SEC Proposes Amendments to Modernize and Enhance Reporting by Investment Companies
At an open meeting held on May 20, 2015, the Securities and Exchange Commission (SEC) proposed amendments to rules and forms under the Investment Company Act of 1940 (Investment Company Act), that are designed to improve the frequency, quality and usability of the information reported by registered funds.1
The proposed amendments are part of a broader rulemaking agenda announced by SEC Chair Mary Jo White in December 2014 to address the risk of the “increasingly complex” asset management industry, including improving the data used to draw conclusions about risks posed by the industry and develop appropriate regulatory responses.2 As described by Commissioner Kara M. Stein at the open meeting, the proposals represent the SEC’s “latest effort in modernizing [registered investment company] disclosures to reflect both a changing industry and advances in technology.”3 Further, the proposals are intended to assist the SEC by providing data to “infor[m] its policy choices and assis[t] with risk monitoring efforts.”
Among other things, the proposals would require that registered investment companies provide or comply with the following enhanced reporting and disclosure to the SEC:
- New Form N-PORT, which would require certain registered investment companies to report information about their monthly portfolio holdings in a structured data format;
- Amendments to Regulation S-X, which would require a registered investment company to include standardized, enhanced disclosure about its investments in derivatives in its financial statements;
- New Rule 30e-3, which would permit, but not require, registered investment companies to transmit (subject to certain conditions) periodic reports to shareholders on a website; and
- New Form N-CEN, which would require registered investment companies (other than face amount certificate companies) to annually report certain census-type information.
The proposals also would rescind current Form N-Q and Form N-SAR and would amend certain other rules and forms under the Investment Company Act.
At the open meeting, the SEC also proposed amendments to Form ADV4 that, among other things, would require advisers to provide specific information about separately managed accounts, including the types of assets held and the use of derivatives and borrowings in the accounts, and facilitate and standardize the process of “umbrella” registration of related advisers on one Form ADV. These proposals are covered in a separate Sidley Update.5
Proposed Form N-PORT
Currently, most registered investment companies are required to report their complete portfolio holdings to the SEC on Form N-Q as of the end of each first and third fiscal quarter, and on Form N-CSR as of the end of each second and fourth fiscal quarter.
Under the proposed amendments, Form N-Q would be rescinded,6 and all registered investment companies7 and each exchange-traded fund (ETF) organized as a unit investment trust (UIT), would be required to file portfolio holdings reports on Form N-PORT. Specifically, reports on Form N-PORT would:
- Be filed on a monthly basis, with every third month of each fiscal quarter available to the public 60 days after the end of the fund’s fiscal quarter;
- Include the fund’s complete portfolio holdings in a structured data Extensible Markup Language (XML) format, which would enhance the ability of the SEC, as well as investors and other potential users, to analyze portfolio data both on a fund-by-fund basis and also across funds; and
- Include additional information concerning fund portfolio holdings not currently provided on Form N-Q and Form N-CSR that would facilitate risk analyses and other SEC oversight. Such additional information would include data relating to derivative investments substantially identical to the disclosure that the proposals also would require to be included in a fund’s financial statements8 and risk metric calculations that would measure a fund’s exposure and sensitivity to changing market conditions, such as changes in asset prices, interest rates or credit spreads.
Proposed Amendments to Regulation S-X
As discussed above, reports on Form N-PORT would contain derivatives disclosures to facilitate analysis of derivatives investments across funds. As explained in the Release, derivative investments data included in Form N-PORT would be primarily designed to assist the SEC and its staff, and the format and presentation of such data would not be designed for individual investors. Accordingly, as a supplement to the new data reporting required by Form N-PORT, the proposals include amendments to Regulation S-X that would require a fund provide data regarding its investments in derivatives in a format designed for individual investors.
As proposed to be amended, Regulation S-X would:
- Require new, standardized enhanced disclosures regarding fund holdings in open futures contracts, open forward foreign currency contracts and open swap contracts, and additional disclosures regarding fund holdings of written and purchased option contracts. To mitigate burdens on the fund industry, the proposed disclosure regarding derivative instruments would be conformed to the disclosure required under Form N-PORT;
- Update the disclosures for other investments, as well as reorganize the order in which some investments are presented; and
- Amend the rules regarding the general form and content of fund financial statements.
The proposals also would require prominent placement of disclosures regarding investments in derivatives in a fund’s financial statements, rather than allowing such disclosures to be placed in the notes to the financial statements.
Proposed Rule 30e-3: Website Reporting
In an effort to “modernize the manner in which periodic information is transmitted to shareholders,” proposed Rule 30e-3 under the Investment Company Act would permit, but not require, a fund to satisfy shareholder reporting requirements by making such reports and certain other materials available on its website.
Under proposed Rule 30e-3, a fund’s annual or semi-annual report to shareholders would be considered transmitted to a shareholder if certain conditions set forth in the Rule are satisfied, including:
- Availability of the Report and Other Materials. Specifically, a report would need to be publicly accessible, free of charge and available at a specified website address (other than the SEC’s website address). A report also would need to be accessible beginning no later than the date that such report is transmitted to shareholders and ending no earlier than the date when the fund’s next report is transmitted. Further, among other things, a fund would be required to post the following additional materials on its website: (1) any previous shareholder report transmitted within the last 244 days and (2) in the case of a fund that is not a money market fund or an SBIC, the fund’s complete portfolio holdings as of the close of its most recent first and third fiscal quarters after the date on which its registration statement became effective. Such materials also would be required to be publicly accessible in the same manner and for the same time period as the current shareholder report.
- Shareholder Consent. Rule 30e-3 would permit electronic transmission of a shareholder report to a particular shareholder only if such shareholder has either previously consented to this method of transmission or has been determined to have provided implied consent under certain conditions.9 Shareholder consent would be obtained by transmitting a written statement (Initial Statement) at least 60 days before a fund’s reliance on the Rule, notifying such shareholder of the fund’s intent to make shareholder reports available on the fund’s website until such shareholder revokes consent. If the fund does not receive the related reply form or other notification indicating that a particular shareholder wishes to continue receiving paper reports by mail within 60 days of the Initial Statement, the fund may begin to transmit shareholder reports to such shareholder electronically, subject to certain other conditions.
- Notice to Shareholders of the Availability of Shareholder Reports. Rule 30e-3 would require funds relying on the Rule with respect to a particular shareholder to send a notice within 60 days of the close of the fiscal period to which the report relates. Such notice is designed to alert shareholders as to the availability of a shareholder report online and to provide shareholders with information on how to obtain a paper copy of the report as an alternative. Funds also would be required to file a form of such notice with the SEC no later than 10 days after such notice is sent to shareholders.
- Shareholder Ability to Request Paper Copies of the Shareholder Report. Under Rule 30e-3, a fund would be required to send, at no cost to the requestor, a paper copy of the report and related materials within three business days of receiving a request for a paper copy. A shareholder may so request a paper copy, even if he/she has consented to electronic transmission without revoking such consent.
Proposed Form N-CEN
Currently, funds are required to report a wide variety of census information to the SEC — such as information relating to a fund’s organization, service providers, fees and expenses, portfolio strategies and investments, portfolio transactions and share transactions — on Form N-SAR. Funds generally must file reports on Form N-SAR semi-annually.
As discussed in the Release, the SEC staff “has found that the utility of the information reported on Form N-SAR has become increasingly limited” due to the outdated subject matter of the information required to be reported on the Form and the technology by which funds file reports on Form N-SAR. Accordingly, under the proposed amendments, Form N-SAR would be rescinded and replaced with new Form N-CEN, which would “streamline and update information reported to the [SEC] to reflect current [SEC] staff information needs and developments in the industry.”
All funds (except for face amount certificate companies)10 would be required to file reports on Form N-CEN within 60 days of the end of the fiscal year (as opposed to semi-annually as required by Form N-SAR) and structured in XML format. The categories of information to be included in each report would depend on the structure and form of organization of a fund, but would generally include, among other things: general organizational and identifying information; information about management, including details about the board and the fund’s officers; information about matters submitted to a shareholder vote; information regarding instances of an affiliated entity’s financial support of a fund; information as to whether a fund relied on exemptive orders granted by the SEC; information about service providers; certain accounting and valuation information; information about payments made to shareholders as a result of errors in the calculation of net asset value; information about securities lending; portfolio information; and investments in controlled foreign corporations for purposes of investing in certain types of instruments, such as commodities. New Form N-CEN also includes certain reporting requirements for closed-end funds ETFs and UITs, among others. The Form eliminates a number of Form N-SAR items where the information is reported elsewhere (e.g., items relating to fees and expenses).
Looking toward the future, Chair White indicated at the open meeting that, among other things, the staff is developing recommendations to enhance the management and disclosure of liquidity risk by mutual funds and ETFs and to update the liquidity standards for those investment vehicles. The staff also is reviewing options for specific requirements for the use of derivatives by funds, including measures to appropriately limit the leverage these instruments may create, in addition to enhanced risk management programs for such activities.11
Public comments on the proposed amendments must be received by the SEC on or before 60 days after publication in the Federal Register.
1 “Investment Company Reporting Modernization,” Investment Company Act Release No. 31610 (May 20, 2015) (the “Release”), available at: http://www.sec.gov/rules/proposed/2015/33-9776.pdf.
2 Speech by SEC Chair Mary Jo White, “Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry” (Dec. 11, 2014), available at: http://www.sec.gov/News/Speech/Detail/Speech/1370543677722.
3 Statement on Proposed Rules on Investment Company Reporting Modernization and on Amendments to Form ADV and Investment Advisers Act Rules” by SEC Commissioner Kara M. Stein: “Modernizing and Enhancing Investment Company and Investment Adviser Reporting (May 20, 2015), available at: http://www.sec.gov/news/statement/stein-investment-company-reporting-modernization.html.
4 “Amendments to Form ADV and Investment Advisers Act Rules,” Investment Advisers Act Release No. 4091 (May 20, 2015), available at: http://www.sec.gov/rules/proposed/2015/ia-4091.pdf.
5 Sidley Austin LLP, Investment Funds, Advisers and Derivatives Update, “SEC Proposes Form ADV Amendments to Require Reporting on Separately Managed Accounts and Clarify ‘Umbrella’ Registration” (June 2, 2015), available at: http://www.sidley.com/en/news/06-02-2015-investment-funds-advisers-and-derivatives-update.
6 In connection with the SEC’s implementation of the Sarbanes-Oxley Act of 2012, Form N-Q and Form N-CSR require the principal executive and financial officers of a fund to make quarterly certifications relating to (1) the accuracy of information reported to the SEC, and (2) disclosure controls and procedures and internal control over financial reporting. Rescission of Form N-Q would eliminate certifications for the first and third fiscal quarters. Under the proposals, the form of certification in Form N-CSR would require each certifying officer to state that he or she has disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the most recent fiscal half-year, rather than the registrant’s most recent fiscal quarter as currently required by the form.
7 Other than money market funds and small business investment companies (SBICs).
8 See “Amendments to Schedule S-X” below.
9 Under the proposed amendments, a fund offering multiple series would need to obtain a separate consent from an individual shareholder of each series, regardless of whether consent was obtained from such shareholder by other series offered by such fund.
10 Funds offering multiple series would be required to report information in Part C of the Form as to each series separately, even if some information is the same for two or more series.
11 Statement at Open Meeting by SEC Chair Mary Jo White: “Modernizing and Enhancing Investment Company and Investment Adviser Reporting” (May 20, 2015), available at: http://www.sec.gov/news/statement/modernizing-investment-company-and-investment-adviser-reporting.html.
If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or
Laurin Blumenthal Kleiman
Investment Funds, Advisers and Derivatives Practice
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