SEC Modernization: A Form N-PORT Regulatory Playbook

Transcription

1 SEC Modernization: A Form N-PORT Regulatory Playbook Includes: One-Page Form N-PORT Regulatory Overview... Page 1 Form N-PORT Paper Form... Page 3 SEC Reporting Modernization FAQs... Page 23 Form N-PORT Data Challenges White Paper... Page 38 July 2017 info@advisetechnologies.com advisetechnologies.com

2 ONE-PAGE FORM N-PORT REGULATORY OVERVIEW advisetechnologies.com Page 1

3 Forms N-PORT & N-CEN Form N-PORT and Form N-CEN are two new reporting forms, recently adopted by the SEC, which require registered investment companies ( RICs ) to report certain information about their funds. With the adoption of Forms N-PORT and N-CEN, the SEC will rescind Forms N-Q and N-SAR. 1 Form N-PORT will require monthly reporting of portfolio holding details to the SEC in a structured XML format. It replaces Form N-Q, the portfolio holdings report currently filed by RICs. Who must report Form N-PORT? All RICs and exchange-traded funds ( ETFs ) organized as unit investment trusts ( UITs ). When does Form N-PORT reporting begin? Compliance dates are based on asset size. RIC Size Compliance Date Larger RICs (NAV $1 billion) June 1, 2018 Smaller RICs (NAV < $1 billion) June 1, 2019 Form N-PORT information requirements (must be reported within 30 days after the end of each month): (a) general information about the fund; (b) assets and liabilities; (c) certain portfolio-level metrics, including certain risk metrics; (d) information regarding securities lending counterparties; (e) information regarding monthly returns; (f) flow information; Form N-CEN will require annual reporting of certain census-type information to the SEC in a structured XML format. Form N-CEN will replace the form currently used to report fund census information, Form N-SAR. Who must report Form N-CEN? All RICs, except face-amount certificate companies. 2 When does Form N-CEN reporting begin? The compliance date for all Form N-CEN filers regardless of asset size is June 1, Form N-CEN information requirements (must be reported within 75 days after the end of the fiscal year 3 ): (a) general information about the fund (completed by all funds); (b) information about the registrant (completed by all funds); (c) items relating to management investment companies (completed by management investment companies other than small business investment companies ( SBICs )); i. background and classification of funds; ii. investments in certain foreign corporations; iii. securities lending; iv. reliance on certain rules; (g) certain information regarding each investment in the portfolio; (h) miscellaneous securities (if any); (i) explanatory notes (if any); and (j) exhibits. RIC Size Compliance Date All RICs June 1, 2018 v. expense limitations; and vi. service providers; (d) information concerning closed-end management companies and SBICs (completed by closed-end funds and SBICs); (e) information specific to ETFs and exchange-traded managed funds ( ETMFs ) (completed by ETFs and ETMFs); (f) information regarding unit investment trusts (completed by UITs); and (g) attachments (completed by all funds, where applicable). 1 Investment Company Reporting Modernization, Investment Company Act Release No (Oct. 13, 2016). 2 Face-amount certificate companies are investment companies which are engaged or propose to engage in the business of issuing face-amount certificates of the installment type, or which have been engaged in such businesses and have any such certificates outstanding. See Section 4(1) of the Investment Company Act. 15 U.S.C. 80a-4(1). 3 Within 75 days after the end of the fiscal year (for RICs) and calendar year-end (for UITs). info@advisetechnologies.com Page 2 July 2017 Advise Technologies

4 FORM N-PORT PAPER FORM advisetechnologies.com Page 3

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

6 82068 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations ER18NO16.060</GPH> Page 5

7 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.061</GPH> Page 6

8 82070 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.062</GPH> Page 7

9 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.063</GPH> Page 8

10 82072 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.064</GPH> Page 9

11 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.065</GPH> Page 10

12 82074 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.066</GPH> Page 11

13 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.067</GPH> Page 12

14 82076 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.068</GPH> Page 13

15 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.069</GPH> Page 14

16 82078 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.070</GPH> Page 15

17 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.071</GPH> Page 16

18 82080 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 4725 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.072</GPH> Page 17

19 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Rules and Regulations mstockstill on DSK3G9T082PROD with RULES2 VerDate Sep<11> :36 Nov 17, 2016 Jkt PO Frm Fmt 4701 Sfmt 9990 E:\FR\FM\18NOR2.SGM 18NOR2 ER18NO16.073</GPH> Page 18

20 issue by: 9. Modify Form N-PORT (referenced in ), as published elsewhere in this a. In the General Instructions E. Definitions, adding definitions of Highly Liquid Investment Minimum and Illiquid Investment in alphabetical order; Availability; b. In the General Instructions, revising the second paragraph of F. Public c. In Part B, adding Item B.7 and Item B.8; and d. In Part C, adding Item C.7. The revisions and additions read as follows: * * * * * E. Definitions * * * FORM N-PORT MONTHLY PORTFOLIO INVESTMENTS REPORT Highly Liquid Investment Minimum has the meaning defined in rule 22e-4(a)(7). Illiquid Investment has the meaning defined in rule 22e-4(a)(8). * * * * * F. Public Availability * * * Page 19

21 The SEC does not intend to make public the information reported on Form N-PORT for the first and second months of each Fund s fiscal quarter that is identifiable to any particular Fund or adviser, or any information reported with regards to a Fund s Highly Liquid Investment Minimum (Item B.7 of this Form), country of risk and economic exposure (Item C.5.b), delta (Items C.9.f.5, C.11.c.vii, or C.11.g.iv), liquidity classification for portfolio investments (Item C.7), or miscellaneous securities (Part D of this Form), or explanatory notes related to any of those topics (Part E) that is identifiable to any particular Fund or adviser. However, the SEC may use information reported on this Form in its regulatory programs, including examinations, investigations, and enforcement actions. * * * * * Part B: Information About the Fund * * * Item B.7 Highly Liquid Investment Minimum Information. a. If applicable, provide the Fund s current Highly Liquid Investment Minimum. b. If applicable, provide the number of days that the Fund s holdings in Highly Liquid Investments fell below the Fund s Highly Liquid Investment Minimum during the reporting period. c. Did the Fund s Highly Liquid Investment Minimum change during the reporting period? [Y/N] 1. If yes, provide any Highly Liquid Investment Minimums set by the fund during the reporting period. Page 20

22 Item B.8 Liquidity aggregate classification information. For portfolio investments of openend management investment companies, provide the following information: a. The aggregate percentage of investments that are assets (excluding any investments that are reflected as liabilities on the Fund s balance sheet) compared to total investments that are assets of the Fund for each of the following categories as specified in rule 22e-4: 1. Highly Liquid Investments 2. Moderately Liquid Investments 3. Less Liquid Investments 4. Illiquid Investments b. Derivatives Transactions. 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 as: 1. Moderately Liquid Investments 2. Less Liquid Investments 3. Illiquid Investments Page 21

23 Part C: Schedule of Portfolio Investments * * * Item C.7. Liquidity classification information. For portfolio investments of open-end management investment companies, provide the liquidity classification for each portfolio investment among the following categories as specified in rule 22e-4: 1. Highly Liquid Investments 2. Moderately Liquid Investments 3. Less Liquid Investments 4. Illiquid Investments * * * * * 14. Section [274. ] is added to read as follows: [274. ] Form N-LIQUID, Current report, open-end investment company liquidity This form shall be used by registered open-end management investment companies, or series thereof, but not including a company or series thereof that is regulated as a money market fund under 270.2a-7 of this chapter, to file reports pursuant to b1-10 of this chapter. Note: The text of Form N-LIQUID will not appear in the Code of Federal Regulations. Page 22

24 SEC REPORTING MODERNIZATION FREQUENTLY ASKED QUESTIONS advisetechnologies.com Page 23

25 Investment Company Reporting Modernization Frequently Asked Questions Published 18 July 2017 The staff of the Division of Investment Management has prepared the following responses to questions related to the investment company reporting modernization reforms adopted in October 2016 and expects to update this document from time to time to include responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved these FAQs or the interpretive answers to these FAQs. The adopting release for the investment company reporting modernization reforms ( Adopting Release ) is available at: If you have questions about filing requirements related to Form N-CEN and Form N-PORT, please contact the IM Investment Company Regulation Office at Those who encounter problems during the testing or filing of those forms or who have questions regarding the technical specifications may StructuredData@sec.gov with the subject line NPORT/NCEN Feedback. This FAQ is also available on the SEC website: Compliance Dates and General Filing Obligations 1. What is the schedule for release of the schema and the beginning of the test filing period, if any, for new Forms N-PORT and N-CEN? The schemas for Forms N-PORT and N-CEN are available for viewing at Test filing will be permitted following EDGAR Release 17.3 later this year. [1] During the testing period, filers should identify their filings as test filings. Live filings will not be permitted, and the system will reject such filings, until the compliance dates for the forms. Test filings will not be evaluated for compliance with the forms or be available for public viewing. Page 24

26 2. What are the respective compliance dates for Form N-PORT, Form N-CEN, the amendments to Regulation S-X, and the securities lending disclosures related amendments to Forms N-1A, N-3, and N- CSR? Form N-PORT: As discussed in the Adopting Release, larger entities 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 have a compliance date of June 1, Smaller entities have a compliance date of June 1, Funds must file reports on Form N-PORT no later than 30 days after the end of each month. Compliance should be based on reporting period-end date. This means, for example, that funds that are part of larger entities would file their first reports on Form N-PORT, reflecting data as of June 30, 2018, no later than July 30, [2] Form N-CEN: The compliance date for Form N-CEN is June 1, 2018 for all funds. Funds must report on Form N-CEN within 75 days of the fund s fiscal year-end (75 days after the calendar year-end for unit investment trusts). Compliance should be based on reporting period-end date. For example, a fund with a June 30 fiscal year-end should make its first filing for the year ended June 30, 2018 on Form N-CEN by September 13, A fund with a May 31 fiscal year-end would not need to make its first filing on Form N-CEN until the fiscal year ending May 31, 2019 (with such filing being made within 75 days of that date) because May 31, 2018 is prior to Form N-CEN s compliance date. Regulation S-X: The compliance date for these amendments is August 1, Compliance should be based on reporting period-end date. For example, financial statements contained in a report on Form N- CSR for the period ended June 30, 2017, need not comply with the amendments to Regulation S-X, even though that report is required to be filed by September 8, 2017 (i.e., 70 days after the period end date). Financial statements in reports on Forms N-CSR, N-Q, 10-K or 10-Q (whether quarterly, semi-annual, or annual) for the period ended August 31, 2017, should comply with the amendments to Regulation S-X since the period ends after the compliance date of August 1, Securities lending disclosures: The compliance date for these amendments to Form N-1A, N-3, and N- CSR is August 1, Compliance should be based on reporting period-end date. Thus, open-end funds and separate accounts offering variable annuity contracts that have fiscal-year ends following the compliance date should reflect these amendments as part of their next annual update of their prospectuses. For example, a July 31 fiscal year-end open-end fund should first reflect the amendments in its prospectus update following the July 31, 2018 fiscal year-end. For closed-end funds, the amendments to Form N-CSR should be reflected beginning with the first Form N-CSR relating to an annual reporting period ended after the compliance date. Thus, a February 28 fiscal year-end closed-end fund should first reflect the amendments in its report on Form N-CSR for the annual reporting period ending February 28, Page 25

27 3. When determining whether a fund is part of a group of related investment companies that has reached the $1 billion threshold that distinguishes larger and smaller entities for Form N-PORT compliance date purposes, should assets of private funds be included in calculating the $1 billion threshold? No. A private fund relying on section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 is not an investment company and thus would not be part of a group of related investment companies. [3] 4. What are funds filing obligations with respect to Form N-Q and Form N-CSR once they are required to comply with Form N-PORT? Once a fund begins filing reports on Form N-PORT, it will no longer be required to file reports on Form N-Q. [4] Moreover, when a fund ceases filing reports on Form N-Q, its certification on Form N-CSR must cover any change in the registrant s internal control over financial reporting that occurred during the most recent fiscal half-year, rather than the registrant s most recent fiscal quarter as currently required. [5] For example, the staff believes that a fund that is part of a larger entity, for which the Form N-PORT compliance date is June 1, 2018, would file the Regulation S-X compliant portfolio schedule as Exhibit F to Form N-PORT relating to the 3rd and 9th fiscal months beginning June 1, 2018, in lieu of Form N-Q, even though Form N-Q will not be rescinded until August 1, As noted above, a fund with a March 31 fiscal year-end that is part of a larger entity should first file a report on Form N-PORT, relating to the month ended June 30, 2018, no later than July 30, 2018 (30 days after the reporting period end date). No later than August 29, 2018 (which is 60 days after the reporting period end date), the fund should file Exhibit F to Form N-PORT containing the fund s Regulation S-X compliant portfolio schedule, listing holdings as of June 30, 2018 (rather than filing a report on Form N- Q containing the portfolio schedule). No later than December 9, 2018 (70 days after the reporting period end date), the fund should also file a report on Form N-CSR for the semi-annual period ended September 30, 2018, with a certification covering any change in the registrant s internal control over financial reporting that occurred during the most recent fiscal half-year. Page 26

28 5. Will money market funds continue to file reports on Form N-Q after the form is rescinded on August 1, 2019? No. A money market fund with a fiscal year-end of August 31 will make its final Form N-Q filing for the quarter ended May 31, This is because the filing is due by July 30, 2019 (60 days after the reporting period end date), which is before the date Form N-Q is rescinded. A money market fund with a fiscal year-end of September 30 would not make a Form N-Q filing for the quarter ended June 30, 2019 (because the filing will be due after the rescission of Form N-Q). Such a fund s final Form N-Q filing will cover the quarter ended December 31, Moreover, when a money market fund ceases filing reports on Form N-Q, its certification on Form N-CSR must cover any change in the registrant s internal control over financial reporting that occurred during the most recent fiscal halfyear, rather than the registrant s most recent fiscal quarter as currently required. [6] Money market funds must, however, continue to post their portfolio holdings on a web site monthly pursuant to rule 2a-7(h)(10) under the Investment Company Act of 1940 and file Form N-MFP monthly pursuant to rule 30b1-7 under the Investment Company Act of Money market funds also must continue to file Form N-Q until the form is rescinded on August 1, If a fund s fiscal year ends on April 30 or May 31, then the fund s final filing on Form N-SAR (due 60 days after its fiscal year-end) would be after Form N-SAR is scheduled to be rescinded on June 1, May the fund file its final report for FY on either Forms N-SAR or N-CEN? The staff believes that funds with a fiscal year-end on April 30 or May 31, 2018 may file their final reports for fiscal year on either Form N-SAR (due 60 days after the reporting period end) or Form N-CEN (due 75 days after the reporting period end). Although reports on Form N-SAR will no longer be required to be filed after June 1, 2018, EDGAR will accept Form N-SAR filings, including amendments to previously filed reports on Form N-SAR, until June 30, Page 27

29 Form N-PORT 1. If a fund uses T+1 accounting to report portfolio holdings on Form N-PORT, may it calculate and report portfolio- and security-level risk metrics on a T+0 basis in Item B.3 and Items C.9.f.5, C.11.c.vii, and C.11.g.iv? The Commission staff would not object if a fund distinguishes between the basis on which it calculates portfolio holdings and the basis on which it calculates risk metrics. Thus, the staff believes that a fund that uses T+1 accounting for daily NAV calculation and for purposes of reporting portfolio holdings on Form N-PORT may calculate and report security- and portfolio-level risk metrics required by the form on a T+0 basis, provided that the reported information also complies with General Instruction G. [7] 2. How will Form N-PORT Part F attachments be added to filings made on Form N-PORT? Funds must file reports on Form N-PORT up to 30 days after the end of each month, but may file Part F attachments up to 60 days after the end of the reporting period. As will be detailed more fully in the EDGAR Filing Manual, Part F attachments and amendments to those attachments should be filed as EDGAR submission types NPORT-EX and NPORT-EX/A, respectively. Funds should also provide the accession number of the related report on Form N-PORT, so that the Part F submission can be attached to that report by the Commission. Adding the Part F attachment in this manner will not cause the original report on Form N-PORT to be marked as amended in EDGAR. Additional details and instructions will be provided in the EDGAR filing manual. 3. Some trusts that have multiple series all with the same fiscal year end currently include in their shareholder reports and on Form N-Q portfolio schedules for each of the different series, as well as one set of financial statement notes that cover all of the different series combined into one document. Can funds continue this practice when filing their Form N-PORT Part F attachments? Yes. The Part F attachment is designed to ensure that notwithstanding the rescission of Form N-Q, portfolio holdings schedules for the first and third fiscal quarters continue to be presented using the form and content which investors are accustomed to viewing in reports on Form N-Q and in shareholder reports. The staff therefore believes that the Part F attachment may contain the portfolio schedule for the series making the filing, as well as the portfolio schedules for the other series in the trust with the same fiscal year-end and one set of financial statement notes that cover all of the different series combined into one Part F attachment. Page 28

30 4. Will reports filed for the month ended December 31, 2018 be the first Form N-PORT filings made public? Yes. The SEC states in the Adopting Release that it has determined to maintain as nonpublic all reports filed on Form N-PORT for the first six months following June 1, This means that reports filed on Form N-PORT for the months ended June 30 through November 30, 2018 will be non-public, and that reports filed for the months ended December 31, 2018 and later will be made public (but only those filings for the third month of each fund s fiscal quarter). Commission staff notes, however, that even during the six-month non-public filing period, portfolio holdings information filed as exhibits to Form N- PORT (i.e., Form N-PORT Part F attachments) for the first and third quarters of the fund s fiscal year will be made public. 5. Form N-PORT requires funds to file reports within 30 days of month-end. How should funds report values for holdings where no market value is available at that point for month-end? In response to commenters, the Commission noted in the Adopting Release that while most closed-end funds do strike their NAV on at least a monthly basis, those funds that do not do so may report information on Form N-PORT by using their internal methodologies consistent with how they report internally and to current and prospective investors, as allowed by General Instruction G to Form N- PORT. [8] Funds that value their holdings by relying upon their internal methodologies in this manner may provide additional information in Part E (explanatory notes to Form N-PORT) explaining the internal methodology. 6. Item B.5.a of Form N-PORT requires funds to report monthly total returns for each of the preceding three months for each class of a multiple class fund, and Item B.5.b of Form N-PORT requires funds to report class identification numbers, if any, of the class(es) for which returns are reported. What happens if a class terminates during the reporting period? A fund should report all information for each of its classes through the reporting period in which the class existed. For example, if a fund class terminates in January, the fund should continue reporting the Items B.5.a and B.5.b information for that class through its March Form N-PORT filing (which would be due thirty days after March 31). The March Form N-PORT filing should include monthly total returns for January, which should include the return information for the terminated class, as well as return information for February and March, which would not include any return information for the terminated class. Funds instead should report N/A for the return information for the terminated class for February and March. See Instruction G to Form N-PORT. [9] Page 29

31 7. Item B.6 of Form N-PORT requires funds to provide aggregate flow information for the preceding three months. How should master portfolios report flow information? The staff believes that master portfolios should provide flow information at the master portfolio level for transactions between the master portfolio and its feeder funds. 8. Items C.2.b and C.2.c require funds to report, for each investment, the currency in which the investment is denominated and the value in U.S. dollars (and if the currency is not denominated in U.S. dollars, the exchange rate used to calculate value). How should funds report this information for foreign forward currency contracts? For foreign forward currency contracts, funds must report value in U.S. dollars in Item C.2.c, however the Commission staff would not object if funds report N/A for the other reporting requirements in Items C.2.b and c because that information is separately reported in Items C.11.e.i and ii (amount and description of currency sold and purchased, respectively). 9. For purposes of Item C.4 (asset and issuer type), how should funds report investments in shares of other funds? In responding to Item C.4.a (asset type) for investments in the shares of other funds, the staff believes that the reporting fund should report the asset type as either short-term investment vehicle (e.g., money market fund, liquidity pool, or other cash management vehicle) or equity-common (other funds). In responding to Item C.4.b (issuer type) for investments in other funds, the staff believes that the reporting fund should report the issuer as registered fund or private fund, as appropriate. 10. For purposes of Item C.6 (identifying restricted securities), may funds consider the guidance provided by the Commission in the Adopting Release for the amendments to Article 12 of Regulation S-X regarding identification of restricted investments? For example, the Adopting Release provides that, for the amendments to Regulation S-X, a fund should indicate that a derivative that cannot be sold as of the reporting date because of a restriction applicable to the investment itself (as opposed to, e.g., illiquidity in the markets) should be identified as a restricted investment. [10] When reporting restricted securities on Form N-PORT, Commission staff believes that funds may consider the Commission guidance provided for amendments to Article 12 of Regulation S-X regarding identification of restricted securities in financial statements. Page 30

32 11. Item C.9.b.i of Form N-PORT requires funds to select the category that most closely reflects the coupon type of debt securities among the following: fixed, floating, variable, none. How should funds distinguish between debt securities that have a floating versus a variable rate of return? The staff believes that funds may look to definitions in rule 2a-7 under the Investment Company Act to make these determinations. Rule 2a-7(a)(13) defines a floating rate security, in part, as a security the terms of which provide for the adjustment of its interest rate whenever a specified interest rate changes. Rule 2a-7(a)(27) defines a variable rate security, in part, as a security the terms of which provide for the adjustment of its interest rate on set dates (such as the last day of a month or calendar quarter). 12. Item C.10.f requires funds to report certain collateral information for securities subject to repurchase agreements, including the principal amount, value of collateral, and category of investments that most closely represents the collateral. Must that information be reported for each category of investments, and to what extent can that information be aggregated? A fund should separately report this information for each category of investments. However, the staff would not object if funds aggregated the principal amount and value of collateral for each category of investments, regardless of whether the collateral is issued by the same issuer. For example, a fund with a repurchase agreement collateralized by approximately $2 million in various asset-backed securities and $1 million in corporate debt securities might respond to Item C.10.f by reporting, in part, as follows: C.10.f.i. $2,000,000, C.10.f.ii. $2,001,932.45, C.10.f.iii. asset-backed securities C.10.f.i. $1,000,000, C.10.f.ii. $1,000,412.23, C.10.f.iii. corporate debt securities 13. Item C.11.c.iii.2 contemplates a tiered reporting structure for the reporting of derivatives where the underlying asset is an index or basket of investments. If the index s or custom basket s components are not publicly available and the notional amount of the derivative represents greater than 1%, but 5% or less, of the net asset value of the fund, the fund will provide the name, identifier, number of shares or notional amount or contract value as of the trade date, and value, for (i) the 50 largest components in the index and (ii) any other components where the notional value for that component is over 1% of the notional value of the index or custom basket. Likewise, if the index s or custom basket s components are not publicly available and the notional amount of the derivative represents more than 5% of the net asset value of the fund, the fund will provide the name, identifier, number of shares or notional amount or contract value as of the trade date, and value, for all of the index s or custom basket s components. Can funds voluntarily report information about all the underlying index components even when such disclosure is not required? Yes. Page 31

33 14. For Form N-PORT and in the amendments to Regulation S-X, the reporting of notional amount is required for many different derivatives investments, but can be calculated in different ways. Is there a prescribed calculation of notional amount that funds should follow? The Commission staff understands that funds currently use different methods for calculating notional amount of a derivatives investment. For example, the staff understands that some common methods used by funds for determining a derivative transaction s notional amount may include the methods listed in Table 1 on page 69 of the Derivatives Proposing Release. [11] However, the staff notes that funds would not delta-adjust the notional amount for options, as reflected in Table 1, because Form N- PORT separately requires delta and Article 12 of Regulation S-X specifically requires notional amount without a delta adjustment. 15. Should funds report TBAs on Form N-PORT as derivatives? To Be Announced or TBAs is a phrase commonly used to describe forward mortgage-backed securities trades. The term TBA is derived from the fact that the actual mortgage-backed security that will be delivered to fulfill a TBA trade is not designated at the time the trade is made. The staff recognizes that some funds currently disclose TBAs in their financial statements either as derivatives or securities, depending on, among other factors, whether TBAs are cash settled (derivative) or physically settled (security). Instruction G to Form N-PORT provides that funds may respond using their own internal methodologies and the conventions of their service providers, provided the information is consistent with information that they report internally and to current and prospective investors. Thus, the staff believes that to the extent funds categorize TBAs as derivatives in their portfolio holdings, as reported internally and to current and prospective investors, they may also do so in their reports on Form N-PORT. Page 32

34 Regulation S-X 1. Rules 12-13, 12-13A, 12-13B, 12-13C, 12-13D, and prescribe information to be presented for derivatives contracts, other investments, and investments in affiliates. The rules contemplate a tabular format where each row is an individual contract or investment, and each column is a specified data element (e.g., description, number of contracts, expiration date, notional amount). Must the columns appear in the exact order specified in the rules, and to the extent that certain columns contain the same information, can such columns be merged if the heading of the merged column appropriately discloses what the information represents? The staff believes that the order of the columns need not be the same as the order set forth in the rules. Additionally, when columns contain the same information, the staff believes that the information may be provided in a single column provided that the heading to the column clearly discloses what the information represents. For example, when the value of a futures contract is the same as the unrealized appreciation or depreciation on the contract, the value and unrealized appreciation or depreciation on the contract may be presented under one column with a heading such as Value and unrealized appreciation/depreciation. 2. Article 12 of Regulation S-X requires, in certain circumstances, for derivatives where the underlying asset is an index or basket of investments, that funds disclose the 50 largest components in the index or custom basket. How should short positions be treated for these purposes? Will every underlying instrument have a notional value to determine this calculation? For purposes of these calculations, the staff believes that the notional values of short positions should be treated in terms of their absolute values because Article 12 requires that the fund disclose the largest components of an index or basket and the staff believes that the magnitude of a component does not depend on whether the position is long or short. The staff recognizes that all components would have a notional amount or other metric to evaluate the magnitude of the components in the index or custom basket, although the staff believes that the metric utilized could be determined differently based on the nature of the investment. For example, notional amount should be used for swaps, while the staff believes par value and value could be used for bonds and equities, respectively. Page 33

35 3. Article 12 of Regulation S-X requires, in certain circumstances, for derivatives where the underlying asset is an index or basket of investments, that funds disclose for each component of the index or custom basket a description of the underlying investment as required by [rules] , 12-13, 12-13A, 12-13B or 12-13D as part of the description. Rules 12-12, 12-13, 12-13A, 12-13B and 12-13D, in turn, require a fund to disclose information about each investment in columns, and each column has notes describing certain requirements. Do funds need to include in the description of each component of an index or custom basket all of the information required by the notes to all of the columns in rules 12-12, 12-13, 12-13A, 12-13B or 12-13D, or only the information required by the notes in certain columns related to the description of the components? When providing a description of the components of the index or custom basket, the staff would not object if funds limit their disclosures to the information required by the column in each of the tables included in Article 12 that relate to the description of the instrument, including any notes in that column. For example, if the underlying component of the index or basket of investments is a derivative that would normally be presented in accordance with rule of Regulation S-X, the staff believes that the fund should provide the information required by Column A (description), including the notes to Column A. [12] The staff believes, if the underlying component is a security that would normally be presented in accordance with rule of Regulation S-X, the fund would provide the information required by Column A of rule (related to the name of the issuer and the title of the issue), including the notes to Column A. [13] 4. Rules through 12-13D require funds to "[i]ndicate by an appropriate symbol each investment which cannot be sold because of restrictions or conditions applicable to the investment." [14] Certain derivatives transactions may be subject to limitations such that they cannot be sold, but the fund would be able to exit the transaction through other means, such as through the execution of an offsetting transaction. For example, a fund would exit a futures transaction by entering into an offsetting transaction. How should the fund treat these types of transactions for the purposes of rules to 12-13D? The Commission staff recognizes that a fund may exit derivatives transactions through means other than sale, such as through a negotiated agreement with the fund s counterparty, a transfer to another party, or close out of the position through execution of an offsetting transaction. [15] The staff believes that a fund should identify a derivatives transaction as restricted if, as of the balance sheet date, the fund would not have been able to exit the transaction. Page 34

36 5. Do the disclosures required by rule of Regulation S-X regarding investments in and advances to affiliates need to be presented in the schedule of investments, or can they be presented in the notes to the financial statements? The Commission staff understands that the disclosures required by rule relate to investments that are already presented in the schedule of investments under rules and through 12-13D, and, as such and to preserve the readability of the schedule of investments, would not object if funds chose to provide the additional disclosures required by rule in the notes to the financial statements. 6. Rule of S-X requires a fund to "State separately amounts held by others in connection with: (a) short sales; (b) open options contracts; (c) futures contracts; (d) forward foreign currency contracts; (e) swap contracts; and (f) investments-other than those presented in rules , 12-12A, 12-12B, 12-13, 12-13A, 12-13B and 12-13C. In some cases, however, a fund s counterparty will collect margin or collateral for all open derivatives transactions between the fund and the counterparty. That is, the fund will post (or receive) a single net amount of margin or collateral for all of the fund s open transactions. The counterparty will not separately collect margin or collateral for each particular type of transaction, making it not practicable for the fund to identify the portions of any margin or collateral posted by the fund attributable to each of the types of investments specified in Rule In these circumstances, may a fund instead provide disclosure about the arrangements with counterparties in the notes to the financial statements that includes a description of the rights of setoff and the amounts held by each counterparty in connection with the investments specified in Rule ? The Commission staff would not object to a fund providing the amounts held by others in connection with derivative contracts by counterparty in the notes to the financial statements under these circumstances, provided that the disclosure also includes the rights of setoff associated with the investments and the effect of the arrangements with counterparties on the fund s balance sheet. [16] Page 35

37 Form N-CEN 1. How should information be reported for Item C.2.a of Form N-CEN (number of authorized classes of shares of the fund) for funds that have not adopted a plan pursuant to rule 18f-3? We understand that some open-end funds and exchange-traded funds consist of a series without an authorized class (i.e., funds that have not adopted a plan pursuant to rule 18f-3). In this case, the fund would have a class ID only because EDGAR issues every series a corresponding class ID. The staff believes that a fund without an authorized class should report 0 to Item C.2.a (number of authorized classes of shares of the fund). However, as per the requirements of Form N-CEN, the fund must report its ticker and class ID if applicable in response to Item C.2.d (which requests the name, class ID and ticker of each class with shares outstanding). 2. Item C.10.vii of Form N-CEN requires funds to report information on sub-transfer agents. Are funds required to report information on intermediaries, such as broker-dealers, that provide sub-transfer agent or administrative services for their customers whose shares are maintained in omnibus accounts with the fund s primary transfer agent? No. Item C.10.vii requires funds to report their transfer agent arrangements, including arrangements where systems, transaction processing and services are provided by sub-transfer agents in supporting the fund s primary transfer agent systems and recordkeeping functions (such as part of a remote systems or hybrid or fully outsourced arrangement). [17] In the staff s view, for purposes of Item C.10.vii, funds do not need to identify intermediary arrangements (e.g., with broker-dealer firms and other intermediaries such as retirement plan thirdparty administrators) that are administrative service type arrangements (also sometimes referred to as sub-accounting and sub-transfer agent arrangements), because such firms are engaging with the primary transfer agent as record owners of fund shares and conducting transactions with fund s transfer agent on behalf of their customers who are beneficial or underlying shareholders in funds, and such arrangements are not part of the primary transfer agent s recordkeeping arrangement with the fund, as described above. 3. If a variable insurance product no longer files post-effective prospectus amendments, for example, because the variable insurance product is no longer being sold, [18] is the registrant still required to file reports on Form N-CEN? Variable insurance products are required to file periodic reports with the Commission pursuant to section 30 of the Investment Company Act and therefore must continue to file annual reports on Form N-CEN even when the variable insurance product no longer files post-effective amendments. Page 36

38 References: [1] The planned deployment date for EDGAR Release 17.3 is September [2] Note that June 30, 2018 is a Saturday. Per Instruction A to Form N-PORT, funds must report information about their portfolios and each of their portfolio holdings as of the last business day, or last calendar day of the month. [3] Section 3(c)(1) excludes from the definition of investment company any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make a public offering of its securities. Section 3(c)(7) excludes from the definition of investment company any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities. [4] See Adopting Release, at section II.B.1. [5] See Adopting Release, at section II.B.2. [6] See Adopting Release, at section II.B.2. [7] Instruction G to Form N-PORT provides that funds may respond using their own internal methodologies and the conventions of their service providers, provided the information is consistent with information that they report internally and to current and prospective investors. [8] See Adopting Release at n.460 and accompanying text. [9] Instruction G states that, [i]f a sub-item requests information that is not applicable (for example, an LEI for a counterparty that does not have an LEI), respond N/A. [10] See Adopting Release, at section II.C.4. See also rule 12-13, n.6 of Regulation S-X; see also rules 12-13A, n.4; 12-13B, n.2; 12-13C, n.5; and 12-13D, n.6 of Regulation S-X. [11] See Use of Derivatives by Registered Investment Companies and Business Development Companies, Investment Company Act Release No (Dec. 11, 2015) [80 FR (Dec. 28, 2015)] ( Derivatives Proposing Release ), at text following n.162. [12] See, e.g., Rule 12-13, nn.1, 2, and 3 of Regulation S-X. [13] See, e.g., Rule 12-12, nn.1, 2, 3, and 4 of Regulation S-X. [14] See Rules 12-13, n.6; 12-13A, n.4; 12-13B, n.2; 12-13C, n.5; 12-13D, n.6 of Regulation S-X. [15] See, e.g., Derivatives Proposing Release, at text following footnote 335. [16] See ASC [17] See also Adopting Release, at section II.D.4.c.vi. [18] See, e.g., Great-West Life & Annuity Insurance Co., SEC Staff No-Action Letter (Oct. 23, 1990). Page 37

39 FORM N-PORT DATA CHALLENGES WHITE PAPER advisetechnologies.com Page 38

40 Form N-PORT: Highlighted Data Challenges The Impact of Form N-PORT s Data Requirements on Asset Managers Introduction Form N-PORT will require all Registered Investment Companies (RICs) and exchanged traded funds (ETFs) organized as unit investment trusts (UITs) to disclose portfolio holding details on a monthly basis. This new reporting form which has a June 1, 2018 compliance date for RICs with a NAV $1 billion will present several new challenges related to data for filers, including: Adjusting to public disclosure requirements Developing processes to source and report new data points Determining methodologies related to risk reporting Preparing and reporting all required data in a structured XML format within 30 days 1 To help firms prepare for this rigorous requirement, Advise reviewed the SEC s Investment Company Reporting Modernization release 2 (the Release ) to determine its impact on investment managers. We have highlighted key challenges for filers below. 1. Data Visible to the Public What the Release Says 3 Information reported on Form N-PORT for the third month of each Fund s fiscal quarter will be made publicly available 60 days after the end of the Fund s fiscal quarter. The SEC does not intend to make public the information reported on Form N-PORT for the first and second months of each Fund s fiscal quarter that is identifiable to any particular fund or adviser, or any information reported with regards to country of risk and economic exposure (Item C.5.b of this Form), delta (Items C.9.f.5, C.11.c.vii, or C.11.g.iv), or miscellaneous securities (Part D of this Form), or explanatory notes related to any of those topics (Part E) that is identifiable to any particular fund or adviser. However, the SEC may use information reported on this Form in its regulatory programs, including examinations, investigations, and enforcement actions. 4 What this Means Summary: Unlike some other reporting forms, portions of Form N-PORT will be made public. Specifically, information reported for the third month of each firm s fiscal quarter will be made public 60 days after the end of the quarter. NOTE: Form N-PORT filings made for six months after June 1, 2018 will be non-public. Impact: Answers that will be made public appear throughout the form (as opposed to being in one section of the form). As such, asset managers will need to become familiar with what information will be made public and when the information will be disclosed. A Form N-PORT filing covering the third month of a fund s fiscal quarter will be made publicly available on a 60 day lag. Page 39

41 A Form N-PORT filing for the first or second month of a fund s fiscal quarter will not be made publicly available. 5 The following items will never be made public: Highly liquid investment minimum (Item B.7) Country of risk/economic exposure (Item C.5.b) Delta (Items C.9.f.5, C.11.c.vii, and C.11.g.iv) Liquidity classification for portfolio investments (Item C.7) Miscellaneous securities (Part D) Explanatory notes pertaining to any non-public item (Part E) Additionally, Part F which reports the fund s complete portfolio holdings and is required in reports filed for the end of the first and third quarters of the fund s fiscal year will be made public on a 60 day lag. Asset managers may want to consider using a reporting solution that visually highlights information that will be made public during filing preparation. A quick reference guide to the filings that will be made publicly available appears below: Quarter Month Will the Form N-PORT filing covering this month be made publicly available? Will portfolio holdings (Part F) be made publicly available? Fiscal Quarter 1 Month 1 No No Month 2 No No Month 3 Yes, 60 days after the fiscal quarter ends Yes, 60 days after the fiscal quarter ends Fiscal Quarter 2 Month 4 No No Month 5 No No Month 6 Yes, 60 days after the fiscal quarter ends Fiscal Quarter 3 Month 7 No No Month 8 No No Month 9 Yes, 60 days after the fiscal quarter ends No Yes, 60 days after the fiscal quarter ends Fiscal Quarter 4 Month 10 No No Month 11 No No Month 12 Yes, 60 days after the fiscal quarter ends No Page 40

42 2. No substitute compliance regime for Form N-PORT & CPO-PQR What the Release Says Another commenter suggested that the Commission and the CFTC should agree on and implement a substituted compliance regime. Although we recognize that there are various alternative reporting requirements imposed in other contexts and by other regulators, the reporting requirements imposed by Form N-PORT have been designed specifically to meet the Commission s regulatory needs with regards to monitoring and oversight of registered funds. 6 What this Means Summary: No substitute compliance regime will be established, so firms that were hoping to avoid filing Form N-PORT because they already file CPO-PQR are out of luck. The SEC has designed Form N-PORT to meet its needs, and it will be required for all firms who meet the reporting criteria (regardless of their other regulatory filings). Impact: Affected firms will need to complete two regulatory filings Form N-PORT and CPO-PQR instead of one. Asset managers who already file CPO-PQR will need to prepare to also meet Form N-PORT s reporting requirements (which include different asset classification requirements) and develop processes for preparing and reporting data. 3. Reporting per Series (with multiple series) What the Release Says We are adopting, as proposed, the requirement that each registered management investment company and each ETF organized as a UIT file a report on Form N-PORT. Registrants offering multiple series will be required to file a report for each series separately, even if some information is the same for two or more series. 7 What this Means Summary: Form N-PORT will require asset managers organized as UITs to report at the series level (if applicable). This is different than most other forms, which ask firms to report at the fund level. Impact: For UITs, Form N-PORT reporting may take longer to complete than other forms because of its requirement to report at the series level. 8 This means that asset managers who have series funds will need to file a separate Form N-PORT for each series. Page 41

43 Preparing data at the series level may place an additional burden on your data sources or fund administrators, as this information is not typically reported on other forms. 4. Criteria to include securities in Part D MISC section What the Release Says As currently permitted by Regulation S-X, and as further discussed below, Form N-PORT permits funds to report an aggregate amount not exceeding 5 percent of the total value of their portfolio investments in one amount as Miscellaneous securities, provided that securities so listed are not restricted, have been held for not more than one year prior to the date of the related balance sheet, and have not previously been reported by name to the shareholders, or set forth in any registration statement, application, or report to shareholders or otherwise made available to the public. 9 What this Means Summary: Information on almost all securities the asset manager holds will be reported publicly. To classify a security as under the Miscellaneous securities umbrella and avoid public disclosure, four very specific criteria must be met: 1. The aggregate of all securities classified as Miscellaneous securities cannot exceed 5% of the total value of the portfolio s investments. 2. The security is not restricted. 3. The security has been held for not more than 1 year prior to the date of the related balance sheet. 4. The security has not previously been reported to shareholders, in a registration statement, application, or any other report available to shareholders or the public. If a security does not meet all four conditions outlined above, then it will need to be reported publicly. Impact: This Form N-PORT reporting requirement is unique among reporting forms other forms request security information at an aggregate level, rather than at the individual security level so asset managers will need to develop a process that allows them to track and report on the securities they hold on a monthly basis. This will likely place an additional burden on your typical data sources or fund administrators, especially during initial filings. An automated reporting solution may be required to help asset managers identify and track the securities that can be reported as Miscellaneous securities. Page 42

44 5. Realized/unrealized gains and losses per security What the Release Says We are also requiring, substantially as proposed, that funds report, for each of the preceding three months, monthly net realized gain (or loss) and net change in unrealized appreciation (or depreciation) attributable to derivatives for certain categories. In order to provide a point of comparison, and as proposed, we are also requiring that funds report, for each of the last three months, monthly net realized gain (or loss) and net change in unrealized appreciation (or depreciation) for investments other than derivatives. 10 What this Means Summary: Form N-PORT will require firms to report details on realized/unrealized gains and losses per security over a three-month period. Impact: This level of scrutiny does not appear on other reporting forms, so it is likely that asset managers will need to develop a process to prepare and report this information. Developing this process is likely to place an additional burden on your typical data sources or fund administrator, especially during initial filing periods. Asset managers will need to be very careful when reporting this information to ensure it reconciles with the details reported on publicly reported financial statements. 6. Borrower/Lender details What the Release Says Securities lending may implicate certain provisions of the Investment Company Act, and funds that engage in securities lending do so in reliance on Commission staff no-action letters, and in some circumstances, exemptive orders. Funds that rely on these letters and orders are subject to conditions on a number of aspects of their securities lending activities, including loan collateralization and termination, fees and compensation, board approval and oversight, and voting of proxies. Currently, the information that funds are required to report about securities lending activity, whether in a structured format or otherwise, is limited. As proposed, to address these data gaps and provide additional information to the Commission, investors, and other potential users regarding a fund s securities lending activities, we are requiring funds to report certain borrower information and position-level information monthly on Form N- PORT. 11 We also received several comments requesting that we revise Form N-PORT to phase in reporting of securities lending borrowers LEIs. Commenters urged that this requirement be delayed until LEIs have Page 43

45 been fully integrated into the global financial system and lending agents and funds have implemented the necessary systems enhancements to facilitate LEI reporting. Form N-PORT instructs funds to report LEIs if any for borrowers, and thus already acknowledges and makes accommodations for the fact that LEI identifiers may not be available in some contexts as LEIs are continuing to be integrated into the global financial system. 12 What this Means Summary: Form N-PORT will require asset managers to provide transparency on securities borrowing and lending. Firms will need to report information including details on income obtained from cash collateral or reinvestment of non-cash collateral, as well if a security is financed by a loan. If available, the LEI of the borrower/lender will also need to be accurately tracked and reported. Impact: While other forms request information related to securities borrowing and lending, Form N-PORT requests details at a much more granular level; Form N-PORT is essentially asking for details that track the security from when it is initially bought to when it is eventually sold. It is unlikely most asset managers currently have this information available. As such, asset managers will need to work with their typical data sources and brokers/prime brokers to develop a process to track and report this information. Sourcing these details from brokers/prime brokers may be especially difficult, as this information is not typically provided to asset managers. Asset managers will also need to adjust to disclosing all details on borrowing and lending of securities. Previously, this information was not made available to the SEC or investors. Now, those groups will be able to see information including the counterparty who borrowed the security, which may affect investor decisions. 7. In Default, Interest Paid-in-Kind, and Mandatory/Contingent Conversion What the Release Says As proposed, funds would also indicate whether the security is currently in default, whether interest payments for the security are in arrears or whether any coupon payments have been legally deferred by the issuer, as well as whether any portion of the interest is paid in kind 13 As we discuss in more detail in section II.C.3 below, commenters noted that in-kind payments where the fund elects to receive payments-in-kind (as opposed to cash) do not raise the same risks as an issuer that only makes in-kind payments, because such a scenario does not represent an issuer who may be in financial difficulties and cannot pay cash dividends, as opposed to an investor who merely chooses to receive in-kind dividends rather than cash. We agree and are adding an additional clarifying clause to Item C.9.e that a fund should not designate interest as paid-in-kind if the fund has the option to elect an in-kind payment and has elected to be paid-in-kind. Finally, we proposed to require additional information for convertible securities, to indicate whether the conversion is mandatory or contingent. 14 Page 44

46 What this Means Summary: Form N-PORT will require extensive reporting of information related to fixed income and convertible instruments. Specifically, the form requires details on in default, interest paid-in-kind, and mandatory/contingent conversion situations that may be out of the asset manager s control. Impact: These details on fixed income and convertible instruments are not required on other reporting forms. As such, asset managers will need to develop a process to track and report this information. This requirement is likely to be time consuming for your typical data sources and/or fund administrators, especially during initial filing periods. 8. Country of Issuer and Concentration of Risk What the Release Says As proposed, Form N-PORT would have required funds to report the country that corresponds to the country of investment or issuer based on the concentrations of the investment s risk and economic exposure, and, if different, the country in which the issuer is organized. As adopted, Form N-PORT will switch the sequence of those disclosures, thus requiring funds to report the country in which the issuer is organized and, if different, the country that corresponds to the country of investment or issuer based on the concentrations of the investment s risk and economic exposure. 15 Partly in response to these concerns, and as discussed above, we are revising Form N-PORT to include instructions clarifying that in reporting information on Form N-PORT, funds may generally use their own internal methodologies and the conventions of their service providers, provided that the information they report is consistent with information that they report elsewhere (e.g., the fund s schedule of portfolio holdings as prepared pursuant to Regulation S-X). 16 What this Means Summary: Form N-PORT will require asset managers to report the country where the issuer is organized, OR the country of the investment s economic exposure. Impact: Most mutual funds have not had to report this information before. 17 As such, these firms will need to develop a process to track and report this information, which could place an additional burden on your typical data sources or fund administrators. When preparing this information, firms will need to be careful to select a methodology (either internal or using the conventions of a service provider) that is consistent with other reporting to investors. Note that whatever methodology is selected will also need to be used in future as well to allow comparison across reports. Page 45

47 Details on your methodology will need to be disclosed in Section E of Form N-PORT. 9. Deltas for Convertible Bonds What the Release Says Another commenter noted that calculating deltas for convertible bonds using the Black-Scholes model, which is commonly used for calculating the delta for options would be impractical and therefore requested further clarification for calculating delta for convertible bonds. As discussed above, while we believe that it is important to receive consistent reporting between funds, we have endeavored to limit burdens on funds, when possible. Thus, rather than provide prescriptive instructions for funds to calculate delta, General Instruction G to Form N-PORT now clarifies that funds may use their own current methodology. 18 What this Means Summary: Form N-PORT will require asset managers to report delta information for convertible bonds. Firms will be able to report this information using their existing methodology. Impact: Many mutual funds have not had to report this information before, so these firms will need to develop a process to track and report this information. This requirement could place an additional burden on your typical data sources or fund administrators, especially during initial filing periods. Asset managers will need to ensure the methodology used is: Consistent with details reported to investors. Relevant to your strategy. Applicable across all investments, including those in emerging markets where sourcing delta information may be more difficult. 10. Interest Rate Risk (DV01, DV100) and Spread Risk (SDV01/CR01/CS01) What the Release Says We have, however, made certain modifications to the proposed reporting requirements regarding the reporting of risk metrics in response to comments received. For example, as discussed in detail above, we are requiring the reporting of fewer key rates to reduce the reporting burden for funds, adopting a 1% de minimis threshold for reporting risk metrics for each currency to which the fund is exposed, and raising the threshold for fixed income allocation for risk reporting from 20% to 25% to align the reporting requirement with current disclosures required in the prospectus. To the extent that adopting a de minimis amount for reporting risk metrics for each currency will prevent the Commission, investors, and other users from seeing an exhaustive view of fund s currency risk exposures, there could be a reduction in the informational benefit to the Commission, investors, and other users relative to Page 46

48 the proposal. However, relative to the baseline, we believe the economic effects of the disclosure of currency risk metrics are substantially similar with or without the adoption of a de minimis. 19 Moreover, for purposes of this calculation, we believe that it is appropriate to measure whether such derivative instrument exceeds the 1% threshold based on the derivative s notional value, as opposed to the current market value of the derivative, because derivatives with a small market value could have a much larger potential impact on a fund s performance than the current market value would suggest, and thus believe that a derivative s notional value better measures its potential contribution to the gains or losses of the fund. 20 What this Means Summary: Asset managers with portfolios where fixed income securities represent >25% of NAV will need to report risk metrics for those securities. Impact: Where applicable, the interest rate risk metrics required by Form N-PORT are much more extensive than those reported on other forms. As such, asset managers will need to develop a process to prepare and report this information. We anticipate this could be a very time intensive task that places a significant burden on your typical data sources, fund administrators, or risk data vendors. Asset managers will need to continually monitor their portfolio to see if it crosses >25% fixed income securities threshold that will trigger this reporting requirement. Firms that trade anywhere near this range will need to be diligent because market movements could lead to a crossed threshold, even if your strategy is typically different. For additional details on how Form N-PORT s risk metric requirements compare to other forms, see Risk Measures Overview: A Cross-Form Comparison Guide Derivatives classified as Other What the Release Says Finally, for derivatives that do not fall into the categories enumerated in Form N-PORT, we proposed that funds would provide a description of information sufficient for a user of financial information to understand the nature and terms of the investment. This description would include, as applicable, currency, payment terms, payment rates, call or put features, exercise price, and a description of the reference instrument, among other things. As proposed, the description of the reference instrument would conform to the same requirements as the description of reference instruments for options and warrants. Funds would also report termination or maturity (if any), notional amount(s), unrealized appreciation or depreciation, and the delta (if applicable). 22 Page 47

49 What this Means Summary: Form N-PORT requires asset managers to provide transparency on their derivative holdings by classifying them into categories outlined in the form. Derivatives that do not fit into a prescribed category will need to be classified as Other and firms will need to provide detailed information about these holdings. Asset managers who trade in derivatives extensively or frequently are most likely to be impacted by this requirement. Impact: Asset managers will need to build a process that: Allows for mapping of all derivatives into one of the form s designated categories. Enables the firm to provide extensive details on any derivatives that are classified as Other. This may be difficult at times because of the possible exotic nature of these investments. Preparing this filing data may be time intensive for your typical data sources or fund administrators. 12. Derivatives with an Index/Basket as the underlier What the Release Says Accordingly, we are adopting a tiered reporting structure for the reporting of the components of an index or custom basket underlying a derivative. For investments in a non-public index or custom basket that represent more than 1%, but less than 5%, of a fund s net assets, funds will be required to report the top 50 components of the basket and, in addition, those components that exceed 1% of the notional value of the index. For investments in a non-public index or custom basket that exceed 5% of a fund s net assets, funds will be required to report all components. We developed this tiered threshold in response to commenters, discussed above, that suggested a higher de minimis threshold of 5% of net assets for requiring any reporting of the underlying components. We recognize that this approach will be more burdensome for funds holding investments that fall within these thresholds than raising the de minimis for any reporting of components to 5% of net assets, which was suggested by some commenters. We believe, however, that investments representing between 1% and 5% of a fund s net assets are sufficiently significant to a fund that some reporting of individual components is appropriate and will help the Commission staff and investors to understand a fund s indirect exposures to investments that are the most significant components of the index. 23 We recognize that some derivatives have underlying assets that are indexes of securities or other assets or a custom basket of assets, the components of which are not always publicly available. We proposed requirements to ensure that the Commission, investors, and other potential users are aware of the components of such indexes or custom baskets. As proposed, if the reference instrument is an index for which the components are publicly available on a website and are updated on that website no less frequently than quarterly, funds would identify the index and provide the index identifier, if any. Page 48

50 We proposed to require at least quarterly public disclosure for the components of the index because it matches the frequency with which funds are currently required and, as adopted in this release, would continue to be required, to disclose their portfolio investments. 24 Likewise, if the index s or custom basket s components are not publicly available and the notional amount of the derivative represents more than 5% of the net asset value of the fund, the fund will provide the name, identifier, number of shares or notional amount or contract value as of the trade date (all of which would be reported as negative for short positions), and value, for all of the index s or custom basket s components. We also proposed to require funds to report the delta of options and warrants, which is the ratio of the change in the value of the option or warrant to the change in the value of the reference instrument. This measure reflects the sensitivity of the value of the option or warrant to changes in the price of the reference instrument. 25 What this Means Summary: Form N-PORT provides complex and extensive rules on how derivatives that use an index/basket as the underlier should be reported. Reporting on the underlying components will be tiered: Impact: For investments that are between 1%-5% of the fund s NAV, firms will be required to report on the top 50 components of the basket AND components that exceed 1% of the notional value of the index. If a custom basket is used as a benchmark and its components that are publicly available and updated quarterly, then the asset manager may simply reference the basket on Form N-PORT. For investments that are > 5% of the fund s NAV, firms will be required to report on all components of the index and additional components detailed below. Similar to above, If a custom basket is used as a benchmark and its components that are publicly available and updated quarterly, then the asset manager may simply reference the basket on Form N-PORT. If the components of a custom basket are not publicly available and > 5% of NAV, then the asset manager will need to report details on all of the basket s components. Additionally, delta values will need to be provided for options/warrants, and risk calculation methodologies will need to be in place. We anticipate this will be one of the most painful areas of the form for asset managers to complete because of the added burden associated with sourcing and preparing this data. This will be especially challenging for firms who use a custom, non-public basket that is > 5% of NAV. Asset managers will need to develop a process that allows for the sourcing and reporting of data on underlying index derivative components. In some cases, this may require finding a new way to Page 49

51 source data, or adjusting agreements with typical data sources (which may not make this information publicly available). 13. Benchmarks What the Release Says Some commenters also objected to the public disclosure of the components underlying an index as that disclosure could harm the intellectual property rights that index providers might assert and, as a result, harm investors who may lose the benefit of index products that would no longer be available to them, should an index provider choose to no longer do business with a fund, rather than have its index s components made publicly available. Other commenters urged the Commission to delete this requirement as information on non-public indexes or custom baskets may be difficult for funds to obtain. We believe that it is fundamental to the reporting by funds that fund shareholders have access to the information necessary to understand the exposures of their fund s investments. Moreover, we note that a fund whose investment objective tracks an index or custom basket is currently required to publicly disclose its direct holdings quarterly in its financial statements. Likewise, funds should not be able to use proprietary indexes to mask exposures to investments underlying a custom basket for a swap or options contract. Moreover, while some commenters noted that obtaining information on the components of an underlying index may be difficult, again, we believe that fund shareholders need sufficient information to understand their fund s exposures, even if such transparency requires the fund to renegotiate licensing agreements or, in some cases results in the fund having to forego investments in a custom basket or nonpublic index. For the reasons discussed above, we believe that it is important that the Commission and investors have full transparency into any index or custom basket that significantly contributes to a fund s NAV. 26 What this Means Summary: Where applicable, Form N-PORT will require asset managers to disclose an index s underlying components. The SEC believes that fund shareholders should have access to this information so they can understand the fund s investment exposure. Impact: Many asset managers will need to develop a process that allows for the sourcing and reporting of benchmark data (like indexes). First, firms will need to determine if they will be required to report benchmark information. If required, firms may need to adjust existing relationships (potentially at additional cost) because benchmarks are sometimes considered intellectual property of the issuer. In some (severe) cases, a firm may need to change its benchmarks to remain in compliance with Form N-PORT. Page 50

52 Funds whose investment objective tracks an index or custom basket are likely to be minimally affected by this requirement because they are currently required to disclose direct holdings quarterly in financial statements. 14. Restricted Securities What the Release Says Funds will also report, as proposed, for each investment, whether the investment is a restricted security. 27 This disclosure will provide investors and the Commission staff with more information about liquidity risks associated with the fund s investments. 28 What this Means Summary: Form N-PORT will require asset managers to report whether an investment is a restricted security. Impact: This is not reported on other forms, so asset managers may not currently track this information on a per security basis. Firms that do not have this information available will need to develop a process with their typical data sources to track and report this information. Contact For more information, please contact: Data & Analytics Team Advise Technologies +1 (212) calcs@adviserms.com About Advise Technologies Advise Technologies provides regulatory intelligence software and solutions for the financial services industry. For more information, go to advisetechnologies.com or info@advisetechnologies.com. Page 51

53 1 Unlike the rest of Form N-PORT, Part F (which requires details on the fund s complete portfolio holdings) must be filed no later than 60 days after the end of the reporting period. Part F is required in reports filed at the end of the first and third quarters of the fund s fiscal year. 2 Investment Company Reporting Modernization, Securities and Exchange Commission Release NO , 3 Where present, emphasis was added by Advise when referencing the guidance from the regulator. 4 Page The SEC may make information that is not identifiable to a specific adviser or fund publicly available. 6 Page 27 7 Page 25 8 Note that Form N-PORT requires reporting at the series level, which should not be confused with reporting at the share class level. 9 Page Page Page Page Page Page Page Page Form PF also requests country of issuer information. 18 Page Page Page Page Pages Page Pages Pages See for additional details on restricted securities. 28 Page 93 Page 52