Disclosure
    We continue to believe it is im{ant for investors to understand the 
liquidity risks of the funds they hold and how those risks are managed. 
However, we appreciate commenters' concerns that public dissemination 
of the aggregate classification information, without an accompanying 
explanation to investors of the underlying subjectivity, methodological 
decisions, and assumptions that shape this information, and other 
relevant context, may be potentially misleading to investors.\32\ As 
discussed above, in light of the variability of the classification 
process under rule 22e-4, we do not believe it is appropriate to adapt 
Form N-PORT to provide the level of detail and narrative context 
necessary for investors to effectively appreciate the fund's liquidity 
risk profile.\33\ We also believe that it may take significant detailed 
disclosure and nuanced explanation to effectively inform investors 
about the subjectivity and limitations of aggregate liquidity 
classification information so as to allow them to properly make use of 
the information. Such lengthy disclosure may not be the most accessible 
and useful way to accomplish the Commission's goals. To the extent that 
such disclosure would need to be granular and detailed to effectively 
explain the process, it may also not be consistent with the careful 
balancing of investor interests that the Commission performed in 
determining to require disclosure of sensitive granular information, 
including position-level data, only on a non-public basis.\34\
---------------------------------------------------------------------------

    \32\ The Commission has access to the more granular position-
level liquidity classification information as well as funds' 
methodologies and assumptions, and thus does not face these same 
challenges in interpreting the classification data.
    \33\ We believe that due to the variability and subjective 
inputs required to engage in liquidity classification under rule 
22e-4, providing effective information about liquidity 
classifications under that rule to investors poses difficult and 
different challenges than the other data that is publicly disclosed 
on Form N-PORT, which is more objective and less likely to vary 
between funds based on their particular facts and circumstances.
    \34\ As discussed in the Liquidity Adopting Release, we 
determined that liquidity classification data on individual 
securities was necessary for our monitoring efforts, but not 
appropriate or in the public interest to be disclosed to investors 
or other market participants in light of the inherent variability of 
the classification process and the potential for predatory trading 
using such granular information.'' See Liquidity Adopting Release, 
supra footnote 2, at text accompanying nn.613-615.
---------------------------------------------------------------------------

    We also appreciate how the public dissemination of the aggregate 
classification information could create perverse incentives to classify 
investments as more liquid, and may inappropriately single out 
liquidity risk compared to other risks of the fund. Additionally, we 
are concerned that disclosing funds' aggregate liquidity profile may 
potentially create risks of coordinated investment behavior, if, for 
example, funds were to create more correlated portfolios by purchasing 
investments that they believed third parties, such as investors or 
regulators, may view as ``more liquid.'' \35\ Such risks may both 
increase the possibility of correlated market movements in times of 
stress, and may potentially reduce the utility of the classification 
data reported to us. We now preliminarily believe that effective 
disclosure of liquidity risks may be better achieved through another 
disclosure vehicle, rather than Form N-PORT, which would not present 
the potential drawbacks discussed above.
---------------------------------------------------------------------------

    \35\ See ICI Letter I.
---------------------------------------------------------------------------

    Accordingly, as discussed previously, we are proposing to replace 
the requirement for funds to disclose their aggregate liquidity profile 
on a quarterly basis on Form N-PORT with a new requirement for funds to 
discuss briefly the operation and effectiveness of a fund's liquidity 
risk management program in the fund's annual report to shareholders, as 
part of its management discussion of fund performance (``MDFP'').\36\ 
This disclosure would complement existing liquidity risk disclosure 
that funds provide in their prospectus (if it is a principal investment 
risk of the fund).
---------------------------------------------------------------------------

    \36\ Proposed Item 27(b)(7)(iii) of Form N-1A.

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[[Page 11910]]

    The proposed amendments to Form N-1A would require funds to 
``briefly discuss the operation and effectiveness of the Fund's 
liquidity risk management program during the most recently completed 
fiscal year.'' \37\ To satisfy this requirement, a fund generally 
should provide information about the operation and effectiveness of the 
program, and insight into how the program functioned over the past 
year.\38\ This discussion should provide investors with enough detail 
to appreciate the manner in which a fund manages its liquidity risk, 
and could, but would not be required to, include discussion of the role 
of the classification process, the 15% illiquid investment limit, and 
the HLIM in the fund's liquidity risk management process.\39\
---------------------------------------------------------------------------

    \37\ Proposed Item 27(b)(7)(iii) of Form N-1A.
    \38\ We considered whether to require funds to disclose specific 
elements of their liquidity risk management program, but we believe 
that such a requirement would unnecessarily limit the fund's ability 
to provide the appropriate level of context it believes necessary 
for investors to understand the fund's liquidity risks. We believe 
that a principles-based approach to this disclosure requirement 
would better achieve our goal of promoting investor understanding of 
fund liquidity risks, without risking investor confusion. 
Furthermore, we believe that a principles-based approach, rather 
than a prescriptive one, will give a fund the flexibility to 
disclose its approach to liquidity risk management in a manner most 
appropriate for the fund as part of its broader discussion of the 
fund's risks without placing undue emphasis on liquidity risks. We 
also believe that the approach we are proposing today is less likely 
to result in standardized boilerplate disclosure because it will 
allow funds to tailor disclosure to their particular liquidity risks 
and how they manage them.
    \39\ We note that rule 22e-4(b)(2)(iii) requires a fund board to 
review, no less frequently than annually, a report prepared by the 
program administrator that addresses the operation of the program 
over the last year and its adequacy and effectiveness. Because funds 
will already need to prepare a report on the program for these 
purposes, we expect that the disclosure requirement we are proposing 
today would be unlikely to create significant additional burdens as 
the conclusions in this report may be largely consistent with the 
overall conclusions disclosed to investors in the annual report.
---------------------------------------------------------------------------

    For example, as part of this new disclosure, a fund might opt to 
discuss the particular liquidity risks that it faced over the past 
year, such as significant redemptions, changes in the overall market 
liquidity of the investments the fund holds, or other liquidity risks, 
and explain how those risks were managed and addressed, and whether 
those risks affected fund performance. If the fund faced any 
significant liquidity challenges in the past year, it could opt to 
discuss how those challenges affected the fund and how they were 
addressed. Funds may also wish to provide context and other 
supplemental information about how liquidity risk is managed in 
relation to other investing risks of the fund. We note that this new 
disclosure would not require a fund to disclose any specific 
classification information, either security specific or in the 
aggregate, although a fund could do so if it wished. Also, consistent 
with the current rule, it would not require a fund to disclose publicly 
the level of its HLIM, any shortfalls or changes to it, or any breaches 
of the 15% illiquid investment limit.\40\ We expect that this 
disclosure should allow funds to provide context and an accessible and 
useful explanation of the fund's liquidity risk in relation to its 
management practices and other investment risks as appropriate.
---------------------------------------------------------------------------

    \40\ Under rule 22e-4 and related rules and forms, funds are not 
required to publicly disclose any shortfalls or changes to their 
HLIM or breaches of the 15% illiquid investment limit.
---------------------------------------------------------------------------

    Because the proposal would eliminate public disclosure of a fund's 
aggregate liquidity classification information, we would also re-
designate reporting about the percentage of a fund's highly liquid 
investments that are segregated to cover, or pledged to satisfy margin 
requirements in connection with, derivatives transactions that are 
classified as Moderately Liquid Investments, Less Liquid Investments 
and Illiquid Investments to the non-public portion of the Form.\41\ We 
believe public disclosure of this percentage of a fund's highly liquid 
investments would be of limited to no utility to investors without 
broader context and, therefore, may be confusing. However, we believe 
that funds should report this item to us on a non-public basis because 
we would otherwise be unable to determine the percentage of a fund's 
highly liquid investments that is actually unavailable to meet 
redemptions.\42\
---------------------------------------------------------------------------

    \41\ We are proposing to do this by renumbering current Item 
B.8.b of Form N-PORT as Item B.8 and making this item non-public. 
This item requires public reporting of the percentage of a fund's 
highly liquid investments that it has segregated to cover, or 
pledged to satisfy margin requirements in connection with, 
derivatives transactions that are classified as moderately liquid, 
less liquid, or illiquid investments. Item B.8.b of Form N-PORT. We 
originally required this disclosure in order to avoid misleading 
investors about the actual availability of investments that are 
highly liquid investments to meet redemptions. See Liquidity 
Adopting Release, supra footnote 2, at n.623 and accompanying text.
    \42\ For these reasons, we find that it is neither necessary nor 
appropriate in the public interest or for the protection of 
investors to make this reporting about the percentage of a fund's 
highly liquid investments that is segregated to cover less liquid 
derivatives transactions publicly available.
---------------------------------------------------------------------------

    We believe that these proposed amendments will provide effective 
disclosure that better informs investors of how the fund's liquidity 
risk and liquidity risk management practices affect their investment 
than the current Form N-PORT public liquidity risk profile.\43\ The 
annual report disclosure provides a fund the opportunity to tailor its 
disclosure to the fund's specific risks. This would provide funds the 
opportunity to explain the level of subjectivity involved in liquidity 
assessment, and give a narrative description of these risks and how 
they are managed within the context of the fund's own investment 
strategy. This annual report disclosure should provide funds the 
ability to give sufficient context on these risks, in a way that the 
current Form N-PORT liquidity disclosure does not.
---------------------------------------------------------------------------

    \43\ As an alternative to this new proposed narrative disclosure 
requirement, we considered moving the aggregate liquidity profile 
from Form N-PORT to the fund's annual report, which might allow 
funds to provide additional context and explanation of their 
methodology. However, we believe that such an approach might not 
address the concerns discussed above, as investors may still use the 
liquidity profile to compare funds despite its inherent subjectivity 
and variability.
---------------------------------------------------------------------------

    In addition, because funds deliver annual reports to their 
shareholders each year, the annual report may be a better vehicle for 
certain existing investors to gain access to liquidity risk information 
if they prefer to base their decisions partially on information 
delivered to them, versus information that they would need to seek out 
on Form N-PORT, whether directly from the Commission or via a third 
party service.\44\ Moreover, third party services, in repackaging this 
information, may potentially use additional assumptions about the value 
or proper presentation of liquidity profiles, thereby introducing 
further subjectivity and variability about which investors may not be 
aware.\45\ The proposed annual report disclosure also

[[Page 11911]]

would allow a fund to discuss liquidity risk as one among several 
risks, and does not require funds to provide any security or portfolio 
specific classification information. As a result, liquidity risk should 
not be inappropriately singled out among the other risks of the fund. 
Finally, because many funds deliver annual reports in conjunction with 
an annual delivery of the summary prospectus, investors may be able to 
evaluate the summary of the principal risks of investing in the fund 
contained in the summary prospectus, including liquidity risk if 
applicable, in conjunction with the liquidity risk management program 
disclosure we are proposing to include in the annual report. This may 
facilitate a more comprehensive understanding of the fund's liquidity 
risks and its management of these risks for investors.
---------------------------------------------------------------------------

    \44\ Although investors would be provided liquidity information 
only annually under our proposal (rather being able to access it 
quarterly through Form N-PORT), as discussed above we believe that 
investors may be more likely to access and appreciate liquidity 
information provided in the context of the annual report, rather 
than seeking out liquidity information on Form N-PORT or through 
third parties. Accordingly, we believe that the annual report is a 
more appropriate venue for providing liquidity information, even 
though it is updated less frequently than Form N-PORT.
    \45\ We recognize that third party service providers who provide 
tools that assist funds engaging in the classification process may 
have some insight into the methodologies and assumptions used by the 
funds they service which, if they were to repackage and distribute 
fund liquidity profile data, may allow them to provide context about 
such information. However, these service providers also may provide 
public information about funds they do not service, even if their 
insight into classification methodologies and assumptions may be 
inapplicable to these funds. Further, even when a third party 
service provider does assist a fund, that fund may not share all of 
the assumptions and methods that it ultimately uses in 
classification with its service provider, further limiting the 
utility of any such insight in providing context about the 
variability and lack of comparability of fund liquidity profiles.
---------------------------------------------------------------------------

    To further assist in providing investors with information about 
fund liquidity, the staff anticipates that publishing aggregated and 
anonymized information about the fund industry's liquidity may be 
beneficial. We note that, since October 2015, Commission staff has 
published a periodic report that contains highly-aggregated and 
anonymized private fund industry statistics derived from Form PF data. 
This staff report is designed to enhance public understanding of the 
private fund industry and facilitate Commission staff participation in 
meetings and discussions with industry professionals, investors, and 
other regulators.\46\ Publishing a similar staff report on the 
aggregated liquidity of funds may provide similar benefits as the Form 
PF report. We expect that the staff would publish the report 
periodically and that the report would discuss aggregated and 
anonymized liquidity data of all funds or funds in certain categories, 
but would not identify the specific liquidity profile of any individual 
fund. Staff from the Division of Investment Management as well as staff 
from the Division of Economic and Risk Analysis have also published ad 
hoc papers on data drawn from Form PF to help inform the public as to 
the staff's analyses of that data. We would anticipate a similar 
approach to the fund liquidity data.\47\
---------------------------------------------------------------------------

    \46\ See Annual Staff Report Related to the Use of Form PF Data, 
available at https://www.sec.gov/files/im-private-fund-annual-report-101617.pdf.
    \47\ See Liquidity Adopting Release, supra footnote 2, at n.617 
and accompanying text; see also Investment Company Reporting 
Modernization, Investment Company Act Release No. 32936 (Dec. 8, 
2017) [82 FR 58731 (Dec. 14, 2017)] at text accompanying nn.13-15.
---------------------------------------------------------------------------

    In addition to interim public reporting of aggregate, anonymized 
liquidity information, staff from the Divisions of Investment 
Management and Economic and Risk Analysis will conduct a review of the 
granular fund-specific liquidity classification data that the 
Commission will begin receiving on a confidential basis in June 
2019.\48\ The staff will provide an analysis of the data to the 
Commission and present to the Commission by June 2020 a recommendation 
addressing whether and, if so, how there should be public dissemination 
of fund-specific liquidity classification information.
---------------------------------------------------------------------------

    \48\ See Liquidity Extension Release supra footnote 8.
---------------------------------------------------------------------------

    Finally, in its 2017 Asset Management and Insurance Report, the 
Department of Treasury highlighted the importance of robust liquidity 
risk management programs, but recommended that the Commission embrace a 
``principles-based approach to liquidity risk management rulemaking and 
any associated bucketing requirements.''\49\ Today, we are proposing to 
modify certain aspects of our liquidity framework. We note that market 
participants will continue to gather insights as liquidity risk 
management programs are implemented, and can provide comments to the 
Commission as they do so. The staff will monitor the information 
received and report to the Commission what steps, if any, the staff 
recommends in light of commenter experiences.
---------------------------------------------------------------------------

    \49\ See A financial System That Creates Economic Opportunities; 
Asset Management and Insurance, U.S. Department of the Treasury, 
Oct. 2017 available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-That-Creates-Economic-Opportunities-Asset_Management-Insurance.pdf.
---------------------------------------------------------------------------

3. Comment Request
    We request comment on the proposed elimination of the aggregate 
liquidity profile public disclosure requirement of Form N-PORT and our 
proposed replacement with a requirement that funds discuss the 
operation and effectiveness of their liquidity risk management program 
as part of their annual reports to shareholders.
     Should we eliminate this public disclosure of funds' 
aggregate liquidity profiles? Why or why not?
     To what extent would investors have relied on a fund's 
aggregate liquidity profile in making investment decisions? Is it 
likely that this disclosure would have been informative rather than 
confusing to investors in making these decisions?
     If, as proposed, we were to eliminate the requirement that 
funds publicly disclose their aggregate liquidity profile, would 
investors have sufficient information about a fund's liquidity risk to 
make an informed investment decision?
     Should we retain the public disclosure of a fund's 
aggregate liquidity profile and otherwise seek to address the concerns 
discussed above? For example, would making the disclosure more frequent 
(i.e., monthly), reducing the lag on public disclosure, providing funds 
the opportunity to publicly provide additional context and explanation 
on the Form or elsewhere, or other changes address the concerns 
discussed above? Should we permit funds to choose to make any 
explanatory notes related to liquidity disclosures in Part E of Form N-
PORT publicly available?
     Instead of eliminating the public disclosure of a fund's 
aggregate liquidity profile as proposed, should we instead make the 
profile non-public for some additional period of time (e.g., 2 to 3 
years) to allow us to evaluate the quality of the information provided 
and its potential impact on investors?
     Should we make current Item B.8.b of Form N-PORT (highly 
liquid investments segregated to cover less liquid derivatives) non-
public as proposed? If it was retained as public, would investors 
understand it without accompanying classification information? 
Alternatively, should we rescind the requirement entirely?
     Should we require a fund to provide a discussion of the 
operation and effectiveness of its liquidity risk management program, 
as we are proposing? Why or why not? Should we instead require 
disclosure about the extent to which and the manner in which the fund 
took liquidity risk and managed liquidity risk during the period in 
question and how those risks and management affected fund performance?
     As part of this proposed disclosure, should we require a 
fund to discuss specific elements of the fund's liquidity risk program 
such as the 15% illiquid investment limit, HLIM, classification process 
or specific liquidity risk observations? Why or why not?
     Should we require a fund to include a discussion of any 
relevant changes made to its liquidity risk management over the course 
of the reporting period?
     What additional information would be relevant to investors 
regarding liquidity risks that we should require funds to disclose?
     Should we require this liquidity risk disclosure to be 
included in the annual report? Should it instead be included in another 
disclosure document such as the fund's statutory prospectus, summary 
prospectus, or statement of additional information? If

[[Page 11912]]

so, under what item should it be included?
     Are there alternative approaches to providing relevant 
liquidity information to investors? If so, what are they, and why 
should we use them?
     Are there advantages to the approach that Treasury 
recommends? If so, what additional steps, if any, should we consider to 
shift toward a principles-based approach? To what extent have funds 
already implemented the existing liquidity classification requirement?

B. Proposed Amendments to Liquidity Reporting Requirements

    We are also proposing to make certain changes to Form N-PORT 
related to the liquidity data reported on Form N-PORT. As discussed 
below, we believe these changes enhance the liquidity data reported to 
us. In addition, for some funds, these proposed changes may also reduce 
cost burdens as they comply with the rule.
1. Multiple Classification Categories
    We are proposing amendments to Form N-PORT to allow funds the 
option of splitting a fund's holding into more than one classification 
category in three specified circumstances.\50\ Today, Form N-PORT 
requires a fund to classify each holding into a single liquidity 
bucket. The staff has engaged in discussions with funds regarding 
questions that have arisen in implementing the liquidity rule and 
related requirements. These discussions have led us to propose these 
changes today.
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    \50\ See proposed Item C.7.b of Form N-PORT and Instructions.
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    First, some funds have explained that the requirement to classify 
each entire position into one classification category poses 
difficulties for certain holdings and may not accurately reflect the 
liquidity of that holding. In these cases, even though the holding may 
nominally be a single security, different liquidity-affecting features 
may justify the fund treating the holding as two or more separate 
investments for liquidity classification purposes (``differences in 
liquidity characteristics''). For example, a fund might hold an asset 
that includes a put option on a percentage (but not all) of the fund's 
holding of the asset.\51\ Such a feature may significantly affect the 
liquidity characteristics of the portion of the asset subject to the 
feature, such that the fund believes that the two portions of the asset 
should be classified into different buckets.\52\
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    \51\ For example, if 30% of a holding is subject to a liquidity 
feature such as a put, and the other 70% is not, pursuant to the 
proposed Instructions to Item C.7 of Form N-PORT, a fund may split 
the position, evaluate the sizes it reasonably anticipates trading 
for each portion of the holding that is subject to the different 
liquidity characteristics, and classify each separate portion 
differently, as appropriate. The fund in such a case would use the 
classification process laid out in the final rule, but would apply 
it separately to each portion of the holding that exhibits different 
liquidity characteristics.
    \52\ As another example, a fund might have purchased a portion 
of an equity position through a private placement that makes those 
shares restricted (and therefore illiquid) while also purchasing 
additional shares of the same security on the open market. In that 
case, certain shares of the same holding may have very different 
liquidity characteristics depending on the specific shares being 
evaluated.
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    Second, some funds suggested that in cases of sub-advisers managing 
different portions or ``sleeves'' of a fund's portfolio, differences 
may arise between sub-advisers as to their views of the liquidity 
classification of a single holding that may be held in multiple 
sleeves. They noted it would avoid the need for costly reconciliation--
and may provide useful information to the Commission on each sub-
adviser's determination about the asset's liquidity--to be able to 
report each sub-adviser's classification of the proportional holding it 
manages instead of putting the entire holding into a single 
category.\53\
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    \53\ Similar to the ``differences in liquidity characteristics'' 
examples discussed above, under the proposed amendments to the 
liquidity classification reporting on Form N-PORT the fund 
effectively would be treating the portions of the holding managed by 
different sub-advisers as if they were two separate and distinct 
securities, and bucketing them accordingly. See Instructions to Item 
C.7 of Form N-PORT.
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    Finally, some funds indicated that for internal risk management 
purposes they currently classify their holdings proportionally across 
buckets, based on an assumed sale of the entire position 
(``proportionality'').\54\ In such cases, they argued that allowing a 
fund to have the option of proportionally reporting the position on 
Form N-PORT would be more efficient and less costly.\55\ We believe 
that in such cases, this form of reporting would not impair the 
Commission's monitoring and oversight efforts as compared to our 
approach of classifying based on ``sizes that the fund would reasonably 
anticipate trading.'' \56\ Further, we believe the approach we are 
proposing today, which allows, but does not require, funds to use the 
proportionality approach in specified circumstances, would maintain the 
quality of the information reported to us and be potentially less 
costly than either our previously proposed or adopted approaches.\57\
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    \54\ We initially proposed to require that funds classify each 
portfolio position based on the amount of time it would take to 
convert the entire position, or portions thereof, to cash 
(``proportionality approach''). 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)], at n.172 and accompanying text. Multiple commenters 
expressed concern about the proposed requirement, arguing, among 
other things, that a fund generally would not need to liquidate an 
entire large position unexpectedly. Rule 22e-4 as adopted, requires 
a fund, when classifying an investment, to instead determine whether 
trading varying portions of a position in a particular portfolio 
investment, in sizes that the fund would reasonably anticipate 
trading, is reasonably expected to significantly affect the 
liquidity characteristics of that investment (i.e., market-depth). 
These market-depth considerations were adopted as a substitute for 
the proposed proportionality approach. See Liquidity Adopting 
Release, supra footnote 2, at n.439 and accompanying text.
    \55\ Effectively, these funds requested the option to use the 
position size bucketing approach that was originally proposed 
(analyzing the entirety of a fund's position and splitting it among 
buckets), rather than bucketing the entire holding into a single 
category based on the sizes they reasonably anticipate trading, as 
required under the final rule.
    \56\ Under the proposed Instructions to Item C.7 of Form N-PORT, 
a fund taking the proportionality approach would use a method 
similar to that described in the proposal, and split the entire 
holding among the four classification categories. For example, a 
fund holding $100 million in Asset A could determine that it would 
be able to convert to cash $30 million of it in 1-3 days, but could 
only convert the remaining $70 million to cash in 3-7 days. This 
fund could choose to split the liquidity classification of the 
holding on Form N-PORT and report an allocation of 30% of Asset A in 
the Highly Liquid category and 70% of Asset A in the Moderately 
Liquid category. Such a fund would not use sizes that it reasonably 
anticipates trading when engaging in this analysis, but instead 
would assume liquidation of the whole position.
    \57\ As discussed in the economic analysis below, allowing 
classification in multiple categories may be less costly if it 
better aligns with current fund systems or allows funds to avoid 
incurring costs related to the need to develop systems and processes 
to allocate each holding to exactly one classification bucket.
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    We agree that we should permit funds to report liquidity 
classifications in these ways as they may equally, or more accurately, 
reflect their liquidity and in some cases may be less burdensome. In 
addition, we believe that allowing funds to proportionally report the 
liquidity classification of securities under the three circumstances we 
discussed here will enhance our monitoring efforts, as it will allow 
for a more precise view of the liquidity of these securities. Because 
funds that choose to classify across multiple categories under this 
approach would be required to indicate which of the three circumstances 
led to the split classification, we will be able to monitor more 
effectively the liquidity of a fund's portfolio and determine the 
circumstances leading to the classification. Therefore, we are 
proposing to amend Item C.7 of Form N-PORT to provide funds the option 
of splitting the classification categories reported for their 
investments on a percentage basis, if done for one of these

[[Page 11913]]

three reasons.\58\ We are also proposing new Instructions to Item C.7 
that explain the specified circumstances where a fund may split 
classification categories. In addition, we are proposing new Item 
C.7.b, which would require funds taking advantage of the option to 
attribute multiple classifications to a holding to note which of the 
three circumstances led the fund to split the classifications of the 
holdings.\59\
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    \58\ Proposed revisions to Item C.7 and its Instructions of Form 
N-PORT. Funds that choose not to take advantage of this proportional 
splitting approach may continue to use the approach laid out in the 
final rule of bucketing an entire position based on the liquidity of 
the sizes the fund would reasonably anticipate trading.
    \59\ Proposed Item C.7.b of Form N-PORT. A fund may also choose 
to provide (but is not required to) additional context on its 
process for classifying portions of the same holding differently in 
the explanatory notes section of Form N-PORT. See Part E of Form N-
PORT.
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    We seek comment on our proposal to allow, but not require, funds to 
classify a single holding in multiple categories on Form N-PORT.
     Should we allow funds to split holdings among different 
liquidity categories in three specified circumstances as we are 
proposing today? \60\ Why or why not?
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    \60\ Proposed Instructions to Item C.7 to Form N-PORT.
---------------------------------------------------------------------------

     Should we require funds to use a consistent approach to 
classification for all of their investments for purposes of Form N-PORT 
reporting? For example, should we require a fund that attributes 
multiple classifications for a holding because it uses a full 
liquidation analysis on one position to do so consistently for all of 
its positions?
     Are there circumstances other than the ones discussed in 
the proposed Form N-PORT Instructions to Item C.7 when funds may wish 
to classify the same security into multiple categories? If so, what are 
they and why should we permit classification splitting in those cases?
     Instead of requiring funds to note the circumstance that 
led them to split classification of a position on new Item C.7.b as 
proposed, should we instead require them to note the circumstance in 
the explanatory notes section of the Form? Should we not require them 
to note the circumstance leading to the splitting at all? Why or why 
not?
     Should we allow a fund using the proportionality approach 
to not classify the liquidity of a holding based on an assumed 
liquidation of the whole position, but instead classify it by 
evaluating different portions of the sizes it reasonably anticipates 
trading and bucketing the entire position accordingly? \61\ Would this 
result in misleading or incorrect liquidity classifications?
---------------------------------------------------------------------------

    \61\ For example, under this alternate approach, a fund with a 
$100 million position in a security with a reasonably anticipated 
trading size of $10 million might determine that it could convert $4 
million to cash in 1-3 days and $6 million in 4-7 days. The fund 
might then bucket $40 million as highly liquid and $60 million as 
moderately liquid, even though the fund has previously determined 
that it could only convert $4 million into cash in 1-3 days. We 
believe this approach would potentially result in inaccurate 
classifications that may not fully reflect the liquidity of a fund's 
investments, but has been suggested to our staff as a potential 
method of splitting classifications in some circumstances.
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2. Proposed Disclosure of Cash and Cash Equivalents
    We are also proposing to add to Form N-PORT an additional 
disclosure relating to a registrant's holdings of cash and cash 
equivalents not reported in Parts C and D of the Form.\62\ This 
disclosure would be made publicly available each quarter.\63\ Form N-
PORT currently does not require registrants to specifically report the 
amount of cash and cash equivalents held by the registrant. For 
example, as we noted in the Reporting Modernization Adopting Release, 
we designed Part C of Form N-PORT to require registrants to report 
certain information on an investment-by-investment basis about each 
investment held by the registrant.\64\ However, cash and certain cash 
equivalents are not considered an investment on Form N-PORT, and 
therefore registrants are not required to report them in Part C of the 
Form as an investment. Similarly, Part B.1 of Form N-PORT (assets and 
liabilities) will require information about a registrant's assets and 
liabilities, but does not require specific disclosure of a registrant's 
holdings of cash and cash equivalents.\65\
---------------------------------------------------------------------------

    \62\ See supra footnote 15 (noting that the term ``registrant'' 
refers to entities required to file Form N-PORT, including all 
registered management investment companies, other than money market 
funds and small business investment companies, and all ETFs 
(regardless of whether they operate as UITs or management investment 
companies).
    \63\ See proposed Item B.2.f. of Form N-PORT.
    \64\ See Reporting Modernization Adopting Release, supra 
footnote 2.
    \65\ We understand that, in addition to cash, a registrant's 
disclosure of total assets on Part B.1.a. could also include certain 
non-cash assets that are not investments of the registrant, such as 
receivables for portfolio investments sold, interest receivable on 
portfolio investments, and receivables for shares of the registrant.
---------------------------------------------------------------------------

    Cash held by a fund is a highly liquid investment under rule 22e-4 
and would have been included in the aggregate liquidity profile that we 
are proposing to eliminate. Without the aggregate liquidity profile, we 
may not be able to effectively monitor whether a fund is compliant with 
its HLIM unless we know the amount of cash held by the fund. The 
additional disclosure of cash and certain cash equivalents by funds 
will also provide more complete information that will be useful in 
analyzing a fund's HLIM, as well as trends regarding the amount of cash 
being held, which also correlates to other activities the fund is 
experiencing, including net inflows and outflows.
    As a result, we are proposing to amend Item B.2. of Form N-PORT 
(certain assets and liabilities) to include a new Item B.2.f. which 
would require registrants to report ``cash and cash equivalents not 
reported in Parts C and D.'' Current U.S. Generally Accepted Accounting 
Principles (``GAAP'') define cash equivalents as ``short-term, highly 
liquid investments that . . . are . . . [r]eadily convertible to known 
amounts of cash . . . [and that are] [s]o near their maturity that they 
present insignificant risk of changes in value because of changes in 
interest rates.'' \66\ However, we understand that certain categories 
of investments currently reported on Part C of Form N-PORT (schedule of 
portfolio investments) could be reasonably considered by some 
registrants as cash equivalents. For example, Item C.4. of Form N-PORT 
will require registrants to identify asset type, including ``short-term 
investment vehicle (e.g., money market fund, liquidity pool, or other 
cash management vehicle),'' which could reasonably be categorized by 
some registrants as a cash equivalent. Therefore, in order to ensure 
the amount reported under proposed Item B.2.f is accurate and does not 
double count items that are more appropriately reported in Parts C 
(Schedule of portfolio investments) and D (Miscellaneous securities) of 
Form N-PORT, we are proposing to require registrants to only include 
the cash and cash equivalents not reported in those sections.\67\
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    \66\ See FASB Accounting Standards Codification Master Glossary.
    \67\ We also are proposing other amendments to Form N-PORT. In 
particular, we are proposing to amend General Instruction F (Public 
Availability) to remove the phrase ``of this form'' from 
parenthetical references to Item B.7 and Part D for consistency with 
other parenthetical cross references in the Form. We also are 
proposing to amend Part F (Exhibits) to fix a typographical error in 
the citation to Regulation S-X. In addition, for consistency with 
the amendments we are proposing today and we are proposing to add 
Item B.8 (Derivative Transactions) to General Instruction F.
---------------------------------------------------------------------------

    We seek comment on our proposal to require registrants to report 
cash and cash equivalents on Form N-PORT.
     Should we require registrants to report cash and cash 
equivalents?

[[Page 11914]]

Should we require a different formulation for cash? For example, should 
we require registrants to report separately pledged or segregated cash?
     Should we require registrants to provide more detailed 
information on cash, rather than reporting cash and cash equivalents 
together? For example, should we require registrants to report cash 
separately from cash equivalents in Part C of Form N-PORT? If so, 
should we require cash to be reported separately for different 
currencies?

C. Compliance Dates

    If the amendments we propose to Forms N-PORT and N-1A related to 
liquidity risk disclosure are adopted, we would expect to provide for a 
tiered set of compliance dates based on asset size.\68\ Specifically, 
we are proposing to align the compliance date for our proposed 
amendments to Forms N-PORT and N-1A with the revised compliance date we 
previously adopted for Form N-PORT.\69\ We believe that aligning the 
compliance date for all liquidity-related reporting requirements will 
allow funds to holistically implement all liquidity reporting and 
disclosure requirements at the same time and may make the requirements 
less burdensome.
---------------------------------------------------------------------------

    \68\ ``Larger entities'' are defined as funds that, together 
with other investment companies in the same ``group of related 
investment companies,'' have net assets of $1 billion or more as of 
the end of the most recent fiscal year of the fund. ``Smaller 
entities'' are defined as 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 its most recent 
fiscal year. See Liquidity Adopting Release, supra footnote 2, at 
n.997. We adopted this tiered set of compliance dates based on asset 
size because we anticipated that smaller groups would benefit from 
this extra time to comply and from the lessons learned by larger 
investment companies, and we believe the same rationale applies to 
the changes we are proposing today. See Liquidity Adopting Release, 
supra footnote 2, at nn.999 and 1008 and accompanying text.
    \69\ See Investment Company Reporting Modernization, Investment 
Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 
2017)]. These compliance dates would apply to all Form N-PORT 
filings after the relevant date and to funds subject to these 
proposed requirements that file initial registration statements on 
Form N-1A, or that file post-effective amendments that are annual 
updates to effective registration statements on Form N-1A, after 
these proposed compliance dates.
---------------------------------------------------------------------------

    We request comment on the compliance dates discussed above.
     Should we align the compliance dates for the amendments 
with the general compliance date for Form N-PORT? Alternatively, should 
we align the compliance date for the proposed amendments with the 
compliance date for the other liquidity-related requirements of rule 
22e-4 and Form N-PORT?
     Should we provide a longer compliance period for these 
proposed changes? For example, should we provide an additional six 
months or one year beyond the compliance dates for the liquidity-
related requirements of rule 22e-4 and Form N-PORT? Should we provide a 
different compliance period for the Form N-PORT changes and the Form N-
1A changes? If so, why and how long?

III. Economic Analysis

A. Introduction

    The Commission is sensitive to the potential economic effects of 
the proposed amendments to Form N-PORT and Form N-1A. These effects 
include the benefits and costs to funds, their investors and investment 
advisers, issuers of the portfolio securities in which funds invest, 
and other market participants potentially affected by fund and investor 
behavior as well as any effects on efficiency, competition, and capital 
formation.

B. Economic Baseline

    The costs and benefits of the proposed amendments as well as any 
impact on efficiency, competition, and capital formation are considered 
relative to an economic baseline. For the purposes of this economic 
analysis, the baseline is the regulatory framework and liquidity risk 
management practices currently in effect, and any expected changes to 
liquidity risk management practices, including any systems and 
processes that funds have already implemented in order to comply with 
the liquidity rule and related requirements as adopted. The baseline 
also includes the economic effects anticipated in the Liquidity 
Adopting Release and the Liquidity Extension Release.\70\
---------------------------------------------------------------------------

    \70\ See supra footnotes 2 and 8.
---------------------------------------------------------------------------

    The economic baseline's regulatory framework consists of the 
liquidity rule's requirements adopted by the Commission on October 13, 
2016. Under the baseline, larger entities must comply with some of the 
liquidity rule's requirements, such as the establishment of a liquidity 
risk management program, by December 1, 2018 and must comply with other 
requirements, such as the classification of portfolio holdings, by June 
1, 2019.\71\ Similarly, smaller entities must comply with some of the 
liquidity rule's requirements by June 1, 2019 and other requirements by 
December 1, 2019.
---------------------------------------------------------------------------

    \71\ See supra footnote 68 for a detailed description of large 
and small entities. The compliance date for some of the requirements 
related to portfolio holding classification is being delayed. See 
the Liquidity Extension Release, supra footnote 8, for a more 
detailed discussion of the requirements that are being delayed.
---------------------------------------------------------------------------

    The primary SEC-regulated entities affected by these proposed 
amendments would be mutual funds and ETFs. As of the end of 2016, there 
were 9,090 mutual funds managing assets of approximately $16 
trillion,\72\ and there were 1,716 ETFs managing assets of 
approximately $2.5 trillion.\73\ Other potentially affected parties 
include investors, investment advisers that advise funds, issuers of 
the securities in which these funds invest, and other market 
participants that could be affected by fund and investor behavior.
---------------------------------------------------------------------------

    \72\ See 2017 ICI Fact Book, available at https://www.ici.org/pdf/2017_factbook.pdf, at 22, 170, 174. The number of mutual funds 
includes funds that primarily invest in other mutual funds but 
excludes 421 money-market funds.
    \73\ See 2017 ICI Fact Book, available at https://www.ici.org/pdf/2017_factbook.pdf, at 180, 181.
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C. Economic Impacts

    We are mindful of the costs and benefits of the proposed amendments 
to Form N-PORT and Form N-1A. The Commission, where possible, has 
sought to quantify the benefits and costs, and effects on efficiency, 
competition and capital formation expected to result from these 
amendments. However, as discussed below, the Commission is unable to 
quantify certain of the economic effects because it lacks information 
necessary to provide reasonable estimates. The economic effects of the 
amendments fall into two categories: (1) Effects stemming from changes 
to public disclosure on Form N-PORT and Form N-1A; (2) effects stemming 
from changes to non-public disclosure on Form N-PORT.
Changes to Public Disclosure
    The proposed amendments to Form N-PORT and Form N-1A alter the 
public disclosure of information about fund liquidity in three ways. 
First, the proposed amendments rescind the requirement that funds 
publicly disclose their aggregate liquidity profile on a quarterly 
basis with a 60-day delay in structured format on Form N-PORT.\74\ 
Second, the proposed amendments require a fund to provide a narrative 
description of the fund's liquidity risk management program's operation 
and effectiveness in unstructured format on Form N-1A. Finally, the 
proposed amendments require funds and other

[[Page 11915]]

registrants to report to the Commission on a non-public basis the 
amount of cash and cash equivalents in their portfolio on Form N-PORT 
on a monthly basis and to publicly disclose this amount on a quarterly 
basis with a 60-day delay through EDGAR.\75\
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    \74\ See supra footnote 1 for a definition of ``funds.'' The 
requirement to publicly disclose aggregate liquidity profiles does 
not apply to funds that are In-Kind ETFs under the baseline, so it 
is only being proposed to be rescinded for funds that are not In-
Kind ETFs. In-Kind ETFs are included as funds that would provide a 
narrative description of their liquidity risk management program on 
Form N-1A under this proposal.
    \75\ The Commission will continue to receive non-public position 
level liquidity information on Form N-PORT. See supra footnote 32.
---------------------------------------------------------------------------

    Funds and other registrants would experience benefits and costs 
associated with proposed changes to public disclosures on Form N-PORT. 
Funds \76\ would no longer incur the one-time and ongoing costs 
associated with preparing the portion of Form N-PORT associated with 
the aggregate liquidity profile, which would likely constitute a small 
portion of the aggregate one-time costs of $158 million and the ongoing 
costs of $3.9 million for Form N-PORT that we estimated in the 
Liquidity Adopting Release.\77\ At the same time, funds and other 
registrants would also incur additional costs, relative to the 
baseline, associated with the requirement that they report their 
holdings of cash and cash equivalents on Form N-PORT.\78\ Because funds 
and other registrants are already preparing Form N-PORT, and already 
need to keep track of their cash and cash equivalents for valuation 
purposes, we expect that these additional costs will not be 
significant. In aggregate, we expect any additional costs associated 
with the requirement that funds and other registrants disclose their 
holdings of cash and cash equivalents to be offset by the savings 
associated with funds no longer having to report an aggregate liquidity 
profile. Therefore, we expect that funds and other registrants will not 
experience a significant net economic effect associated with the direct 
costs of filing Form N-PORT.\79\ Additionally, to the extent that any 
risk of herding or correlated trading would exist if funds executed 
trades in order to make their aggregate liquidity profiles appear more 
liquid to investors, rescinding the requirement that funds publicly 
disclose an aggregate liquidity profile would mitigate such risk.\80\
---------------------------------------------------------------------------

    \76\ See supra footnote 73.
    \77\ See Liquidity Adopting Release, supra footnote 2, at 
nn.1188-1191. We estimated the total one-time costs associated with 
the rule's disclosure and reporting requirements on Form N-PORT as 
being approximately $55 million for funds that will file reports on 
Form N-PORT in house and approximately $103 million for funds that 
will use a third-party service provider. Similarly, we estimated the 
total ongoing annual costs as being approximately $1.6 million for 
funds filing reports in house and $2.3 million for funds that will 
use a third-party service provider.
    \78\ See supra footnote 15.
    \79\ See text following infra footnote 98.
    \80\ See supra footnote 35 and surrounding discussion.
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    Relative to the baseline, funds would incur costs associated with 
preparing an annual narrative discussion of their liquidity risk 
management programs on Form N-1A. We estimate that funds would incur 
aggregate one-time costs of approximately $18 million and aggregate 
ongoing costs of approximately $8.9 million in association with 
preparing this narrative discussion.\81\
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    \81\ See infra footnotes 102 and 105. We estimate funds will 
incur an additional aggregate one-time of burden of 53,990 hours and 
an additional aggregate annual burden of 26,995 hours. Assuming a 
blended hourly rate of $329 for a compliance attorney ($345) and a 
senior officer ($313), that translate to an additional aggregate 
one-time burden of $17,7627,710 = 53,990 x $329 and an additional 
aggregate annual burden of $8,881,355 = 26,995 x $329.
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    Investors also would experience costs and benefits as a result of 
the proposed amendments to the public disclosure requirements on Form 
N-PORT and Form N-1A. To the extent that aggregate liquidity profiles 
on Form N-PORT would help certain investors make more informed 
investment choices that match their liquidity risk preferences, 
rescinding the aggregate liquidity profile requirement will reduce an 
investor's ability to make more informed investment choices. However, 
to the extent that aggregate liquidity profiles are not comparable 
across funds because portfolio holding classifications incorporate 
subjective factors that may be interpreted differently by different 
funds, rescinding the aggregate liquidity profile requirement may not 
reduce these investors' ability to make informed investment choices. 
Rather, the amendments may reduce the likelihood that investors make 
investment choices based on any confusion about how the fund's 
liquidity risk profile should be interpreted.\82\ Additionally, the 
annual narrative discussion in Form N-1A may mitigate any reduction in 
their ability to make more informed investment choices, though this 
disclosure would be less frequent than the quarterly public disclosure 
of aggregate liquidity profiles as adopted and would provide 
information about a fund's liquidity risk management rather than the 
fund's aggregate liquidity profile of investments.
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    \82\ Even if aggregate liquidity profiles are not comparable 
across funds, they may be comparable across time for a given fund, 
which might provide useful information to investors. This would be 
the case if a fund maintains a consistent position classification 
process over time.
---------------------------------------------------------------------------

    If certain investors prefer to base their investment decisions on 
information that is delivered to them directly, those investors would 
be more likely to use the narrative discussion of a fund's liquidity 
risk management program on Form N-1A than to have used the aggregate 
liquidity profile on Form N-PORT to inform their investment decisions. 
However, if certain other investors could more easily access, reuse, 
and compare the information about a fund's liquidity risk if included 
within a structured format on Form N-PORT, those investors would have a 
reduced ability to make as timely and accurate an analysis when that 
information is provided to them in the unstructured format of an annual 
report. To the extent that certain investors rely on third parties to 
provide them with information for analysis, there may be an increased 
burden on these third-party providers to search, aggregate and analyze 
the unstructured information in funds' annual reports. Finally, the 
proposed amendment to Form N-PORT that requires funds and other 
registrants to publicly disclose their holdings of cash and cash 
equivalents on a quarterly basis with a 60-day delay gives investors 
some potentially useful information about the most liquid assets that a 
fund previously had available to, for example, meet its redemption 
obligations.
Changes to Non-Public Disclosure
    In addition to the proposed amendments to public disclosures of 
liquidity information discussed above, the proposed amendments to Form 
N-PORT give funds the option to split a given holding into portions 
that may have different liquidity classifications on their non-public 
reports on Form N-PORT. Funds may benefit from the proposed amendment 
because it gives them the option to either include an entire holding 
within a classification bucket or to allocate portions of the holding 
across classification buckets. This could benefit a fund if a more 
granular approach to classification that assigns portions of a 
portfolio holding to separate classification buckets is more consistent 
with the fund's preferred approach to liquidity risk management, and 
reduces the need for funds to develop systems and processes to allocate 
each holding to exactly one classification bucket.\83\ In addition, to

[[Page 11916]]

the extent that providing the option to choose the position 
classification method most suitable to a given fund results in 
disclosures on Form N-PORT that more accurately reflect the fund's 
liquidity profile, the proposed amendments may improve the Commission's 
ability to monitor liquidity risks in markets and protect investors 
from liquidity-related developments. However, we acknowledge that 
providing funds with this option does add an additional subjective 
decision to the portfolio holding classification process. Thus the 
proposed amendments could result in classification profiles that are 
less comparable across funds relative to the baseline.\84\
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    \83\ For example, funds that use multiple sub-advisers to manage 
different sleeves of a portfolio might have to establish more 
complex systems and processes for combining the classifications of 
individual sub-advisers into a single classification for the 
portfolio's aggregate holding of a given security under the rule as 
adopted. The ability to split a portfolio holding across multiple 
classification buckets provides funds with a straightforward way of 
combining the classifications of different sub-advisers.
    \84\ Portfolio classifications on Form N-PORT will include 
CUSIPs or other identifiers that allow Commission staff to identify 
when different funds classify the same investment using different 
classification methods. However, comparing such classifications will 
require some method of adjustment between classifications based on, 
for example, reasonably anticipated trade size and those based 
splitting a position into proportions that are assigned to different 
classification buckets.
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Efficiency, Competition, and Capital Formation
    The proposed amendments have several potential impacts on 
efficiency, competition, and capital formation. First, if publicly 
disclosed aggregate liquidity profiles created an incentive for a fund 
to classify its holdings in a manner that led to a relatively more 
liquid aggregate liquidity profile in order to attract investors, the 
proposed amendments remove any such incentive and potentially reduce 
the likelihood that funds compete based on their aggregate liquidity 
profiles. To the extent that a fund or other registrant's cash and cash 
equivalent holdings are interpreted by investors as being associated 
with lower liquidity risk, funds and other registrants may still have 
some incentive to compete based on their holdings of cash and cash 
equivalents under the proposed amendments.\85\ We do not expect the 
proposed amendments to Form N-1A to have a significant competitive 
effect.
---------------------------------------------------------------------------

    \85\ However, because cash and cash equivalent holdings do not 
generate significant returns relative to other holdings, funds and 
other registrants may have an incentive to shift to non-cash or cash 
equivalent holdings that generate higher returns.
---------------------------------------------------------------------------

    Second, to the extent that publicly disclosed aggregate liquidity 
profiles would have helped investors more accurately evaluate fund 
liquidity risk and make more informed investment decisions, the 
proposed amendments could reduce allocative efficiency. However, to the 
extent that aggregate liquidity profiles on Form N-PORT would have 
increased the likelihood of investors making investment choices based 
on any confusion about a fund's liquidity risk profile, which would 
have harmed the efficient allocation of capital, the proposed 
amendments could increase allocative efficiency. The proposed annual 
discussion of a fund's liquidity risk management program on Form N-1A 
and the proposed requirement that funds and other registrants publicly 
disclose their holdings of cash and cash equivalents on Form N-PORT 
potentially mitigate this reduction in allocative efficiency, but only 
to the extent that these proposed requirements provide information that 
helps investors evaluate fund liquidity risk.
    Finally, to the extent that the information provided by aggregate 
liquidity profiles would have promoted increased investment in certain 
funds, and the assets those funds invest in, rescinding the aggregate 
liquidity profile requirement could reduce capital formation. At the 
same time, we note that the new public disclosure requirements we are 
proposing could offset any reduction in capital formation.
    In summary, we note that all of the impacts described above are 
conditioned upon the usefulness to investors of information that we 
propose to no longer require relative to the usefulness of additional 
proposed disclosures. We cannot estimate the aggregate effect on 
efficiency, competition, or capital formation that will result from the 
new amendments because we do not know the extent to which aggregate 
liquidity risk profiles, narrative discussion of a fund's liquidity 
risk management program, or the amount of cash and cash equivalents 
held by a fund and other registrants are useful to investors in making 
more informed investment choices.

D. Reasonable Alternatives

    The Commission considered several alternatives to the proposed 
amendments to funds public and non-public disclosure requirements. 
First, in order to address any potential issues with the interpretation 
of a fund's aggregate liquidity profile by investors, we could have 
maintained the public disclosure of this profile on Form N-PORT and 
added a requirement that funds publicly disclose on Form N-PORT 
additional information providing context and clarification regarding 
how their aggregate liquidity profile were generated and should be 
interpreted. This alternative would have provided investors with some 
of the benefits of the additional context provided by the proposed 
narrative discussion on Form N-1A, and, to the extent that it increased 
investors' understanding of a fund's aggregate liquidity profile, could 
allow them to make more informed investment choices relative to the 
baseline. However, to the extent that some investors believe that they 
can more easily obtain information in a fund's annual report compared 
to information in the fund's N-PORT filings because annual reports are 
delivered directly to them, and the investors are not as interested in 
being able to access, reuse, and compare the information if included in 
a structured format on Form N-PORT, this alternative would require 
investors to seek out this additional information on EDGAR instead of 
having it delivered directly to them in an annual report. Similarly, we 
could have required funds to disclose an aggregate liquidity profile in 
their annual report along with additional information providing context 
and clarification regarding how its aggregate liquidity profile was 
generated and should be interpreted. If such disclosure increased 
investors' understanding of a fund's aggregate liquidity profile, this 
would allow them to make more informed investment choices relative to 
the baseline, though they would receive this information at an annual 
rather than quarterly frequency.
    Second, instead of requiring a fund to briefly discuss the 
operation and effectiveness of its liquidity risk management program in 
the MDFP section of its annual report, we could have required a more 
specific discussion of the fund's exposure to liquidity risk over the 
preceding year, how the fund managed that risk, and how the fund's 
returns were affected over the preceding year. This alternative could 
have provided investors with a more in-depth understanding of both a 
fund's liquidity risk and the fund's approach to managing that risk, 
which might allow them to make more informed investment decisions 
compared to the proposed discussion of the fund's liquidity risk 
management program. However, we preliminarily believe that this 
alternative would be more costly for funds to implement than the 
proposed narrative discussion on Form N-1A because it might require 
funds to perform a more detailed analysis of their liquidity risk over 
the past year.
    Third, we could have amended both Form N-PORT and rule 22e-4 to

[[Page 11917]]

prescribe an objective approach to classification in which the 
Commission would specify more precise criteria and guidance regarding 
how funds should classify different categories of investments. Such an 
approach could permit consistent comparisons of different funds' 
aggregate liquidity profiles, allowing investors to make more informed 
investment decisions without requiring funds to provide additional 
contextual discussion of their liquidity risk management programs. 
However, as discussed in the Liquidity Adopting Release, the Commission 
may not be able to respond as quickly as market participants to dynamic 
market conditions that might necessitate changes to such criteria and 
guidance, and would be unable to account for determinants of investment 
liquidity that rule 22e-4 treats as fund-specific.\86\
---------------------------------------------------------------------------

    \86\ See Liquidity Adopting Release, supra footnote 2, at n.1143 
and accompanying text.
---------------------------------------------------------------------------

    Finally, we could have required that if funds chose to split the 
classification of any of their portfolio holdings across liquidity 
buckets when reporting them on the non-public portion of Form N-PORT, 
they do so for all of their portfolio holdings. This would have ensured 
that all of the portfolio holdings within a given fund could be 
interpreted more consistently for any monitoring purposes by the 
Commission. However, to the extent that being able to choose the 
classification approach appropriate to each portfolio holding more 
accurately reflects a manager's judgment of that portfolio holding's 
liquidity, any reduction in the consistency of portfolio 
classifications under the proposed amendment could be offset by a more 
accurate assessment of fund liquidity risk.

E. Request for Comment

    We request comment on our analysis of the likely economic effects 
of the proposed form amendments. We also request comment on the 
following:
     To what extent will investors rely on the annual narrative 
discussion of a fund's liquidity risk management program's 
effectiveness in making investment decisions?
     To what extent will investors rely on the quarterly 
disclosure of a fund or other registrant's holdings of cash and cash 
equivalents in making investment decisions?
     Will investors find the new proposed public disclosures 
more or less informative than an aggregate liquidity profile in making 
investment choices? Would investors be better off if both types of 
disclosures were required?
     How much would it cost a fund to discuss the extent and 
manner in which the fund took liquidity risk, the way that risk was 
managed, and the effects of these on the fund's performance over the 
past year in the MDFP section of its annual report? Would it be more 
costly than the proposed narrative discussion of the fund's liquidity 
risk management program in its annual report? If so, how much more 
costly would it be? Are there other benefits of this alternative to 
funds, investors, and other market participants that we should 
consider?
     Do investors have a reason to access, reuse, or compare 
the narrative information? If so, would investors' ease of access and 
usability of the information improve if the information were provided 
in a structured format (e.g., XML, XBRL, Inline XBRL)? If so, which 
structured format would be most useful and why?
     To the extent that certain investors prefer to have 
information about a fund's liquidity risk management delivered to them 
rather than having to seek out that information on EDGAR, would 
investors prefer that information on Form N-PORT pertaining to 
aggregate liquidity risk profiles be delivered to them as a separate 
disclosure in paper or electronic form?
     Are there any other reasonable alternative with 
significant economic impacts that we should consider?

IV. Paperwork Reduction Act

A. Introduction

    The proposed amendments to Form N-PORT and Form N-1A contain 
``collections of information'' within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\87\
---------------------------------------------------------------------------

    \87\ 44 U.S.C. 3501 through 3521.
---------------------------------------------------------------------------

    The title for the existing collections of information are: ``Rule 
30b1-9 and Form N-PORT'' (OMB Control No. 3235-0730); and ``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). The Commission is submitting 
these 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 proposing to amend 
Form N-PORT and Form N-1A. The proposed amendments are designed to 
improve the reporting and disclosure of liquidity information by funds. 
We discuss below the collection of information burdens associated with 
these amendments.

B. Form N-PORT

    As discussed above, on October 13, 2016, the Commission adopted new 
Form N-PORT, which requires all registered management investment 
companies, other than money market funds and small business investment 
companies, and unit investment trusts (``UITs'') that operate as ETFs 
to report information about their monthly portfolio holdings to the 
Commission in a structured data format.\88\ On the same day, the 
Commission adopted amendments to Form N-PORT requiring a fund to 
publicly report on Form N-PORT the aggregate percentage of its 
portfolio investments that falls into each of the four liquidity 
classification categories noted above.\89\ Today, the Commission is 
proposing amendments to rescind the requirement that funds publicly 
disclose their aggregate liquidity profile on a quarterly basis with a 
60-day delay. The Commission also is proposing to require funds and 
other registrants to report to the Commission on a non-public basis the 
amount of cash and cash equivalents in their portfolio on Form N-PORT 
on a monthly basis and to publicly disclose this amount on a quarterly 
basis with a 60 day delay.\90\ Finally, the Commission is proposing to 
allow funds the option of splitting a fund's holding into more than one 
liquidity classification category in certain specified 
circumstances.\91\ As of the end of 2016, there were 9,090 mutual funds 
managing assets of approximately $16 trillion, and there were 1,716 
ETFs managing assets of approximately $2.5 trillion.\92\ Preparing a 
report on Form N-PORT is mandatory and is a collection of information 
under the PRA, and the information required by Form N-PORT will be 
data-tagged in XML format.

[[Page 11918]]

Except for certain reporting items specified in the form,\93\ 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.
---------------------------------------------------------------------------

    \88\ Reporting Modernization Adopting Release, supra footnote 2.
    \89\ Item B.8.a of Form N-PORT. Form N-PORT also requires public 
reporting of the percentage of a fund's highly liquid investments 
that it has segregated to cover, or pledged to satisfy margin 
requirements in connection with, derivatives transactions that are 
classified as moderately liquid, less liquid, or illiquid 
investments. Item B.8.b of Form N-PORT.
    \90\ See supra footnote 15 (noting that the term ``registrant'' 
refers to entities required to file Form N-PORT, including all 
registered management investment companies, other than money market 
funds and small business investment companies, and all ETFs 
(regardless of whether they operate as UITs or management investment 
companies).
    \91\ See Proposed Item C.7.b of Form N-PORT and Instructions.
    \92\ See supra footnote 73 and accompanying text.
    \93\ These items include information reported with respect to a 
fund's Highly Liquid Investment Minimum (Item B.7), derivatives 
transactions (Item B.8), country of risk and economic exposure (Item 
C.5.b), delta (Items C.9.f.v, C.11.c.vii, or C.11.g.iv), liquidity 
classification for portfolio investments (Item C.7), or 
miscellaneous securities (Part D), or explanatory notes related to 
any of those topics (Part E) that is identifiable to any particular 
fund or adviser. See Proposed General Instruction F of Form N-PORT.
---------------------------------------------------------------------------

    In the Liquidity Adopting Release, we estimate that, for the 35% of 
funds that would file reports on Form N-PORT in house, the per fund 
average aggregate annual hour burden will be 144 hours per fund, and 
the average cost to license a third-party software solution will be 
$4,805 per fund per year.\94\ For the remaining 65% of funds that would 
retain the services of a third party to prepare and file reports on 
Form N-PORT on the fund's behalf, we estimate that the average 
aggregate annual hour burden will be 125 hours per fund, and each fund 
will pay an average fee of $11,440 per fund per year for the services 
of third-party service provider. In sum, we estimate that filing 
liquidity-related information on Form N-PORT will impose an average 
total annual hour burden of 144 hours on applicable funds, and all 
applicable funds will incur on average, in the aggregate, external 
annual costs of $103,787,680, or $9,118 per fund.\95\
---------------------------------------------------------------------------

    \94\ See Liquidity Adopting Release, supra footnote 2, at n.1237 
and accompanying text.
    \95\ See Liquidity Adopting Release, supra footnote 2, at n.1238 
and accompanying text.
---------------------------------------------------------------------------

    Today, we are proposing amendments to Form N-PORT to rescind the 
requirement that a fund report the aggregate percentage of the fund's 
portfolio representing each of the four liquidity categories. As 
discussed above, we are rescinding this requirement because we believe 
that Form N-PORT may not be the most accessible and useful way to 
convey to the public information about a fund's liquidity risks and the 
fund's approach to liquidity risk management. Because there would no 
longer be public disclosure of a fund's aggregate liquidity 
classification information, we would also re-designate reporting about 
the amount of a fund's highly liquid investments that are segregated or 
pledged to cover less liquid derivatives transactions to the non-public 
portion of the form. We believe that public disclosure of this 
information would be of limited to no utility to investors without 
broader context and, therefore, may be confusing. However, because we 
would otherwise be unable to determine the amount of a fund's highly 
liquid investments that is actually unavailable to meet redemptions, we 
believe that funds should continue to report this item to us, on a non-
public basis. Finally, we are proposing other amendments to Form N-PORT 
to add an additional disclosure requirement relating to the fund's and 
other registrant's holdings of cash and cash equivalents not reported 
in Parts C and D of the Form \96\ and to allow funds the option of 
splitting a fund's holding into more than one classification category 
in three specified circumstances.\97\ We believe these additional 
amendments enhance, the liquidity data reported to the Commission.\98\ 
In addition, for some funds, these proposed changes may also reduce 
cost burdens as they comply with the rule.
---------------------------------------------------------------------------

    \96\ See proposed Item B.2.f. of Form N-PORT.
    \97\ See proposed Instructions to Form N-PORT Item C.7.
    \98\ See Liquidity Adopting Release, supra footnote 2, at n.293 
and accompanying text (discussing the Commission's need for the 
information reported on Form N-PORT).
---------------------------------------------------------------------------

    Based on Commission staff experience, we believe that our proposal 
to rescind the requirement that funds publicly report the aggregate 
classification information on Form N-PORT will reduce the estimated 
burden hours and costs associated with Form N-PORT by approximately one 
hour. We believe, however, that this reduction in cost will be offset 
by the increase in cost associated with the other proposed amendments 
to Form N-PORT, which we also estimate to be one hour. Therefore, we 
believe that there will be no substantive modification to the existing 
collection of information for Form N-PORT. As a result, the Commission 
believes that the current PRA burden estimates for the existing 
collection of information requirements remain appropriate.

C. Form N-1A

    Form N-1A is the registration form used by open-end investment 
companies. The respondents to the amendments to Form N-1A adopted today 
are open-end management investment companies registered or registering 
with the Commission. Compliance with the disclosure requirements of 
Form N-1A is mandatory, and the responses to the disclosure 
requirements are not confidential. In our most recent Paperwork 
Reduction Act submission for Form N-1A, we estimated for Form N-1A a 
total hour burden of 1,602,751 hours, and the total annual external 
cost burden is $131,139,208.\99\
---------------------------------------------------------------------------

    \99\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2018.
---------------------------------------------------------------------------

    The Commission is proposing to amend Form N-1A to require funds to 
discuss certain aspects of their liquidity risk management program as 
part of their annual reports to shareholders. Specifically we are 
proposing to require a fund to discuss briefly the operation and 
effectiveness of the fund's liquidity risk management program in the 
fund's annual report to shareholders, as part of its MDFP.\100\ We 
believe that this proposed amendment will provide effective disclosure 
that better informs investors of how the fund's liquidity risk and 
liquidity risk management practices affect their investment than the 
Form N-PORT public liquidity risk profile.
---------------------------------------------------------------------------

    \100\ Proposed Item 27(b)(7)(iii) of Form N-1A.
---------------------------------------------------------------------------

    Form N-1A generally imposes two types of reporting burdens on 
investment companies: (i) The burden of preparing and filing the 
initial registration statement; and (ii) the burden of preparing and 
filing post-effective amendments to a previously effective registration 
statement (including post-effective amendments filed pursuant to rule 
485(a) or 485(b) under the Securities Act, as applicable). We estimate 
that each fund would incur a one-time burden of an additional five 
hours,\101\ to draft and finalize the required disclosure and amend its 
registration statement. In aggregate, we estimate that funds would 
incur a one-time burden of an additional 53,990 hours,\102\ to comply 
with the proposed Form N-1A disclosure requirements. Amortizing the 
one-time burden over a three-year period results in an average annual 
burden of an additional 17,996.7 hours.\103\
---------------------------------------------------------------------------

    \101\ This estimate is based on the following calculation: 5 
hours (3 hours for the compliance attorney to consult with the 
liquidity risk management program administrator and other investment 
personnel in order to produce an initial draft of the MDFP 
disclosure + 2 hours for senior officers to familiarize themselves 
with the new disclosure and certify the annual report). These 
calculations stem from the Commission's understanding of the time it 
takes to draft and review MDFP disclosure and to update a fund's 
registration statement.
    \102\ This estimate is based on the following calculations: 5 
hours x 10,798 open-end funds (excluding money market funds and ETFs 
organized as UITs, and including ETFs that are management investment 
companies) = 53,990 hours.
    \103\ This estimate is based on the following calculation: 
53,990 hours / 3 = 17,996.7 average annual burden hours.
---------------------------------------------------------------------------

    Based on Commission staff expertise and experience in reviewing 
registration

[[Page 11919]]

statements, we estimate that each fund would incur an ongoing burden of 
an additional 2.5 hours each year to review and update the required 
disclosure and amend its registration statement.\104\ In aggregate, we 
estimate that funds would incur an annual burden of an additional 
26,995 hours,\105\ to comply with the proposed Form N-1A disclosure 
requirements.
---------------------------------------------------------------------------

    \104\ This estimate is based on the following calculation: 2.5 
hours (2 hours for the compliance attorney to consult with the 
liquidity risk management program administrator and other investment 
personnel in order to produce an initial draft of the MDFP 
disclosure + .5 hours for senior officers to certify the annual 
report). These calculations stem from the Commission staff's 
understanding of the time it takes to review MDFP disclosure and to 
update a fund's registration statement.
    \105\ This estimate is based on the following calculation: 2.5 
hours x 10,798 open-end funds (excluding money market funds and ETFs 
organized as UITs, and including ETFs that are management investment 
companies) = 26,995 hours.
---------------------------------------------------------------------------

    Amortizing these one-time and ongoing hour and cost burdens over 
three years results in an average annual increased burden of 
approximately 3.3 hours per fund.\106\
---------------------------------------------------------------------------

    \106\ This estimate is based on the following calculation: 5 
burden hours (year 1) + 2.5 burden hours (year 2) + 2.5 burden hours 
(year 3) / 3 = 3.3.
---------------------------------------------------------------------------

    In total, we estimate that funds would incur an average annual 
increased burden of approximately 44,991.7 hours,\107\ to comply with 
the proposed Form N-1A disclosure requirements.
---------------------------------------------------------------------------

    \107\ This estimate is based on the following calculation: 
17,996.7 hours + 26,995 hours = 44,991.7 hours.
---------------------------------------------------------------------------

D. Request for Comments

    We request comment on whether our estimates for burden hours and 
any external costs as described above are reasonable. Pursuant to 44 
U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (i) 
Evaluate whether the proposed collections of information are necessary 
for the proper performance of the functions of the Commission, 
including whether the information will have practical utility; (ii) 
evaluate the accuracy of the Commission's estimate of the burden of the 
proposed collections of information; (iii) determine whether there are 
ways to enhance the quality, utility, and clarity of the information to 
be collected; and (iv) determine whether there are ways to minimize the 
burden of the collections of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    The agency is submitting the proposed collections of information to 
OMB for approval. Persons wishing to submit comments on the collection 
of information requirements of the proposed amendments should direct 
them to the Office of Management and Budget, Attention Desk Officer for 
the Securities and Exchange Commission, Office of Information and 
Regulatory Affairs, Washington, DC 20503, and should send a copy to 
Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549-1090, with reference to File No. S7-04-
18. OMB is required to make a decision concerning the collections of 
information between 30 and 60 days after publication of this release; 
therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days after publication of this release. 
Requests for materials submitted to OMB by the Commission with regard 
to these collections of information should be in writing, refer to File 
No. S7-04-18, and be submitted to the Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 
20549-2736.

V. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis in accordance with section 3(a) of the Regulatory 
Flexibility Act (``RFA'').\108\ It relates to proposed amendments to 
Form N-PORT and proposed amendments to Form N-1A.
---------------------------------------------------------------------------

    \108\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons for and Objectives of the Proposed Actions

    The Commission adopted rule 22e-4 and related rule and form 
amendments to enhance the regulatory framework for liquidity risk 
management of funds.\109\ In connection with rule 22e-4, a fund is 
required to publicly report on Form N-PORT the aggregate percentage of 
its portfolio investments that falls into each of the liquidity 
categories enumerated in rule 22e-4. This requirement was designed to 
enhance public disclosure regarding fund liquidity and redemption 
practices. However, since we adopted these requirements, we have 
received letters raising concerns that the public disclosure of a 
fund's aggregate liquidity classification information on Form N-PORT 
may not achieve our intended purpose and may confuse and mislead 
investors. As we discuss further in section II.A above, these letters 
have led us to believe that the approach of disclosing liquidity 
information to the public through Form N-PORT may not be the most 
accessible and useful way to convey fund liquidity information to the 
public, given that only the Commission, and not the public, would have 
access to the more granular information and can request information 
regarding the fund's methodologies and assumptions that would provide 
needed context to understand this reporting.\110\
---------------------------------------------------------------------------

    \109\ See supra section I.
    \110\ See supra section II.A.1 at text following footnote 18.
---------------------------------------------------------------------------

B. Legal Basis

    The Commission is proposing amendments to Form N-1A and Form N-PORT 
under the authority set forth in the Securities Act, particularly 
section 19 thereof [15 U.S.C. 77a et seq.], the Exchange Act, 
particularly sections 10, 13, 15, and 23, and 35A thereof [15 U.S.C. 
78a et seq.], and the Investment Company Act, particularly, sections 8, 
30, and 38 thereof [15 U.S.C. 80a et seq.].

C. Small Entities Subject to the Proposed Liquidity Regulations

    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.\111\ Commission staff estimates that, as of June 
31, 2017, there were 64 open-end investment companies (within 60 fund 
complexes) that would be considered small entities. This number 
includes open-end ETFs.\112\
---------------------------------------------------------------------------

    \111\ See rule 0-10(a) under the Investment Company Act.
    \112\ This estimate is derived from an analysis of data obtained 
from Morningstar Direct as well as data reported on Form N-SAR filed 
with the Commission for the period ending June 30, 2017.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    We are proposing amendments to Form N-1A and Form N-PORT to enhance 
fund disclosure regarding a fund's liquidity risk management practices. 
Specifically, the proposed amendments to Form N-PORT \113\ would 
rescind the requirement that funds publicly disclose aggregate 
liquidity classification information about their portfolios and 
proposed amendments to Form N-1A would require funds to discuss certain 
aspects of their liquidity risk management program as part of their 
annual reports to shareholders.\114\ In addition, we are proposing 
amendments to Form N-PORT to allow funds to report multiple 
classification categories for a single

[[Page 11920]]

position in certain cases \115\ and require funds and other registrants 
to report their holdings of cash and cash equivalents.\116\
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    \113\ See proposed amendments to Item B.8 of Form N-PORT.
    \114\ See proposed amendments to Item 27(b)(7)(iii) of Form N-
1A.
    \115\ See proposed Item C.7.b of Form N-PORT and Instructions.
    \116\ See proposed Item B.2.f. of Form N-PORT.
---------------------------------------------------------------------------

    All funds would be subject to the proposed disclosure and reporting 
requirements, including funds that are small entities. We estimate that 
64 funds (comprising 60 fund complexes) are small entities that would 
be required to comply with the proposed disclosure and reporting 
requirements. As discussed above, we do not believe that our proposed 
amendments will change Form N-PORT's estimated burden hours and 
costs.\117\ We estimate that each fund would incur a one-time burden of 
an additional five hours,\118\ each year to draft and finalize the 
required Form N-1A disclosure and amend its registration statement. For 
purposes of this analysis, Commission staff estimates, based on 
outreach conducted with a variety of funds, that small fund groups will 
incur approximately the same initial and ongoing costs as large fund 
groups. Therefore, in the aggregate, we estimate that funds that are 
small entities would incur a one-time burden of an additional 320 
hours,\119\ to comply with the proposed Form N-1A disclosure 
requirements. Amortizing the one-time burden over a three-year period 
results in an average annual burden of an additional 106.7 hours.\120\ 
We estimate that each fund would incur an ongoing burden of an 
additional 2.5 hours each year to review and update the required Form 
N-1A disclosure and amend its registration statement.\121\ Therefore, 
we estimate that funds that are small entities will incur an ongoing 
burden of an additional 160 hours to comply with the proposed Form N-1A 
disclosure requirements.\122\
---------------------------------------------------------------------------

    \117\ See supra text accompanying footnote 79.
    \118\ See supra footnote 101 (noting that this estimate is based 
on the Commission staff's understanding of the time it takes to 
draft and review MDFP disclosure and to update a fund's registration 
statement, including the time it takes for the compliance attorney 
to consult with the liquidity risk management program administrator 
and other investment personnel in order to produce an initial draft 
of the MDFP disclosure as well as the time it takes for senior 
officers to familiarize themselves with the new disclosure and 
certify the annual report).
    \119\ This estimate is based on the following calculations: 5 
hours x 64 = 320 hours.
    \120\ This estimate is based on the following calculation: 320 
hours / 3 = 106.7 average annual burden hours.
    \121\ See supra footnote 104 and accompanying text (noting that 
this estimate is based on the Commission staff's understanding of 
the time it takes to review MDFP disclosure and to update a fund's 
registration statement, including the time it takes for the 
compliance attorney to consult with the liquidity risk management 
program administrator and other investment personnel in order to 
produce an initial draft of the MDFP disclosure as well as the time 
it takes for senior officers to certify the annual report).
    \122\ This estimate is based on the following calculations: 2.5 
hours x 64 = 160 hours.
---------------------------------------------------------------------------

    Amortizing these one-time and ongoing hour and cost burdens over 
three years results in an average annual increased burden of 
approximately 4.2 hours per fund.\123\ In total, we estimate that funds 
that are small entities would incur an average annual increased burden 
of approximately 266.7 hours, to comply with the proposed Form N-1A 
disclosure requirements.
---------------------------------------------------------------------------

    \123\ This estimate is based on the following calculations: (160 
hours + 106.7 hours) / 64 funds = 4.2 hours.
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission has not identified any federal rules that duplicate, 
overlap, or conflict with the proposed liquidity regulations.

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives 
that would accomplish our stated objectives, while minimizing any 
significant economic impact on small entities. We considered the 
following alternatives for small entities in relation to the proposed 
liquidity disclosure requirements: (i) Exempting funds that are small 
entities from the proposed disclosure requirements on Form N-1A, or 
establishing different disclosure or reporting requirements, or 
different disclosure frequency, to account for resources available to 
small entities; (ii) clarifying, consolidating, or simplifying the 
compliance requirements under the amendments for small entities; (iii) 
using performance rather than design standards; and (iv) exempting 
funds that are small entities from other proposed amendments to Form N-
PORT.
    We do not believe that exempting any subset of funds, including 
funds that are small entities, from the proposed amendments would 
permit us to achieve our stated objectives. Nor do we believe that 
clarifying, consolidating or simplifying the proposed amendments for 
small entities would satisfy those objectives. In particular, we do not 
believe that the interest of investors would be served by these 
alternatives. We believe that all fund investors, including investors 
in funds that are small entities, would benefit from accessible and 
useful disclosure about liquidity risk, with appropriate context, so 
that investors may understand its nature and relevance to their 
investments.\124\ We also believe that all fund investors would benefit 
from the other proposed amendments to Form N-PORT that would preserve, 
and in some cases enhance, the liquidity data reported to the 
Commission by allowing funds to more accurately reflect their 
liquidity.\125\ We note that the current disclosure requirements for 
reports on Forms N-1A and N-PORT do not distinguish between small 
entities and other funds. Finally, we determined to use performance 
rather than design standards for all funds, regardless of size, because 
we believe that providing funds with the flexibility to determine how 
to design their MDFP disclosures allows them the opportunity to tailor 
their disclosure to their specific risk profile. By contrast, we 
determined to use design standards for our proposed amendments to Form 
N-PORT because we believe information reported to the Commission on the 
Form must be uniform to the extent practicable in order for the 
Commission to carry out its oversight and monitoring responsibilities.
---------------------------------------------------------------------------

    \124\ See supra text accompanying footnote 96.
    \125\ See supra section IV.B at text accompanying footnote 98.
---------------------------------------------------------------------------

G. General Request for Comment

    The Commission requests comments regarding this analysis. We 
request comment on the number of small entities that would be subject 
to the proposed form amendments and whether the proposed form 
amendments would have any effects on small entities that have not been 
discussed. We request that commenters describe the nature of any 
effects on small entities subject to the proposed form amendments and 
provide empirical data to support the nature and extent of such 
effects. We also request comment on the estimated compliance burdens of 
the proposed form amendments and how they would affect small entities.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \126\ we must advise OMB whether a proposed 
regulation constitutes a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results in or is likely to 
result in (1) an annual effect on the economy of $100 million or more; 
(2) a major increase in costs or prices for consumers or individual 
industries; or

[[Page 11921]]

(3) significant adverse effects on competition, investment or 
innovation.
---------------------------------------------------------------------------

    \126\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    We request comment on the potential impact of the proposed 
amendments on the potential effect on the economy on an annual basis; 
any potential increase in costs or prices for consumers or individual 
industries; and any potential effect on competition, investment, or 
innovation.
    Commenters are requested to provide empirical data and other 
factual support for their views to the extent possible.

VII. Statutory Authority

    The Commission is proposing amendments to Form N-1A and Form N-PORT 
under the authority set forth in the Securities Act, particularly 
section 19 thereof [15 U.S.C. 77a et seq.], the Exchange Act, 
particularly sections 10, 13, 15, and 23, and 35A thereof [15 U.S.C. 
78a et seq.], and the Investment Company Act, particularly, sections 8, 
30 and 38 thereof [15 U.S.C. 80a et seq.].

List of Subjects in 17 CFR Part 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Rules and Forms

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is amended as follows:

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
1. The authority citation for part 274 continues to read, in part, 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 Pub. L. 111-203, sec 
939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
2. Amend Form N-1A (referenced in 274.11A) by:
0
a. In Item 27 adding new paragraph (b)(7)(iii).
    The addition reads 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

    (a) * * *
    (b) * * *
    (7) Management's Discussion of Fund Performance.
* * * * *
    (iii) Briefly discuss the operation and effectiveness of the Fund's 
liquidity risk management program during the most recently completed 
fiscal year.
* * * * *
0
3. Amend Form N-PORT (referenced in Sec.  274.150) by:
0
a. In the General Instructions, revising the second paragraph of F. 
Public Availability;
0
b. In Part B, amending Item B.2 by adding Item B.2.f;
0
c. In Part B, revising Item B.8;
0
d. In Part C, revising Item C.7; and
0
e. Revising Part F.
    The revisions read as follows:

    Note:  The text of Form N-PORT does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-Port--Monthly Portfolio Investments Report

* * * * *
F. Public Availability
* * * * *
    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 respect to a Fund's Highly Liquid Investment 
Minimum (Item B.7), Derivatives Transactions (Item B.8), country of 
risk and economic exposure (Item C.5.b), delta (Items C.9.f.v, 
C.11.c.vii, or C.11.g.iv), liquidity classification for portfolio 
investments (Item C.7), or miscellaneous securities (Part D), 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.
* * * * *

Part B: Information About the Fund

* * * * *
    Item B.2.f Cash and cash equivalents not reported in Parts C and D.
* * * * *
    Item B.8 Derivatives Transactions. For portfolio investments of 
open-end management investment companies, provide the percentage of the 
Fund's Highly Liquid Investments that it has segregated to cover or 
pledged to satisfy margin requirements in connection with derivatives 
transactions that are classified among the following categories as 
specified in rule 22e-4 [17 CFR 270.22e-4]:

1. Moderately Liquid Investments
2. Less Liquid Investments
3. Illiquid Investments
* * * * *

Part C: Schedule of Portfolio Investments

* * * * *
    Item C.7.a Liquidity classification information.
    For portfolio investments of open-end management investment 
companies, provide the liquidity classification(s) for each portfolio 
investment among the following categories as specified in rule 22e-4 
[17 CFR 270.22e-4]. For portfolio investments with multiple liquidity 
classifications, indicate the percentage amount attributable to each 
classification.

i. Highly Liquid Investments
ii. Moderately Liquid Investments
iii. Less Liquid Investments
iv. Illiquid Investments
    Item C.7.b If attributing multiple classification categories to the 
holding, indicate which of the three circumstances listed in the 
Instructions to Item C.7 is applicable.
    Instructions to Item C. 7 Funds may choose to indicate the 
percentage amount of a holding attributable to multiple classification 
categories only in the following circumstances: (1) If a fund has 
multiple sub-advisers with differing liquidity views; (2) if portions 
of the position have differing liquidity features that justify treating 
the portions separately; or (3) if the fund chooses to classify the 
position through evaluation of how long it would take to liquidate the 
entire position (rather than basing it on the sizes it would reasonably 
anticipated trading). In (1) and (2), a fund would classify using the 
reasonably anticipated trade size for each portion of the position.
* * * * *

Part F: Exhibits

    For reports filed for the end of the first and third quarters of 
the Fund's fiscal year, attach no later than 60 days after the end of 
the reporting period the Fund's complete portfolio holdings as of the 
close of the period covered by the report. These portfolio holdings 
must be presented in accordance with the schedules set forth in 
Sec. Sec.  210.12-12--210.12-14 of Regulation S-X [17 CFR 210.12-12--
210.12-14].
* * * * *

    By the Commission.

    Dated: March 14, 2018
Brent J. Fields,
Secretary.
[FR Doc. 2018-05511 Filed 3-16-18; 8:45 a.m.]
 BILLING CODE P

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