The Securities and Exchange Commission today voted to adopt
changes to modernize and enhance the reporting and disclosure of
information by registered investment companies and to enhance liquidity
risk management by open-end funds, including mutual funds and
exchange-traded funds (ETFs). The new rules will enhance the
quality of information available to investors and will allow the
Commission to more effectively collect and use data reported by
funds. The new rules also will promote effective liquidity risk
management across the open-end fund industry and will enhance disclosure
regarding fund liquidity and redemption practices.
The new rules are part of the Commission's initiative to enhance its monitoring and regulation of the asset management industry.
"These new rules represent a sweeping change for the industry by
requiring strong transparency provisions and enhanced investor
protections," said SEC Chair Mary Jo White. "Funds will more
effectively manage liquidity risk and both Commission staff and
investors will receive additional and better quality information about
fund holdings."
The reporting modernization rules will enhance data reporting for mutual
funds, ETFs and other registered investment companies. With these
rules, registered funds will be required to file a new monthly
portfolio reporting form (Form N-PORT) and a new annual reporting form
(Form N-CEN) that will require census-type information. The
information will be reported in a structured data format, which will
allow the Commission and the public to better analyze the
information. The rules also will require enhanced and standardized
disclosures in financial statements and will add new disclosures in
fund registration statements relating to a fund's securities lending
activities.
The liquidity risk management rules are designed to promote effective
liquidity risk management for mutual funds and ETFs, reducing the risk
that funds will not be able to meet shareholder redemptions and
mitigating potential dilution of the interests of fund
shareholders. The new rules will require mutual funds and ETFs to
establish liquidity risk management programs that address multiple
elements, including classification of the liquidity of fund portfolio
investments and a highly liquid investment minimum. The rules also
strengthen the 15 percent limit on illiquid investments and will
require enhanced disclosure regarding fund liquidity and redemption
practices.
The swing pricing rule will permit mutual funds to use swing pricing "“
the process of adjusting a fund's net asset value to pass on to
purchasing or redeeming shareholders costs associated with their trading
activity.
The new rules and forms will be published on the Commission's website and in the
Federal Register.
FACT SHEET
Investment Company Reporting Modernization
SEC Open Meeting
October 13, 2016
Action
The Commission will consider whether to adopt new rules and forms,
as well as amendments to existing rules and forms that would enhance
transparency and modernize reporting requirements for mutual funds, ETFs
and other registered investment companies. The new rules would
improve the access and quality of information available to the
Commission and investors about fund investments. The rules would
also enable the Commission to more effectively collect and use data, as
well as enhance its ability to conduct more targeted examinations, which
would ultimately benefit investors.
The recommendations are part of an initiative to enhance the SEC's monitoring and regulation of the asset management industry.
Highlights of the Investment Company Rules and Forms
The new rules and forms would enhance data reporting for mutual funds, ETFs and other registered investment companies.
Portfolio Reporting
A new monthly portfolio reporting form, Form N-PORT, would require
registered funds other than money market funds to provide portfolio-wide
and position-level holdings data to the Commission on a monthly
basis. The form would require monthly reporting of the fund's
investments, including:
- Data related to the pricing of portfolio securities
- Information regarding repurchase agreements, securities lending activities, and counterparty exposures
- Terms of derivatives contracts
- Discrete portfolio level and position level risk measures to better understand fund exposure to changes in market conditions
Information contained on reports for the last month of each fund's
fiscal quarter would be available to the public after 60days. The
Commission would also rescind Form N-Q, on which funds currently report
certain portfolio holdings for the first and third fiscal quarters.
Census Reporting
A new annual reporting form, Form N-CEN, would require registered
funds to annually report certain census-type information to the
Commission and would replace the form currently used to report fund
census information (Form N-SAR). The form would streamline and
update information reported to the Commission to reflect current
information needs, such as requiring more information on exchange-traded
funds and securities lending. Reports would be filed annually
within 75 days of the end of the fund's fiscal year, rather than
semi-annually as is currently required by Form N-SAR for most funds.
Structured Data Format
Funds would report portfolio and census information in a structured
data format, which would improve the ability of the Commission and the
public to aggregate and analyze information across all funds and to link
the reported information with information from other sources. The
Commission currently receives this type of reporting for both money
market funds, through Form N-MFP, and certain private fund advisers,
through Form PF.
Reporting on Fund Financial Statements
The Commission will consider adopting amendments that would require
enhanced and standardized disclosures in financial statements that are
required in fund registration statements and shareholder reports.
The amendments would include specific information related to
derivatives, similar to the information about derivatives that would be
required in the monthly portfolio holdings reports. Current
requirements do not require specific information for many types of
derivatives, including swaps, futures, and forwards.
Additionally, in order to make fund derivatives holdings easier to
review, the amended rules would require derivative disclosures to be
displayed prominently in the financial statements, rather than in the
notes.
The Commission will consider adopting amendments to fund
registration statements requiring disclosures relating to fund
securities lending activities, including income and fees from securities
lending, and the fees paid to securities lending agents in the prior
fiscal year. These specific requirements with respect to fees
would increase the comparability of securities lending fees between
funds.
What's Next
The new rules and forms would be published on the Commission's
website and in the Federal Register. Most funds would be required
to begin filing reports on new Forms N-PORT and N-CEN after June 1,
2018, while fund complexes with less than a $1 billion in net assets
would be required to begin filing reports on Form N-PORT after June 1,
2019.
FACT SHEET
Liquidity Risk Management Programs and Swing Pricing
SEC Open Meeting
Oct. 13, 2016
Action
The Commission will consider whether to adopt a new rule and form,
and amendments designed to promote effective liquidity risk management
across the open-end fund industry. The Commission also will
consider rule and form amendments that would permit certain open-end
funds to use "swing pricing." Additionally, the amendments would
enhance disclosure regarding fund liquidity and redemption practices and
would enhance funds' management of their liquidity risks, which would
strengthen our securities markets and better protect investors.
The recommendations are part of an initiative to enhance the SEC's monitoring and regulation of the asset management industry.
Highlights of the Rulemaking
A fundamental feature of open-end funds is that they allow
investors to redeem their shares daily. Funds must maintain
sufficiently liquid assets in order to meet shareholder redemptions
while also minimizing the impact of those redemptions on the fund's
remaining shareholders.
Liquidity Risk Management Programs
Rule 22e-4 would require mutual funds and other open-end management
investment companies, including ETFs, to establish liquidity risk
management programs. The rule would exclude money market funds
from all requirements of this rule and ETFs that qualify as "in-kind
ETFs" from certain requirements. The liquidity risk management
program would be required to include multiple elements, including:
- Assessment, management, and periodic review of a fund's liquidity risk
- Classification of the liquidity of fund portfolio investments
- Determination of a highly liquid investment minimum
- Limitation on illiquid investments
- Board oversight
Assessment, Management, and Periodic Review of a Fund's Liquidity Risk:
Funds would be required to assess, manage, and periodically review
their liquidity risk, based on specified factors. Liquidity risk
would be defined as the risk that a fund could not meet requests to
redeem shares issued by the fund without significant dilution of
remaining investors' interests in the fund.
Classification of the Liquidity of Fund Portfolio Investments:
Each fund would be required to classify each of the investments in its
portfolio. The classification would be based on the number of days
in which the fund reasonably expects the investment would be
convertible to cash in current market conditions without significantly
changing the market value of the investment, and the determination would
have to take into account the market depth of the investment.
Funds would be required to classify each investment into one of four
liquidity categories: highly liquid investments, moderately liquid
investments, less liquid investments, and illiquid investments.
Additionally, funds would be permitted to classify investments by asset
class, unless market, trading, or investment-specific considerations
with respect to a particular investment are expected to significantly
affect the liquidity characteristics of that investment as compared to
the fund's other portfolio holdings within that asset class.
Determination of a Highly Liquid Investment Minimum:
A fund would be required to determine a minimum percentage of its net
assets that must be invested in highly liquid investments, defined as
cash or investments that are reasonably expected to be converted to cash
within three business days without significantly changing the market
value of the investment. The fund also would be required to
implement policies and procedures for responding to a highly liquid
investment minimum shortfall, which must include board reporting in the
event of a shortfall.
Limitation on Illiquid Investments: A fund would not
be permitted to purchase additional illiquid investments if more than
15 percent of its net assets are illiquid assets. An illiquid
investment is an investment that the fund reasonably expects cannot be
sold in current market conditions in seven calendar days without
significantly changing the market value of the investment. The
determination would have to follow the same process as the other
liquidity classifications, and funds would have to review their illiquid
investments at least monthly. If a fund breaches the 15 percent
limit, the occurrence must be reported to the board, along with an
explanation of how the fund plans to bring its illiquid investments back
within the limit within a reasonable period of time, and if it is not
resolved within 30 days, the board must assess whether the plan
presented to it is in the best interest of the fund and its
shareholders.
Board Oversight: A fund's board, including a
majority of the fund's independent directors, would be required to
approve the fund's liquidity risk management program and the designation
of the fund's adviser or officer to administer the program. The
fund's board also would be required to review, at least annually, a
written report on the adequacy of the program and the effectiveness of
its implementation.
Form N-LIQUID: The new form would generally require a
fund to confidentially notify the Commission when the fund's level of
illiquid assets exceeds 15 percent of its net assets or when its highly
liquid investments fall below its minimum for more than a brief period
of time.
Swing Pricing
Swing pricing is the process of adjusting a fund's net asset value
per share to pass on to purchasing or redeeming shareholders certain of
the costs associated with their trading activity. It is designed
to protect existing shareholders from dilution associated with
shareholder purchases and redemptions and would be another tool to help
funds manage liquidity risks. Pooled investment vehicles in
certain foreign jurisdictions currently use forms of swing
pricing. The reforms will permit open-end funds (except money
market funds or ETFs) to use swing pricing.
A fund that chooses to use swing pricing would adjust its net asset
value by a specified amount"“ the swing factor "“ once the level of net
purchases into or net redemptions from the fund has exceeded a specified
percentage or percentages of the fund's net asset value known as the
swing threshold. A fund's swing pricing policies and procedures
would have to specify the process for how the fund's swing factor and
swing threshold would be determined (taking into account certain
considerations) and establish and disclose an upper limit on the swing
factor used, which may not exceed two percent of net asset value per
share.
The amendments also would require the fund's board to approve the
fund's swing pricing policies and procedures and periodically review a
written report that would have to, among other things, review the
adequacy of the fund's swing pricing policies and procedures and the
effectiveness of their implementation. The board also would be
required to approve the funds' swing factor upper limit, swing pricing
threshold, and any changes thereto.
Additional Disclosure and Reporting Requirements
The Commission will consider amendments to the registration form
used by open-end management investment companies and two reporting
forms.
Form N-1A
Amendments to the registration form used by open-end funds (Form
N-1A) would require funds to describe their procedures for redeeming
fund shares, the number of days in which the fund typically expects to
pay redemption proceeds, and the methods for meeting redemption
requests. Amendments to Form N-1A and Regulation S-X would also
address financial statement and performance reporting related to swing
pricing, and would require funds that use swing pricing to provide an
explanation of a fund's use of swing pricing in its registration
statement.
Form N-PORT
Amendments to the portfolio holdings reporting form (Form N-PORT)
would require a fund to report the aggregated percentage of its
portfolio representing each of the four classification categories.
Funds also would be required to report position-level liquidity
classification information to the Commission and information regarding a
fund's highly liquid investment minimum on a confidential basis.
Form N-CEN
Amendments to the census reporting form (Form N-CEN) would require
funds to disclose information regarding the use of lines of credit and
interfund borrowing and lending, and would require an ETF to report if
it is an in-kind ETF under the rule. The swing pricing amendments
would add a new item to Form N-CEN that would require a fund to report
information regarding the use of swing pricing, including a fund's swing
factor upper limit.
What's Next
The new rules and forms, and amendments to rules and forms, would
be published on the Commission's website and in the Federal Register. Most
funds would be required to comply with the liquidity risk management
program requirements on Dec. 1, 2018, while fund complexes with less
than a $1 billion in net assets would be required to do so on June 1,
2019. The Commission is delaying the effective date of the
amendments that would permit funds to use swing pricing. The final
amendments, if adopted, would become effective 24 months after
publication in the Federal Register. The compliance date for the
form amendments would differ by form.