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



[[Page 81869]]

Vol. 81

Friday,

No. 223

November 18, 2016

Part II





Securities and Exchange Commission





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





 Investment Company Reporting Modernization; Final Rule

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

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SECURITIES AND EXCHANGE COMMISSION

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

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


Investment Company Reporting Modernization

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

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

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

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

Table of Contents

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

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

I. Background

A. Changes in the Industry and Technology

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

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

B. Summary of Changes to Current Reporting Regime

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

[[Page 81873]]

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

    Form N-CEN includes many of the same data elements as Form N-SAR, 
but, in order to improve the quality and utility of information 
reported, replaces those items that are outdated or of limited 
usefulness with items that we believe to be of greater relevance today. 
Where possible, we are also eliminating items that are reported on 
other Commission forms, or are available elsewhere. In addition, 
reports on Form N-CEN will be filed in a structured XML format, which, 
we believe, will reduce reporting burdens for current Form N-SAR filers 
and yield data that can be used more effectively by the Commission and 
other potential users.\24\ Finally, reports on new Form N-CEN will be 
filed annually, rather than semi-annually as is required for reports on 
Form N-SAR by management companies, which will further reduce current 
burdens on funds.
---------------------------------------------------------------------------

    \24\ See infra footnotes 750-752 and accompanying text.
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II. Discussion

A. Form N-PORT

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

[[Page 81874]]

Commission monthly portfolio investments information on reports in an 
XML format no later than 30 days after the close of each month.\25\ 
Except as discussed below in section II.A.4, only information reported 
for the third month of each fund's fiscal quarter on Form N-PORT will 
be publicly available, and that information will not be made public 
until 60 days after the end of the fiscal quarter.\26\
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    \25\ See new rule 30b1-9.
    \26\ As used throughout this section, the term ``fund'' 
generally refers to investment companies that will file reports on 
Form N-PORT.
    As discussed further in section II.A.4, the Commission does not 
intend to make public the information reported on Form N-PORT for 
the first and second months of each fund's fiscal quarter that is 
identifiable to any particular fund or adviser or any information 
reported with regard to country of risk and economic exposure, 
delta, or miscellaneous securities, or explanatory notes related to 
any of those topics that is identifiable to any particular fund or 
adviser. However, the Commission may use such information in its 
regulatory programs, including examinations, investigations, and 
enforcement actions. See infra footnote 500; see also General 
Instruction F of Form N-PORT.
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    As the primary regulator of the asset management industry, the 
Commission relies on information that funds file with us, including 
their registration statements, shareholder reports, and various 
reporting forms such as Form N-CSR. The Commission and its staff use 
this information to understand trends in the fund industry and carry 
out regulatory responsibilities, including formulating policy and 
guidance, reviewing fund registration statements, and assessing and 
examining a fund's regulatory compliance with the federal securities 
laws and Commission rules thereunder.
    Information on fund portfolios is currently filed with the 
Commission quarterly with up to a 70-day delay.\27\ Moreover, the 
reports are currently filed in a format that does not allow for 
efficient searches or analyses across portfolios, and even limits the 
ability to search or analyze a single portfolio. Based on staff 
experience with data analysis of funds, including staff experience 
using Form N-MFP, we believe, and commenters generally agreed, that 
more frequent and timely information concerning fund portfolios than we 
currently receive, will assist the Commission in its role as the 
primary regulator of funds, as discussed further below.\28\
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    \27\ Funds currently file with the Commission portfolio 
schedules for the fund's first and third fiscal quarters on Form N-
Q, and shareholder reports, including portfolio schedules for the 
fund's second and fourth fiscal quarters, on Form N-CSR. These 
reports are available to the public and the Commission with either a 
60- or 70-day delay. See rule 30b1-5 (requiring management 
companies, other than SBICs, to file reports on Form N-Q no more 
than 60 days after the close of the first and third quarters of each 
fiscal year); rule 30b2-1 (requiring management companies to file 
reports on Form N-CSR no later than 10 days after the transmission 
to stockholders of any report required to be transmitted to 
stockholders under rule 30e-1). See also rules 30e-1 and 30e-2 under 
the Investment Company Act [17 CFR 270.30e-1 and 17 CFR 270.30e-2] 
(requiring management companies and certain UITs to transmit to 
stockholders semi-annual reports containing, among other things, the 
fund's portfolio schedules, no more than 60 days after the close of 
the second and fourth quarters of each fiscal year). These reports 
include portfolio holdings information as required by Regulation S-
X. See rule 12-12 of Regulation S-X [17 CFR 210.12-12], et seq.
    \28\ See, e.g., Comment Letter of Morningstar, Inc. (Aug. 21, 
2015) (``Morningstar Comment Letter'') (expressing belief that 
timelier information to investors through monthly public disclosures 
of portfolios would assist the Commission in monitoring the 
financial system, while also providing suggested revisions to 
enhance the proposal.); Comment Letter of Vanguard (Aug. 11, 2015) 
(``Vanguard Comment Letter'') (stating that the proposal strikes the 
appropriate balance between disclosures to the Commission and 
protecting funds and their investors from front-running, and 
providing suggested modifications to the proposal).
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    The information we will collect on Form N-PORT will be important to 
the Commission and its staff in analyzing and understanding the various 
risks in a particular fund, as well as risks across specific types of 
funds and the fund industry as a whole. These risks can include the 
investment risk that the fund is undertaking as part of its investment 
strategy, such as interest rate risk, credit risk, volatility risk, 
other market risks, or risks associated with specific types of 
investments, such as emerging market debt or commodities. Additionally, 
as we discuss in the Liquidity Adopting Release that we are adopting 
concurrently Form N-PORT will help the Commission better understand 
liquidity risks through additional Form N-PORT disclosure requirements 
discussed in that release.\29\ The information collected on Form N-PORT 
will also assist with understanding whether and to what extent a fund's 
exposure to price movements is leveraged, either through borrowings or 
the use of derivatives.
---------------------------------------------------------------------------

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

    Many commenters generally agreed with us that the information 
required on Form N-PORT will assist the Commission in better 
understanding each of these risks in the fund industry.\30\ These 
commenters also generally agreed with us that the ability to understand 
the risks that funds face will help Commission staff better understand 
and monitor risks and trends in the fund industry as a whole, 
facilitating the Commission's informed regulation of the fund 
industry.\31\ We also believe, and some commenters agreed, that 
information obtained from Form N-PORT filings will facilitate the 
Commission's oversight of funds and assist Commission staff in 
examination, enforcement, and monitoring, as well as in formulating 
policy and in its review of fund registration statements and 
disclosures.\32\ In this regard, we expect that Commission staff will 
use the data reported on Form N-PORT for many of the same purposes as 
Commission staff has used data reported on Form N-MFP by money market 
funds. The data received on Form N-MFP has been used extensively by 
Commission staff, including for purposes of assessing regulatory 
compliance, identifying funds for examination, and risk monitoring. 
Form N-MFP data has also informed Commission policy; for example, staff 
used Form N-MFP data in analyses that informed the Commission's 
considerations when it proposed and adopted money market fund reform 
rules in 2013 and 2014.\33\
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    \30\ See, e.g., Comment Letter of BlackRock (Aug. 11, 2015) 
(``BlackRock Comment Letter'') (``Importantly, the greater depth and 
frequency of information requested by the Commission will help the 
Commission better identify and monitor emerging risks associated 
with specific RICs or categories of RICs as well as asset management 
activities.''); Comment Letter of Wells Fargo Funds Management, LLC 
(Aug. 11, 2015) (``Wells Fargo Comment Letter'') (``we believe that 
the enhanced disclosure requirements of the Proposals represent 
appropriate valuable information for the Commission to have in order 
to assess trends in risks, for example, across the mutual fund 
industry.''); but see, e.g., Comment Letter of Federated Investors, 
Inc. (January 13, 2016) (``Federated Comment Letter) (``A majority 
of the Commission's proposed amendments to Form N-1A, N-PORT, and N-
CEN would require a large effort from funds while offering data that 
is, at best, of little utility, and, at worst, misleading. Many of 
these deficiencies relate to flaws inherent in a security-level 
disclosure scheme.''). We disagree with the commenter that a 
security-level disclosure scheme is of little utility. See infra 
footnote 1283 and accompanying and following text (discussing the 
utility of the security-level information that will be reported on 
Form N-PORT).
    \31\ Id.
    \32\ Id.
    \33\ See, e.g., Money Market Fund Reform; Amendments to Form PF, 
Investment Company Act Release No. 30551 (June 5, 2013) [78 FR 36834 
(June 19, 2013)]; Money Market Fund Reform; Amendments to Form PF, 
Investment Company Act Release No. 31166 (July, 23 2014) [79 FR 
44076 (July 29, 2014)] (``Money Market Fund Reform 2014 Release'') 
at n. 502 and accompanying text (citing use of Form N-MFP data in 
discussing the Commission's decision to require basis point 
rounding) and at n. 651 and accompanying text (citing use of Form N-
MFP data in discussing the Commission's decision regarding the size 
of the non-government securities basket for government money market 
funds).
---------------------------------------------------------------------------

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

[[Page 81875]]

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

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

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

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

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

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

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

[[Page 81876]]

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

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

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

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

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

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

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

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

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

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

    The same commenter also recommended that reports on Form N-PORT be 
filed by business development companies (``BDCs'').\54\ BDCs are a 
category of closed-end funds that are operated for the purpose of 
investing in, and providing managerial assistance to, small and 
developing businesses, and financially troubled businesses. BDCs are 
not required to register as investment companies under the Investment 
Company Act although they do elect to be subject to certain specialized 
provisions, and they are subject to a different reporting regime than 
registered investment companies.\55\ Based on these differences, and as 
reflected in the current reporting and registration regime, we have 
determined not to extend Form N-PORT filing requirements to BDCs at 
this time.\56\
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    \54\ See Morningstar Comment Letter (recommending that 
``business development companies . . . and other [registered 
investment companies]'' should be required to file reports on Form 
N-PORT).
    \55\ See Adoption of Permanent Notification Forms for Business 
Development Companies; Statement of Staff Position, Investment 
Company Act Release No. 12274 (Mar. 5, 1982) [47 FR 10518-02 (Mar. 
11, 1982)]; and Interim Notification Forms for Business Development 
Companies, Investment Company Act Release No. 11703 (Mar. 26, 1981) 
[46 FR 19459 (Mar. 31, 1981)] for a discussion of the regulatory 
system applicable to BDCs.
    \56\ Although BDCs will not be subject to Form N-PORT filing 
requirements, the amendments being adopted to Regulation S-X will 
apply to both registered investment companies and BDCs. See infra 
footnote 700.
---------------------------------------------------------------------------

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

[[Page 81877]]

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

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

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

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

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

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

    As proposed, funds will also provide the Legal Entity Identifier 
(``LEI'') number of the registrant and series.\61\ The LEI is a unique 
identifier generally associated with a single corporate entity and is 
intended to provide a uniform international standard for identifying 
counterparties to a transaction.\62\ Fees are not imposed for the usage 
of or access to LEIs, and all of the associated reference data needed 
to understand, process, and utilize the LEIs is widely and freely 
available and not subject to any usage restrictions. Funds or 
registrants that have not yet obtained an LEI will be required to 
obtain one, which currently entails a one-time fee of $219 plus $119 
per year in annual maintenance costs and fees.\63\
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    \61\ See Item A.1.d and Item A.2.c of Form N-PORT. The 
Commission has begun to require disclosure of the LEI in other 
contexts. See, e.g., Form PF, Reporting Form for Investment Advisers 
to Private Funds and Certain Commodity Pool Operators and Commodity 
Trading Advisors, available at http://www.sec.gov/rules/final/2011/ia-3308-formpf.pdf; Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Securities Exchange Act Release No. 
74244 (Feb. 11, 2015) [80 FR 14564 (Mar. 19, 2015)] (``Regulation 
SBSR Adopting Release'').
    \62\ The global LEI system operates under an LEI Regulatory 
Oversight Committee (``ROC'') that currently includes members that 
are official bodies from over 40 jurisdictions. The Commission is a 
member of the ROC and currently serves on its Executive Committee. 
The Commission notes that it would expect to revisit the requirement 
to report LEIs if the operation of the LEI system were to change 
significantly.
    \63\ As of June 30, 2016, the cost of obtaining an LEI from the 
Global Markets Entity Identifier (``GMEI'') Utility in the United 
States was $200, plus a $19 surcharge for the LEI Central Operating 
Unit. The annual cost of maintaining an LEI from the GMEI Utility 
was $100, plus a $19 surcharge for the LEI Central Operating Unit. 
See GMEI Utility, Frequently Asked Questions, available at https://www.gmeiutility.org/frequentlyAskedQuestions.jsp.
---------------------------------------------------------------------------

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

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

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

[[Page 81878]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81879]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 81880]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81881]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81882]]

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

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

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

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

    In particular, for funds that invest in debt instruments, or in 
derivatives that provide exposure to debt or debt instruments, we 
believe it is important for the Commission staff, investors, and other 
potential users to have measures that can help them analyze how 
portfolio values might change in response to changes in interest rates 
or credit spreads.\121\ To improve the ability of the Commission staff, 
investors, and other potential users to analyze how changes in interest 
rates and credit spreads might affect a fund's portfolio value, we 
proposed that a fund that invests in debt instruments, or derivatives 
that provide notional exposure to debt instruments or interest rates, 
representing at least 20% of the fund's net asset value as of the 
reporting date, provide a portfolio level calculation of duration and 
spread duration across the applicable maturities in the fund's 
portfolio.\122\
---------------------------------------------------------------------------

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

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

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

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

[[Page 81883]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81884]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81885]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 81886]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81887]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81888]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 81889]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81890]]

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

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

e. Return Information
    As proposed, we are requiring funds to provide monthly total 
returns for each of the preceding three months.\219\ If the fund is a 
multiple class fund, it will report returns for each class.\220\ Funds 
with multiple classes will also report their class identification 
numbers.\221\ Funds will calculate returns using the same standardized 
formulas required for calculation of returns as reported in the 
performance table contained in the risk-return summary of the fund's 
prospectus and in fund sales materials.\222\
---------------------------------------------------------------------------

    \219\ See Item B.5.a of Form N-PORT.
    \220\ See id.
    \221\ See Item B.5.b of Form N-PORT.
    \222\ See Item 26(b)(1) of Form N-1A; Instruction 13 to Item 4 
of Form N-2; Item 26(b)(i) of Form N-3. Return information reported 
on Form N-PORT will reflect swing pricing for funds that elect to 
swing price pursuant to the contemporaneous release we are adopting 
today regarding swing pricing for open-end funds. See Swing Pricing 
Adopting Release, supra footnote 9., at section II.A.3.g.
---------------------------------------------------------------------------

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

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

    Because only quarter-end reports on Form N-PORT will be made 
public, we are requiring, as proposed, that funds provide return 
information for each of the preceding three months.\225\ This rolling 
three month requirement will provide investors and other potential 
users with monthly return information, so that they will have access to 
each month's return on a quarterly basis. Otherwise, we are concerned 
that investors might potentially confuse the month's disclosed return 
as representing the return for the full quarter.
---------------------------------------------------------------------------

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

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

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

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

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

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

[[Page 81891]]

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

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

    We are also requiring, substantially as proposed, that funds 
report, for each of the preceding three months, monthly net realized 
gain (or loss) and net change in unrealized appreciation (or 
depreciation) attributable to derivatives for certain categories. We 
proposed that this information would be reported by asset category 
(i.e., commodity contracts, credit contracts, equity contracts, etc.). 
We are modifying the proposal to require funds to report this 
information by both asset category and also by type of derivative 
instrument (i.e., forward, future, option, swap, etc.).\231\ This 
information will help the Commission staff, investors, and other 
potential users better understand how a fund is using derivatives in 
accomplishing its investment strategy and the impact of derivatives on 
the fund's returns. In order to provide a point of comparison, and as 
proposed, we are also requiring that funds report, for each of the last 
three months, monthly net realized gain (or loss) and net change in 
unrealized appreciation (or depreciation) for investments other than 
derivatives.\232\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

[[Page 81892]]

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

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

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

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

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

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

f. Flow Information
    As proposed, Form N-PORT will require funds to separately report, 
for each of the preceding three months, the total net asset value of: 
(1) Shares sold (including exchanges but excluding reinvestment of 
dividends and distributions); (2) shares sold in connection with 
reinvestments of dividends and distributions; and (3) shares redeemed 
or repurchased (including exchanges).\242\ This information is similar 
to what is currently reported on Form N-SAR, and is generally to be 
reported subject to the same instructions that currently govern 
reporting of flow information on that form.\243\ We are requiring this 
information on Form N-PORT because we believe that this information 
will be more helpful if reported on a monthly basis rather than 
retrospectively on an annual basis on Form N-CEN.
---------------------------------------------------------------------------

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

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

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

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

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

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

[[Page 81893]]

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

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

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

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

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

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

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

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

i. Information for All Investments
    Form N-PORT will require, as proposed, funds to report certain 
basic information about each investment held by the fund and its 
consolidated subsidiaries. In particular, funds will report the name of 
the issuer and title of issue or description of the investment, as they 
are currently required to do on their reported schedules of 
investments.\253\ To facilitate analysis of fund portfolios, it is 
important for Commission staff to be able to identify individual 
portfolio securities, as well as the reference instruments of 
derivative investments through the use of an identifying code or 
number, which is not currently required to be reported on the schedule 
of investments. Fund shareholders and potential investors that are 
analyzing fund portfolios or investments across funds could similarly 
benefit from the clear identification of a fund's portfolio securities 
across funds. The staff has found that some securities reported by 
funds lack a securities identifier, and this absence has reduced the 
usefulness of other information reported.
---------------------------------------------------------------------------

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

    To address this issue, and as proposed, we are requiring that funds 
report additional information about the issuer and the security. Funds 
will report certain securities identifiers, if available.\254\ For 
example, for security-based swaps, funds may report the product ID if a 
product ID for that contract is used by one or more security-based swap 
data repositories.\255\ Identifiers for other types of derivatives may 
also be used, if available.\256\ If a unique identifier is reported, 
funds will also indicate the type of identifier used.\257\ Such an 
identifier might be assigned by a security-based swap data repository 
or be internally generated by the fund or provided by a third party, 
but should be consistently used across the fund's filings for reporting 
that investment so that the Commission, investors, and other potential 
users of the information can track the investment from report to 
report.
---------------------------------------------------------------------------

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

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

[[Page 81894]]

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

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

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

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

    We are also requiring, as proposed, funds to report the amount of 
each investment as of the end of the reporting period, as is currently 
required under Regulation S-X.\264\ Funds will report the number of 
units or principal amount for each investment, as well as the value of 
each investment at the close of the period, and the percentage value of 
each investment when compared to the net assets of the fund.\265\ Funds 
will also report the currency in which the investment was denominated, 
and, if not denominated in U.S. dollars, the exchange rate used to 
calculate value.\266\ We received no comments on this aspect of our 
proposal.
---------------------------------------------------------------------------

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

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

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

    As proposed, funds will also report the asset type for the 
investment: short-term investment vehicle (e.g., money market fund, 
liquidity pool, or other cash management vehicle), repurchase 
agreement, equity-common, equity-preferred, debt, derivative-commodity, 
derivative-credit, derivative-equity, derivative-foreign exchange, 
derivative-interest rate, structured note, loan, ABS-mortgage backed 
security, ABS-asset backed commercial paper, ABS-collateralized bond/
debt obligation, ABS-other, commodity, real estate, other) and issuer 
type (corporate, U.S. Treasury, U.S. government agency, U.S. government 
sponsored entity, municipal, non-U.S. sovereign, private fund, 
registered fund, other).\268\ We are also adopting a modification from 
the proposal to add a ``derivatives-other'' category to encompass 
derivatives that do not fall into the other categories of derivatives 
enumerated in this Item, so as to allow Commission staff, investors, 
and other users of the information reported on Form N-PORT to more 
easily aggregate the fund's derivative investments. We have based these 
categories in part on staff review of how funds currently categorize 
investments on their schedule of investments, and in part on the 
categories of investments required to be reported by private funds on 
Form PF.\269\ These disclosures will allow the Commission, investors, 
and other potential users to assess the composition of fund portfolios 
in terms of asset and issuer types and also facilitate comparisons 
among similar types of investments.
---------------------------------------------------------------------------

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

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

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

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

[[Page 81895]]

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

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

    Also as proposed, each fund will report whether the investment is 
categorized by the fund as a Level 1, Level 2, or Level 3 fair value 
measurement in the fair value hierarchy under GAAP.\272\ Commission 
staff could use this information to identify and monitor investments 
that may be more susceptible to increased valuation risk and identify 
potential outliers that warrant additional monitoring or inquiry.\273\ 
In addition, Commission staff will be better able to identify anomalies 
in reported data by aggregating all fund investments industry-wide into 
the various level categories. These disclosures will also provide 
investors and the Commission staff with more information about which of 
the fund's investments are more actively traded, and which investments 
are less actively traded and thus potentially less liquid. Currently, 
funds are required to categorize the fair value measurement of each 
investment in the fair value hierarchy in their financial 
statements.\274\ We believe that based on this requirement, funds 
should have pricing information available to determine the 
categorization of their portfolio investments as Level 1, Level 2, or 
Level 3 within the fair value hierarchy.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

[[Page 81896]]

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

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

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

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

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

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

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

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

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

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

ii. Debt Securities
    In addition to the information required above, as proposed, Form N-
PORT would require additional information about each debt security held 
by the fund in order to gain transparency into the payment flows and 
potential convertibility into equity of such investments, as such 
information can be used to better understand the payoff profile and 
credit risk of these investments. First, funds would report the 
maturity date and coupon (reporting the annualized interest rate and 
indicating whether fixed, floating, variable, or none).\292\
---------------------------------------------------------------------------

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

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

[[Page 81897]]

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

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

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

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

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

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

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

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

    Finally, we proposed to require additional information for 
convertible securities, to indicate whether the conversion is mandatory 
or contingent.\310\ We also proposed to require funds to disclose for 
each convertible security: The conversion ratio; information about the 
asset into which the debt is convertible; and the delta, which is the 
ratio of the change in the value of the option to the change in the 
value of the asset into which the debt is convertible. This reflects 
the sensitivity of the debt's value to changes in the price of the 
asset into which the debt is convertible. For example, based upon staff 
experience, we believe that the risk and reward profiles for mandatory 
and contingent conversions vary considerably and, thus we proposed to 
require disclosure of the type of conversion in order to better 
understand these risks. Similarly, we proposed to require disclosure of 
the conversion ratio and information about the asset into which the 
debt is convertible. Furthermore, the proposed requirement to provide 
the delta was also proposed to be required for options, as discussed 
further below, because convertible securities have optionality.\311\ 
For similar reasons discussed below regarding options, we expressed our 
belief that providing the delta for convertible securities is important 
to understand the extent of both the credit exposure of the debt 
portion of the convertible bond as well as the market price exposure 
relative to the underlying security into which it can be converted or 
exchanged.
---------------------------------------------------------------------------

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

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

[[Page 81898]]

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

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

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

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

iii. Repurchase and Reverse Repurchase Agreements
    As we proposed, and in addition to the information required above 
for all investments, Form N-PORT requires each fund to report 
additional information for each repurchase and reverse repurchase 
agreement held by the fund. The fund will report the category that 
reflects the transaction from the perspective of the fund (repurchase, 
reverse repurchase), whether the transaction is cleared by a central 
counterparty--and if so the name of the central counterparty--or if not 
the name and LEI (if any) of the over-the-counter counterparty, 
repurchase rate, whether the repurchase agreement is tri-party (to 
distinguish from bilateral transactions), and the maturity date.\320\ 
Funds will also report the principal amount and value of collateral, as 
well as the category of investments that most closely represents the 
collateral.\321\
---------------------------------------------------------------------------

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

    These disclosures will enhance the information currently reported 
regarding funds' use of repurchase agreements and reverse repurchase 
agreements. Information regarding repurchase agreements will be 
comparable to similar disclosures currently required to be made by 
money market funds on Form N-MFP. The categories used for reporting 
collateral will track the categories currently used to report tri-party 
repurchase agreement information to the Federal Reserve Bank of New 
York. We believe that conforming the categories that will be used in 
Form N-PORT to categories used in other reporting contexts will ease 
reporting burdens and enhance comparability.\322\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

[[Page 81899]]

staff as well as investors and other potential users of this 
information to use the data on Form N-PORT as discussed above.
iv. Derivatives
    As discussed above and in the Proposing Release, the current 
reporting regime for derivatives has led to inconsistent approaches to 
reporting derivatives information and, in some cases, insufficient 
information concerning the terms and underlying reference assets of 
derivatives to allow the Commission or investors to understand the 
investment. Additionally, as discussed further below, for options, 
warrants, and certain convertible bonds, the Commission believes that 
it is important to have a measurement of ``delta,'' a measure not 
reported in the financial statements or schedule of investments, to 
better understand the exposure to the underlying reference asset that 
the options, warrants, and certain convertible bonds produce in the 
portfolio. Currently, the Commission and investors are sometimes unable 
to accurately assess funds' derivatives investments and the exposures 
they create, which can be important to understanding funds' investment 
strategies, use of leverage, and potential risk of loss.
    With this rulemaking, we will increase transparency into funds' 
derivatives investments by requiring funds to disclose certain 
characteristics and terms of derivative contracts that are important to 
understand the payoff profile of a fund's investment in such contracts, 
as well as the exposures they create or hedge in the fund. This will 
include, for example, exposures to currency fluctuations, interest rate 
shifts, prices of the underlying reference asset, and counterparty 
credit risk. As discussed further below, we are also amending 
Regulation S-X to make similar changes to the reporting regime for 
derivatives disclosures in fund financial statements.\329\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

[[Page 81900]]

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

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

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

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

    As proposed, Form N-PORT would also require funds to report terms 
and conditions of each derivative investment that are important to 
understanding the payoff profile of the derivative.\347\ For options 
and warrants, including options on a derivative (e.g., swaptions), 
funds would report the type (e.g., put), payoff profile (e.g., 
written), number of shares or principal amount of underlying reference 
instrument per contract, exercise price or rate, expiration date, and 
the unrealized appreciation or depreciation of the option or 
warrant.\348\ Proposed Form N-PORT would require funds to provide a 
description of the reference instrument, including name of issuer, 
title of issue, and relevant securities identifier.\349\ We received 
comments supporting these items \350\ and are adopting them as 
proposed.\351\
---------------------------------------------------------------------------

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

    We recognize that some derivatives have underlying assets that are 
indexes of securities or other assets or a ``custom basket'' of assets, 
the components of which are not always publicly available. We proposed 
requirements to ensure that the Commission, investors, and other 
potential users are aware of the components of such indexes or custom 
baskets. As proposed, if the reference instrument is an index for which 
the components are publicly available on a Web site and are updated on 
that Web site no less frequently than quarterly, funds would identify 
the index and provide the index identifier, if any.\352\ We proposed to 
require at least quarterly public disclosure for the components of the 
index because it matches the frequency with which funds are currently 
required and, as adopted in this release, would continue to be 
required, to disclose their portfolio investments.\353\ We proposed 
that if the index's components are not publicly available as provided 
above, and the notional amount of the derivative represents 1% or less 
of the NAV of the fund, the fund would provide a narrative description 
of the index.\354\ If the index's components are not publicly available 
in that manner, and the notional amount of the derivative represents 
more than 1% of the NAV of the fund, we proposed that the fund would 
provide the name, identifier, number of shares or notional amount or 
contract value as of the trade date (all of which would be reported as 
negative for short positions), value, and unrealized appreciation or 
depreciation of every component in the index.\355\
---------------------------------------------------------------------------

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

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

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

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

[[Page 81901]]

investors, and other potential users to have transparency into a fund's 
exposures to assets, regardless of whether the fund directly holds 
investments in those assets or chooses to create those exposures 
through a derivatives contract.\360\ Our proposed one percent threshold 
was based on our experience with the summary schedule of investments, 
which requires funds to disclose investments for which the value 
exceeds 1% of the fund's NAV in that schedule.\361\ Similar to the 
threshold in the summary schedule of investments, we believe that 
providing a 1% de minimis for disclosing the components of a derivative 
with nonpublic reference assets considers the need for the Commission, 
investors, and other potential users to have transparency into the 
exposures that derivative contracts create while not requiring 
extensive disclosure of multiple components in a nonpublic index for 
instruments that represent a small amount of the fund's overall value.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81902]]

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

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

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

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

    Thus, if the index's or custom basket's components are not publicly 
available and the notional amount of the derivative represents more 
than 1%, but less than 5%, of the net asset value of the fund, the fund 
will provide the name, identifier, number of shares or notional amount 
or contract value as of the trade date (all of which would be reported 
as negative for short positions), and value, for (i) the 50 largest 
components in the index or custom basket and (ii) any other components 
where the notional value for that component is over 1% of the notional 
value of the index or custom basket.\376\ Likewise, if the index's or 
custom basket's components are not publicly available and the notional 
amount of the derivative represents more than 5% of the net asset value 
of the fund, the fund will provide the name, identifier, number of 
shares or notional amount or contract value as of the trade date (all 
of which would be reported as negative for short positions), and value, 
for all of the index's or custom basket's components.\377\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

[[Page 81903]]

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

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

    For futures and forwards (other than foreign exchange forwards, 
which share similarities with foreign exchange swaps and should be 
reported accordingly as discussed below), as proposed, Form N-PORT 
would require funds to report a description of the reference 
instrument, the payoff profile (i.e., long or short), expiration date, 
aggregate notional amount or contract value as of the trade date, and 
unrealized appreciation or depreciation.\385\ The description of the 
reference instrument would conform to the same requirements as the 
description of reference instruments for warrants and options.\386\
---------------------------------------------------------------------------

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

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

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

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

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

    For swaps (other than foreign currency swaps), as proposed, funds 
would report the description and terms of payments necessary for a user 
of financial information to understand the nature and terms of payments 
to be paid and received, including, as applicable: A description of the 
reference instrument, obligation, or index; financing rate to be paid 
or received; floating or fixed rates to be paid and received; and 
payment frequency.\392\ The description of the reference instrument 
would conform to the same requirements as the description of reference 
instruments for forwards and futures.\393\ Funds would also report 
upfront payments or receipts, unrealized appreciation or depreciation, 
termination or maturity date, and notional amount.\394\
---------------------------------------------------------------------------

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

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

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

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

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

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

[[Page 81904]]

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

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

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

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

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

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

v. Securities on Loan and Cash Collateral Reinvestment
    As discussed above, and as we proposed, we will require funds to 
report on Form N-PORT, for each of their securities lending 
counterparties as of the reporting date, the full name and LEI of the 
counterparty (if any), as well as the aggregate value of all securities 
on loan to the counterparty.\407\ We are also requiring, substantially 
as proposed, that funds report on Form N-PORT, on an investment-by-
investment level, information about securities on loan and the 
reinvestment of cash collateral that secures the loans. For each 
investment held by the fund, a fund will report: (1) Whether any 
portion of the investment was on loan by the fund, and, if so, the 
value of the investment on loan; \408\ (2) whether any amount of the 
investment represented reinvestment of the cash collateral and, if so, 
the dollar amount of such reinvestment; \409\ and (3) whether any 
portion of the investment represented non-cash collateral treated as 
part of the fund's assets and received to secure loaned securities and, 
if so, the value of such non-cash collateral.\410\
---------------------------------------------------------------------------

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

    These disclosures will provide information about how funds reinvest 
the cash collateral received from securities lending activity and 
should allow for more accurate determination of the value of collateral 
securing such loans. This information will also allow us to determine 
whether funds that are relying on exemptive orders or no-action 
assurances to engage in securities lending are complying with any 
associated conditions regarding collateral received for such 
activities. This will improve the ability of Commission staff, as well 
as investors, brokers, dealers, and other market participants to assess 
collateral reinvestment risks and associated potential liquidity risk 
and risk of loss, as well as better understand any potential leverage 
creation through the reinvestment of collateral.\411\ These disclosures 
will also help identify those investments that funds might have to sell 
or redeem in the event of widespread termination or default by 
borrowers. More generally, we expect that this information will help to 
address concerns expressed by industry participants about the lack of 
transparency in funds' securities lending transactions.\412\
---------------------------------------------------------------------------

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

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

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

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

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

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

[[Page 81905]]

aggregate amount not exceeding 5 percent of the total value of their 
portfolio investments in one amount as ``Miscellaneous securities,'' 
provided that securities so listed are not restricted, have been held 
for not more than one year prior to the date of the related balance 
sheet, and have not previously been reported by name to the 
shareholders, or set forth in any registration statement, application, 
or report to shareholders or otherwise made available to the public. 
Funds electing to separately report miscellaneous securities will use 
the same Item numbers and report the same information that would be 
reported for each investment if it were not a miscellaneous 
security.\419\ Consistent with the disclosure regime under Regulation 
S-X, all such responses regarding miscellaneous securities will be 
nonpublic and will be used for Commission use only, notwithstanding the 
fact that all other information reported for the third month of each 
fund's fiscal quarter on Form N-PORT will otherwise be publicly 
available.\420\ Keeping information related to these investments 
nonpublic may serve to guard against the premature release of those 
securities positions and thus deter front-running and other predatory 
trading practices, while still allowing the Commission to have a 
complete record of the portfolio for monitoring, analysis, and checking 
for compliance with Regulation S-X.\421\ The only information publicly 
reported for miscellaneous securities will be their aggregate value, 
which is consistent with current practice as permitted by Regulation S-
X.\422\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

[[Page 81906]]

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

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

j. Exhibits
    In Part F of Form N-PORT, for reports filed for the end of the 
first and third quarters of the fund's fiscal year, as proposed, a fund 
will also attach the fund's complete portfolio holdings as of the close 
of the period covered by the report. These portfolio holdings will be 
presented in accordance with the schedules set forth in Sec. Sec.  
210.12-12 to 12-14 of Regulation S-X, and will not be required to be 
reported in a structured data format.
    As discussed further below in section II.B, we are rescinding Form 
N-Q because reports on Form N-PORT for the first and third fiscal 
quarters will make similar reports on Form N-Q unnecessarily 
duplicative. While we recognize that the quarterly, publicly disclosed 
reports on Form N-PORT will provide structured data to investors and 
other potential users, we also recognize that some individual investors 
may not want to access the data in an XML format. We believe that such 
investors might prefer that portfolio holdings schedules for the first 
and third quarters continue to be presented using the form and content 
specified by Regulation S-X, which investors are accustomed to viewing 
in reports on Form N-Q and in shareholder reports. Therefore, as 
proposed, we are requiring that, for reports on Form N-PORT for the 
first and third quarters of a fund's fiscal year, the fund will attach 
its complete portfolio holdings for that fiscal quarter, presented in 
accordance with the schedules set forth in Sec. Sec.  210.12-12 to 12-
14 of Regulation S-X.
    Requiring funds to attach these portfolio holdings schedules to 
reports on Form N-PORT will provide the Commission, investors, and 
other potential users with access to funds' current and historical 
portfolio holdings for those funds' first and third fiscal quarters. 
This will also consolidate these disclosures in a central location, 
together with other fund portfolio holdings disclosures in shareholder 
reports and reports on Form N-CSR for funds' second and fourth fiscal 
quarters.
    Consistent with current practice and our proposal, funds will have 
until 60 days after the end of their second and fourth fiscal quarters 
to transmit reports to shareholders containing portfolio holdings 
schedules prepared in accordance with Regulation S-X for that reporting 
period.\438\ In addition, although we proposed that funds would have 30 
days after the end of their first and third fiscal quarters to file 
reports on Form N-PORT that would include portfolio holdings schedules 
prepared in accordance with Regulation S-X, we have modified this 
requirement from the proposal to allow funds 60 days.
---------------------------------------------------------------------------

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

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

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

3. Reporting of Information on Form N-PORT
    As discussed above, we proposed that funds would report information 
on Form N-PORT in XML, so that Commission staff, investors, and other 
potential users could download structured data for immediate 
aggregation and comparison, for example by creating databases of fund 
portfolio information to be used for data analysis. Forms N-CSR and N-Q 
are not currently filed in a structured format, which results in 
reports that are comprehensible to a human reader, but are not suitable 
for automated processing, and generally require filers to reformat the 
required information from the way it is stored for normal business 
uses.\441\ By contrast, requiring that reports on Form N-PORT be 
structured would allow the Commission and other potential users to 
combine information from more than one report in an automated way to, 
for example, construct a data base of fund portfolio investments 
without additional manual entry.\442\
---------------------------------------------------------------------------

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

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

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

    Based upon our experiences with Forms N-MFP and PF, both of which 
require filers to report information in an XML format, we believe that 
requiring funds to report information on Form N-PORT in an XML format 
is the most appropriate method of structuring this type of data.\447\ 
Moreover, the

[[Page 81907]]

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

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

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

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

    We proposed that funds report information on Form N-PORT on a 
monthly basis, no later than 30 days after the close of each 
month.\452\ For the reasons discussed herein, and consistent with 
current disclosure practices, only information reported for the third 
month of each fund's fiscal quarter would be publicly available, and 
such information would not be made public until 60 days after the end 
of the third month of the fund's fiscal quarter.\453\
---------------------------------------------------------------------------

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

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

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

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

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

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

[[Page 81908]]

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

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

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

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

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

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

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

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

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

[[Page 81909]]

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

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

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

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

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

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

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

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

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

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

    We believe that, on balance, investors would benefit from the 
information that will be reported on Form N-PORT. Likewise, the 
Commission continues to believe that public availability of 
information, including the types of information that will be collected 
on Form N-PORT that may not currently be reported or disclosed by 
funds, can benefit investors and other potential users by assisting 
them in making more informed investment decisions.
    We continue to recognize, however, that more frequent portfolio 
disclosure than is currently required could potentially harm fund 
shareholders by expanding the opportunities for professional traders to 
exploit this information by engaging in predatory trading practices, 
such as trading ahead of funds, often called ``front-running.'' \488\ 
Similarly, the Commission is sensitive to concerns that more frequent 
portfolio disclosure may facilitate the ability of non-investors to 
``free ride'' on a mutual fund's investment research, by allowing those 
investors to reverse engineer and

[[Page 81910]]

``copycat'' the fund's investment strategies and obtain for free the 
benefits of fund research and investment strategies that are paid for 
by fund shareholders.\489\ Both front-running and copycatting can 
adversely affect funds and their shareholders.\490\ We raised such 
concerns in the Proposing Release, and, many commenters that discussed 
public disclosure of portfolio information agreed with these 
concerns.\491\ However, one commenter argued that such effects were 
unlikely.\492\
---------------------------------------------------------------------------

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

    We recognize that some free-riding and front running activity can 
occur even with quarterly disclosure, with the potential for investor 
harm.\493\ Conversely, however, and as we noted in the Proposing 
Release, we previously received petitions for quarterly disclosures, 
noting numerous benefits that quarterly disclosure of portfolio 
schedules could provide, including allowing investors to better monitor 
the extent to which their funds' portfolios overlap, and hence enabling 
investors to make more informed asset allocation decisions, and 
providing investors with more information about how a fund is complying 
with its stated investment objective.\494\ The Commission cited many of 
these benefits when it adopted Form N-Q, and based on staff experience 
and outreach, believes that the current practice of quarterly portfolio 
disclosures provides benefits to investors, notwithstanding the 
opportunities for front-running and reverse engineering it might 
create.\495\
---------------------------------------------------------------------------

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

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

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

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

    \497\ See General Instruction F of Form N-PORT.
    \498\ We are maintaining the status quo of public disclosure of 
quarterly information based upon each fund's fiscal quarters, rather 
than calendar quarters, to ensure that public disclosure of 
information filed on Form N-PORT will be concurrent with the public 
portfolio disclosures reported on a semi-annual fiscal year basis on 
Form N-CSR. We believe that such overlap will minimize the risks of 
predatory trading, because otherwise funds with fiscal year-ends 
that fall other than on a calendar quarter- or year-end will have 
their portfolios publicly available more frequently than funds with 
fiscal year-ends that fall on a calendar quarter- or year-end, thus 
increasing the risks to those funds discussed above related to 
potential front-running or reverse engineering.
---------------------------------------------------------------------------

    We continue to believe that maintaining the status quo with regard 
to the frequency and the time lag of portfolio reporting will allow the 
Commission, the fund industry, and the marketplace to assess the impact 
of the structured and more detailed data reported on Form N-PORT on the 
mix of information available to the public, and the extent to which 
these changes might affect the potential for predatory trading, before 
determining whether more frequent or more timely public disclosure 
would be beneficial to investors in funds.\499\ For the reasons 
discussed above, we find that it is neither necessary nor appropriate 
in the public interest or for the protection of investors to make 
information reported for the first and second months of each fund's 
fiscal quarter on Form N-PORT or ``miscellaneous securities'' reported 
for the third month of each fund's fiscal quarter publicly 
available.\500\
---------------------------------------------------------------------------

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

    As noted above, some commenters, while generally supporting 
quarterly

[[Page 81911]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 81912]]

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

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

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

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

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

1. Rescission of Form N-Q
    Along with our adoption of new Form N-PORT, we are also rescinding 
Form N-Q, as we proposed. Management companies other than SBICs are 
currently required to report their complete portfolio holdings as of 
the end of their first and third fiscal quarters on Form N-Q. Because 
the data reported on Form N-PORT will include the portfolio holdings 
information contained in reports on Form N-Q, we believe that Form N-
PORT will render reports on Form N-Q unnecessarily duplicative. 
Therefore, we believe it is appropriate to rescind Form N-Q rather than 
require funds to report similar information to the Commission on two 
separate forms.
    However, as noted earlier, we believe that individual investors and 
other potential users might prefer that portfolio holdings schedules 
for the first and third quarters continue to be presented using the 
form and content specified by Regulation S-X, which investors are 
accustomed to viewing in reports on Form N-Q and in shareholder 
reports. Therefore, and as proposed, we are requiring that, for reports 
on Form N-PORT for the first and third quarters of a fund's fiscal 
year, the fund will attach its complete portfolio holdings for that 
fiscal quarter, presented in accordance with the schedules set forth in 
Sec. Sec.  210.12-12 to 12-14 of Regulation S-X [17 CFR 210.12-12--12-
14].
    We requested comments on our proposed rescission of Form N-Q. One 
commenter supported our proposed rescission of Form N-Q.\519\ Other 
commenters recommended maintaining Form N-Q, noting that Form N-PORT 
might not serve the interests of investors, while Form N-Q is an 
established channel through which funds currently provide pertinent 
information to shareholders.\520\ We understand these concerns, but as 
noted above because the data reported on Form N-PORT will include the 
portfolio holdings information that would be contained in reports on 
Form N-Q, we believe that Form N-PORT will render reports on Form N-Q 
unnecessarily duplicative. We are also concerned about the possibility 
of investor confusion that may arise in the event of simultaneous 
public disclosure of portfolio reporting information for the same 
reporting periods on Form N-PORT as well as on Form N-Q. For these 
reasons, we are rescinding Form N-Q.
---------------------------------------------------------------------------

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

2. Amendments to Certification Requirements of Form N-CSR
    In connection with the Commission's implementation of the Sarbanes-
Oxley Act of 2002, Form N-Q and Form N-CSR currently require the 
principal executive and financial officers of the fund to make 
quarterly certifications relating to (1) the accuracy of information 
reported to the Commission, and (2) disclosure controls and procedures 
and internal control over financial reporting.\521\ Rescission of Form 
N-Q will eliminate certifications as to the accuracy of the portfolio 
schedules reported for the first and third fiscal quarters.
---------------------------------------------------------------------------

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

    Under today's amendments, and as we proposed, the certifications as 
to the accuracy of the portfolio schedules reported for the second and 
fourth fiscal quarters on Form N-CSR will remain. However, and as we 
proposed, we are amending the form of certification in Form N-CSR to 
require each certifying officer to state that he or she has disclosed 
in the report any change in the registrant's internal control over 
financial reporting that occurred during the most recent fiscal half-
year, rather than the registrant's most recent fiscal quarter as 
currently required by the form.\522\ Lengthening the look-back of this 
certification to six months, so that the certifications on Form N-CSR 
for the semi-annual and annual reports will cover the first and second 
fiscal quarters and third and fourth fiscal quarters, respectively, 
will fill the gap in certification coverage regarding the registrant's 
internal control over financial reporting that will otherwise occur 
once Form N-Q is rescinded. To the extent that certifications improve 
the accuracy of the data reported, removing such certifications could 
have negative effects on the quality of the data reported. Likewise, if 
the reduced frequency of the certifications affects the process by 
which controls and procedures are assessed, requiring such 
certifications semi-annually rather than quarterly could reduce the 
effectiveness of the fund's disclosure controls and procedures and 
internal control over financial reporting. However, we expect such 
effects, if any, to be minimal because certifying officers will 
continue to certify portfolio holdings for the fund's second and fourth 
fiscal quarters and will further provide semi-annual certifications 
concerning disclosure controls and procedures and internal control over 
financial reporting that would cover the entire year.
---------------------------------------------------------------------------

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

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

[[Page 81913]]

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

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

C. Amendments to Regulation S-X

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

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

    As outlined below, we are adopting amendments to Articles 6 and 12 
of Regulation S-X that will: (1) Require new, standardized disclosures 
regarding fund holdings in open futures contracts, open forward foreign 
currency contracts, and open swap contracts,\526\ and additional 
disclosures regarding fund holdings of written and purchased option 
contracts; (2) update the disclosures for other investments and 
investments in and advances to affiliates, as well as reorganize the 
order in which some investments are presented; and (3) amend the rules 
regarding the general form and content of fund financial statements. 
Our amendments will require prominent placement of details regarding 
investments in derivatives in a fund's schedule of investments, rather 
than allowing such schedules to be disclosed in the notes to the 
financial statements.
---------------------------------------------------------------------------

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

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

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

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

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

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

[[Page 81914]]

[GRAPHIC] [TIFF OMITTED] TR18NO16.000

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

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

2. Enhanced Derivatives Disclosures
    In 2011, as part of a wider effort to review the use of derivatives 
by management investment companies, we issued a concept release and 
request for comment on a range of issues.\532\ We received comment 
letters on the concept release from a variety of stakeholders. Several 
commenters noted that holdings of derivative investments are not 
currently reported by funds in a consistent manner.\533\ Commenters 
also suggested that more disclosure on underlying risks was necessary, 
including more information on counterparty exposure and reporting 
relating to the notional amount of certain derivatives.\534\ Another 
commenter specifically requested that we revise Regulation S-X in order 
to keep ``financial reporting current with developments in the 
financial markets.'' \535\
---------------------------------------------------------------------------

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

    We are adopting rules that will standardize the reporting of 
certain derivative investments for fund financial statements. While the 
current rules under Regulation S-X establish general requirements for 
portfolio holdings disclosures in fund financial statements, they do 
not prescribe standardized information to be included for derivative 
instruments other than options. Current rule 12-13 of Regulation S-X 
(Investments other than securities) requires limited information on the 
fund's investments other than securities--that is, the investments not 
disclosed under current rules 12-12, 12-12A, 12-12B, and 12-14.\536\ 
Thus, currently, under Regulation S-X, a fund's disclosures of open 
futures contracts, open forward foreign currency contracts, and open 
swap contracts are generally reported in accordance with rule 12-13.
---------------------------------------------------------------------------

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

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

[[Page 81915]]

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

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

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

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

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

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

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

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

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

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

    For options where the underlying investment would otherwise be 
presented in accordance with another provision of rule 12-12 or 
proposed rules 12-13 through 12-13D, we also proposed requiring that 
the presentation of that underlying investment must include a 
description, as required by those provisions.\553\ For example, 
reporting for a swaption would include the disclosures required under 
both the swaps rule (proposed rule 12-13C) and the options rule 
(proposed rule 12-13). We received no comments on this aspect of the 
proposal, and we are adopting it as proposed.
---------------------------------------------------------------------------

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

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

[[Page 81916]]

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

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

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

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

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

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

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

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

    As stated in the Proposing Release and in the Form N-PORT 
discussion above, we continue to believe that it is important for the 
Commission, investors, and other potential users to have transparency 
into exposures to assets that the fund has, regardless of whether the 
fund directly holds investments in those assets or chooses to create 
those exposures through a derivatives contract.\569\ The 1% threshold 
is based on our experience with the summary schedule of investments, 
which requires funds to disclose investments for which the value 
exceeds 1% of the fund's NAV in that schedule.\570\ We believe that, 
similar to the 1% threshold in the summary schedule of investments, 
providing a 1% de minimis threshold for disclosing the components of a 
derivative with nonpublic reference assets considers the need for the 
Commission, investors, and other potential users to have transparency 
into the exposures that derivative contracts create while not requiring 
extensive disclosure of multiple components in a nonpublic index for 
instruments that represent a smaller risk to the fund's overall 
performance. Separately, as discussed further below, we believe that 
this modification mitigates concerns some commenters had about public 
disclosure of such indexes.\571\
---------------------------------------------------------------------------

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

    We also believe that it is appropriate to measure whether such 
derivative instrument exceeds the 1% threshold based on the 
derivative's notional value, as opposed to the current market value 
because derivatives with a small market value and a large notional 
amount could magnify losses or gains in net assets as compared to 
derivatives with a smaller notional amount, and thus believe that a 
derivative's notional value better measures its potential contribution 
to the gains or losses of the fund. Furthermore, as in Form N-PORT, we 
believe that providing a 1% de minimis for disclosing the components of 
a derivative with nonpublic reference assets considers the need for 
investors and other potential users to have transparency into the 
exposures that derivative contracts create while not requiring 
extensive disclosure of multiple components in a nonpublic index for 
instruments that represent a

[[Page 81917]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 81918]]

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

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

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

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

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

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

c. Open Forward Foreign Currency Contracts--New Rule 12-13B
    We are also adopting as proposed new rule 12-13B, which requires 
standardized disclosures for open forward foreign currency 
contracts.\596\ Under current rule 12-13, many funds reported for each 
open forward foreign currency contract, a description of the contract 
(including a description of what is to be purchased and sold under the 
contract and the settlement date), the amount to be purchased and sold 
on settlement date (under the balance held--quantity column), and any 
unrealized appreciation or depreciation (under the value column).\597\ 
In order to allow investors to better understand counterparty risk for 
forward foreign currency contracts, we are adopting as proposed, a 
requirement that funds also disclose the counterparty to each 
transaction.\598\ Under new rule 12-13B, funds holding open forward 
foreign currency contracts will therefore report the: (1) Amount and 
description of currency to be purchased; (2) amount and description of 
currency to be sold; (3) counterparty; (4) settlement date; (5) 
unrealized appreciation/depreciation.\599\
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    \596\ See proposed rule 12-13B of Regulation S-X.
    \597\ See rule 12-13 of Regulation S-X.
    \598\ See rule 12-13B, Column C of Regulation S-X.
    \599\ See rule 12-13B of Regulation S-X.
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    One commenter recommended that we include a clear definition of 
``forward contract'' to avoid potential confusion and foster consistent 
derivatives disclosure under Form N-PORT, Regulation S-X, and Form 
ADV.\600\ Many funds appear to be already classifying forward foreign 
currency contracts in their financial statements, and the approach we 
are adopting allows flexibility as products evolve. We are therefore 
declining to adopt a definition of ``forward contract.''
---------------------------------------------------------------------------

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

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

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

    One commenter suggested that since most funds report derivatives on 
a gross basis, appreciation and depreciation for the disclosures of 
non-exchange-traded derivatives such as forward foreign currency 
contracts and swaps contracts should be disclosed in two separate 
columns or include subtotals, rather than in one column, as was 
proposed.\603\ We agree that in certain circumstances this change in 
format would assist with reconciling the unrealized appreciation and 
depreciation with the corresponding figures on the fund's balance sheet 
and would encourage this presentation to the extent it provides such 
assistance. In some cases, however, an extra column may not be 
necessary \604\ and we are therefore not adopting the commenters' 
suggested modifications to the disclosure tables for those rules, 
although we note that the rules do not prevent a fund from presenting 
the information in two separate columns, if it so chooses.\605\
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    \603\ See BlackRock Comment Letter.
    \604\ For example, if derivatives are presented net in 
accordance with ASC Topic 210 (Balance Sheet).
    \605\ See rule 12-13A, Column F and rule 12-13C, Column H of 
Regulation S-X.
---------------------------------------------------------------------------

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

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

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[[Page 81919]]

d. Open Swap Contracts--New Rule 12-13C
    We are also adopting, substantially as proposed, rule 12-13C, which 
will standardize reporting of fund positions in open swap 
contracts.\608\ Under current rule 12-13, for each open swaps contract, 
funds reported description (including a description of what is to be 
paid and received by the fund and the contract's maturity date), 
notional amount (under balance held--quantity column), and any 
unrealized appreciation or depreciation (under the value column).\609\ 
Under new rule 12-13C, funds will also be required to report the 
counterparty to each transaction (except for exchange-traded and 
centrally cleared swaps), the contract's value, and any upfront 
payments or receipts.\610\ This additional information will allow 
investors to both better understand the economics of the transaction, 
as well as its associated risks.\611\ Therefore, funds will report for 
each swap the: (1) Description and terms of payments to be received 
from another party; (2) description and terms of payments to be paid to 
another party; (3) counterparty; (4) maturity date; (5) notional 
amount; (6) value; (7) upfront payments/receipts; and (8) unrealized 
appreciation/depreciation.\612\ Commenters were generally supportive of 
this proposed disclosure, although some expressed concerns about some 
aspects of the disclosures, as discussed in more detail below. We are 
adopting rule 12-13C substantially as proposed in an effort to increase 
transparency of swap contracts, but are making some modifications in 
response to comments, which are discussed below. The final rules are 
designed to maintain enough flexibility for the variety of swap 
products that currently exist and future products that might come to 
market.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

[[Page 81920]]

Web site as of the fund's balance sheet date, or if the notional amount 
of the holding does not exceed one percent of the fund's NAV as of the 
close of the period, we are requiring that the fund provide information 
sufficient to identify the referenced asset, such as a 
description.\624\ If the referenced asset is an index or custom basket 
whose components are not publicly available on a Web site as of the 
balance sheet date, and the notional amount of the derivative 
represents more than 1% of the net asset value of the fund as of the 
close of the period, the fund will provide a description of the index 
or custom basket and list separately (i) the 50 largest components in 
the index or custom basket and (ii) any other components where the 
notional value for that components is over 1% of the notional value of 
the index or custom basket.\625\ For each investment separately listed, 
the fund will include the description of the underlying investment as 
would be required by Article 12 of Regulation S-X, as part of the 
description, the quantity held, the value at the close of the period, 
and the percentage value when compared to the custom basket's net 
assets.\626\ As with underlying investments for option contracts, we 
believe that disclosure of the underlying referenced assets of a swap 
would assist investors in better understanding and evaluating the full 
risks of investments in swaps.
---------------------------------------------------------------------------

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

    For swaps which pay or receive financing payments, we proposed that 
funds would disclose variable financing rates in a manner similar to 
disclosure of variable interest rates on securities in accordance with 
instruction 4 to proposed rule 12-12.\627\ Commenters expressed concern 
that disclosing financing rates for swaps contracts could harm fund 
investors as financing rates are negotiated between parties.\628\ We 
believe, however, that the Commission's objective to increase 
transparency and enhance investor understanding in these instruments by 
giving investors the opportunity to better understand the investments 
held in a fund's portfolio justifies the disclosure of financing rates 
for swaps contracts.\629\ We are therefore adopting this portion of 
instruction 3 to rule 12-13C as proposed.\630\
---------------------------------------------------------------------------

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

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

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

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

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

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

[[Page 81921]]

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

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

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

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

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

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

    We continue to believe that disclosure of the referenced rate and 
spread will allow investors to better understand the economics of the 
fund's investments in variable rate debt securities. We are persuaded, 
however, that the period-end interest rate is also important for 
investors because it will provide investors with the actual interest 
rate of the investment at the period end, thereby giving investors both 
the ability to understand the investment's current return (through 
period-end rate) and to better understand how interest rate changes 
could affect the investment's future returns. Therefore, in a 
modification from the proposal, we are now including in the instruction 
a requirement that the fund both describe the referenced rate and 
spread and provide the end of period interest rate for each investment, 
or include disclosure of each referenced rate at the end of the 
period.\650\ For securities with payments-in-kind, we proposed that the 
fund provide the rate paid in-kind in order to provide more 
transparency to investors when the fund is generating income that is 
not paid in cash.\651\ We received no comments addressing this item and 
therefore are adopting as proposed.\652\
---------------------------------------------------------------------------

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

    We also proposed to modify the current instruction to rule 12-12 
\653\ that requires a fund to identify each issue of securities held in 
connection with open put or call option contracts and loans for short 
sales, by adding the requirement to also indicate where any portion of 
the issue is on loan.\654\ We received no comments on this item. This 
disclosure, which we believe is consistent with current industry 
practices, will increase the transparency of the fund's securities 
lending activities, and we are adopting the modification to the 
instruction as proposed.\655\
---------------------------------------------------------------------------

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

    We proposed to modify current instruction 3 of rule 12-12 (proposed 
instruction 5 of rule 12-12) concerning the organization of subtotals 
for each category of investments, making the instructions consistent 
with those in proposed rule 12-12B (current rule 12-12C), Summary 
schedule of investments in securities of unaffiliated issuers.\656\ We 
received no comments on this item and are adopting as proposed.\657\
---------------------------------------------------------------------------

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

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

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

    Funds are permitted to include in their reports to shareholders a 
summary portfolio schedule, in lieu of a complete portfolio schedule, 
so long as it conforms with current rule 12-12C

[[Page 81922]]

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

    \659\ See rule 6-10(c)(2) of Regulation S-X [17 CFR 210.6-
10(c)(2)]; see also Quarterly Portfolio Holdings Adopting Release, 
supra footnote 421.
    \660\ Instruction 2 will add ``type of investment'' to the 
current subtotal requirements for the summary schedule. See proposed 
rule 12-12B, n. 2 of Regulation S-X. Instruction 3 will extend rule 
12-12's requirement that funds indicate the interest rate or 
preferential dividend rate and maturity date for certain enumerated 
securities. See rule 12-12B, n. 3 of Regulation S-X. Instruction 5 
will require for options purchased all information that would be 
required by rule 12-13 for written option contracts. See rule 12-
12B, n. 5 of Regulation S-X. Instruction 12 will require the fund to 
indicate each issue of securities whose fair value was determined 
using significant unobservable inputs. See rule 12-12B, n. 12 of 
Regulation S-X; see also infra section II.C.4. Instruction 13 will 
extend rule 12-12's requirement that the fund indicate ``where any 
portion of the issue is on loan.'' See rule 12-12B, n. 13 of 
Regulation S-X.
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4. Instructions Common to Rules 12-12 Through 12-12B and 12-13 Through 
12-13D
    We proposed several instructions to the proposed rules in order to 
maintain consistency with the disclosures required by current rules 12-
12 and 12-13. Current rule 12-13 contains an instruction requiring 
identification of ``each investment not readily marketable.'' \661\ We 
proposed to modify this requirement in current rule 12-13 (new rule 12-
13D), and add it to the new schedules we are adopting or modifying 
concerning derivatives, by adding instructions that funds must indicate 
(1) whether an investment was fair valued by using significant 
unobservable inputs \662\ and (2) whether an investment cannot be sold 
because of restrictions or conditions applicable to the 
investment.\663\ These proposed instructions were intended to increase 
transparency into the marketability of, and observability of valuation 
inputs for, a fund's investments by instead requiring separate 
identification of investments that are restricted investments, as well 
as those investments that were fair valued using significant 
unobservable inputs. Similarly, for proposed rules 12-12, 12-12A, and 
12-12B, we proposed to include an instruction requiring funds to 
indicate whether an issue of securities was fair valued by using 
significant unobservable inputs.\664\
---------------------------------------------------------------------------

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

    We received comments generally supporting the disclosure of 
investments fair valued using significant unobservable inputs.\665\ 
However, in order to make ``value'' consistent with current Article 12, 
the final rule amendments only refer to ``value'' (rather than ``fair 
value,'' as we do in the proposed amendments to Regulation S-X), which 
is consistently used and defined under Regulation S-X.\666\ We are 
therefore adopting the requirement that funds indicate if an 
investment's value was determined using significant unobservable 
inputs.\667\
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    \665\ See, e.g., Harvest Comment Letter; Markit Comment Letter.
    \666\ See, e.g., current rule 12-12, Column C (``Value of each 
item at close of period''); current rule 12-13, Column C (same).
    \667\ See rule 12-13, n. 7 of Regulation S-X; see also rules 12-
12, n. 9; 12-12A, n. 6, 12-12B, n. 12; 12-13A, n. 5; 12-13B, n. 3; 
12-13C, n. 6; and 12-13D, n. 7 of Regulation S-X. These instructions 
will require funds to identify each investment categorized in Level 
3 of the fair value hierarchy in accordance with ASC Topic 820. See 
FASB ASC 820-10-20 (Fair Value Measurement-Overall-Glossary) (``ASC 
820-10-20'') (defining ``level 3 inputs'' as ``unobservable inputs 
for the asset or liability''); see also FASB ASC 820-10-35-37A (Fair 
Value Measurement-Overall-Subsequent Measurement-Fair Value 
Hierarchy) (``ASB 820-10-35-37A'') (``In some cases, the inputs used 
to measure the fair value of an asset or a liability might be 
categorized within different levels of the fair value hierarchy. In 
those cases, the fair value measurement is categorized in its 
entirety in the same level of the fair value hierarchy as the lowest 
level input that is significant to the entire measurement.'') 
(emphasis added); Harvest Comment Letter (supporting disclosure of 
level 3 securities).
---------------------------------------------------------------------------

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

    \668\ See State Street Comment Letter.
    \669\ Id. (``For example, it is unclear whether the lockup 
period for trading blocks would be included as a restriction 
applicable to derivatives. If the SEC's purpose is to have a narrow 
definition, then it is unclear whether the stricter definition 
includes limitation on the types of entities that would be able to 
buy an instrument such as rule 144a [sic] restrictions, which limits 
trading to qualified institutional buyers.''). Consistent with this 
example, a restricted security subject to rule 144A would be 
identified as restricted under rules 12-12, 12-12A, or 12-12B only 
if the security has restrictions and the fund cannot sell the 
security to qualified institutional buyers at the report date due to 
those restrictions.
    \670\ See rule 12-13, n. 6 of Regulation S-X; see also rules 12-
13A, n. 4; 12-13B, n. 2; 12-13C, n. 5; and 12-13D, n. 6 of 
Regulation S-X.
---------------------------------------------------------------------------

    Current rules 12-12, 12-12C, and 12-13 each contain an instruction 
to include tax basis disclosures for investments.\671\ We proposed 
extending this requirement to the proposed rules concerning derivatives 
holdings and securities sold short \672\ because we believed that this 
type of tax basis information may be important to investors in 
investment companies, which are generally pass-through entities 
pursuant to Subchapter M of the Internal Revenue Code.\673\ We received 
several comments arguing against extending our proposed tax basis 
disclosures to the proposed derivatives schedules. Several commenters 
noted their belief that disclosure of tax basis by investment type 
would not provide meaningful disclosure to investors, while increasing 
the volume and complexity of the financial statements.\674\ Others 
stated that the tax-basis information is unnecessary in light of 
recently added GAAP-required disclosure of tax basis components of 
dividends and distributions.\675\ The current GAAP requirement that 
funds disclose the components of distributable

[[Page 81923]]

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

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

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

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

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

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

5. Investments In and Advances to Affiliates--Rule 12-14
    We proposed amendments to rule 12-14 (Investments in and advances 
to affiliates).\688\ Rule 12-14 currently requires a fund to make 
certain disclosures about its investments in and advances to any 
``affiliates'' or companies in which the investment company owns 5% or 
more of the outstanding voting securities.\689\ The rule currently 
requires that a fund disclose the ``amount of equity in net profit and 
loss for the period'' for each controlled company, but does not require 
disclosure of realized or unrealized gains or losses. Based upon staff 
experience, we believe that the presentation of realized gains or 
losses and changes in unrealized appreciation or depreciation would 
assist investors with better understanding the impact of each 
affiliated investment on the fund's statement of operations. As a 
result, we had proposed to modify Column C of the schedule to rule 12-
14 to require ``net realized gain or loss for the period,'' \690\ and 
Column D to require ``net increase or decrease in unrealized 
appreciation or depreciation for the period'' for each affiliated 
investment.\691\ We received one comment supporting this aspect of the 
proposal and are adopting it as proposed.\692\
---------------------------------------------------------------------------

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

    Likewise, in instruction 6(e) and (f), we proposed to require 
disclosure of total realized gain or loss and total net increase or 
decrease in unrealized appreciation or depreciation for affiliated 
investments in order to

[[Page 81924]]

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

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

    Additionally, we proposed a new instruction 7 in order to make the 
categorization of investments in and advances to affiliates consistent 
with the method of categorization used in rules 12-12, 12-12A, and 12-
12B, for which we received no comments and are adopting as 
proposed.\696\
---------------------------------------------------------------------------

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

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

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

6. Form and Content of Financial Statements
    Finally, we are adopting substantially as proposed, revisions to 
Article 6 of Regulation S-X, which prescribes the form and content of 
financial statements filed for funds. Many of the revisions we are 
adopting today are intended to conform Article 6 with our changes to 
Article 12 and update other financial statement requirements.\698\ As 
part of these changes, we proposed to modify the title and the 
description of Article 6 from ``Registered Investment Companies'' to 
``Registered Investment Companies and Business Development Companies'' 
to clarify that BDCs are subject to Article 6 of Regulation S-X.\699\ 
This amendment is a technical amendment and does not change existing 
requirements for BDCs.\700\ Commenters did not object to this 
change,\701\ and we are adopting it as proposed.\702\
---------------------------------------------------------------------------

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

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

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

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

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

    Current rule 6-10(a) also provides that if the information required 
by any schedule (including the notes thereto) is shown in the related 
financial statement or in a note thereto without making such statement 
unclear or confusing, that procedure may be followed and the schedule 
omitted.\710\ As we stated in the Proposing Release, we believe that 
some funds may have interpreted this guidance as allowing presentation 
of some Article 12 schedules (e.g., rules 12-13 and 12-14) in the notes 
to the financial statements, as opposed to immediately following the 
schedules required by rules 12-12, 12-12A, and

[[Page 81925]]

12-12C. Our proposal to rescind rule 6-10(a) would have also eliminated 
this instruction. Commenters generally supported eliminating this 
instruction as it would assist with the comparability of funds by 
shareholders.\711\ In light of the increased use of derivatives by 
funds, we continue to believe that all schedules required by rule 6-10 
should be presented together within a fund's financial statements, and 
not in the notes to the financial statements. We recognize that this 
may change current practice for some funds but believe that, coupled 
with more detailed disclosure rules for derivatives, this amendment 
would provide more consistent disclosure and improve the usability of 
financial statements for investors. However, as discussed above, we 
were persuaded to not rescind rule 6-10(a) in these final rules. Thus 
we are adopting a conforming modification to rule 6-10(a) to eliminate 
this specific instruction.\712\
---------------------------------------------------------------------------

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

    We also proposed changes to rules 6-03 and 6-04 to specifically 
reference the investments required to be reported on separate schedules 
in amended Article 12.\713\ We received no comment on these proposals 
and are adopting them as proposed.\714\ Additionally, we proposed to 
eliminate current rule 6-04.4, which requires disclosure of ``Total 
investments'' on the balance sheet under ``Assets,'' recognizing that 
investments reported under proposed rules 12-13A through 12-13D could 
potentially be presented under both assets and liabilities on the 
balance sheet.\715\ For example, a fund may hold a forward foreign 
currency contract with unrealized appreciation and a different forward 
foreign currency contract with unrealized depreciation. The fund may 
present on its balance sheet an asset balance for the contract with 
unrealized appreciation and a liability balance for the contract with 
unrealized depreciation. Totaling the amounts of investments reported 
under assets could be misleading to investors in this example, or in 
other examples where a fund holds derivatives in a liability position 
(e.g., unrealized depreciation on an interest rate swap contract). A 
``Total investments'' amount in the Assets section of the fund's 
balance sheet would include the fund's investments in securities and 
derivatives that are in an appreciated position, but it would not 
include the unrealized depreciation on the interest rate swap contract, 
which would be classified under the Liabilities section of the fund's 
balance sheet. Given the increasing use of derivatives by funds, we 
continue to believe eliminating current rule 6-04.4 would provide more 
complete information to investors. We received no comments on this 
proposal and are adopting this change as proposed, as well as the 
corresponding proposed change in rule 6-03(d) to remove the reference 
to ``total investments reported under [rule 6-04.4].'' \716\ As 
discussed above in section II.C.4, we are also adding a requirement to 
rule 6-03(h) requiring funds to report the cost of all investments in 
an unrealized appreciation and the cost of all assets in an unrealized 
depreciation on a gross basis.\717\
---------------------------------------------------------------------------

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

    We are also adopting, as proposed, an amendment to rule 6-04 to 
refer individually to our derivatives disclosures in proposed rules 12-
13A through 12-13C.\718\ As is currently the case, these proposed 
amendments are not meant to require gross presentation where netting is 
allowed under U.S. GAAP.\719\ For example, if a fund held a forward 
foreign currency contract which had unrealized appreciation and another 
forward foreign currency contract which had unrealized depreciation, 
the fact that forward foreign currency contracts are mentioned in 
proposed rules 6-04.3(b) and 6-04.9(d) is not meant to require both 
contracts to be presented gross on the balance sheet if netting were 
allowed under U.S. GAAP. We received no comments on this proposal.
---------------------------------------------------------------------------

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

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

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

    We also proposed to add new disclosure requirements that are 
designed to increase transparency to investors about certain 
investments and activities. First, we proposed to add new subsection 
(m) to rule 6-03 that would require funds to make certain disclosures 
in connection with a fund's securities lending activities and cash 
collateral management in order to allow investors to better understand 
the income generated from, as well as the expenses associated with, 
securities lending activities.\724\ As discussed in more detail below, 
after consideration of issues raised by commenters, we have determined 
that it is more appropriate to require that these disclosures be made 
in a fund's Statement of Additional Information (or, for closed-end 
funds, reports on Form N-CSR) or in Form N-CEN, rather than to require 
their inclusion in its financial statements.\725\
---------------------------------------------------------------------------

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

    Second, we proposed to amend rule 6-07 to require funds to make a 
separate disclosure for income from non-cash dividends and payment-in-
kind interest on the statement of operations.\726\ Our proposed 
amendment to rule 6-07 was intended to increase transparency for 
investors in order to allow them to better understand when fund income 
is earned, but not received, in the form of cash. While one commenter 
generally supported disclosure for in-kind payments,\727\ many 
recommended, if the Commission should adopt such a disclosure, that we 
provide a disclosure threshold for non-cash income, such as one similar 
to the requirement to disclose expense items that exceed 5

[[Page 81926]]

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

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

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

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

    We proposed to amend rule 6-07.7(a) in order to conform statement 
of operations disclosures of the net realized gains or losses from 
investments to include our additional derivatives disclosures in 
proposed rules 12-13A through 12-13C.\735\ Likewise, we proposed 
similar changes to proposed rule 6-07.7(c) (current rule 6-07.7(d)) in 
order to conform statement of operations disclosures of the net 
increase or decrease in the unrealized appreciation or depreciation of 
investments to include our new derivatives disclosures.\736\ We 
received no comments on this proposal and are adopting both changes as 
proposed.\737\
---------------------------------------------------------------------------

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

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

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

    We proposed to eliminate the exception in Schedule II of current 
rule 6-10 which does not require reporting under current rule 12-13 if 
the investments, at both the beginning and end of the period, amount to 
one percent or less of the value of total investments.\742\ We believe 
that it is appropriate to eliminate this exception, because a fund may 
have significant notional amounts in its portfolio that could be valued 
at one percent or less of the value of total investments. Accordingly, 
removing this exception will provide more transparency to investors 
regarding a fund's derivatives activity. We received no comments on 
this proposal, and we are adopting it as proposed.\743\
---------------------------------------------------------------------------

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

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

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

[[Page 81927]]

1985 and requires that funds report a variety of census-type 
information to the Commission, including information relating to a 
fund's organization, service providers, fees and expenses, portfolio 
strategies and investments, portfolio transactions, and share 
transactions. Funds generally must file reports on Form N-SAR semi-
annually, except for UITs, which file annually.\746\ By contrast, as 
discussed further below, all funds will now file reports on Form N-CEN 
annually.\747\
---------------------------------------------------------------------------

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

    In recent years, Commission staff has found that the utility of the 
information reported on Form N-SAR has become increasingly limited. We 
believe there are two primary reasons for this limited utility. First, 
in the past two decades, we have not substantively updated the 
information reported on the form to reflect new market developments, 
products, investment practices, or risks. Second, the technology by 
which funds file reports on Form N-SAR has not been updated and limits 
the Commission staff's ability to extract and analyze the data 
reported. We believe that by updating the content and format 
requirements for census reporting through new Form N-CEN, the 
Commission will be better able to carry out its regulatory functions 
while at the same time reducing burdens on filers.
    Many commenters agreed that Form N-SAR is outdated and commended 
the Commission's efforts to improve the relevance of information 
reported to the Commission.\748\ Commenters generally supported Form N-
CEN as proposed, and we are adopting the form substantially as proposed 
with some modifications to address specific issues raised by 
commenters, as discussed in more detail below.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

2. Who Must File Reports on Form N-CEN
    We are adopting, as proposed, the requirement that all registered 
investment companies, except face-amount certificate companies,\757\ 
file reports on Form N-CEN.\758\ No commenters objected to this 
requirement.\759\ As proposed, funds offering multiple series will be 
required to report information in Part C of the form as to each series 
separately, even if some information is the same for two

[[Page 81928]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81929]]

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

    \781\ See current rule 30b1-3; see also infra section II.G 
concerning technical and conforming amendments to current rule 30b1-
3.
    \782\ See General Instruction C.1 of Form N-CEN.
    \783\ Id.
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    As proposed, a fund would be able to file an amendment to a 
previously filed report on Form N-CEN at any time, including an 
amendment to correct a mistake or error in a previously filed 
report.\784\ A fund that files an amendment to a previously filed 
report on the form should provide information in response to all items 
of Form N-CEN, regardless of why the amendment is filed.\785\ 
Commenters did not object to these proposed requirements although one 
commenter suggested that an amendment should not be required for any 
subsequent changes to previously reported information and that, except 
for any material errors, any subsequent changes should be reported in 
the next filing period.\786\ We are adopting these requirements as 
proposed.\787\ Although funds generally should correct a material 
mistake in a Form N-CEN report by filing an amendment to that report, 
Form N-CEN does not generally require registrants to file amendments in 
order to update information throughout the year. Rather, changes in 
information during the course of the year would be reflected in the 
fund's next report on the form.
---------------------------------------------------------------------------

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

    Similar to Form N-PORT,\788\ Form N-CEN also includes general 
filing instructions,\789\ as well as definitions of specific terms 
referenced in the form.\790\ As discussed in connection with Form N-
PORT above, we have eliminated proposed instructions regarding the 
signature and filing of reports,\791\ because we believe that the 
general rules and regulations applicable under the Act provide 
sufficient guidance regarding those issues.\792\ As discussed further 
below, we have also revised, consistent with the changes to Form N-PORT 
discussed above, the definitions of ``Exchange-Traded Fund'' and 
``Exchange-Traded Managed Funds'' to clarify that the terms would apply 
to a series or class of a UIT organized as an ETF or ETMF.\793\ We have 
also revised, as we did in Form N-PORT, the definition of ``LEI'' to 
reflect new terminology regarding LEIs.\794\
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    \788\ See supra section II.A.3 regarding Form N-PORT.
    \789\ See General Instruction C of Form N-CEN.
    \790\ See General Instruction E of Form N-CEN.
    \791\ General Instruction E of proposed Form N-CEN.
    \792\ See General Instruction B to Form N-CEN (``The General 
Rules and Regulations under the Act contain certain general 
requirements that are applicable to reporting on any form under the 
Act. These general requirements should be carefully read and 
observed in the preparation and filing of reports on this Form, 
except that any provision in the Form or in these instructions shall 
be controlling.'').
    \793\ General Instruction E of Form N-CEN. See supra footnotes 
93-94 and accompanying text; infra footnote 896 and accompanying 
text.
    \794\ See supra footnote 95 and accompanying text. Form N-CEN's 
revised definition of ``LEI'' refers to the legal entity identifier 
``endorsed'' by LEI ROC or ``accredited'' by GLEIF, as opposed to 
``assigned or recognized'' by those two entities. General 
Instruction E to Form N-CEN.
---------------------------------------------------------------------------

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

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

b. Part B--Information About the Registrant
    We proposed a number of reporting items under Part B of Form N-CEN 
to provide information about the registrant. Although commenters did 
not raise broad objections to the reporting requirements under Part B, 
many commenters raised concerns with and/or requested clarification on 
specific reporting items. We are adopting Part B substantially as 
proposed with some modifications in response to comments on specific 
reporting items. Where we have received comments on specific reporting 
requirements, we discuss them in more detail below.
    As proposed, Part B of Form N-CEN would have been required to have 
been completed by all funds and would have required certain background 
and other identifying information about the funds. Part B of Form N-
CEN, as proposed, would have included an instruction that required 
funds offering multiple series to provide a response for each series 
when the response to an item in Part B of the form differed between 
series, and to label the response with the name and series 
identification number of the series to which a response relates.\796\ 
In order to provide more clarity to filers as to when series 
information is required in Part B of the form, we have removed the 
proposed instruction to Part B and have instead added sub-items 
requesting series information, when applicable, for certain items in 
Part B of the form. We have added these sub-items to the items in Part 
B where we believe identification of the particular series would be 
most helpful to our monitoring efforts and general review and analysis 
of the information reported on the form.\797\
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    \796\ See Instruction to Part B of proposed Form N-CEN.
    \797\ See Item B.10, Item B.11, Item B.14, Item B.19, Item B.20, 
Item B.22, and Item B.23 of Form N-CEN. We note that, with respect 
to those items in Part B that do not include sub-items for series 
information, a registrant may still provide more than one response 
to the item (where applicable), but the response will not be 
required to indicate the relevant series to which it relates.
---------------------------------------------------------------------------

    As proposed, Part B of the form requires certain background and 
other identifying information about the fund. This background 
information will allow the staff to categorize filers by fund type and 
will assist with our oversight of

[[Page 81930]]

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

    We are adopting, as proposed, the requirement that funds include 
the location of their books and records in reports on Form N-CEN. We 
note that books and records information is currently required by fund 
registration forms; \807\ however, this information is not filed with 
the Commission in a structured format. We believe that having books and 
records information in a structured format will increase our efficiency 
in preparing for exams and, thus, we have determined to include this 
information in Form N-CEN.\808\ In addition, so as not to create 
unnecessary burdens, we are adopting proposed amendments to Forms N-1A, 
N-2, N-3, N-4, and N-6 to exempt funds from those forms' respective 
books and records disclosure requirements if the information is 
provided in a fund's most recent report on Form N-CEN.\809\
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    \807\ See Item 33 of Form N-1A; Item 32 of Form N-2; Item 36 of 
Form N-3; Item 30 of Form N-4; and Item 31 of Form N-6.
    \808\ Additionally, by including books and records information 
in Form N-CEN, we may receive more frequently updated books and 
records information from closed-end funds. Closed-end funds do not 
update their registration statements as regularly as open-end funds 
and, thus, the information regarding their books and records may not 
always be current.
    \809\ Funds that have not yet filed a report on Form N-CEN will 
have to continue to include this information in their registration 
statement filings.
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    Similar to Form N-SAR,\810\ Form N-CEN requires information 
regarding whether the fund is part of a ``family of investment 
companies.'' \811\ The form, which includes a substantially similar 
definition as Form N-SAR,\812\ defines a ``family of investment 
companies'' to mean, except with respect to insurance company separate 
accounts, any two or more registered investment companies that (i) 
share the same investment adviser or principal underwriter; and (ii) 
hold themselves out to investors as related companies for purposes of 
investment and investor services.\813\ This item will assist Commission 
staff with analyzing multiple funds across the same family of 
investment companies. One commenter suggested that a broader term such 
as ``fund complex'' would be a beneficial alternative to the proposed 
term ``family of investment companies.'' \814\ We believe, however, 
that ``fund complex,'' as such term is defined for purposes of Form N-
1A, for example, could be overly broad (e.g., could unintentionally 
incorporate unaffiliated sub-advisers), and thus, we have determined to 
adopt the item as proposed.\815\
---------------------------------------------------------------------------

    \810\ Item 19, Item 94, and Item 116 of Form N-SAR; see also 
General Instruction H to Form N-SAR (defining ``family of investment 
companies'').
    \811\ Item B.5 of Form N-CEN.
    \812\ See id.; see also Instruction 1 to Item 17 of Form N-1A.
    \813\ Instruction to Item B.5 of Form N-CEN. The instruction, 
like the definition of ``family of investment companies'' in Form N-
SAR, also clarifies that insurance company separate accounts that 
may not hold themselves out to investors as related companies 
(products) for purposes of investment and investor services should 
consider themselves part of the same family if the operational or 
accounting or control systems under which these entities function 
are substantially similar. See General Instruction H to Form N-SAR.
    \814\ See Morningstar Comment Letter.
    \815\ See Instruction 1(b) to Item 17 of Form N-1A (defining 
``fund complex'' to mean two or more registered investment companies 
that: (1) Hold themselves out to investors as related companies for 
purposes of investment and investor services; or (2) have a common 
investment adviser or have an investment adviser that is an 
affiliated person of the investment adviser of any of the other 
registered investment companies).
---------------------------------------------------------------------------

    We are adopting, as proposed, a requirement in Form N-CEN that the 
fund provide its classification (e.g., open-end fund, closed-end fund), 
similar to Form N-SAR.\816\ Unlike the requirements of Form N-SAR, 
however, we are also adopting, as proposed, a requirement in Form N-CEN 
that specifically asks whether the fund issues a class of securities 
registered under the Securities Act.\817\ These questions are intended 
to elicit background information on the fund, which will assist us in 
our monitoring and oversight functions (for example, identifying those 
funds that have not issued securities registered under the Securities 
Act).
---------------------------------------------------------------------------

    \816\ Item B.6 of Form N-CEN; see also Item 5, Item 6, Item 27, 
Item 58, Item 59 and Item 117 of Form N-SAR. If the registrant is an 
open-end fund, Form N-CEN also requires information on the total 
number of series of the registrant and, if a series of the 
registrant with a fiscal year end covered by the report was 
terminated during the reporting period, information regarding that 
series. See Item B.6.a.i-Item B.6.a.ii of Form N-CEN. In addition, 
registrants that indicate they are management companies registered 
on Form N-3 are directed by Item B.6 to respond to certain 
additional items in Part F of the form that relate to insurance 
company separate accounts. See Item B.6.c.i of Form N-CEN.
    \817\ Item B.7 of Form N-CEN.
---------------------------------------------------------------------------

    We are also adopting, as proposed, the requirement in Form N-CEN 
that a management company report information about its directors, 
including each director's name, whether they are an ``interested 
person'' (as defined by section 2(a)(19) of the Investment Company 
Act), and the Investment Company Act file number of any other 
registered investment company for which they serve as a director.\818\ 
Some commenters supported inclusion of such information \819\ and one 
commenter suggested that the Commission request additional information 
concerning individual directors (and chief compliance officers 
(``CCOs'')), such as length of service, roles certain directors have on 
the board, and prior experience as fund directors.\820\ Another 
commenter opposed the inclusion of additional disclosure requirements 
concerning the board or individual directors beyond those in the 
proposed

[[Page 81931]]

form without a prior statement of regulatory purpose and opportunity 
for public comment.\821\ We have determined to adopt these requirements 
as proposed because we believe it appropriately balances the need for 
director information in a structured format with efforts to minimize 
the partially duplicative reporting requirements.\822\
---------------------------------------------------------------------------

    \818\ Item B.8 of Form N-CEN.
    \819\ See Franco Comment Letter; Morningstar Comment Letter.
    \820\ Morningstar Comment Letter.
    \821\ See IDC Comment Letter. It was unclear whether the 
commenter intended also to express concerns about the proposed 
requirements concerning directors, in addition to the concerns it 
expressed about other potential requirements concerning directors. 
Id. (``First, the Release asks about the information regarding fund 
directors that is proposed to be included in Form N-CEN, which 
includes each director's name, whether they are an ``interested 
person'' and the Investment Company Act file number of any other 
fund for which they serve as a director. Specifically, the Release 
asks whether funds should be required to include on Form N-CEN any 
additional information concerning the board or individual directors, 
such as information about the length of service of directors. The 
Release does not discuss why the Commission might be interested in 
this or other possible director-related information or how it would 
be used. Absent a clear statement of how information about directors 
would assist the Commission in carrying out its regulatory 
functions, and the opportunity to comment on any such information, 
we do not support adding it to Form N-CEN.'') To the extent that the 
commenter was commenting on the proposed requirements, we note, as 
we did in the Proposing Release, that although the information is 
reported in a management company's Statement of Additional 
Information and provided in annual reports to shareholders, 
providing this information to the Commission in a structured format 
will allow the Commission and other potential data users to sort and 
analyze the data more efficiently. See Proposing Release, supra 
footnote 7, at 33636.
    \822\ This information (along with additional director 
information) is also disclosed in a management company's Statement 
of Additional Information and its annual report to shareholders, 
albeit in an HTML or ASCII, rather than structured, format. See, 
e.g., Item 17 and Item 27(b)(5) of Form N-1A (requiring, for 
example, disclosures regarding length of service, position(s) held 
with the fund, and other directorships held by the director).
---------------------------------------------------------------------------

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

    \823\ See Morningstar Comment Letter; infra notes 825-833 and 
accompanying text.
    \824\ Item B.8.b of Form N-CEN.
---------------------------------------------------------------------------

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

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

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

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

    We are also adopting, substantially as proposed, the requirement in 
Part B that funds report matters that have been submitted to a vote of 
security holders during the relevant period.\834\ Information regarding 
submissions of matters to a vote of securities holders is currently 
reported in Form N-SAR by management companies in the form of an 
attachment with multiple reporting requirements.\835\ In order to 
alleviate the burden on filers, we are reducing the information to be 
reported regarding votes of security holders to a yes/no question that 
is primarily meant to allow staff to quickly identify funds with such 
votes, so that they can follow up as appropriate, such as by reviewing 
more detailed information required by other filings.\836\
---------------------------------------------------------------------------

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

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

[[Page 81932]]

    Form N-CEN, like Form N-SAR, will also include an item relating to 
material legal proceedings during the reporting period.\837\ One 
commenter suggested that the Commission define legal proceedings for 
purposes of Form N-CEN.\838\ The relevant item includes an instruction 
highlighting certain proceedings that should be described in response 
to the item \839\ and the item itself only requests information on 
``material legal proceedings, other than routine litigation incidental 
to the business.'' We believe the instruction and language of the item 
appropriately describes the legal proceedings funds should include when 
responding to this item. Another commenter suggested that the 
Commission state that derivative suits reported in response to this 
item are deemed to satisfy the requirements under section 33 of the 
Investment Company Act for filing pleadings and other documents in 
connection with that type of lawsuit.\840\ Section 33 requires every 
fund which is a party and every affiliated person of such fund who is a 
party defendant to any action or claim by a fund or a security holder 
thereof in a derivative capacity or representative capacity against 
certain persons to file certain documents related to the action or 
claim with the Commission.\841\ We do not believe that reporting 
pursuant to this requirement, taken alone, would be an appropriate 
alternative for a fund to use to satisfy the legal proceeding filing 
requirements under section 33, as Form N-CEN requires only a brief 
description of the proceeding (as well as the case or docket number (if 
any) and names of the principal parties to the proceeding) and does not 
itself require the filing of all materials plainly required by section 
33.\842\ Moreover, for data users interested in the materials required 
to be filed under section 33, the reporting required by Form N-CEN 
would not be the same as, nor in many cases a suitable substitute for, 
the materials themselves. Accordingly, we are adopting the reporting 
item as proposed.
---------------------------------------------------------------------------

    \837\ Item B.11 of Form N-CEN. As in Item 77.E of Form N-SAR, if 
there were any material legal proceedings, or if a proceeding 
previously reported had been terminated, the registrant will file an 
attachment as required by Part G of Form N-CEN. See Item G.1.a.i of 
Form N-CEN. We note that Form N-CEN, unlike Form N-SAR, will require 
UITs to respond to the information request related to material legal 
proceedings. For the same reasons discussed above with respect to 
matters submitted for security holder vote, we believe it is 
important to have information on material legal proceedings of all 
registered investment companies. See supra footnotes 834-836 and 
accompanying text.
    \838\ See State Street Comment Letter.
    \839\ See Instruction to Item B.11 of Form N-CEN, which states, 
``[f]or purposes of this Item, the following proceedings should be 
described: (1) Any bankruptcy, receivership or similar proceeding 
with respect to the Registrant or any of its significant 
subsidiaries; (2) any proceeding to which any director, officer or 
other affiliated person of the Registrant is a party adverse to the 
Registrant or any of its subsidiaries; and (3) any proceeding 
involving the revocation or suspension of the right of the 
Registrant to sell securities.''
    \840\ See Schnase Comment Letter.
    \841\ Section 33 of the Investment Company Act.
    \842\ We note that the commenter did not explain how reporting 
pursuant to this requirement, taken alone, would be consistent with 
the requirements of section 33.
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    Form N-SAR currently requires management companies to report a 
number of data points relating to fidelity bond and errors and 
omissions insurance policy coverage.\843\ As proposed, we are limiting 
this request to two separate items in Form N-CEN in order to limit the 
number of items to those most useful to the Commission staff and reduce 
burdens on filers.
---------------------------------------------------------------------------

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

    One item requires funds to report if any claims were filed under 
the management company's fidelity bond and the aggregate dollar amount 
of any such claims.\844\ One commenter requested that we eliminate the 
item requesting fidelity bond information, stating that the information 
is already provided elsewhere by funds.\845\ The other item requires 
registrants to report if the management company's officers or directors 
are covered under any directors and officers/errors and omissions 
insurance policy and, if so, whether any claims were filed under the 
policy during the reporting period with respect to the registrant.\846\ 
The staff appreciates that some of this information may be disclosed in 
other filings with the Commission, although it is not reported in a 
structured data format.\847\ We continue to believe that having 
responses to these questions in a structured data format will help 
alert Commission staff to insurance claims made by the fund or its 
officers and directors as a result of legal issues related to the fund. 
Accordingly, we are adopting these reporting requirements as proposed.
---------------------------------------------------------------------------

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

    In order to better understand instances when funds receive 
financial support from an affiliated entity, we are adopting, 
substantially as proposed but with a modification that is designed to 
address a commenter's suggestion, a new requirement for information 
regarding the provision of such financial support.\848\ We adopted 
disclosure requirements relating to fund sponsors' support of money 
market funds as part of our money market reform amendments in 2014, 
including a new requirement that money market funds file reports on 
Form N-CR, reporting, among other things, the receipt of financial 
support.\849\ As with money market funds, we believe that it is 
important that the Commission understand the nature and extent to which 
a fund's sponsor provides financial support to a fund. Therefore, we 
are extending this requirement to all funds that will file reports on 
Form N-CEN. As we stated in the Proposing Release, although we believe 
it is an infrequent practice, based on staff experience, non-money 
market funds have received sponsor support in the past and we believe 
this item will allow Commission staff to readily identify any funds 
that have received such support for further analysis and review, as 
appropriate.
---------------------------------------------------------------------------

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

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

[[Page 81933]]

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

    We are also adopting, as proposed, an item in Form N-CEN requiring 
reporting as to whether the fund relied on orders from the Commission 
granting the fund an exemption from one or more provisions of the 
Investment Company Act, Securities Act or Securities Exchange Act 
during the reporting period.\855\ Funds are required to identify any 
such order by release number.\856\ Collecting this information in a 
structured format will assist us with our oversight functions and 
improve our ability to monitor fund reliance on exemptive orders.
---------------------------------------------------------------------------

    \855\ Item B.15 of Form N-CEN. If any actions were taken during 
the reporting period, which were required to be reported on Form N-
1Q pursuant to an exemptive order, Form N-SAR requires that 
information be reported in response to Sub-Item 77P of Form N-SAR. 
See Instructions to Sub-Items 77P and 102O of Form N-SAR. Form N-CEN 
requires the fund to file as an attachment any information required 
to be filed pursuant to exemptive orders issued by the Commission 
and relied on by the fund. Instruction 5 to Item G.1 of Form N-CEN.
    \856\ See Item B.15.a.i of Form N-CEN.
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    One commenter expressed support for this new reporting requirement, 
including the reporting of release numbers applicable to such exemptive 
orders.\857\ The commenter suggested, however, that in addition to 
release numbers, the form include the classification or category of the 
exemptive order in relation to the Commission's Investment Company Act 
Notices and Orders Category Listing Web page \858\ and similar 
reporting requirements for a fund's reliance on staff no-action 
letters.\859\ We have determined to adopt the reporting item as 
proposed. We believe that reporting requirements regarding reliance on 
no-action letters may impose additional administrative costs on filers. 
Therefore, we believe that the requested information as proposed 
balances the Commission's need for information to monitor a fund's 
regulatory compliance with the costs imposed on registrants reporting 
this information.
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    \857\ See Morningstar Comment Letter.
    \858\ Investment Company Act Notices and Orders Category Listing 
Web page is available at: https://www.sec.gov/rules/icreleases.shtml.
    \859\ See Morningstar Comment Letter.
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    As proposed, Form N-CEN, similar to Form N-SAR,\860\ will require 
identifying information for the fund's principal underwriters \861\ and 
independent public accountants,\862\ including, as applicable, name, 
SEC file number, CRD number, PCAOB number, LEI (if any), state or 
foreign country, and whether a principal underwriter was hired or 
terminated or if the independent public accountant changed since the 
last filing.\863\ We are adopting these requirements as proposed.
---------------------------------------------------------------------------

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

    If the independent public accountant changed since the last filing, 
under the proposal, the fund would also have been required to provide a 
detailed narrative attachment to Form N-CEN similar to the exhibit in 
Form N-SAR reporting a change in independent registered public 
accountants, along with the predecessor accountant's letter reporting 
the change in independent registered public accountants also required 
to be reported on Form N-SAR.\864\
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    \864\ Item 79.a.iii of proposed Form N-CEN.
---------------------------------------------------------------------------

    Some commenters expressed concern that because Form N-CEN would be 
an annual reporting form, rather than a semi-annual reporting form like 
Form N-SAR, the exhibit may be filed a significant amount of time after 
an accountant had changed.\865\ Commenters instead suggested that the 
proposed attachment be filed by funds with their semi-annual Form N-CSR 
filings.\866\ We are persuaded by these concerns, and are modifying the 
requirement by moving the change in independent public accountant 
attachment from Form N-CEN to Form N-CSR as a new attachment to reports 
on that form.\867\ We share commenters' concerns that, as proposed, a 
significant amount of time may lapse before shareholders would be 
provided the letter reporting a change in independent registered public 
accountants. We also believe that moving the attachment from Form N-CEN 
to Form N-CSR will help ensure concurrent review and written agreement 
by the predecessor accountant of the required management statement in 
both annual and semi-annual reports, as reports on Form N-CSR are 
required to be filed no later than 10 days after reports to 
shareholders are transmitted. Thus, Form N-CEN provides a means to 
track funds that change accountants in a structured data format on an 
annual basis, while the accountant's letter regarding the change will 
become available to the public semi-annually as an exhibit on Form N-
CSR.
---------------------------------------------------------------------------

    \865\ See AICPA Comment Letter; and PwC Comment Letter (noting 
that Item 27(c)(4) of Form N-1A and Item 24, Instruction 5, of Form 
N-2 both require that the management statement required under Item 
4.01 of Form 8-K be presented in both semi-annual and annual 
shareholder reports. Thus, for any change in accountants occurring 
in the first six months of a registrant's fiscal year, management's 
statement regarding a change in accountants would be required to be 
issued and filed publicly in the fund's semi-annual shareholder 
report while the predecessor accountant's letter reported semi-
annually on former Form N-SAR would, under the proposal, have been 
filed in Form N-CEN six months later).
    \866\ See AICPA Comment Letter; and PwC Comment Letter.
    \867\ See Item 12(a)(4) of Form N-CSR.
---------------------------------------------------------------------------

    We also proposed to include for all funds several other accounting 
and valuation related items that are currently required for management 
companies by Form N-SAR, and that provide important information to the 
Commission regarding possible accounting and valuation issues related 
to a fund. Commenters generally did not object to these proposed 
reporting requirements,\868\ and we are adopting them largely as 
proposed, with some revisions in response to specific commenter 
suggestions. These items include a question relating to material 
changes in the method of valuation of the fund's assets.\869\ If there 
have been material changes in the method of valuation of assets during 
the reporting period, Item B.20 requires that the fund report the types 
of investments involved.
---------------------------------------------------------------------------

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

    One commenter expressed support for this reporting requirement, 
noting that the information would be sufficient to conduct due 
diligence on pricing and valuation issues.\870\ This commenter

[[Page 81934]]

also suggested aligning the type of investments involved with the list 
of asset types identified in Form N-PORT.\871\ After considering the 
commenter's request, we have added an additional sub-item and 
clarifying instructions to Item B.20 to require the applicable ``asset 
type'' category specified in Item C of Form N-PORT.\872\ We believe 
that requiring responses based on the categories used in Form N-PORT 
will provide some measure of standardization that will generally assist 
the staff in its monitoring of changes in valuation methodologies by 
asset class, and will provide regulatory consistency that will assist 
Commission staff in its review of information reported pursuant to both 
forms.
---------------------------------------------------------------------------

    \870\ Morningstar Comment Letter.
    \871\ See id.
    \872\ See Item B.20.c of Form N-CEN and related instruction 
(requiring responses to provide the applicable ``asset type'' 
category specified in Item C.4.a of Form N-PORT).
---------------------------------------------------------------------------

    In addition, and as proposed, funds will also be required to 
provide a brief description of the types of investments involved.\873\ 
However, we have modified the instruction to this sub-Item from the 
proposal to provide that if the change in methodology relates to a sub-
asset type included in the response to Item B.20.c, then funds should 
report the sub-asset class in responding to Item B.20.d.\874\ This 
modification is intended to avoid duplicative responses to Item B.20.c 
and Item B.20.d by eliciting more specific information as to any sub-
asset classes contained in the broader Form N-PORT asset categories 
that are impacted by the change of valuation methodologies. Unlike 
reports on Form N-SAR, Form N-CEN does not require a separate 
attachment detailing the circumstances surrounding a change in 
valuation methods.\875\ Instead, to facilitate review of this 
information in a structured format, Form N-CEN includes specific items 
in the form itself, including the date of change, explanation of 
change, type of investment, statutory or regulatory basis for the 
change, and the fund(s) involved.\876\ Also as proposed, Form N-CEN 
carries forward the requirement from Form N-SAR \877\ that the fund 
identify whether there have been any changes in accounting principles 
or practices, and, if any, to provide more detailed information in a 
narrative attachment to the form.\878\
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    \873\ Item B.20.d of Form N-CEN.
    \874\ See Instruction to Item B.20 of Form N-CEN. Thus, if a 
fund changed its valuation methodologies with respect to municipal 
securities, the fund would report ``debt' in response to Item B.20.c 
and ``municipal securities'' in response to Item B.20.d.
    \875\ See Item 77.J and Item 102.I of Form N-SAR.
    \876\ Compare Item 77.J of Form N-SAR with Item B.20 of Form N-
CEN. An instruction to Item B.20 of Form N-CEN clarifies that we do 
not expect responses to this item to include changes to valuation 
techniques used for individual securities (e.g., changing from 
market approach to income approach for a private equity security). 
Form N-SAR does not contain a similar instruction, but we are 
including it in Form N-CEN to provide clarity for filers and because 
we believe that responding to Item B.20 of Form N-CEN for individual 
securities may be overly burdensome.
    \877\ See Item 77.L and Item 102.K of Form N-SAR.
    \878\ Item B.21 and Item G.1.a.iv of Form N-CEN. Like the 
information requested regarding changes in valuation methods, Form 
N-SAR only requests information from management companies regarding 
changes in accounting principles and practices. Unlike Form N-SAR, 
Form N-CEN requires this information from UITs as well, for the same 
reasons as discussed above with respect to changes in valuation 
methods. See supra footnote 869.
---------------------------------------------------------------------------

    We are also adopting, largely as proposed, a requirement in Form N-
CEN that management companies other than SBICs, file a copy of their 
independent public accountant's report on internal control as an 
attachment to their reports on the form.\879\ To flag instances where a 
report noted any material weaknesses, Form N-CEN also includes, as 
proposed, a question that asks whether the report on internal control 
noted any material weaknesses.\880\ In addition, as was proposed, Form 
N-CEN contains a new requirement that the fund report if the certifying 
accountant issued an opinion other than an unqualified opinion with 
respect to its audit of the fund's financial statements.\881\ These 
questions will elicit information on potential accounting issues 
identified by a fund's accountant.
---------------------------------------------------------------------------

    \879\ Item G.1.a.iii of Form N-CEN. Management companies other 
than SBICs are currently required to file a copy of the independent 
public accountant's report on internal control with their reports on 
Form N-SAR. See Item 77.B of Form N-SAR. We continue to believe that 
a copy of the management company's report on internal control should 
be filed with the Commission and thus are carrying over the filing 
requirement to Form N-CEN.
    \880\ Item B.18 of Form N-CEN. One commenter suggested that the 
word ``find'' in the text of proposed Item 19 be changed to 
``note,'' stating that the term ``find'' could be misinterpreted, 
creating an ``expectation gap'' over the nature of the consideration 
of internal control in an audit of financial statements, 
particularly for investment companies, which (except for BDCs) are 
not subject to the integrated audit requirements of the Sarbanes-
Oxley Act. See PwC Comment Letter. We are persuaded by the 
commenter's concern and have revised the language of the item from 
``find'' to ``note'' as recommended.
    \881\ Item B.19 of Form N-CEN.
---------------------------------------------------------------------------

    We are also adopting, largely as proposed, a requirement in Form N-
CEN, not contained in Form N-SAR, to indicate whether, during the 
reporting period, an open-end fund made any payments to shareholders or 
reprocessed shareholder accounts as a result of an NAV error.\882\ One 
commenter expressed support for additional information related to NAV 
errors.\883\ Another commenter recommended that this item be omitted 
from Form N-CEN, arguing that the item is not an appropriate reporting 
item for a census form, would likely engender inquiries and claims from 
potential litigants, and could be obtained through the Commission's 
examination program.\884\ We continue to believe, however, that the 
item will assist the staff's monitoring efforts and the yes/no 
reporting structure of the item will be a useful means to flag the 
occurrence of NAV corrections whereby Commission staff can request 
further information in connection with staff examinations and other 
inquiries.\885\
---------------------------------------------------------------------------

    \882\ Item B.22 of Form N-CEN.
    \883\ Morningstar Comment Letter.
    \884\ See SIFMA Comment Letter I.
    \885\ Regarding the commenter's concerns regarding potential 
increased litigation risk or inquiries based on public disclosure, 
based on our experience, we understand that these types of payments 
and reprocessing transactions are typically already disclosed to 
investors through account statements.
---------------------------------------------------------------------------

    In addition, one commenter requested that we revise the item to 
ensure that any errors that ``exceeded the registrant's threshold for 
reprocessing'' were captured, even if the reprocessing was paid for by 
a service provider.\886\ After consideration of the comment, we agree 
that this question should capture all incidents of reprocessed 
shareholder accounts regardless of the source of payment and have 
revised the item to clarify that a registrant should respond 
affirmatively if any payments were made to shareholders (i.e., 
regardless of the source of the payment) or if any shareholder accounts 
were reprocessed as a result of an error in calculating the 
registrant's NAV.\887\
---------------------------------------------------------------------------

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

    As proposed, Form N-CEN also requires information from management 
companies regarding payments of dividends or distributions that 
required a written statement pursuant to section 19(a) of the 
Investment Company Act and rule 19a-1 thereunder.\888\ These questions 
will assist the staff in monitoring valuation of fund assets and the 
calculation of the fund's NAV, as well as compliance with distribution

[[Page 81935]]

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

    \888\ Item B.23 of Form N-CEN. Section 19(a) of the Investment 
Company Act generally prohibits a fund from making a distribution 
from any source other than the fund's net income, unless that 
payment is accompanied by a written statement that adequately 
discloses the source or sources of the payment. See 15 U.S.C. 80a-
19(a). Rule 19a-1 under the Investment Company Act specifies the 
information required to be disclosed in the written statement. [17 
CFR 270.19a-1]; see also Shareholder Notices of the Sources of Fund 
Distributions--Electronic Delivery, IM Guidance Update No. 2013-11 
(Nov. 2013), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-11.pdf.
    \889\ See State Street Comment Letter.
    \890\ Id.
---------------------------------------------------------------------------

c. Part C--Items Relating to Management Investment Companies
i. Background and Classification of Funds
    We proposed a number of reporting items under Part C of Form N-CEN 
to provide the Commission and its staff with background information on 
the fund industry and to assist us in meeting our legal and regulatory 
requirements, such as requirements under the Paperwork Reduction Act. 
Additionally, certain demographic information in Part C will allow the 
Commission to better identify particular types of management companies 
for monitoring and analysis if, for example, an issue arose with 
respect to a particular fund type. We are adopting those reporting 
items substantially as proposed with some modifications in response to 
comments. Where we have received comments on specific reporting 
requirements, we discuss them in more detail below.
    Part C will be completed by management investment companies other 
than SBICs. As in the proposal, for management companies offering 
multiple series, the required information will be reported separately 
as to each series.\891\
---------------------------------------------------------------------------

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

    Similar to Form N-SAR and as proposed, Form N-CEN includes general 
identifying information on management companies and any series thereof, 
including the full name of the fund, the fund's series identification 
number and LEI, and whether it is the fund's first time filing the 
form.\892\ Unlike Form N-SAR, specific information on the classes of 
open-end management companies, including information relating to the 
number of classes authorized, added, and terminated during the relevant 
period are required under Form N-CEN.\893\ In addition, Form N-CEN 
includes a requirement (unlike Form N-SAR) to specifically provide 
identifying information for each share class outstanding, including the 
name of the class, the class identification number, and ticker 
symbol.\894\
---------------------------------------------------------------------------

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

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

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

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

[[Page 81936]]

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

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

    As proposed, ``interval fund'' is defined as a closed-end 
management company that makes periodic repurchases of its shares 
pursuant to rule 23c-3 under the Investment Company Act.\909\ One 
commenter suggested that the definition of interval fund should not be 
limited to closed-end funds, but rather, expanded to other investment 
companies.\910\ We believe, however, that the definition is appropriate 
as proposed because the term ``interval fund'' is commonly used to 
refer to funds that rely on rule 23c-3.\911\
---------------------------------------------------------------------------

    \909\ See Instruction 3 to Item C.3 of Form N-CEN.
    \910\ Morningstar Comment Letter (noting that there is one 
investment company registered on Form N-1A whose redemption 
parameters are largely similar to an interval fund pursuant to 
exemptive relief and suggesting that the definition of interval fund 
be expanded to other investment companies in light of the existence 
of this fund).
    \911\ See rule 23c-3 under the Investment Company Act [17 CFR 
270.23c-3]. We believe that it is more appropriate to maintain the 
definition of interval fund as a closed-end fund that makes periodic 
purchases of its shares pursuant to rule 23c-3 as proposed, rather 
than expand the definition to capture funds that share some similar 
characteristics with interval funds but operate outside the context 
of rule 23c-3. For example, we believe that reports on Form N-CEN 
will appropriately capture an open-end fund that operates with 
redemption procedures similar to an interval fund pursuant to 
exemptive relief in response to Item B.15 of Form N-CEN.
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 81937]]

Moreover, we believe that the frequency and timeliness of reports on 
Form N-CEN are, both generally and specifically with respect to these 
reporting requirements, sufficient for collecting census-type 
information, but that reporting of these particular annualized figures 
on Form N-PORT would not be so timely or so frequent as to advance the 
purposes the commenter suggested (viz., to respond in periods of market 
stress), particularly in light of the Form N-PORT 60-day reporting 
delay.
---------------------------------------------------------------------------

    \917\ See Item C.3.a, Item C.3.b, and Item C.3.f of Form N-CEN.
    \918\ See Item C.3.a.i and Item C.3.a.ii of Form N-CEN.
    \919\ With respect to index funds that are ETFs, we expect a 
fund to use its NAV-based total return, rather than market-based 
total return, in responding to Item C.3.a.i and Item C.3.a.ii of 
Form N-CEN.
    \920\ Item C.3.b.i of Form N-CEN. The tracking difference is the 
return difference between the fund and the index it is following, 
annualized. Morningstar ETF Research, Ben Johnson, et al., On the 
Right Track: Measuring Tracking Efficiency in ETFs (Feb. 2013) 
(``Morningstar Paper'') at 29, available at http://media.morningstar.com/uk/MEDIA/Research_Paper/Morningstar_Report_Measuring_Tracking_Efficiency_in_ETFs_February_2013.pdf. Thus, tracking difference = (1 + RNAV-
RINDEX) \1/N\-1, where RNAV is the total 
return for the fund over the reporting period, RINDEX is 
the total return for the index for the reporting period, and N is 
the length of the reporting period in years. N will equal to 1 if 
the reporting period is the fiscal year. Id.
    \921\ See Item C.3.b.ii of Form N-CEN. Tracking error is 
commonly understood as the standard deviation of the daily 
difference in return between the fund and the index it is following, 
annualized. Morningstar Paper, supra footnote 920, at 29. Thus, 
tracking error = std (RNAV - RINDEX) x 
[radic]n, where RNAV is the daily return for the fund, 
RINDEX is the daily return for the index, std([middot]) 
represents the standard deviation function, and n is the number of 
trading days in the fiscal year. Id.
    \922\ See Morningstar Comment Letter (recommending that tracking 
difference and tracking error be reported on N-PORT with trailing 
one-year data rather than annually on Form N-CEN).
---------------------------------------------------------------------------

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

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

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

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

    Finally, as proposed, master funds will be required to provide 
identifying information with respect to each feeder fund, including 
information on unregistered feeder funds (i.e., feeder funds not 
registered as investment companies with the Commission), such as 
offshore feeder funds.\929\ Similarly, a feeder fund will be required 
to provide identifying information of its master fund.\930\
---------------------------------------------------------------------------

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

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

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

ii. Investments in Certain Foreign Corporations
    Form N-CEN requires, as proposed, that a management company 
identify if it invests in a CFC for the purpose of investing in certain 
types of instruments, such as commodities.\935\ If it does, it must 
include the name and LEI of such corporation, if any.\936\ As discussed 
above in section II.A.2.b, some funds use CFCs for making certain 
investments, particularly in commodities and commodity-linked 
derivatives, often for tax purposes. Information regarding assets 
invested in a CFC for the purpose of investing in certain types of 
instruments will provide investors greater insight into CFCs that may 
have certain legal, tax, and country-specific risks associated with 
them. Combined with the information that we are collecting in Form N-
PORT, Commission staff will use this information to better understand 
the use of CFCs, which could allow for more efficient collaboration 
with foreign financial regulatory authorities to the extent the 
Commission may need books and records or other information for specific 
funds or general inquiries related to CFCs.
---------------------------------------------------------------------------

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

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

[[Page 81938]]

securities lending information in reports on Form N-PORT to help inform 
the Commission, investors and other market participants about the scale 
of securities lending activity by funds and their related cash 
collateral reinvestments.\937\ Additionally, we are adopting 
requirements that funds include in their statements of additional 
information \938\ certain information concerning their income and 
expenses associated with securities lending activities in order to 
increase the transparency of this information to investors and other 
potential users.\939\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

[[Page 81939]]

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

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

    We are also adopting, as proposed, a requirement that management 
companies report whether a securities lending agent or any other entity 
indemnifies the fund against borrower default on loans administered by 
the agent and certain identifying information about the entity 
providing indemnification if not the securities lending agent.\952\ In 
addition, in a modification from the proposal, we are now including a 
requirement that management companies report whether the fund exercised 
its indemnification rights during the reporting period.\953\ A 
commenter recommended that the Commission require funds to report 
whether they exercised their indemnification rights to, in part, 
provide information about defaults and the extent to which counterparty 
risks are covered by third parties that provide indemnification.\954\ 
We agree with the commenter that this additional requirement would 
illuminate the frequency of defaults and indemnifications thereby 
providing the Commission with information about such counterparty 
defaults and the extent to which those risks are covered by third 
parties that provide indemnification. We believe that this additional 
requirement, together with the other default and indemnification 
requirements, will yield data that will allow the Commission, 
investors, and other potential users to more effectively assess the 
counterparty risks associated with borrower default in the securities 
lending market and the extent to which those risks are mitigated by--or 
concentrated in--third parties that provide indemnification against 
default.\955\
---------------------------------------------------------------------------

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

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

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

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

[[Page 81940]]

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

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

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

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

    We believe that the information we proposed about the types of 
payments relating to securities lending activities will allow the 
Commission, investors and other management company boards of directors 
to understand better the nature of fees a management company pays in 
connection with securities lending activities and whether, for example, 
the revenue sharing split that the company pays to a securities lending 
agent includes compensation for other services such as administration 
or cash collateral management.\967\ We recognize the potential benefits 
for some data users of access to information about amounts paid for 
each of the types of compensation in a structured format. However, in 
light of the fact that Form N-CEN reporting requirements are intended 
primarily for the Commission's regulatory purposes and that there would 
be additional reporting costs related to such a change, and further 
recognizing that additional securities lending information will now be 
available to investors pursuant to new Statement of Additional 
Information (or, for closed-end funds, Form N-CSR) requirements 
discussed below,\968\ we have determined not to require reporting of 
specific compensation amounts or fee rates in reports on Form N-CEN. In 
addition, we have included in Form N-CEN, a requirement that management 
companies report the monthly average of the value of portfolio 
securities on loan during the reporting period.\969\ This requirement 
was originally proposed to be included in Regulation S-X along with 
other securities lending disclosure requirements.\970\ We have 
determined to move this information to Form N-CEN as we believe having 
this information in a structured format will assist our staff in its 
analyses of the information. As previously noted, we have also 
determined to move the other proposed securities lending disclosures 
from Regulation S-X to the Statement of Additional Information (or, for 
closed-end funds, Form N-CSR), as we believe the Statement of 
Additional Information (or, for closed-end funds, Form N-CSR) is a more 
appropriate location for these disclosures.\971\ One commenter 
recommended that funds be required to report average monthly aggregate 
dollar amounts on loan for each counterparty to the securities 
loan.\972\ We continue to believe, however, that information on the 
overall monthly average of the value of portfolio securities on loan 
provides a better understanding of a fund's securities lending program 
without burdening registrants with additional counterparty reporting 
requirements.
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    \967\ In evaluating the fees and services of any securities 
lending agent, the board of directors of a management company that 
engages in securities lending may be assisted by reviewing and 
comparing information on securities lending agent fee arrangements 
of other management companies. See, e.g., SIFE Trust Fund, SEC No-
Action Letter (pub. avail. Feb. 17, 1982) (management company's 
board of directors determines that the securities lending agent's 
fee is reasonable and based solely on the services rendered); 
Neuberger Berman Equity Funds, et al., Investment Company Act 
Release No. 25880 (Jan. 2, 2003) [68 FR 1071 (Jan. 8, 2003)] 
(Notice); Neuberger Berman Equity Funds, et al., Investment Company 
Act Release No. 25916 (Jan. 28, 2003) (Order) (management company's 
board of directors, including a majority of independent directors, 
will determine initially and review annually, among other things, 
that (i) the services to be performed by the affiliated securities 
lending agent are appropriate for the lending fund, (ii) the nature 
and quality of the services to be provided by the agent are at least 
equal to those provided by others offering the same or similar 
services; and (iii) the fees for the agent's services are fair and 
reasonable in light of the usual and customary charges imposed by 
others for services of the same nature and quality).
    \968\ See infra section II.F.
    \969\ Item C.6.f of Form N-CEN
    \970\ See proposed rule 6-03(m)(6) of Regulation S-X; Proposing 
Release, supra footnote 7, at 33624.
    \971\ See supra section II.C.6 (discussing securities lending 
disclosures in the Statement of Additional Information and Form N-
CSR).
    \972\ See John Adams Comment Letter.
---------------------------------------------------------------------------

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

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

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

[[Page 81941]]

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

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

iv. Reliance on Certain Rules
    We are adopting, as proposed, a requirement in Form N-CEN that 
management companies report whether they relied on certain rules under 
the Investment Company Act during the reporting period.\978\ A similar 
reporting item is contained in Form N-SAR.\979\ However, Form N-CEN 
requires information with respect to additional rules not currently 
covered by Form N-SAR.\980\ We are collecting information on these 
additional rules to better monitor reliance on exemptive rules and to 
assist us with our accounting, auditing and oversight functions, 
including, for some rules, compliance with the Paperwork Reduction Act. 
For example, reporting of reliance on rules 15a-4 and 17a-8 under the 
Investment Company Act will allow the staff to monitor significant 
events relating to interim investment advisory agreements and 
affiliated mergers, respectively.
---------------------------------------------------------------------------

    \978\ Item C.7 of Form N-CEN.
    \979\ Compare id. (requiring management companies to identify if 
they relied upon any of the following rules: Rule 10f-3 (exemption 
for the acquisition of securities during the existence of an 
underwriting or selling syndicate) [17 CFR 270.10f-3], rule 12d1-1 
[17 CFR 270.12d1-1] (exemptions for investments in money market 
funds), rule 15a-4 [17 CFR 270.15a-4] (temporary exemption for 
certain investment advisers), rule 17a-6 [17 CFR 270.17a-6] 
(exemption for transactions with portfolio affiliates), rule 17a-7 
[17 CFR 270.17a-7] (exemption of certain purchase or sale 
transactions between an investment company and certain affiliated 
persons thereof), rule 17a-8 [17 CFR 270.17a-8] (mergers of 
affiliated companies), rule 17e-1 [17 CFR 270.17e-1] (brokerage 
transactions on a securities exchange), rule 22d-1 [17 CFR 270.22d-
1] (exemption from section 22(d) to permit sales of redeemable 
securities at prices which reflect sales loads set pursuant to a 
schedule), rule 23c-1 [17 CFR 270.23c-1] (repurchase of securities 
by closed-end companies), rule 32a-4 [17 CFR 270.32a-4] (independent 
audit committees)) with Item 40, Item 77.N, Item 77.O, Item 102.M, 
and Item 102.N of Form N-SAR (requiring information regarding rule 
2a-7 [17 CFR 270.2a-7] (money market funds), rule 10f-3 (see above 
for description), and rule 12b-1 [17 CFR 270.12b-1] (distribution of 
shares by registered open-end management investment company)).
    \980\ Id.
---------------------------------------------------------------------------

    One commenter suggested that the Commission specify the name of 
each rule next to the rule number.\981\ We believe, however, that the 
rule number descriptions as proposed in Item C.7 are consistent with 
other reporting forms and provide sufficient information for 
registrants, and thus, are adopting the item as proposed.
---------------------------------------------------------------------------

    \981\ Schnase Comment Letter.
---------------------------------------------------------------------------

    In addition, we are adopting, as proposed, amendments to rule 10f-3 
to eliminate the requirement that funds provide the Commission with 
reports on Form N-SAR regarding any transactions effected pursuant to 
the rule.\982\ Rule 10f-3 currently requires funds to maintain and 
preserve certain information--the same information also required to be 
filed pursuant to Form N-SAR--in its records regarding rule 10f-3 
transactions.\983\ Our amendments to rule 10f-3 will eliminate the 
requirement to periodically report this information,\984\ but will not 
alter the requirement to maintain and preserve it. The Commission 
believes it is unnecessary for funds to continue to file this 
information because Commission staff can request the information in 
connection with staff inspections, examinations and other 
inquiries.\985\ We did not receive comment on this aspect of the 
proposal.
---------------------------------------------------------------------------

    \982\ See adopted amendments to rule 10f-3.
    \983\ See rule 10f-3(c)(12) under the Investment Company Act [17 
CFR 270.10f-3(c)(12)].
    \984\ See rule 10f-3(c)(9) under the Investment Company Act [17 
CFR 27010f-3(c)(9)].
    \985\ Similar exemptive rules take this approach and do not 
require filings with the Commission. See, e.g., rule 17a-7 under the 
Investment Company Act [17 CFR 270.17a-7] and rule 17e-1 under the 
Investment Company Act [17 CFR 270.17e-1]. We note that we 
previously proposed deleting this filing requirement from rule 10f-3 
in 1996. See Exemption for the Acquisition of Securities During the 
Existence of an Underwriting Syndicate, Investment Company Act 
Release No. 21838 (Mar. 21, 1996) [61 FR 13620 (Mar. 27, 1996)]. We 
chose not to delete the filing requirement in the final amended rule 
in light of the other amendments to the rule at that time, including 
the increase in the percentage limit on the principal amount of an 
offering that an affiliated fund could purchase. See Exemption for 
the Acquisition of Securities During the Existence of an 
Underwriting of Selling Syndicate, Investment Company Act Release 
No. 22775 (July 31, 1997) [62 FR 42401 (Aug. 7, 1997)].
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v. Expense Limitations
    As in Form N-SAR,\986\ Form N-CEN requires information regarding 
expense limitations.\987\ The requirements in Form N-CEN are, as 
proposed, modified from Form N-SAR and require information on whether 
the management company had an expense limitation arrangement in place, 
whether any expenses of the fund were waived or reduced pursuant to the 
arrangement, whether the waived fees are subject to recoupment, and 
whether any expenses previously waived were recouped during the 
period.\988\ We believe that more specific questions relating to 
management company expense limitation arrangements will limit 
uncertainty for management companies when responding to these items and 
will be a useful means to flag the occurrence of expense limitations 
whereby Commission staff can request further information in connection 
with staff examinations and other inquiries. One commenter expressed 
support for the expense limitation reporting requirement but suggested 
that the item include reporting of the actual dollar values of the 
expense information.\989\ We continue to believe, however, that the 
reporting item, as proposed, appropriately balances the burden on funds 
of providing this information and information necessary for our 
regulatory purposes. The adopted requirements are meant to yield 
census-type information that is, to the extent practicable, comparable 
across reporting funds and that permits the Commission and other 
potential users to follow up, as appropriate, on patterns and 
idiosyncrasies in the reported data. We believe therefore that the 
detailed and nuanced information the commenter suggests requiring is 
better provided in a fund's registration statement than in reports on 
Form N-CEN, to the extent required or otherwise appropriate.
---------------------------------------------------------------------------

    \986\ See Item 53.A-Item 53.C of Form N-SAR (requiring the fund 
to identify if expenses of the Registrant/Series were limited or 
reduced during the reporting period by agreement, and, if so, 
identify if the limitation was based upon assets or income).
    \987\ Item C.8 of Form N-CEN.
    \988\ Id. Form N-CEN also includes an instruction that filers 
should provide information in response to the item concerning any 
direct or indirect limitations, waivers or reductions, on the level 
of expenses incurred by the fund during the reporting period. The 
instructions also provide an example of how an expense limit may be 
applied--when an adviser agrees to accept a reduced fee pursuant to 
a voluntary fee waiver or for a temporary period such as for a new 
fund in its start-up phase. See Instruction to Item C.8 of Form N-
CEN.
    \989\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

vi. Service Providers
    Form N-CEN (similar to Form N-SAR) \990\ will, as proposed, collect 
identifying information on the management company's service providers, 
including its advisers and sub-advisers,\991\ transfer agents,\992\ 
pricing services agents,\993\ custodians (including custodians that 
provide services as sub-custodians),\994\ shareholder servicing 
agents,\995\ administrators,\996\ and affiliated broker-dealers.\997\ 
Together, these items will assist the Commission in analyzing the use 
of third-party service providers by management companies, as well as 
identify service providers that service large portions of the fund 
industry.
---------------------------------------------------------------------------

    \990\ See Item 8 and Items 10-15 of Form N-SAR.
    \991\ Item C.9 of Form N-CEN.
    \992\ Item C.10 of Form N-CEN. Form N-SAR equates a 
``shareholder servicing agent'' with a ``transfer agent.'' See 
Instruction to Item 12 of Form N-SAR.
    \993\ Item C.11 of Form N-CEN.
    \994\ Item C.12 of Form N-CEN.
    \995\ Item C.13 of Form N-CEN.
    \996\ Item C.14 of Form N-CEN.
    \997\ Item C.15 of Form N-CEN.
---------------------------------------------------------------------------

    Unlike Form N-SAR, Form N-CEN will, as proposed, also require the

[[Page 81942]]

management company to provide information on whether the service 
provider was hired or terminated during the reporting period and 
whether it is affiliated with the fund or its adviser(s).\998\ In 
addition, like Form N-SAR, and as proposed, Form N-CEN requests 
custodians to indicate the type of custody, but will expand upon the 
types of custody listed.\999\
---------------------------------------------------------------------------

    \998\ See, e.g., Item C.9.a.vii, Item C.9.c.vii, Item 
C.9.c.viii, Item C.10.a.vi, Item C.10.b, Item C.11.a.v, Item C.11.b, 
Item C.12.a.v, Item C.12.b, Item C.13.a.v, Item C.13.b, Item 
C.14.a.v and Item C.14.b of Form N-CEN.
    \999\ Compare Item 15.E and Item 18 of Form N-SAR with Item 
C.12.a.vii.1-Item C.12.a.vii.9 of Form N-CEN.
---------------------------------------------------------------------------

    One commenter recommended that the text of Item C.10 separate the 
term ``transfer agent'' from ``sub-transfer agents'' by including 
disclosures about the nature of the services rendered by sub-transfer 
agents to help assess shareholder costs paid.\1000\ The commenter did 
not, however, suggest a particular list of specific services. We note 
that the proposed form requested information with respect to ``each'' 
service provider, which we believe would include service providers 
providing services to the fund in a sub-service provider 
capacity.\1001\ However, in response to this comment, we have clarified 
for each relevant service provider, including transfers agents, that 
the fund must report sub-service providers in response to the service 
provider items.\1002\ Thus, with respect to the item, we have added a 
sub-item requiring that funds indicate if the transfer agent is a sub-
transfer agent.\1003\ We have determined not to require a description 
of the services provided by each transfer agent (or of other service 
providers) in Form N-CEN as we believe the information as proposed is 
sufficient for our regulatory purposes and because it is unclear 
whether, absent a specific set of listed services in Form N-CEN, which 
the commenter did not provide, this information on services would yield 
comparable census-type data across funds.
---------------------------------------------------------------------------

    \1000\ Morningstar Comment Letter.
    \1001\ We understand that a sub-service provider generally 
contracts with a primary service provider of the fund, rather than 
the fund itself, to provide a certain subset of the services that 
the primary service provider has otherwise agreed to provide the 
fund.
    \1002\ See Item C.10.a.vii, Item C.12.a.vi, Item C.13.a.vi, and 
Item C.14.a.vi of Form N-CEN. We note that a similar requirement was 
proposed with respect to custodians. See Item 37.a.vi of proposed 
Form N-CEN.
    \1003\ See Item C.10.a.vii of Form N-CEN.
---------------------------------------------------------------------------

    With respect to custodian information, one commenter suggested that 
the form should require identification of the primary custodian only, 
citing that the primary custodian is the primary service provider of 
the fund, whereas any sub-custodians, depositories, or clearing 
organizations that provide custodial services will be a function of the 
specific instruments that the fund invests in during the reporting 
period.\1004\ We note that identifying sub-custodians on Form N-CEN is 
consistent with reporting requirements on Form N-SAR.\1005\ Because 
sub-custodians and other sub-service providers may provide important 
services to funds, we continue to believe that requesting information 
about sub-custodians and other sub-service providers in addition to the 
primary service providers is appropriate and useful for purposes of our 
oversight responsibilities. For example, should an adverse market event 
affect a particular sub-custodian, Commission data analysts could use 
the required information about sub-custodians to identify potentially 
affected funds. Information about the primary custodian alone would not 
permit such identification.
---------------------------------------------------------------------------

    \1004\ State Street Comment Letter.
    \1005\ See, e.g., Instructions to Item 15 of Form N-SAR; see 
also Item 15 and Item 92 of Form N-SAR, including Item 15.E and Item 
92.D of Form N-SAR, which require reporting of rule 17f-5 [17 CFR 
270.17f-5] foreign custodians.
---------------------------------------------------------------------------

    As proposed, the form would have included two new requirements 
regarding pricing services. Management companies would have to provide 
identifying information on persons that provided pricing services 
during the reporting period,\1006\ as well as persons that formerly 
provided pricing services to the management company during the current 
and immediately prior reporting period that no longer provide services 
to that company.\1007\ Based on staff experience, management companies 
and their boards often rely on pricing agents to help price securities 
held by the fund.
---------------------------------------------------------------------------

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

    One commenter expressed support for the new reporting requirements, 
noting that the information would be sufficient to conduct due 
diligence on pricing and valuation issues.\1008\ One commenter 
expressed concern that reporting pricing services no longer retained 
could improperly imply that valuation services provided by the former 
service provider were incorrect and/or unreliable.\1009\ In response to 
that comment, we have determined to remove from the form the item 
requiring funds to provide information on pricing services no longer 
retained. We have instead revised Item C.11 of the form, which requires 
information on persons who provided pricing services to the fund during 
the reporting period, to ask whether a pricing agent was hired or 
terminated during the report period.\1010\ Unlike the proposed 
requirement and in response to the commenter's concern, Item C.11 as 
modified does not identify specifically the pricing service that was 
terminated. A similar question is also included in the form for other 
fund service providers and, as with the information provided for other 
service providers, will still provide Commission staff with a method 
for identifying whether a fund has initiated or terminated a service 
provider relationship during the reporting period.\1011\
---------------------------------------------------------------------------

    \1008\ Morningstar Comment Letter.
    \1009\ See Fidelity Comment Letter.
    \1010\ As proposed, Item 35(f) would have asked ``Was the 
pricing service first retained by the Fund to provide pricing 
services during the current reporting period?'' As adopted, Item 
C.11.b asks ``Was a pricing service hired or terminated during the 
reporting period?''.
    \1011\ See, e.g., Item C.10-Item C.14 of Form N-CEN (requesting 
information regarding transfer agents, custodians, shareholder 
servicing agents, and third-party administrators).
---------------------------------------------------------------------------

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

[[Page 81943]]

the Exchange Act.\1015\ We did not receive comment on these aspects of 
the proposal.
---------------------------------------------------------------------------

    \1012\ Item C.16 of Form N-CEN.
    \1013\ Item C.17 of Form N-CEN.
    \1014\ Items 20-23 of Form N-SAR. Form N-SAR includes an 
instruction designed to help filers distinguish between agency and 
principal transactions for purposes of reporting information 
regarding brokerage commissions and principal transactions. See 
Instruction to Items 20-23 of Form N-SAR. A substantially similar 
instruction will be included in Form N-CEN. See Instructions to Item 
C.16 and Item C.17 of Form N-CEN.
    \1015\ Item C.18 of Form N-CEN; see also Item 26.B of Form N-SAR 
(requiring disclosure if the fund's receipt of investment research 
and statistical information from a broker or dealer was a 
consideration which affected the participation of brokers or dealers 
or other entities in commissions or other compensation paid on 
portfolio transactions of Registrant). Section 28(e) of the Exchange 
Act establishes a safe harbor that allows money managers to use 
client funds to purchase ``brokerage and research services'' for 
their managed accounts under certain circumstances without breaching 
their fiduciary duties to clients. See 15 U.S.C. 78bb(e); see also 
Commission Guidance Regarding Client Commission Practices Under 
Section 28(e) of the Securities Exchange Act of 1934, Securities 
Exchange Act Release No. 34-54165 (July 18, 2006) [71 FR 41978 (July 
24, 2006)]. We continue to believe that an item indicating whether a 
fund uses soft dollars will assist our staff in their examinations 
and provide census data as to the number and type of funds that rely 
on the safe harbor provided by section 28(e).
---------------------------------------------------------------------------

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

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

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

    \1019\ See Morningstar Comment Letter.
    \1020\ See infra footnote 1169 and accompanying text. We note 
that certain fee and expense information for closed-end funds, which 
is not disclosed in a structured format in closed-end fund 
registration statements, is included in Part D of Form N-CEN. See 
Item D.8 and Item D.9 of Form N-CEN. These items will provide 
Commission staff with the fee and expense information for closed-end 
funds that the staff finds most useful to have in a structured data 
format.
    \1021\ See Item C.19 of Form N-CEN.
---------------------------------------------------------------------------

d. Part D--Closed-End Management Companies and Small Business 
Investment Companies
    The Commission recognizes that closed-end funds and SBICs have 
particular characteristics that warrant questions targeted specifically 
to them.\1022\ Like Form N-SAR and as proposed, Form N-CEN requires 
additional information to be reported by closed-end funds in Part D of 
the form and also treats SBICs differently than other management 
investment companies, requiring them to complete Part D of the form in 
lieu of Part C.\1023\ The information required in Part D will provide 
us with information that is particular to closed-end funds and SBICs 
and, thus, will assist us in monitoring the activities of these funds 
and our examiners in their preparation for exams of these funds. Where 
we have received comments on specific reporting requirements of Part D, 
we discuss them in more detail below.
---------------------------------------------------------------------------

    \1022\ See Items 86-88 of Form N-SAR (relating specifically to 
closed-end funds) and Items 89-104 of Form N-SAR (relating 
specifically to SBICs).
    \1023\ As discussed above, SBICs are unique investment companies 
that operate differently than other management investment companies. 
See supra footnote 49.
---------------------------------------------------------------------------

    Similar to Form N-SAR, we are adopting, as proposed, a reporting 
requirement in Part D of Form N-CEN for information on the securities 
that have been issued by the closed-end fund or SBIC, including the 
type of security issued (common stock, preferred stock, warrants, 
convertible securities, bonds, or any security considered ``other''), 
title of each class, exchange where listed, and ticker symbol.\1024\ As 
in the proposal, we are requiring new information relating to rights 
offerings \1025\ and secondary offerings by the closed-end fund or 
SBIC,\1026\ including whether there was such an offering during the 
reporting period and if so, the type of security involved.\1027\ 
Together, this information will allow the staff to quickly identify and 
track the securities and offerings of closed-end funds and SBICs when 
monitoring and examining these funds.
---------------------------------------------------------------------------

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

    Like Form N-SAR,\1028\ we are also adopting, as proposed, a 
requirement that each closed-end fund or SBIC report information on 
repurchases of its securities during the reporting period.\1029\ 
However, unlike Form N-SAR, which requires information on the number of 
shares or principal amount of debt and net consideration received or 
paid for sales and repurchases for common stock, preferred stock, and 
debt securities, we are adopting, as proposed, the requirement in Form 
N-CEN that a closed-end fund or SBIC only needs to indicate if it 
repurchased any outstanding securities issued by the closed-end fund or 
SBIC during the reporting period and indicate which type of 
security.\1030\
---------------------------------------------------------------------------

    \1028\ See Item 86 and Item 95 of Form N-SAR.
    \1029\ Item D.4 of Form N-CEN.
    \1030\ We note that, with respect to closed-end funds, financial 
information relating to monthly sales and repurchases of shares will 
be reported monthly on Form N-PORT. See Item B.6 of Form N-PORT 
(requiring the aggregate dollar amounts for sales and redemptions/
repurchases of fund shares during each of the last three months).
---------------------------------------------------------------------------

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

[[Page 81944]]

we are similarly carrying over the Form N-SAR requirement \1036\ 
regarding modifications to the constituent's instruments defining the 
rights of holders.\1037\ Similar to Form N-SAR, if a closed-end fund or 
SBIC made modifications to such an instrument, it also will be required 
to file an attachment in Part G of Form N-CEN with a more detailed 
description of the modification.\1038\ This item provides the 
Commission with information on and copies of documents reflecting 
changes to shareholders' rights.
---------------------------------------------------------------------------

    \1031\ See Item 77.G and Item 102.F of Form N-SAR.
    \1032\ Item D.5 of Form N-CEN.
    \1033\ Item D.6 of Form N-CEN.
    \1034\ Item 77.G and Item 102.F of Form N-SAR.
    \1035\ Item D.5 of Form N-CEN requires, with respect to any 
default on long-term debt, the nature of the default, the date of 
the default, the amount of the default per $1000 face amount, and 
the total amount of default. An instruction to this item defines 
``long-term debt'' to mean a debt with a period of time from date of 
initial issuance to maturity of one year or greater. Item D.6 of 
Form N-CEN requires, with respect to any dividends in arrears, the 
title of the issue and the amount per share in arrears. This item 
defines ``dividends in arrears'' to mean dividends that have not 
been declared by the board of directors or other governing body of 
the fund at the end of each relevant dividend period set forth in 
the constituent instruments establishing the rights of the 
stockholders.
    \1036\ Item 77.I and Item 102.H of Form N-SAR.
    \1037\ Item D.7 of Form N-CEN.
    \1038\ Item G.1.b.ii of Form N-CEN.
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    We are also adopting, as proposed, requirements in Part G of Form 
N-CEN that closed-end funds or SBICs file attachments regarding 
material amendments to organizational documents,\1039\ new or amended 
investment advisory contracts,\1040\ information called for by Item 405 
of Regulation S-K,\1041\ and, for SBICs only, senior officer codes of 
ethics.\1042\ Where possible, we sought to eliminate the need to file 
attachments with the report in order to simplify the filing process and 
maximize the amount of information we receive in a data tagged format. 
However, the attachments required by Form N-CEN will provide us with 
information that is not otherwise updated or filed with the Commission 
and, thus, we believe they should continue to be filed in attachment 
form. All of the attachments in Form N-CEN that are specific to closed-
end funds and SBICs are also currently required by Form N-SAR.\1043\
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    \1039\ Item G.1.b.i of Form N-CEN.
    \1040\ Item G.1.b.iii of Form N-CEN.
    \1041\ Item G.1.b.iv of Form N-CEN.
    \1042\ Item G.1.b.v of Form N-CEN. This item applies only to 
SBICs because other management investment companies, including 
closed-end funds, provide this information in filings on Form N-CSR. 
See Item 2 and Item 3 of Form N-CSR; see also rule 30d-1 under the 
Investment Company Act [17 CFR 270.30d-1].
    \1043\ Compare Item G.1.b of Form N-CEN with Item 77.Q.1, Item 
77.Q.2, Item 102.P.1, Item 102.P.2, and Item 102.P.3 of Form N-SAR; 
see also Instructions to Specific Item 77Q1(a), Item 77Q1(e), Item 
77Q2, Item 102P1(a), Item 102P1(e), Item 102P2, and Item 102P3 of 
Form N-SAR.
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    Similar to Form N-SAR, we are adopting, as proposed, a requirement 
for other census-type information relating to management fees and net 
operating expenses. Closed-end funds will be required to report the 
fund's advisory fee as of the end of the reporting period as a 
percentage of net assets.\1044\ Some commenters expressed support for 
this specific item requirement.\1045\ One of the commenters also 
suggested that funds report the actual management fee paid as a 
percentage of the average NAV of the fund during the reporting period 
so that the fee reported reflects the fee charged during the reporting 
period.\1046\ We are adopting the requirement as proposed because it 
meets our regulatory purposes and is consistent with the fee disclosure 
requirements for closed-end funds in their registration 
statements.\1047\ We believe that reporting in this manner will yield 
information that is more readily comparable across types of funds, as 
open-end funds must currently disclose tagged fee information as a 
percentage of net assets in XBRL in the fund's risk/return 
summary.\1048\
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    \1044\ Item D.8 of Form N-CEN; cf. Items 47-52 and Item 72.F of 
Form N-SAR (requesting advisory fee information for management 
companies, including closed-end funds). Whereas Form N-SAR requests 
information regarding the advisory fee rate and the dollar amount of 
gross advisory fees, an instruction to Item D.8 of Form N-CEN 
explains that the management fee reported should be based on the 
percentage of amounts incurred during the reporting period.
    \1045\ See ICI Comment Letter (agreeing that management fee 
information should be backward looking); State Street Comment Letter 
(also agreeing that the advisory fee should be backward looking, 
noting that backward looking disclosures are consistent with the 
annual financial statements of regulated investment companies).
    \1046\ See ICI Comment Letter.
    \1047\ See Item 3 of Form N-2 (requesting management fee 
information as a percentage of net assets attributable to common 
shares).
    \1048\ See General Instruction C.3.G to Form N-1A.
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    Additionally, as proposed, closed-end funds and SBICs will both be 
required to report the fund's net annual operating expenses as of the 
end of the reporting period (net of any waivers or reimbursements) as a 
percentage of net assets.\1049\ Unlike open-end funds, which provide 
management fee and net expense information to the Commission in a 
structured format,\1050\ such information is not reported to or updated 
with the Commission in a structured format by closed-end funds or 
SBICs. This information will allow the Commission to track industry 
trends relating to fees. As proposed, Form N-CEN carries forward the 
Form N-SAR requirement that market price per share \1051\ and NAV per 
share \1052\ of the fund's common stock be reported for the end of the 
reporting period.
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    \1049\ Item D.9 of Form N-CEN; cf. Item 72.X and Item 97.X of 
Form N-SAR (requesting total expenses in dollars for closed-end 
funds and SBICs).
    \1050\ Management fee information for open-end funds is 
currently tagged in XBRL format in the fund's risk return summary 
and is therefore not required by Form N-CEN. See General Instruction 
C.3.G to Form N-1A.
    \1051\ Item D.10 of Form N-CEN; see Item 76 and Item 101 of Form 
N-SAR
    \1052\ Item D.11 of Form N-CEN; see Item 74.V.1 and Item 99.V of 
Form N-SAR.
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    Finally, as proposed, Form N-CEN (like Form N-SAR) will require 
information regarding an SBIC's investment advisers,\1053\ transfer 
agents,\1054\ and custodians (including custodians that provide 
services as sub-custodians).\1055\ This information is the same as what 
will be reported by open-end and closed-end funds in Part C of Form N-
CEN, but SBICs will not be required to fill out Part C of the form. The 
majority of questions in Part C of Form N-CEN are inapplicable to SBICs 
or otherwise request information that will not be helpful to us in 
carrying out our regulatory functions with respect to SBICs. 
Accordingly, we are excepting SBICs from filling out Part C of the form 
and instead including for SBICs certain service provider questions from 
Part C in Part D of the form.
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    \1053\ Item D.12 of Form N-CEN.
    \1054\ Item D.13; see supra footnotes 990-997 and accompanying 
text; see also supra footnotes 1000-1002, and accompanying text 
(discussing the addition of a sub-item related to sub-transfer 
agents).
    \1055\ Item D.14 of Form N-CEN.
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e. Part E--Exchange-Traded Funds and Exchange-Traded Managed Funds
    As we proposed, we are adopting a section in Form N-CEN related 
specifically to ETFs--Part E--which ETFs will complete in addition to 
Parts A, B, and G, and either Part C (for open-end funds) or Part F 
(for UITs). For purposes of Form N-CEN, an ETF is a special type of 
investment company that is registered under the Investment Company Act 
as either an open-end fund or a UIT. Unlike other open-end funds and 
UITs, an ETF generally does not sell or redeem its shares except in 
large blocks (or ``creation units'') and with broker-dealers that have 
contractual arrangements with the ETF (called ``authorized 
participants'').\1056\

[[Page 81945]]

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

    ETFs currently are subject to the same information reporting 
requirements on Form N-SAR as are other open-end funds or UITs, and 
they are not required to report additional, more specialized 
information because Form N-SAR predates the introduction of ETFs to the 
market and has not been amended to address ETFs' distinct 
characteristics. In 2009, the Commission amended its registration 
statement disclosure requirements for ETFs \1058\ that are open-end 
funds to better meet the needs of investors who purchase those ETF 
shares in secondary market transactions.\1059\ We believe that it is 
appropriate to similarly tailor some of the comprehensive information 
reporting requirements in Form N-CEN to the special characteristics of 
ETFs. As we proposed, funds and UITs meeting the definition of 
``exchange-traded fund'' in Form N-CEN will be required to report 
information pursuant to the items in Part E of the form, as will 
certain similar investment products known as ``exchange-traded managed 
funds.'' \1060\ Taken together, we believe that, in addition to 
informing the Commission's risk analysis and, potentially, future 
policymaking concerning ETFs, the information these requirements will 
yield could also help inform the interested public about the operation 
of, and possible risks associated with, these funds.
---------------------------------------------------------------------------

    \1058\ See General Instruction A of Form N-1A (defining 
``Exchange-Traded Fund'').
    \1059\ See Enhanced Disclosure and New Prospectus Delivery 
Option for Registered Open-End Management Investment Companies, 
Securities Act Release No. 8998 (Jan. 13, 2009) [74 FR 4546, 4558 
(Jan. 26, 2009)].
    \1060\ General Instruction A to Form N-CEN; see also supra 
footnote 763.
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    Some commenters supported having a distinct section for ETFs.\1061\ 
However, as discussed in detail below, some commenters expressed 
certain concerns about specific reporting items, and, in particular, 
the public disclosure of certain reporting items.\1062\ We are adopting 
proposed Part E, with some modifications in response to specific 
commenter concerns, which are addressed in more detail below. In 
particular, several of the modifications we are making today are 
intended to address concerns raised by commenters that certain of the 
proposed Part E reporting requirements may yield data that is not 
representative of the ETF's activity over the course of the reporting 
period and may not be appropriately reflective of the range of activity 
in the ETF primary market today or in the future.\1063\
---------------------------------------------------------------------------

    \1061\ See, e.g., BlackRock Comment Letter; Morningstar Comment 
Letter.
    \1062\ See BlackRock Comment Letter; Invesco Comment Letter; 
SIFMA Comment Letter I; State Street Comment Letter.
    \1063\ See, e.g., infra footnotes 1077, 1081, 1091-1092 and 
accompanying text.
---------------------------------------------------------------------------

    Some of the new reporting requirements for ETFs that we are 
adopting today as part of Form N-CEN relate to an ETF's (or its service 
provider's) interaction with authorized participants. These entities 
have an important role to play in the orderly distribution and trading 
of ETF shares and are significant to the ETF marketplace.\1064\ Because 
of their importance, we proposed new reporting requirements concerning 
these entities,\1065\ and we have determined to adopt these new 
reporting requirements as proposed.
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    \1064\ See ETF Proposing Release, supra footnote 5, at 14620-21.
    \1065\ Proposing Release, supra footnote 7, at 33645-46; 
Liquidity Proposing Release, supra footnote 11, at 62348.
---------------------------------------------------------------------------

    Currently, the information we have regarding reliance by ETFs on 
particular authorized participants is limited, and we believe that 
collecting information concerning these entities on an annual basis 
will allow us to understand and better assess the size, capacity, and 
concentration of the authorized participant framework and also inform 
the public about certain characteristics of the ETF primary markets. 
Accordingly, we are adopting, as proposed, a new requirement for each 
ETF to report identifying information about its authorized 
participants.\1066\ More specifically, Form N-CEN will require an ETF 
to report the name of each of its authorized participants (even if the 
authorized participant did not purchase or redeem any ETF shares during 
the reporting period) \1067\ and certain other identifying 
information,\1068\ including the authorized participant's SEC file 
number.\1069\ One commenter expressly supported reporting of this 
information, but suggested that authorized participants, rather than 
funds, should be required to provide this identifying information to 
the Commission, reasoning that authorized participants would have more 
ready access to the required information than funds.\1070\ Although we 
acknowledge that authorized participants would be expected to have 
access to the required information, we believe that, because authorized 
participants are counterparties to ETFs in primary market transactions, 
the required information should also be available to ETFs with which 
the authorized participants contract and transact. Because the 
requirements are intended in part to yield information about reliance 
by ETFs on particular authorized participants, and the Commission as 
well as other data users seeking census-type information about ETFs 
will likely be able to find and analyze it most efficiently using 
reports on Form N-CEN, we believe that ETFs themselves are the most 
appropriate source for the required information.
---------------------------------------------------------------------------

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

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

[[Page 81946]]

authorized participants.\1072\ We continue to believe, however, that 
collection of this additional information may allow the Commission 
staff to monitor how ETF purchase and redemption activity is 
distributed across authorized participants and, for example, the extent 
to which a particular ETF--or ETFs as a group--may be reliant on one or 
more particular authorized participants. We believe that adopting the 
new reporting requirements is appropriate in light of these benefits 
notwithstanding the possibility that public availability of the 
information might affect the ETF primary markets in the manner those 
commenters suggest.
---------------------------------------------------------------------------

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

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

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

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

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

    In order to better understand the capital markets implications of 
different creation unit requirements, primary market transaction 
methods, and transaction fees, we proposed requirements that ETFs 
annually report summary information about these characteristics of 
creation units and primary market transactions. ETFs are not currently 
required to report the information discussed below in a structured 
format, and public availability of many of the new data items is 
limited and indeterminable. To better understand how common different 
transaction methods are and the degree to which they vary across ETFs 
and over time, we proposed to require that ETFs report the total value 
(i) of creation units that were purchased by authorized participants 
``primarily'' in exchange for portfolio securities on an in-kind basis; 
(ii) of those that were redeemed ``primarily'' on an in-kind basis; 
(iii) of those that were purchased by authorized participants 
``primarily'' in exchange for cash; and (iv) of those that were 
redeemed ``primarily'' on a cash basis.\1078\ For purposes of these 
reporting requirements concerning transaction methods and transaction 
fees, we proposed to define ``primarily'' to mean greater than 50% of 
the value of the creation unit.\1079\ One commenter expressed general 
support for this information, opining that it would be helpful for 
investors.\1080\ Another commenter, however, expressed concerns with 
the proposed distinction between transactions conducted ``primarily'' 
on an in-kind basis and those conducted ``primarily'' in exchange for 
cash, arguing that treating a creation unit that is almost entirely in-
kind with a small cash balancing amount as equivalent to one that is 
effected with nearly half the value of the creation unit in the form of 
cash would yield data that would not serve the requirement's 
purpose.\1081\
---------------------------------------------------------------------------

    \1078\ See Item 60 of proposed Form N-CEN; see also Proposing 
Release, supra footnote 7, at 33646.
    \1079\ Instruction 9 to Item 60 of proposed Form N-CEN; see also 
See Proposing Release, supra footnote 7, at 33646.
    \1080\ See BlackRock Comment Letter.
    \1081\ Invesco Comment Letter.
---------------------------------------------------------------------------

    We found this comment persuasive, and we agree with the commenter 
that it would better achieve the proposed requirement's purpose of 
better understanding different creation unit requirements, primary 
market transaction methods, and transaction fees to collect such 
information in a manner that obviates the need for the ``primarily'' 
distinction about which the commenter expressed concern. Therefore, in 
a modification from the proposal, we have eliminated the proposed 
distinction between ``primarily'' in-kind and ``primarily'' cash 
transactions. Instead, as adopted, Form N-CEN will require ETFs to 
report, based on the dollar value paid for each creation unit purchased 
by authorized participants during the

[[Page 81947]]

reporting period, (i) the average percentage of that value composed of 
cash; \1082\ (ii) the standard deviation of the percentage of that 
value composed of cash; \1083\ (iii) the average percentage of that 
value composed of non-cash assets and other positions exchanged on an 
in-kind basis: \1084\ And (iv) the standard deviation of the percentage 
of that value composed of non-cash assets and other positions exchanged 
on an in-kind basis.\1085\ The ETF will also be required to report, 
based on the total dollar value of creation units redeemed by 
authorized participants during the reporting period, (i) the average 
percentage of that value composed of cash; \1086\ (ii) the standard 
deviation of the percentage of that value composed of cash; \1087\ 
(iii) the average percentage of that value composed of non-cash assets 
and other positions exchanged on an in-kind basis; \1088\ and (iv) the 
standard deviation of the percentage of that value composed of non-cash 
assets and other positions exchanged on an in-kind basis.\1089\ We 
believe that this modified requirement will better achieve the purposes 
of the proposed requirement and address the commenter's concerns about 
the proposed distinction between ``primarily'' in-kind and 
``primarily'' cash transactions.
---------------------------------------------------------------------------

    \1082\ Item E.3.b.i of Form N-CEN.
    \1083\ Item E.3.b.ii of Form N-CEN.
    \1084\ Item E.3.b.iii of Form N-CEN.
    \1085\ Item E.3.b.iv of Form N-CEN.
    \1086\ Item E.3.c.i of Form N-CEN.
    \1087\ Item E.3.c.ii of Form N-CEN.
    \1088\ Item E.3.c.iii of Form N-CEN.
    \1089\ Item E.3.c.iv of Form N-CEN.
---------------------------------------------------------------------------

    To better understand the effects of primary market transaction fees 
on ETF pricing and trading and to better inform the public about such 
fees, we also proposed a requirement that ETFs report applicable 
transaction fees--including each of ``fixed'' and ``variable'' fees--
applicable to the last creation unit purchased and the last creation 
unit redeemed during the reporting period of which some or all of the 
creation unit was transacted on a cash basis, as well as the same 
figures for the last creation unit purchased and the last creation unit 
redeemed during the reporting period of which some or all of the 
creation unit was transacted on an in-kind basis.\1090\
---------------------------------------------------------------------------

    \1090\ Proposing Release, supra footnote 7, at 33646; see also 
Item 60.e-Item 60.h of proposed Form N-CEN.
---------------------------------------------------------------------------

    As discussed above, one commenter expressed concerns about a 
potential lack of uniformity in how ETFs name and calculate 
transactional fees and suggested that the Commission provide 
definitional guidance about the types of fees to be reported in order 
to receive accurate and standardized information.\1091\ Another 
commenter expressed concerns that the information the proposed 
requirement would have yielded--which would have pertained specifically 
to the last creation units purchased or redeemed in the reporting 
period--may not be representative of the transactions occurring during 
the period and suggested that an alternative formulation would be more 
meaningful and helpful for investors.\1092\
---------------------------------------------------------------------------

    \1091\ Invesco Comment Letter.
    \1092\ BlackRock Comment Letter (suggesting instead that a range 
of fees paid over the reporting period be required).
---------------------------------------------------------------------------

    We find both of these comments persuasive, and consistent with our 
overarching objectives of the proposed requirement to collect 
information that helps data users better understand the effects of 
primary market transaction fees on ETF pricing and trading and to 
better inform the public about such fees in a manner that is more 
representative of the ETF's activity over the course of the reporting 
period, while being flexible enough to embrace the range of activity in 
the ETF market today and, to the extent practicable, in the future. 
Therefore, in a modification from the proposal that we believe will 
better help us meet these objectives while also responding to 
commenters' concerns, we are requiring reporting of average fees based 
on the terms by which they are applied rather than how they are 
characterized or what purpose they serve. Thus we have modified the 
proposed requirement in two respects: First, the terms ``fixed fee'' 
and ``variable fee'' have been eliminated, and the fees required to be 
reported have been specified in a manner that would allow ETFs that 
today or in the future employ an alternative transaction fee schedule 
to report those fees consistent with their actual practice. Second, the 
requirement to report as to the last creation unit purchased or 
redeemed has been replaced with a requirement to report as to the 
average creation unit purchased or redeemed during the reporting 
period, so that the information reported will better reflect the ETF's 
fees over the course of the reporting period rather than at a specific 
moment in time. Accordingly, we are adopting a requirement that, as to 
creation units purchased by authorized participants during the 
reporting period, ETFs report the average transaction fee (i) charged 
in dollars per creation unit; \1093\ (ii) charged for one or more 
creation units on the same business day; \1094\ and (iii) charged as a 
percentage of the value of the creation unit.\1095\ ETFs will also be 
required to report, as to only those creation units purchased by 
authorized participants that were fully or partially composed of cash, 
the average transaction fee (i) charged in dollars per creation unit; 
\1096\ (ii) charged for one or more creation units on the same business 
day; \1097\ and (iii) charged as a percentage of the value of the cash 
in the creation unit.\1098\ Finally, as in the proposed requirements, 
ETFs will be required to report the parallel information for the 
redemption of creation units by authorized participants.\1099\ We 
believe that this modified requirement will better achieve the purposes 
of the proposed requirement and address the commenters' concerns about 
the lack of uniformity in the naming and calculating of ETF primary 
market transaction fees as well as the representativeness of the fees 
on the last business day of the reporting period.
---------------------------------------------------------------------------

    \1093\ Item E.3.d.i.1 Form N-CEN.
    \1094\ Item E.3.d.i.2 Form N-CEN.
    \1095\ Item E.3.d.i.3 Form N-CEN.
    \1096\ Item E.3.d.ii.1 Form N-CEN.
    \1097\ Item E.3.d.ii.2 Form N-CEN.
    \1098\ Item E.3.d.ii.3 of Form N-CEN.
    \1099\ Item E.3.e of Form N-CEN.
---------------------------------------------------------------------------

    We also are adopting, as proposed, a requirement for ETFs to report 
the number of ETF shares required to form a creation unit as of the 
last business day of the reporting period,\1100\ which we believe will 
also allow the Commission and other data users to better analyze any 
effects that ETFs' creation unit size requirements may have on ETF 
pricing and trading. One commenter expressed support for this 
information, opining that it would be helpful for investors.\1101\ In 
addition to information about authorized participants and creation 
units, we are requiring, as proposed, that ETFs, like closed-end funds, 
report the exchange on which the ETF is listed so that Commission staff 
may be better able to quickly gather information as to which ETFs may 
be affected should an idiosyncratic risk or market event arise in 
connection with a particular exchange.\1102\ In a modification from the 
proposal, we are also adopting a requirement that ETFs provide their 
ticker symbol. As discussed above, management investment companies with 
one or more classes of shares outstanding will be required to provide a 
ticker symbol, if any, relating to that class,\1103\ and as we observed

[[Page 81948]]

throughout the Proposing Release, identifiers will assist the 
Commission with organizing the data received and allow the staff to 
cross-reference the data reported on Form N-CEN with data received from 
other sources.\1104\ We have determined that it is appropriate for ETFs 
to provide a ticker symbol also, as not all ETFs would be subject to 
the ticker symbol requirement for management investment companies.
---------------------------------------------------------------------------

    \1100\ Item E.3.a of Form N-CEN.
    \1101\ See BlackRock Comment Letter.
    \1102\ Item E.1.a of Form N-CEN.
    \1103\ See Item C.2.d.iii; 892-894.
    \1104\ See, e.g., Proposing Release, supra note 7, at 33635.
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    Finally, with respect to ETFs that are UITs, we are requiring 
information regarding whether the index whose performance the fund 
tracks is constructed by an affiliated person of the fund and/or 
exclusively constructed for the fund, as requested by a 
commenter,\1105\ and, as proposed, information regarding tracking 
difference and tracking error.\1106\ One commenter expressed support 
for the reporting of tracking difference and tracking error, stating 
that it would be helpful for investors.\1107\ Another commenter 
suggested that tracking error should be reported on a monthly basis, 
rather than on a daily basis, as proposed.\1108\ The index fund 
information is also required of open-end index funds and, for the same 
reasons discussed above in connection with those requirements, the form 
will require this same information of ETFs that are UITs.\1109\ As 
discussed above, commenters made similar suggestions about the 
methodology for calculating tracking error in the open-end fund index 
context, and we have determined to adopt the proposed methodology for 
the same reasons discussed in connection with the open-end index fund 
requirements.\1110\
---------------------------------------------------------------------------

    \1105\ See supra footnote 907 and accompanying text.
    \1106\ Item E.4 of Form N-CEN.
    \1107\ See BlackRock Comment Letter.
    \1108\ See Invesco Comment Letter. See supra footnotes 920-928 
and accompanying text.
    \1109\ See Item C.3.b of Form N-CEN; supra section II.D.4.c.i.
    \1110\ See supra footnotes 923-928 and accompanying text.
---------------------------------------------------------------------------

f. Part F--Unit Investment Trusts
    As proposed, Part F of Form N-CEN requires information specific to 
UITs. Like Form N-SAR, Form N-CEN recognizes that UITs have particular 
characteristics that warrant questions targeted specifically to 
them.\1111\ The information requested in Part F will inform us further 
about the scope and composition of the UIT industry and, thus, will 
assist us in monitoring the activities of UITs and our examiners in 
their preparation for exams of UITs. We did not receive specific 
comments on Part F of the form and are adopting it as proposed.
---------------------------------------------------------------------------

    \1111\ See Items 111-133 of Form N-SAR (relating specifically to 
UITs).
---------------------------------------------------------------------------

    Form N-CEN (similar to Form N-SAR \1112\) also requires certain 
identifying information relating to a UIT's service providers and 
entities involved in the formation and governance of UITs, including 
its depositor,\1113\ sponsor,\1114\ trustee,\1115\ and 
administrator.\1116\ We are also adopting, as proposed, an item in Form 
N-CEN that asks whether a UIT is a separate account of an insurance 
company,\1117\ and, depending on a UIT's response to this item, it will 
then proceed to answer certain additional questions in Part F.\1118\ 
While Form N-SAR generally does not differentiate between UITs that are 
and are not separate accounts of insurance companies, Form N-CEN makes 
this distinction. We believe that by distinguishing between these 
different types of UITs, the form will allow us to better target the 
information requests in the form appropriate to the type of UIT. We 
also believe this new approach will allow filers to better understand 
the information being requested of them because it will be more 
reflective of their operations and should thus improve the consistency 
of the information reported.
---------------------------------------------------------------------------

    \1112\ See Item 111 (depositor information), Item 112 (sponsor 
information), Item 113 (trustee information), and Item 114 
(principal underwriter information) of Form N-SAR.
    \1113\ Item F.1 of Form N-CEN.
    \1114\ Item F.4 of Form N-CEN (only applies to UITs that are not 
insurance company separate accounts).
    \1115\ Item F.5 of Form N-CEN (only applies to UITs that are not 
insurance company separate accounts).
    \1116\ Item F.2 of Form N-CEN; see also supra footnotes 1001-
1002 (discussing the addition of a sub-administrator sub-item). Form 
N-SAR does not request information about a UIT's administrator.
    \1117\ Item F.3 of Form N-CEN; see Item 117.A of Form N-SAR.
    \1118\ If a UIT responds ``yes'' to this item, it will proceed 
to respond to Item F.12-Item F.17 of the form. However, if a UIT 
responds ``no'' to this item, it will proceed to Item F.4-Item F.11, 
and Item F.17. See Instruction to Item F.3 of Form N-CEN.
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    As in the proposal and similar to Form N-SAR,\1119\ a UIT that is 
not a separate account of an insurance company will provide the number 
of series existing at the end of the reporting period that had 
securities registered under the Securities Act \1120\ and, for new 
series, the number of series for which registration statements under 
the Securities Act became effective during the reporting period \1121\ 
and the total value of the portfolio securities on the date of 
deposit.\1122\ As proposed, Form N-CEN also carries over from Form N-
SAR \1123\ requirements relating to the number of series with a current 
prospectus,\1124\ the number of existing series (and total value) for 
which additional units were registered under the Securities Act,\1125\ 
and the value of units placed in portfolios of subsequent series.\1126\ 
We are also adopting, as proposed, a requirement in Form N-CEN that a 
UIT that is not a separate account of an insurance company provide the 
total assets of all series combined as of the reporting period,\1127\ 
which is also currently required by Form N-SAR.\1128\
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    \1119\ See Items 118-120 of Form N-SAR (all UITs are required to 
complete these items).
    \1120\ Item F.6.a of Form N-CEN. As noted earlier, because UITs 
that register on Form N-8B-2 obtain CIKs for the UIT itself as well 
as for series offered by the UIT, we have made a clarifying 
modification to Form N-CEN by including a requirement that such UITs 
report the CIKs for each of their existing series in response to 
Item F.6.b of Part F of the form in addition to reporting the CIK 
for the UIT itself in response to Item B.1.c. See supra footnote 
800.
    \1121\ Item F.7.a of Form N-CEN.
    \1122\ Item F.7.b of Form N-CEN.
    \1123\ See Items 121-124 of Form N-SAR (all UITs are required to 
complete these items).
    \1124\ Item F.8 of Form N-CEN.
    \1125\ Item F.9 of Form N-CEN.
    \1126\ Item F.10 of Form N-CEN.
    \1127\ Item F.11 of Form N-CEN.
    \1128\ See Item 127.L of Form N-SAR (all UITs are required to 
complete this item). Form N-CEN does not require UITs to report 
certain assets held by a UIT as required by Item 127 of Form N-SAR. 
See Items 127.A-K of Form N-SAR.
---------------------------------------------------------------------------

    We are also adopting, as proposed, new requirements in Form N-CEN 
for separate accounts offering variable annuity and variable life 
insurance contracts. Specifically, if the UIT is a separate account of 
an insurance company, Form N-CEN requires reporting of its series 
identification number \1129\ and, for each security that has a contract 
identification number assigned pursuant to rule 313 of Regulation S-T, 
the number of individual contracts that are in force at the end of the 
reporting period.\1130\
---------------------------------------------------------------------------

    \1129\ Item F.12 of Form N-CEN.
    \1130\ Item F.13 of Form N-CEN.
---------------------------------------------------------------------------

    With respect to insurance company separate accounts, we are also 
adopting, as proposed, new requirements in Form N-CEN to identify and 
provide census information for each security issued through the 
separate account. These requirements will include the name of the 
security,\1131\ contract identification number,\1132\ total assets 
attributable to the security,\1133\ number of contracts sold,\1134\ 
gross premiums received,\1135\ and amount of contract value

[[Page 81949]]

redeemed.\1136\ This item also requires additional information relating 
to section 1035 exchanges, including gross premiums received pursuant 
to section 1035 exchanges,\1137\ number of contracts affected in 
connection with such premiums,\1138\ amount of contract value redeemed 
pursuant to section 1035 redemptions \1139\ and the number of contracts 
affected by such redemptions.\1140\ In addition, as proposed, insurance 
company separate accounts will be required to provide information on 
whether they relied on rules 6c-7 \1141\ and 11a-2 \1142\ under the 
Investment Company Act. This information, which is specific to UITs 
that are separate accounts of insurance companies and is either not 
otherwise filed with the Commission or is not filed in a structured 
format, will further assist the Commission in its oversight of UITs, 
including monitoring trends in the variable annuity and variable life 
insurance markets.
---------------------------------------------------------------------------

    \1131\ Item F.14.a of Form N-CEN.
    \1132\ Item F.14.b of Form N-CEN.
    \1133\ Item F.14.c of Form N-CEN.
    \1134\ Item F.14.d of Form N-CEN.
    \1135\ Item F.14.e of Form N-CEN.
    \1136\ Item F.14.h of Form N-CEN.
    \1137\ Item F.14.f of Form N-CEN.
    \1138\ Item F.14.g of Form N-CEN.
    \1139\ Item F.14.i of Form N-CEN.
    \1140\ Item F.14.j of Form N-CEN.
    \1141\ Item F.15 of Form N-CEN. Rule 6c-7 under the Investment 
Company Act provides exemptions from certain provisions of sections 
22(e) and 27 of the Investment Company Act for registered separate 
accounts offering variable annuity contracts to participants in the 
Texas Optional Retirement Program. See 17 CFR 270.6c-7.
    \1142\ Item F.16 of Form N-CEN. Rule 11a-2 under the Investment 
Company Act relates to offers of exchange by certain registered 
separate accounts or others, the terms of which do not require prior 
Commission approval. See 17 CFR 270.11a-2.
---------------------------------------------------------------------------

    Finally, as proposed, Form N-CEN carries over the Form N-SAR \1143\ 
requirement that a UIT provide certain information relating to 
divestments under section 13(c) of the Investment Company Act.\1144\ 
Thus, if a UIT intends to avail itself of the safe harbor provided by 
section 13(c) with respect to its divestment of certain securities, it 
will continue to make the following disclosures on Form N-CEN: 
Identifying information for the issuer, total number of shares or 
principal amount divested, date that the securities were divested, and 
the name of the statute that added the provisions of section 13(c) in 
accordance with which the securities were divested.\1145\ If the UIT 
holds any securities of the issuer on the date of the filing, it will 
also provide the ticker symbol, CUSIP number, and total number of 
shares or, for debt securities, the principal amount held on the date 
of the filing.\1146\
---------------------------------------------------------------------------

    \1143\ Item 133 of Form N-SAR. Section 13(c) of the Investment 
Company Act provides a safe harbor for a registered investment 
company and its employees, officers, directors and investment 
advisers, based solely upon the investment company divesting from, 
or avoiding investing in, securities issued by persons that the 
investment company determines, using credible information that is 
available to the public, engage in certain investment activities in 
Iran or Sudan. The safe harbor, however, provides that this 
limitation on actions does not apply unless the investment company 
makes disclosures about the divestments in accordance with 
regulations prescribed by the Commission. See 15 U.S.C. 80a-
13(c)(2)(B). Management investment companies are required to provide 
the disclosure on Form N-CSR, pursuant to Item 6(b) of the form, and 
UITs are required to provide the disclosure on Form N-SAR, pursuant 
to Item 133 of the form. See Technical Amendments to Forms N-CSR and 
N-SAR in Connection With the Comprehensive Iran Sanctions, 
Accountability, and Divestment Act of 2010, Securities Exchange Act 
Release No. 34-63087 (Oct. 13, 2010) [75 FR 64120 (Oct. 19, 2010)].
    \1144\ Item F.17 of Form N-CEN.
    \1145\ Item F.17.a of Form N-CEN.
    \1146\ Item F.17.b of Form N-CEN. An instruction to Item F.17 
addresses when the UIT should report divestments pursuant to this 
item.
---------------------------------------------------------------------------

g. Part G--Attachments
    Like Form N-SAR,\1147\ Form N-CEN requires, substantially as 
proposed, certain attachments to reports filed on the form in order to 
provide the staff with more granular information regarding certain key 
issues.\1148\ Due to the narrative format of the information required, 
these attachments will not be required to be reported in a structured 
data format. Where possible, we eliminated the need to file attachments 
with the census reporting form in order to simplify the filing process 
and maximize the amount of information we receive in a structured 
format.\1149\ Accordingly, we believe we have limited the number of 
attachments to the form to those that are most useful to the staff, 
either because of investor protection issues or because the information 
is not available elsewhere. Moreover, all except one of the attachments 
to Form N-CEN are current requirements in Form N-SAR.\1150\
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    \1147\ See Item 77.E, Item 77.I, Item 77.K, Item 77.L, Item 
77.N, Item 77.P, Item 77.Q.1, Item 77.Q.2, Item 102.D, Item 102.H, 
Item 102.J, Item 102.K, Item 102.M, Item 102.O, Item 102.P.1, Item 
102.P.2, and Item 102.P.3 of Form N-SAR.
    \1148\ Form N-SAR requires only management companies to file 
attachments to reports on the form, whereas Form N-CEN requires 
certain attachments for all Registrants.
    \1149\ With respect to certain attachments currently in Form N-
SAR, we are integrating the data requirements into the form itself, 
rather than keep the attachment requirements. See, e.g., Item 77.G 
and Item 102.F of Form N-SAR; Item D.5 (default on long-term debt) 
and Item D.6 (dividends in arrears) of Form N-CEN. However, not all 
of the attachments currently required by Form N-SAR lend themselves 
to integration into the form, either because of the amount of 
information reported in the attachment or because the attachment is 
a standalone document (e.g., the accountant's report on internal 
control).
    \1150\ But see supra footnote 1148.
---------------------------------------------------------------------------

    Thus, as proposed, all funds are required, where applicable, to 
file attachments regarding legal proceedings,\1151\ provision of 
financial support,\1152\ independent public accountant's report on 
internal control,\1153\ and changes in accounting principles and 
practices, where applicable.\1154\ Unlike the proposal, however, the 
registrant will not be required under the form to file an attachment 
related to changes in the fund's independent public accountant (i.e., 
information called for by Item 4 of Form 8-K under the Exchange Act). 
As previously discussed in section II.D.4.b above, this change was made 
in response to comments.\1155\
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    \1151\ Item G.1.a.i of Form N-CEN.
    \1152\ Item G.1.a.ii of Form N-CEN.
    \1153\ Item G.1.a.iii of Form N-CEN. As noted in Item G.1.a.iii, 
this item will only apply to management companies other than SBICs.
    \1154\ Item G.1.a.iv of Form N-CEN.
    \1155\ See supra footnotes 860-867 and accompanying text.
---------------------------------------------------------------------------

    In addition, as in the proposal, all funds will be required, where 
applicable, to provide attachments relating to information required to 
be filed pursuant to exemptive orders issued by the Commission and 
relied on by the registrant,\1156\ and other information required to be 
included as an attachment pursuant to Commission rules and 
regulations.\1157\ Moreover, we are adopting, as proposed, requirements 
for closed-end funds and SBICs to provide attachments, where 
applicable, relating to material amendments to organizational 
documents,\1158\ instruments defining the rights of the holders of any 
new or amended class of securities,\1159\ new or amended investment 
advisory contracts,\1160\ information called for by Item 405 of 
Regulation S-K,\1161\ and, for SBICs only, senior officer codes of 
ethics.\1162\ As proposed, each attachment required by Form N-CEN 
includes instructions describing the information that should be 
provided in the attachment.\1163\
---------------------------------------------------------------------------

    \1156\ Item G.1.a.v of Form N-CEN.
    \1157\ Item G.1.a.vi of Form N-CEN.
    \1158\ Item G.1.b.i of Form N-CEN. Unlike open-end funds, 
closed-end funds and SBICs do not otherwise update or file the 
information requested by this item with the Commission and, thus, we 
believe the information should continue to be filed as an attachment 
to the census reporting form.
    \1159\ Item G.1.b.ii of Form N-CEN.
    \1160\ Item G.1.b.iii of Form N-CEN. Unlike open-end funds, 
closed-end funds and SBICs do not otherwise update or file the 
information requested by this item with the Commission and, thus, we 
believe the information should continue to be filed as an attachment 
to the census reporting form.
    \1161\ Item G.1.b.iv of Form N-CEN.
    \1162\ Item G.1.b.v of Form N-CEN.
    \1163\ For example, the instructions to Item G.1.b.v require 
SBICs to attach detailed information regarding the senior officer 
code of ethics and certain information regarding the audit 
committee. The instructions also require SBICs to meet certain 
requirements regarding the availability of their senior office code 
of ethics.

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[[Page 81950]]

    As noted earlier, all of the attachments required by Form N-CEN, 
except one, are currently required by Form N-SAR.\1164\ The new 
attachment relates to the provision of financial support and will be 
filed by a fund (other than a money market fund) if an affiliate, 
promoter or principal underwriter of the fund, or affiliate of such 
person, provided financial support to the fund during the reporting 
period.\1165\ As discussed in section II.D.4.b, we are adopting this 
requirement, as proposed, and including it in Form N-CEN because we 
believe that it is important that the Commission understand the nature 
and extent to which a fund's sponsor provides financial support to a 
fund.
---------------------------------------------------------------------------

    \1164\ See supra footnote 1150 and accompanying text.
    \1165\ Item G.1.a.ii of Form N-CEN.
---------------------------------------------------------------------------

5. Items Required by Form N-SAR That Will Be Eliminated by Form N-CEN
    As we discussed above and in the Proposing Release, with Form N-
CEN, we seek to modernize and improve the information that we collect 
in order to reflect changes in the fund industry since Form N-SAR's 
adoption in 1985. Accordingly, and substantially as proposed, we are 
not carrying forward certain items in Form N-SAR to Form N-CEN that we 
believe are no longer needed by Commission staff or are outdated in 
their current form. For example, in Form N-CEN, we are not including 
Form N-SAR's requirement relating to considerations which affected the 
participation of brokers or dealers or other entities in commissions or 
other compensation paid on portfolio transactions.\1166\ Many 
commenters agreed that Form N-SAR is outdated and commended the 
Commission's efforts to improve the relevance of information reported 
to the Commission.\1167\ Where we have received comments on specific 
reporting requirements, we discuss them in more detail below.
---------------------------------------------------------------------------

    \1166\ Item 26 of Form N-SAR. Form N-CEN does, however, contain 
information relating to funds that paid commissions to brokers and 
dealers for research services. See Item C.18 of Form N-CEN.
    \1167\ See, e.g., ICI Comment Letter; SIFMA Comment Letter I; 
Invesco Comment Letter; BlackRock Comment Letter.
---------------------------------------------------------------------------

    As proposed, Form N-CEN eliminates a number of Form N-SAR items 
where the information is (or will be) reported elsewhere--for example, 
items relating to fees and expenses, including front-end and deferred/
contingent sales loads, redemption and account maintenance fees, rule 
12b-1 fees, and advisory fees.\1168\ Many of the fee and expense items 
required by Form N-SAR are already reported, in a structured format, in 
the risk-return summary required by Form N-1A for open-end funds, as 
well as in an unstructured format in other places in fund registration 
statements.\1169\ For other fee and expense items, the information is 
either not frequently used by Commission staff or we believe that the 
benefit of having such information is minimal while the burden to funds 
of reporting such information is costly.\1170\ For similar reasons as 
above, we are also not requiring other information in Form N-CEN, 
including information relating to adjustments to shares outstanding by 
stock split or stock dividend, minimum initial investments, investment 
practices, portfolio turnover, number of shares outstanding, number of 
shareholder accounts, and certain other condensed balance sheet data 
items.\1171\
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    \1168\ See generally Items 29-44 and Items 47-52 of Form N-SAR. 
Form N-CEN does, however, contain an item relating to expense 
limitations, reductions, and waivers. See Item C.8 of Form N-CEN. As 
discussed above, Form N-CEN also requires information on management 
fees and net operating expenses for closed-end funds, as that 
information is not available elsewhere in a structured format. See 
Item D.8 and Item D.9 of Form N-CEN; see also supra section 
II.D.4.d.
    \1169\ See General Instruction C.3.G to Form N-1A; see generally 
Form N-1A, Form N-2, Form N-4, Form N-5, and Form N-6.
    \1170\ We acknowledge that some of the information reported in 
reports on Form N-SAR related to loads paid to captive or 
unaffiliated broker-dealers has been used by interested third-
parties, including researchers. See, e.g., Susan E.K. 
Christoffersen, Richard Evans, & David K. Musto, What do Consumers' 
Fund Flows Maximize? Evidence from Their Brokers' Incentives, J. of 
Fin., Vol. 68(1), 201-235 (2013) (``Christoffersen Journal 
Article''). While this is evidence of a discrete instance where such 
information has been useful to a third party, based on staff 
experience with this information and Form N-SAR information 
generally, we believe that no longer requiring funds to gather and 
report this information appropriately balances the burden on funds 
of providing this information and the overall utility of the 
information to the Commission, investors and third parties.
    \1171\ See generally Item 57, Item 61, and Items 70-74 of Form 
N-SAR.
---------------------------------------------------------------------------

    One commenter requested that the Commission include certain 
information required on Form N-SAR that was proposed to be eliminated 
in Form N-CEN.\1172\ That commenter, for example, suggested that 
certain fee and expense information currently available semi-annually 
on Form N-SAR (e.g., Items 34-44, 47-52, 54, 72, and 75) should carry 
over into Form N-CEN. As discussed above, we find the commenter's 
concerns persuasive with respect to Item 75 of Form N-SAR and have 
added a reporting requirement in Form N-CEN that (1) funds other than 
money market funds provide the fund's monthly average net assets during 
the reporting period, and (2) money market funds provide the fund's 
daily average net assets during the reporting period.\1173\ Otherwise, 
we continue to believe that Form N-CEN strikes an appropriate balance 
between the current information needs of Commission staff as well as 
the developments in the fund industry and the reduction of reporting 
burdens for registrants where information may be similarly disclosed or 
reported elsewhere.
---------------------------------------------------------------------------

    \1172\ See Morningstar Comment Letter.
    \1173\ See discussion at supra footnotes 1016-1021 and 
accompanying text (discussing Item C.19 of Form N-CEN.
---------------------------------------------------------------------------

    We are also eliminating, as proposed, certain information 
requirements specifically relating to SBICs and UITs that we no longer 
believe are necessary to collect on a census form because, much like 
the items discussed above, the benefit of having such information is 
minimal to the Commission's oversight and examination functions while 
the burdens to these funds of reporting such information is 
costly.\1174\ Additionally, with respect to the Form N-SAR item 
relating to closed-end fund monthly sales and repurchases of 
shares,\1175\ this information will be reported on Form N-PORT,\1176\ 
rather than Form N-CEN.
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    \1174\ See Item 86, Item 93, Item 95, Items 97-100, Items 103-
104, Item 109, and Items 125-132 of Form N-SAR.
    \1175\ See Item 86 (closed-end funds) of Form N-SAR; see also 
Item 28 (management investment companies generally) of Form N-SAR.
    \1176\ See Item B.6 of Form N-PORT.
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    The full list of items from Form N-SAR that will be included in 
Form N-CEN or eliminated is included in Figure 2 below.
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BILLING CODE 8011-01-P

E. Option for Web Site Transmission of Shareholder Reports

    The Commission proposed new rule 30e-3 under the Investment Company 
Act, which would have permitted a fund to satisfy requirements under 
the Act and rules thereunder to transmit reports to shareholders if the 
fund made

[[Page 81961]]

the reports and certain other materials accessible on a Web site. 
Reliance on the rule would have been subject to certain conditions, 
including conditions relating to (1) the availability of the 
shareholder report and other required information; (2) implied 
shareholder consent; (3) notice to shareholders of the availability of 
shareholder reports; and (4) shareholder ability to request paper 
copies of the shareholder report or other required information. The 
proposed option was intended to modernize the manner in which periodic 
information is transmitted to shareholders. When we proposed the rule, 
we stated that we believed it would improve the information's overall 
accessibility while reducing burdens such as printing and mailing costs 
that are borne by funds and, ultimately, by fund shareholders.\1177\
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    \1177\ See Proposing Release, supra footnote 7, at 33626.
---------------------------------------------------------------------------

    Proposed rule 30e-3 generated substantial public comment, with over 
900 commenters expressing views on the rule. Comments received on the 
proposal were mixed. Many commenters expressed support for the proposed 
rule, citing, for example, positive internet access and use trends, 
consistency with the preferences of many investors, intra- and inter-
agency regulatory consistency benefits, and anticipated reduction in 
printing and mailing expenses for funds and their shareholders.\1178\ 
However, many other commenters expressed concerns with the proposed 
rule, arguing, for example, that the proposed rule would have potential 
adverse effects on investor readership of shareholder reports generally 
and on certain demographic groups in particular.\1179\ Commenters also 
disagreed about the size and distribution of printing and mailing 
expense savings that would result from the rule as proposed, 
particularly in the context of investors who purchase shares through 
intermediaries.\1180\
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    \1178\ See, e.g., BlackRock Comment Letter; ICI Comment Letter; 
Schnase Comment Letter.
    \1179\ See, e.g., Comment Letter of Leah J. Adams (Jan. 9, 
2016); Comment Letter of Anonymous (Jan. 10, 2016); Comment Letter 
of Julia Benson (Jan. 10, 2016); Comment Letter of Broadridge 
Financial Solutions, Inc. (Jan. 13, 2016) (``Broadridge Comment 
Letter''); Comment Letter of Julia Cole (Jan. 8, 2016); Comment 
Letter of Lisa A. Darling (Aug. 7, 2015); Comment Letter of Don 
(Jan. 10, 2016); Comment Letter of Keene Ferrer (Jan. 9, 2016); 
Comment Letter of Association of Free Community Papers (Aug. 11, 
2015); Comment Letter of Anthony W. Golden (Aug. 11, 2015); Comment 
Letter of Patricia Hanbury (Jan. 10, 2016); Comment Letter of Zane 
Hollenberger (July 27, 2015); Comment Letter of Lucy James (Jan. 9, 
2016); Comment Letter of Gary Kasufkin (Jan. 12, 2016); Comment 
Letter of Debbi Lambert (Aug. 6, 2015); Comment Letter of William D. 
Looman (Jan. 9, 2016); Comment Letter of Sharon L. McCain (Jan. 9, 
2016); Comment Letter of National Association of Letter Carriers 
(Aug. 4, 2015); Comment Letter of Dan Oved (Jan. 8, 2016); Comment 
Letter of Tim Plunk (July 16, 2015); Comment Letter of Joanne Rock 
(Aug. 7, 2015); Comment Letter of Thomas Scibek (Aug. 10, 2015); 
Comment Letter of Robin Snyder (Aug. 6, 2015); Comment Letter of 
Teresa (Jan. 8, 2016); Comment Letter of Manuel E. Velosa, Jr. (Jan. 
10, 2016); Comment Letter of Wise (Aug. 3, 2015); Form Letter Type A 
(7 copies received); Form Letter Type B (234 copies received); Form 
Letter Type C (57 copies received); Form Letter Type D (93 copies 
received); Form Letter Type E (43 copies received).
    \1180\ See, e.g., Broadridge Comment Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    While the Commission plans to continue to consider how to promote 
electronic transmission to those who might prefer it, the comments 
discussed above raised issues with respect to this proposal that merit 
further consideration. We have, therefore, determined not to adopt 
proposed rule 30e-3 at this time.

F. Amendments to Forms Regarding Securities Lending Activities

    We are also adopting form amendments that require a management 
investment company to disclose in its registration statement (or, in 
the case of a closed-end fund, its reports on Form N-CSR) certain 
disclosures regarding securities lending activities.\1181\ We proposed 
similar requirements as part of the proposed amendments to Regulation 
S-X, including disclosure in the fund's financial statements of (1) the 
gross income from securities lending, including income from cash 
collateral reinvestment; (2) the dollar amount of all fees and/or 
compensation paid by the fund for securities lending activities and 
related services, including borrower rebates and cash collateral 
management services; (3) the net income from securities lending 
activities; (4) the terms governing the compensation of the securities 
lending agent, including any revenue sharing split, with the related 
percentage split between the fund and the securities lending agent, 
and/or any fee-for-service, and a description of services included; (5) 
the details of any other fees paid directly or indirectly, including 
any fees paid directly by the fund for cash collateral management and 
any management fee deducted from a pooled investment vehicle in which 
cash collateral is invested; and (6) the monthly average of the value 
of portfolio securities on loan.\1182\ We proposed these disclosures in 
order to allow investors to better understand the income generated 
from, as well as the expenses associated with, a fund's securities 
lending activities.\1183\
---------------------------------------------------------------------------

    \1181\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; Item 
12 of Form N-CSR. Because closed-end funds do not offer their shares 
continuously, and are therefore generally not required to maintain 
an updated Statement of Additional Information to meet their 
obligations under the Securities Act, we are requiring closed-end 
funds to disclose their securities lending activities information 
annually on Form N-CSR.
    \1182\ See proposed rule 6-03(m) of Regulation S-X; Proposing 
Release, supra footnote 7, at 33624.
    \1183\ See id.
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    We received a number of comments addressing our proposed securities 
lending disclosures. Comments on the proposed disclosure requirements 
were mixed. Most of the commenters who addressed the issue expressed 
support for requiring disclosure of securities lending income and fees, 
although some specifically opposed or expressed concerns about the 
proposed requirement to disclose the terms governing the compensation 
of the securities lending agent.\1184\ Some commenters expressed 
opposition generally to the public nature of the proposed new 
disclosure requirements concerning fund securities lending 
activities.\1185\ Some commenters also

[[Page 81962]]

expressed particular concerns relating to the location of the required 
disclosure in the fund's financial statements.\1186\
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    \1184\ See AICPA Comment Letter (stating that the requirements 
would provide meaningful information to investors and other 
potential users and allow them to better understand the fund's 
securities lending activities, except for disclosure of the terms 
governing the compensation of the securities lending agent other 
than for related parties); BlackRock Comment Letter (stating that 
``investor protection is well served by a level playing field that 
allows investors to make informed choices on a risk adjusted basis'' 
and that uniform and clear information requirements associated with 
securities lending activities will empower mutual fund directors to 
more effectively evaluate and compare securities lending services); 
Deloitte Comment Letter (opposing required financial statement 
disclosure of indirect fees); Fidelity Comment Letter (expressing 
support for enabling investors to better understand the income 
generated from securities lending activity and all proposed 
disclosures except for fee split with a third-party lending agent); 
ICI Comment Letter (expressing support for the proposed requirements 
except the required public disclosure of the terms governing the 
compensation of the securities lending agent); PwC Comment Letter 
(opposing the proposed financial statement disclosure requirement of 
the terms of compensation, including any revenue sharing split, 
while stating that the categories of disclosure would provide 
meaningful information to readers); RMA Comment Letter (opposing a 
requirement to disclose borrower rebates and recommending that, if 
required, revenue sharing percentage disclosure be calculated using 
the fund's net lending income and fees paid during the reporting 
period); Simpson Thacher Comment Letter (opposing required public 
disclosure of securities lending splits); State Street Comment 
Letter (opposing disclosure requirement for borrower rebates and 
recommending requirements for actual income and fees paid rather 
than contractual terms); cf. BlackRock Directors Comment Letter 
(stating, in the context of proposed Form N-CEN requirements, that 
``[i]mproved transparency as to the economic terms in the market for 
securities lending services will assist independent directors in 
assessing annually the customary charges imposed for such 
services'').
    \1185\ See Invesco Comment Letter (opposing required public 
disclosure of fund's securities lending activities); MFS Comment 
Letter (opposing required public disclosure of securities lending 
fees); SIFMA Comment Letter I (opposing public disclosure 
requirements concerning financial arrangements of fund securities 
lending activities); Wells Fargo Comment Letter (opposing required 
public disclosure of securities lending income and expenses); cf. 
IDC Comment Letter (opposing required public disclosure of 
compensation and other fee and expense information relating to 
securities lending arrangements).
    \1186\ See infra note 1190.
---------------------------------------------------------------------------

    We continue to believe that because net earnings from securities 
lending can contribute to the investment performance of a fund, 
investors and others would benefit from the additional transparency 
into the impact of securities lending fees on the income from these 
activities and further believe that the benefits of this additional 
transparency justify the potential unintended consequences, highlighted 
by commenters and discussed below, of public disclosure of certain 
information. We have, however, made certain modifications to the 
proposed requirements in an effort to mitigate some of these potential 
consequences.\1187\ As discussed in greater detail below, these 
modifications include, for example, replacing the proposed requirement 
that funds disclose the terms governing the compensation of the 
securities lending agent--including any revenue split--with a 
requirement to report actual fees paid during the fund's prior fiscal 
year, because commenters persuaded us that backward-looking dollar-
based requirements would yield clearer disclosure than would the 
proposed requirements and may also enhance disclosure comparability 
across funds for investors and reduce preparation complexity for funds.
---------------------------------------------------------------------------

    \1187\ See infra footnotes 1212-1219 and accompanying text.
---------------------------------------------------------------------------

1. Determination To Adopt Requirements as Amendments to Registration 
Statement and Annual Report Forms
    As proposed, certain disclosures relating to securities lending 
activities, including income and expenses, would have been required to 
be included in a fund's financial statements.\1188\ However, we sought 
public comment on whether the proposed or similar disclosures should 
instead be provided as part of other disclosure documents such as the 
Statement of Additional Information.\1189\ In response, some commenters 
raised concerns about including this information in the fund's 
financial statements, including concerns about cost and that lengthy 
disclosure concerning securities lending activity in a fund's financial 
statements could detract from other financial statement 
disclosures.\1190\ After consideration of these issues raised by 
commenters, we have determined that it is appropriate to require funds 
to include these disclosures in their Statements of Additional 
Information (or, for closed-end funds, in their reports on Form N-CSR), 
rather than to require their inclusion in fund financial statements. 
Therefore, we are adopting these disclosure requirements as amendments 
to the fund registration forms (viz., Forms N-1A and N-3) and reports 
on Form N-CSR (for closed-end funds only), rather than as amendments to 
Regulation S-X.\1191\
---------------------------------------------------------------------------

    \1188\ See proposed rule 6-03(m) of Regulation S-X; Proposing 
Release, supra footnote 7, at 33624.
    \1189\ See Proposing Release, supra footnote 7, at 33625.
    \1190\ See Deloitte Comment Letter (noting that indirect fees 
``are typically management's estimate that is imprecise'' and 
stating that additional costs of auditing the disclosure of these 
fees ``would most likely outweigh any benefits of reporting this 
information''); EY Comment Letter (stating that ``the proposed 
disclosures would result in the presentation of detailed information 
with varying degrees of usefulness that could detract from other 
material information presented in the financial statements'' and 
recommending that ``the Commission use other reporting mechanisms 
more suited for that purpose'').
    \1191\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; Item 
12 of Form N-CSR.
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2. Requirement To Disclose Securities Lending Income, Expenses, and 
Services
    As discussed in detail below, the final rules will require funds to 
disclose gross and net income from securities lending activities, fees 
and compensation in total and broken out by enumerated types, and a 
description of the services provided to the fund by the securities 
lending agent. We proposed to require disclosure of gross income from 
securities lending, including income from cash collateral reinvestment; 
\1192\ the dollar amount of fees and compensation paid by the fund for 
securities lending activities and related services, including borrower 
rebates and payments for cash collateral management services; \1193\ 
the net income from securities lending activities; \1194\ the details 
of any other fees paid directly or indirectly, including any fees paid 
directly by the fund for cash collateral management and any management 
fee deducted from a pooled investment vehicle in which cash collateral 
is invested; \1195\ and the terms governing the compensation of the 
securities lending agent, including any revenue sharing split, with the 
related percentage split between the fund and the securities lending 
agent, and/or any fee for service and a description of services 
included.\1196\ After consideration of issues raised by commenters, we 
are generally adopting the substance of the proposed fee disclosure 
requirements but are requiring funds to make these disclosures in their 
Statements of Additional Information (or, in the case of a closed-end 
fund, Form N-CSR) rather than as part of their financial statements (as 
proposed). We are amending the Statement of Additional Information 
requirements in Forms N-1A and N-3, and Form N-CSR (for closed-end 
funds) to require funds to disclose dollar amounts of income and fees 
and compensation paid to service providers related to their securities 
lending activities during their most recent fiscal year, as illustrated 
in Table 1 below.\1197\
---------------------------------------------------------------------------

    \1192\ Proposed rule 6-03(m)(1) of Regulation S-X.
    \1193\ Proposed rule 6-03(m)(2) of Regulation S-X.
    \1194\ Proposed rule 6-03(m)(3) of Regulation S-X.
    \1195\ Proposed rule 6-03(m)(5) of Regulation S-X.
    \1196\ Proposed rule 6-03(m)(4) of Regulation S-X.
    \1197\ See Item 19(i)(1) of Form N-1A; Item 21(j)(i) of Form N-
3; Item 12(a) of Form N-CSR. The disclosure need not be presented in 
a tabular format.

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[[Page 81963]]

[GRAPHIC] [TIFF OMITTED] TR18NO16.011

    The modifications from the proposed requirements are designed to, 
among other things, enhance comparability of the disclosed information 
and potentially ameliorate some concerns commenters expressed about the 
proposed required public disclosure of the terms governing compensation 
of the securities lending agent. Several commenters expressed concern 
that the proposed disclosure requirements could yield information that 
would suggest, inaptly, that fees and expenses related to securities 
lending activities among funds are readily compared and 
contrasted.\1198\ Specifically, one commenter highlighted that 
information provided under the proposed requirements might not be 
comparable due to the subjectivity of related inputs and 
assumptions.\1199\ Another commenter, however, suggested that we could 
facilitate comparability by specifying the fees for particular services 
that must be disclosed.\1200\ We have considered these commenters' 
views and suggestions and have been persuaded to specify in the final 
rules which specific fees should be disclosed and what those fees 
should include rather than requiring, as proposed, disclosure of all 
fees and/or compensation paid for securities lending and related 
services without specifying which fees should be disclosed.\1201\ We 
believe that these modifications will enhance comparability of the 
disclosed fees and compensation. The list of specific fees we are 
enumerating has been adapted from the list of securities lending 
payments about which reporting will be required by Form N-CEN, which, 
as discussed above, we are adopting as proposed.\1202\ We have 
determined that, in specifying the specific categories of fees that are 
required to be disclosed, it is appropriate to adapt the list of fees 
from proposed Form N-CEN because consistency between the two lists will 
allow for better comparability of information from reports on Form N-
CEN and disclosures in funds' Statements of Additional Information and, 
with respect to closed-end funds, reports on Form N-CSR.
---------------------------------------------------------------------------

    \1198\ See MFS Comment Letter; PwC Comment Letter.
    \1199\ See MFS Comment Letter. The commenter did not provide 
examples of specific subjective inputs and assumptions in connection 
with the terms of securities lending expenses.
    \1200\ See Fidelity Comment Letter.
    \1201\ Item 19(i)(1)(ii) of Form N-1A (requiring disclosure of 
all fees and/or compensation for each of the following securities 
lending activities and related services: Any share of revenue 
generated by the securities lending program paid to the securities 
lending agent or agents--the ``revenue split''; fees paid for cash 
collateral management services--including fees deducted from a 
pooled cash collateral reinvestment vehicle--that are not included 
in the revenue split; administrative fees that are not included in 
the revenue split; fees for indemnification that are not included in 
the revenue split; rebates paid to borrowers; and any other fees 
relating to the securities lending program that are not included in 
the revenue split, including a description of those fees); Item 
21(j)(i)(B) of Form N-3 (same); Item 12(a)(2) of Form N-CSR (same). 
If a fee for a service is included in the revenue split, state that 
the fee is ``included in the revenue split.'' Instruction to Item 
19(i)(1) of Form N-1A; Instruction to Item 21(j)(i) of Form N-3 
(same); Instruction (a) to Item 12 of Form N-CSR (same).
    \1202\ See Item 30.e of proposed Form N-CEN; Item C.6.e of Form 
N-CEN; supra section II.D.4.c.iii.
---------------------------------------------------------------------------

    The comparability of the disclosed fee and expense information may 
also depend on the nature of the services provided to a particular fund 
in connection with its securities lending activities. To that end, we 
proposed a disclosure requirement for a description of services 
included in the fund's arrangement with its securities lending 
agent.\1203\ One commenter suggested robust disclosure of the services 
provided by the securities lending agent and provided several examples 
of the types of services that should be disclosed to improve 
comparability.\1204\ The commenter stated that it had observed a lack 
of uniformity in the package of services performed by securities 
lending agents, which can hinder understanding of securities lending 
fees.\1205\ We agree with the commenter that enhanced and more 
comparable disclosure of services provided can help users of the 
information to better understand the particular services provided by

[[Page 81964]]

securities lending agents for the aggregate fees they were paid over 
the reporting period. Accordingly, to further enhance the comparability 
of the disclosed information and allow users to better assess fee and 
expense information, we have determined to specify that this 
information should be provided on the basis of the services actually 
provided to the fund in its most recent fiscal year. Some examples of 
the types of services that could be enumerated include, as applicable, 
locating borrowers, monitoring daily the value of the loaned securities 
and collateral, requiring additional collateral as necessary, cash 
collateral management, qualified dividend management, negotiation of 
loan terms, selection of securities to be loaned, recordkeeping and 
account servicing, monitoring dividend activity and material proxy 
votes relating to loaned securities, and arranging for return of loaned 
securities to the fund at loan termination.\1206\
---------------------------------------------------------------------------

    \1203\ Proposed rule 6-03(m)(4) of Regulation S-X.
    \1204\ See BlackRock Directors Comment Letter (suggesting such a 
requirement in the context of reports on Form N-CEN).
    \1205\ Id.
    \1206\ Item 19(i)(2) of Form N-1A (requiring disclosure of the 
services provided to the fund by the securities lending agent); Item 
21(j)(ii) of Form N-3 (same); Item 12(b) of Form N-CSR (same).
---------------------------------------------------------------------------

    Another commenter expressed concerns that the proposed fee and 
expense information could be used to evaluate the terms of a fund's 
lending arrangements and could, without access to additional 
information, result in potentially inappropriate conclusions that a 
fund negotiated its arrangements poorly or was otherwise disadvantaged 
in its negotiations.\1207\ That commenter noted that the revenue split 
can depend on numerous factors, including the range, amount, and 
attractiveness of the securities a fund complex as a whole may make 
available for loan.\1208\ Two commenters suggested eliminating the 
proposed requirement for disclosure of borrower rebates, reasoning that 
they are primarily a function of prevailing short-term interest 
rates.\1209\ However, we continue to believe that it is appropriate to 
require disclosure of borrower rebates, because, irrespective of how 
they may be determined in particular cases, they are nonetheless an 
expense of securities lending. One commenter argued that a fund board 
wishing to evaluate the fund's securities lending program would have 
access to more detailed analyses than could be practically included in 
the fund's financial statements.\1210\ Conversely, another commenter 
stated that uniform and clear information requirements would have the 
benefit of empowering more effective evaluation and comparison of 
securities lending services.\1211\ While, as commenters suggested, a 
thorough evaluation of a fund's securities lending activities, such as 
an evaluation by that fund's board, may appropriately include 
information beyond the scope of the disclosure requirements we are 
adopting today, we believe that these new requirements will nonetheless 
enhance comparability and allow investors to better understand the 
expenses associated with securities lending activities. We also note 
that today's amendments are not meant to circumscribe the factors to be 
rightfully considered in such an evaluation.
---------------------------------------------------------------------------

    \1207\ PwC Comment Letter (particularly with respect to the 
proposed terms of compensation disclosure requirement); see also RMA 
Comment Letter (concerning borrower rebates).
    \1208\ PwC Comment Letter.
    \1209\ RMA Comment Letter; State Street Comment Letter.
    \1210\ PwC Comment Letter.
    \1211\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    Commenters also expressed concerns with the proposed requirements 
based on the currently nonpublic character of some of the information 
that would be required to be disclosed publicly, particularly the 
proposed requirement to disclose the terms governing compensation of 
the securities lending agent.\1212\ Commenters argued that some funds 
currently enjoy privately negotiated competitive advantages with 
securities lending services or counterparties that could be jeopardized 
should their arrangements with their securities lending agents be made 
public.\1213\ We continue to believe, however, that the required fee 
information will allow investors to better understand the expenses 
associated with securities lending activities and have therefore 
determined to adopt these modified disclosure requirements with 
modifications to address commenters' concerns. We believe that the 
modifications to the proposed requirements that we are making today 
eliminate the disclosures from the proposed requirements that some 
commenters indicated could be the most sensitive--specifically, the 
terms of the revenue split and the terms governing the compensation of 
the securities lending agent more generally--while retaining the 
required information that we think will be most useful to investors in 
understanding the expenses associated with fund securities lending 
activities.
---------------------------------------------------------------------------

    \1212\ See AICPA Comment Letter (particularly concerned with 
respect to the terms governing the compensation of the securities 
lending agent); Fidelity Comment Letter (particularly concerned with 
respect to the revenue split); ICI Comment Letter; Invesco Comment 
Letter; MFS Comment Letter; SIFMA Comment Letter I; Simpson Thacher 
Comment Letter (particularly concerned with respect to the revenue 
split); Wells Fargo Comment Letter.
    \1213\ See AICPA Comment Letter; Fidelity Comment Letter; ICI 
Comment Letter; Invesco Comment Letter; MFS Comment Letter; SIFMA 
Comment Letter I; Simpson Thacher Comment Letter; Wells Fargo 
Comment Letter.
---------------------------------------------------------------------------

    In particular, some commenters suggested that, rather than 
requiring disclosure of the terms governing the compensation of the 
securities lending agent, as we proposed,\1214\ we consider instead 
requiring disclosure of backward-looking actual compensation 
levels.\1215\ One of these commenters argued that, because there are a 
variety of fee arrangements in the marketplace, such an alternative 
disclosure requirement may provide a clearer, more concise view of each 
party's compensation.\1216\ We have been persuaded by these commenters' 
suggestions that backward-looking dollar-based requirements would yield 
clearer disclosure than would the proposed requirements and may also 
enhance disclosure comparability across funds for investors and reduce 
preparation complexity for funds and thus have modified the 
requirements accordingly.\1217\ This dollar-based requirement would 
also eliminate the requirement that potentially sensitive negotiated 
contractual terms be disclosed, while nonetheless allowing investors to 
better understand the expenses associated with securities lending 
activities. A commenter also counseled against placing undue emphasis 
on the securities lending agent's revenue split at the expense of other 
securities lending fees and expenses,\1218\ and we believe that the 
schedule of fees and expenses we are requiring to be disclosed places 
an appropriate level of emphasis on that figure situated among the 
other required fee and expense disclosures.\1219\
---------------------------------------------------------------------------

    \1214\ See proposed rule 6-03(m)(4) of Regulation S-X.
    \1215\ See RMA Comment Letter (recommending that funds report a 
calculated split based on a fund's actual net lending income and 
fees paid during the reporting period); State Street Comment Letter.
    \1216\ State Street Comment Letter.
    \1217\ Item 19(i)(1)(ii) of Form N-1A; Item 21(j)(i)(B) of Form 
N-3; Item 12(a)(1) of Form N-CSR.
    \1218\ See Fidelity Comment Letter.
    \1219\ See supra Table 1.
---------------------------------------------------------------------------

    We also proposed to require disclosure of gross income from 
securities lending, including income from cash collateral 
reinvestment,\1220\ as well as net income.\1221\ We did not receive 
comments specific to these proposed requirements. We are adopting the 
proposed requirement to disclose gross income from securities lending 
activities. Moreover, as further clarification about the types of 
income that could be included in this total, we

[[Page 81965]]

note that--in addition to income from cash collateral reinvestment--
disclosed gross income may also include negative rebates (i.e., those 
paid by the borrower to the lender), loan fees paid by borrowers when 
collateral is noncash, management fees from a pooled cash collateral 
reinvestment vehicle that are deducted from the vehicle's assets before 
income is distributed, and any other income.\1222\ We are adopting the 
proposed requirement to disclose net income and clarifying that the 
reported figure should be equal to the difference between gross income 
and aggregate fees/compensation.\1223\
---------------------------------------------------------------------------

    \1220\ Proposed rule 6-03(m)(1) of Regulation S-X.
    \1221\ Proposed rule 6-03(m)(3) of Regulation S-X.
    \1222\ Item 19(i)(1)(i) of Form N-1A; Item 21(j)(i)(A) of Form 
N-3 (same); Item 12(a)(1) of Form N-CSR. Gross income for purposes 
of this disclosure generally should include indirect fees paid for 
cash collateral management services--i.e., management services 
provided to a pooled investment vehicle in which cash collateral is 
invested. Those fees are indirect because they are taken from the 
pooled assets before any income is distributed to the lending fund. 
In order for the net income disclosure from securities lending to 
sum to the net income for securities lending reported at period end, 
we believe that indirect fees for cash collateral management 
generally should be added to the gross income from securities 
lending in the Statement of Additional Information or, with respect 
to closed-end funds, in reports on Form N-CSR.
    \1223\ Item 19(i)(1)(iv) of Form N-1A; Item 21(j)(i)(D) of Form 
N-3; Item 12(a)(4) of Form N-CSR.
---------------------------------------------------------------------------

3. Required Disclosures of Monthly Average Value on Loan
    We also proposed to require disclosure of the monthly average of 
the value of portfolio securities on loan.\1224\ As discussed above, we 
have determined to adopt a similar requirement in Form N-CEN where it 
will be available in a structured data format and are not including it 
in the amendments to Forms N-1A, N-3, and N-CSR.\1225\
---------------------------------------------------------------------------

    \1224\ See proposed rule 6-03(m)(6) of Regulation S-X.
    \1225\ See supra footnotes 969-972 and accompanying text.
---------------------------------------------------------------------------

G. Technical and Conforming Amendments

    As proposed, we are also adopting technical and conforming 
amendments to various rules and forms. As discussed above, we are 
rescinding Form N-Q and adopting new Form N-PORT. In order to implement 
this change, we are revising Forms N-1A, N-2, and N-3 to refer to the 
availability of portfolio holdings schedules attached to reports on 
Form N-PORT and posted on fund Web sites rather than on reports on Form 
N-Q.\1226\ In addition, we are rescinding 17 CFR 249.332 and revising 
the following rules to remove references to Form N-Q: 17 CFR 232.401, 
17 CFR 270.8b-33, 17 CFR 270.30a-2, 17 CFR 270.30a-3, and 17 CFR 
270.30d-1.
---------------------------------------------------------------------------

    \1226\ See Instruction 3(b) to Item 16(f) of Form N-1A; 
Instruction 4 to Item 27(d)(1) of Form N-1A; Instruction 6.b to Item 
24 of Form N-2; Instruction 6(ii) to Item 28(a) of Form N-3; 
Instruction 3(b) to Item 19(e)(ii) of Form N-3.
---------------------------------------------------------------------------

    We are also rescinding Form N-SAR and replacing it with new Form N-
CEN. In order to implement this change, we are revising the following 
rules and sections to remove references to Form N-SAR and replacing 
them with references to Form N-CEN: 17 CFR 232.301, 17 CFR 240.10A-1, 
17 CFR 240.12b-25, 17 CFR 249.322, 17 CFR 249.330, 17 CFR 270.8b-16, 
270.30d-1, 17 CFR 274.101, and Form N-8F.\1227\
---------------------------------------------------------------------------

    \1227\ Although we are deleting references to Form N-SAR in 17 
CFR 232.301, we are not replacing them with references to Form N-CEN 
because the references in that section relate to specific portions 
of the EDGAR Filer Manual that would not be relevant to Form N-CEN.
---------------------------------------------------------------------------

    Currently, reports on Form N-SAR are filed semi-annually by 
management investment companies as required by 17 CFR 270.30b1-1, and 
annually by UITs as required by 17 CFR 270.30a-1. Because we are 
requiring reports on Form N-CEN to be filed annually by all registered 
investment companies, we are rescinding 17 CFR 270.30b1-1 and revising 
17 CFR 270.30a-1 to require all registered investment companies to file 
reports on Form N-CEN. We are also revising the following rules to 
remove references to 17 CFR 270.30b1-1 and add references to revised 
rule 17 CFR 270.30a-1: 17 CFR 240.13a-10, 17 CFR 240.13a-11, 17 CFR 
240.13a-13, 17 CFR 240.13a-16, 17 CFR 240.15d-10, 17 CFR 240.15d-11, 17 
CFR 240.15d-13, and 17 CFR 240.15d-16.
    In addition, as a result of the proposed new annual reporting 
requirement that would apply to all registered investment companies, we 
are rescinding 17 CFR 270.30b1-2--which currently permits wholly-owned 
management investment company subsidiaries of management investment 
companies to not file Form N-SAR under certain circumstances--and 
adopting new rule 17 CFR 270.30a-4--which will permit wholly-owned 
management investment company subsidiaries of management investment 
companies to not file Form N-CEN under those same circumstances. We are 
also amending 17 CFR 200.800 to display control numbers assigned to 
information collection requirements for Forms N-PORT and N-CEN by the 
Office of Management and Budget pursuant to the Paperwork Reduction 
Act. As discussed further below, an agency may not conduct or sponsor, 
and a person is not required to respond to a collection of information 
unless it displays a currently valid OMB control number.\1228\
---------------------------------------------------------------------------

    \1228\ See infra section IV.
---------------------------------------------------------------------------

    Our amendments to Regulation S-X will, among other things, require 
management investment companies to report new schedules for certain 
derivatives holdings.\1229\ To implement these changes, we are 
renumbering the sections for schedules required to be reported by 
management investment companies and renumbering the list of schedules 
provided in 17 CFR 210.6-10, which outlines the schedules to be 
reported by investment companies.\1230\ We are also adopting conforming 
changes to references to Regulation S-X in the following forms: Form N-
1A, Form N-2, Form N-3, and Form N-14.\1231\
---------------------------------------------------------------------------

    \1229\ Our amendments require new schedules to be filed to 
report open futures contracts, open forward foreign currency 
contracts, and open swap contracts. See new rules 12-13A-C of 
Regulation S-X.
    \1230\ Among other things, our amendments will renumber the CFR 
sections for open option contracts and the summary schedule of 
investments in unaffiliated issuers from 17 CFR 210.12-12B and 17 
CFR 210.12-12C to 17 CFR 210.12-13 and 17 CFR 210.12-B, 
respectively. These amendments group the schedule for open option 
contracts written together with the new schedules for open futures 
contracts, open forward foreign currency contracts, and open swap 
contracts, and list the summary schedule sequentially after the 
investments in securities of unaffiliated issuers. We are also 
amending 17 CFR 210.6-10 to, among other things, add new schedules 
V, VI, and VII for open futures contracts, open forward foreign 
currency contracts, and open swap contracts, respectively, and 
renumber schedule II for investments other than securities and 
schedule VI for summary of investments in securities of unaffiliated 
issuers as schedules VIII and IX, respectively. See amended rule 6-
10 of Regulation S-X (listing the schedules required to be filed by 
management investment companies, UITs, and face-amount certificate 
companies).
    \1231\ See Item 27(b)(1) of Form N-1A (reference to schedule VI 
changed to schedule IX and reference to schedule I are corrected to 
cite to the appropriate CFR section); Instruction 7 to Item 24 of 
Form N-2 (we are updating references to schedule VI); Instruction 
7(i) and (ii) to Item 28(a) of Form N-3 (we are updating references 
to schedule VI).
---------------------------------------------------------------------------

    We are also amending Form N-CSR to revise instructions addressing 
how disclosures and certifications as to the effectiveness and changes 
in the registrant's internal control over financial reporting should be 
handled during the transition period when certifications for funds' 
portfolio holdings for their first and third fiscal quarters will no 
longer be provided on Form N-Q but instead will provided on Form N-
CSR.\1232\ In the Proposing Release we proposed deleting these 
instructions, but we are revising the instructions to clarify how these 
disclosures and certifications shall be handled with regards to smaller 
entities

[[Page 81966]]

as opposed to larger entities during the transition period.
---------------------------------------------------------------------------

    \1232\ Item 11 and Item 12 of Form N-CSR.
---------------------------------------------------------------------------

    We are also removing and reserving paragraph (a) of 17 CFR 232.105, 
which currently requires electronic filers to submit Forms N-SAR and 
13F in ASCII. We are rescinding Form N-SAR, and Form 13F has been 
submitted by electronic filers in XML, rather than ASCII, since 
2013.\1233\ Although we also proposed to revise the section heading of 
17 CFR 232.105 and redesignate paragraphs (b) and (c) as (a) and (b), 
respectively, upon further consideration we believe those changes are 
unnecessary at this time.
---------------------------------------------------------------------------

    \1233\ See SEC, Announcement: Notice to EDGAR Form 13F Filers 
(Mar. 29, 2013), available at http://www.sec.gov/divisions/investment/imannouncements/notice-form-13f-im.htm (requiring funds 
to file Form 13F according to EDGAR XML Technical Specifications 
beginning on April 29, 2013).
---------------------------------------------------------------------------

    We received no comments on these technical and conforming 
amendments, and are adopting them substantially as proposed, as 
discussed herein.

H. Compliance Dates

    We are adopting the following compliance dates for our amendments, 
as set forth below.
1. Form N-PORT, Rescission of Form N-Q, and Amendments to the 
Certification Requirements of Form N-CSR
    As proposed, given the nature and frequency of filings on Form N-
PORT, the Commission is providing a tiered set of compliance dates 
based on asset size. Specifically, for larger entities--namely, funds 
that together with other investment companies in the same ``group of 
related investment companies'' \1234\ have net assets of $1 billion or 
more as of the end of the most recent fiscal year of the fund--we are 
adopting a compliance date of June 1, 2018. This will result in larger 
funds filing their first reports on Form N-PORT, reflecting data as of 
June 30, no later than July 30, and will provide those funds with a 
compliance period of at least 18 months, consistent with our proposal. 
For these entities, we expect that this period of time will provide an 
adequate period of time for funds, intermediaries, and other service 
providers to conduct the requisite operational changes to their systems 
and to establish internal processes to prepare, validate, and file 
reports on new Form N-PORT with the Commission.\1235\
---------------------------------------------------------------------------

    \1234\ For these purposes, the threshold is based on the 
definition of ``group of related investment companies,'' as such 
term is defined in rule 0-10 under the Investment Company Act [17 
CFR 270.0-10]. Rule 0-10 defines the term as ``two or more 
management companies (including series thereof) that: (i) Hold 
themselves out to investors as related companies for purposes of 
investment and investor services; and (ii) Either: (A) Have a common 
investment adviser or have investment advisers that are affiliated 
persons of each other; or (B) Have a common administrator; and [. . 
.] In the case of a unit investment trust, the term group of related 
investment companies shall mean two or more unit investment trusts 
(including series thereof) that have a common sponsor.'' We believe 
that this broad definition will encompass most types of fund 
complexes and therefore is an appropriate definition for compliance 
date purposes.
    \1235\ We believe that this compliance period for larger groups 
of investment companies is an adequate amount of time for funds to 
implement new Form N-PORT and make the necessary system and 
operational changes. We adopted a nine month compliance period when 
we first required money market funds to report their portfolio 
holdings to the Commission on a monthly basis on Form N-MFP. Based 
upon our Form N-MFP compliance experience, and the larger number of 
non-money market fund filers, we believe that doubling the Form N-
MFP compliance period to eighteen months for filing reports on Forms 
N-PORT is appropriate. See Money Market Fund Reform 2010 Release, 
supra footnote 447, at 10087.
---------------------------------------------------------------------------

    For smaller entities (i.e., funds that together with other 
investment companies in the same ``group of related investment 
companies'' have net assets of less than $1 billion as of the end of 
the most recent fiscal year of the fund),\1236\ the compliance date 
will be June 1, 2019. This will provide smaller entities an extra 12 
months, as proposed, to comply with the new reporting requirements. We 
believe that smaller groups will benefit from this extra time to comply 
with the filing requirements for Form N-PORT and will potentially 
benefit from the lessons learned by larger investment companies and 
groups of investment companies during the adoption period for Form N-
PORT.
---------------------------------------------------------------------------

    \1236\ Based on staff analysis of data obtained from Morningstar 
Direct, as of June 30, 2016, we estimate that a $1 billion assets 
threshold would provide an extended compliance period to more than 
67% of fund groups, but only 0.6% of all fund assets. We therefore 
believe that the $1 billion threshold will appropriately balance the 
need to provide smaller groups of investment companies with more 
time to prepare for the initial filing of reports on Form N-PORT, 
while still including the vast majority of fund assets in the 
initial compliance period.
---------------------------------------------------------------------------

    In the Proposing Release, we stated that we intended to rescind 
Form N-Q and require implementation of the amendments to the 
certification requirements of Form N-CSR within a timing that would be 
consistent with this adoption. We received no comments on this aspect 
of the proposal. Therefore, consistent with the timing for the 
implementation of reporting requirements for Form N-PORT, we are also 
rescinding Form N-Q (referenced in 17 CFR 274.130) and implementing the 
amendments to the certification requirements of Form N-CSR (referenced 
in 17 CFR 274.128) with approximately the same time frame. However, we 
are delaying the rescission of Form N-Q by two additional months to 
allow funds sufficient time to satisfy Form N-Q's 60-day filing 
requirements with regard to their final filing on Form N-Q for the 
reporting period preceding their first filing on Form N-PORT. Thus, the 
compliance dates for the amendments to the certification requirements 
of Form N-CSR will be June 1, 2018 for larger entities, and June 1, 
2019 (12 months later) for smaller entities. Form N-Q and related rules 
referencing Form N-Q will be rescinded two months later, on August 1, 
2019. In addition, as discussed below, the compliance date for 
reporting a change in independent public accountant on Form N-CSR will 
be consistent with the compliance date for other information reported 
on Form N-CEN.\1237\
---------------------------------------------------------------------------

    \1237\ See infra section II.H.2.
---------------------------------------------------------------------------

    We understand that certain changes to issuers' and market 
participants' systems may not be able to occur until the final 
technical requirements are published in the EDGAR Filer Manual and 
EDGAR Technical Specifications documents. In order to provide issuers 
and other filers time to make adjustments to their systems, we 
anticipate making a draft of the EDGAR Technical Specifications 
documents available in advance. We believe that test submissions may 
assist both the Commission and issuers with addressing unknown and 
unforeseeable issues that may arise with the reporting of information 
on Form N-PORT. We will permit funds to file test submissions during a 
trial period.
    Additionally, we have determined to maintain as nonpublic all 
reports filed on Form N-PORT for the first six months following June 1, 
2018. We believe that, separate from the voluntary trial, having a time 
period where all funds are required to file reports on Form N-PORT with 
the Commission but not have those reports disclosed publicly will allow 
funds and the Commission to make adjustments to fine-tune the technical 
specifications and data validation processes. We believe that this 
process can ultimately improve the data that is reported to the 
Commission and, as required disclosed to the public. Accordingly, we 
find that it is neither necessary nor appropriate in the public 
interest or for the protection of investors to make reports filed on 
Form N-PORT during the first six months following the compliance date 
publicly available.\1238\ However, portfolio information attached as

[[Page 81967]]

exhibits to Form N-PORT for the first and third quarters of a fund's 
fiscal year will still be made public during this period, to ensure 
that information about funds' portfolio holdings continues to be 
publicly available to investors and other users during the six month 
period when reports on Form N-PORT will not be made publicly 
available.\1239\
---------------------------------------------------------------------------

    \1238\ See section 45(a) of the Investment Company Act.
    \1239\ See supra section II.A.2.j (discussing exhibits to Form 
N-PORT).
---------------------------------------------------------------------------

    One commenter did not explicitly address compliance dates for Form 
N-PORT, but suggested that the compliance period for Regulation S-X be 
changed to 18 months so that Form N-PORT and the amendments to 
Regulation S-X would have the same compliance date.\1240\ Other 
commenters suggested extending the compliance period for Form N-PORT 
for all funds, including specific recommendations for 24 months, 30 
months, or 36 months after the later of the effective date for this 
rulemaking or the adoption of amendments requiring funds to report 
liquidity information on Form N-PORT.\1241\
---------------------------------------------------------------------------

    \1240\ See State Street Comment Letter (stating that ``[m]any of 
the changes to disclosures for derivatives are aligned with the 
information required within Form N-PORT and will require significant 
enhancements to systems'').
    \1241\ See, e.g., Dreyfus Comment Letter (compliance date of 24 
months after the effective date); SIFMA Comment Letter I (later of 
24 months following adoption or six months following publication of 
the final XML data structure for Form N-PORT); Fidelity Comment 
Letter (30 months after the effective date); ICI Comment Letter (30 
months after the effective date of Form N-PORT or the requirement to 
report liquidity information on Form N-PORT); Oppenheimer Comment 
Letter (30 months after the effective date); Pioneer Comment Letter 
(36 months after the effective date).
---------------------------------------------------------------------------

    We are adopting an initial compliance date for Form N-PORT of June 
1, 2018, which is consistent with the 18-month compliance period we 
proposed. As discussed above, we anticipate that the information that 
will be reported on Form N-PORT will enable us to further our mission 
to protect investors by assisting us in carrying out our regulatory 
responsibilities related to the asset management industry. We believe 
that it is important for the Commission to obtain and benefit from such 
information as soon as it is reasonably possible for this information 
to be reported. Although several commenters recommended extending the 
compliance period in order to update reporting systems,\1242\ based in 
part upon our experience with Form N-MFP reporting implementation, we 
continue to believe that 18 months for larger entities and 30 months 
for smaller entities will provide sufficient time for funds and their 
service providers to prepare to file reports on Form N-PORT.
---------------------------------------------------------------------------

    \1242\ See, e.g., Fidelity Comment Letter; Vanguard Comment 
Letter; Pioneer Comment Letter; and Invesco Comment Letter.
---------------------------------------------------------------------------

    Separately, as discussed above, our adoption includes numerous 
modifications from or clarifications to the proposal that address 
concerns raised by commenters and that are intended, in part, to 
decrease reporting and implementation burdens relative to the proposal. 
For example, we have added an instruction to Form N-PORT specifying 
that funds must report portfolio information on the same basis used in 
computing NAV, which is generally a T + 1 basis, rather than on a T + 0 
basis, which is currently used for financial statement reporting. 
Several commenters asked for this clarification, as filing on a T + 0 
basis would have required time-intensive conversion of portfolio 
transactions normally recorded on a T+1 basis.\1243\ We are also 
permitting funds to attach Regulation S-X compliant portfolio holdings 
schedules to Form N-PORT within 60 days after the end of the first and 
third fiscal quarters as opposed to our proposed 30 days, thus allowing 
funds to focus on preparing their Form N-PORT filings as opposed to 
also preparing their Regulation S-X compliant portfolio holdings 
schedules simultaneously.\1244\ More generally, we are permitting a 
fund to generally use its own methodology or the methodology of its 
service provider, so long as the methodology is consistently applied 
and is consistent with the way the fund reports internally and to 
current and prospective investors, which should help circumvent 
operational challenges that would have arisen if firms had attempted to 
standardize reporting of certain non-standardized information such as 
country of risk for each portfolio holding.\1245\
---------------------------------------------------------------------------

    \1243\ See supra footnotes 74-76 and accompanying text.
    \1244\ See supra footnote 438 and accompanying and following 
text.
    \1245\ See supra footnote 79 and accompanying and following 
text.
---------------------------------------------------------------------------

    Several commenters suggested that the Commission should provide for 
a phase-in period based on a fund's fiscal year-end, such that the 
Commission would require each fund to first begin filing its Form N-
PORT as of its next fiscal year following the compliance date.\1246\ We 
decline to adopt this suggestion. A rolling compliance period based on 
fiscal year would mean that some funds would be filing reports on Form 
N-PORT while other funds would be filing reports on Form N-Q for the 
same reporting period, which would delay the Commission and other users 
from obtaining complete information about the industry on Form N-PORT 
for up to a year. Commission staff believes that this would diminish 
the value of the information reported on Form N-PORT in terms of 
assessing industry trends, identifying outliers, and monitoring 
industry developments, because only a portion of the industry would be 
filing reports on Form N-PORT each month in a structured data format. 
This would also create complexities for investors who might not 
understand why some of their funds would be reporting on one form while 
other funds would be reporting on a different form, and would diminish 
the ability of investors to compare the information reported by one 
fund with information reported by another fund if each fund reported 
information on a different form. While our staggered compliance 
approach will also result in some funds reporting on Form N-PORT while 
others are still reporting on Form N-Q, the difference will be less 
significant than with a rolling compliance date because under our 
approach only smaller funds representing a relatively small proportion 
of assets will continue to use Form N-Q after the initial compliance 
date.
---------------------------------------------------------------------------

    \1246\ See ICI Comment Letter (recommending a rolling compliance 
period, with each fund not required to file Form N-PORT until the 
beginning of its next fiscal year following 30 months after the 
effective date); Invesco Comment Letter (same, except each fund not 
required to file Form N-PORT until the beginning of its next fiscal 
year following 36 months after the effective date).
---------------------------------------------------------------------------

    One commenter suggested that the Commission should consider 
limiting liability for Form N-PORT filings for a transition period, 
similar to what was done with earlier structured data reporting 
rules.\1247\ We decline to adopt this suggestion. In the prior 
structured data reporting rules, filers were required to report the 
same information in both structured and non-structured formats, with 
limited liability for the information reported in a structured format 
and full liability for that same information when reported in a non-
structured format. In this case, the information will be reported on 
Form N-PORT in only a structured data format.
---------------------------------------------------------------------------

    \1247\ See Simpson Thacher Comment Letter (for a two-year 
transition period, structured data filings remained subject to 
standard antifraud provisions under federal securities laws, but 
were not subject to section 34(b) of the Investment Company Act of 
1940 or section 18 of the Securities Exchange Act of 1934). See also 
Interactive Data to Improve Financial Reporting, Investment Company 
Act Release No. 28609 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)].
---------------------------------------------------------------------------

    One commenter suggested raising the asset threshold for determining 
the larger entities that would be required to comply with Form N-PORT 
filing

[[Page 81968]]

requirements following an 18 month compliance period, as opposed to 30 
months for smaller entities that fell below the asset threshold.\1248\ 
As discussed above, we estimate that our proposed $1 billion assets 
threshold will provide an extended compliance period to more than 67% 
of the fund groups, but only 0.6% of all fund assets, and therefore 
believe that the $1 billion threshold will appropriately balance the 
need to provide smaller groups of investment companies with more time 
to prepare for the initial filing of reports on Form N-PORT, while 
still including the vast majority of fund assets in the initial 
compliance period.\1249\
---------------------------------------------------------------------------

    \1248\ See Simpson Thacher Comment Letter.
    \1249\ See supra footnote 1236.
---------------------------------------------------------------------------

2. Form N-CEN, Rescission of Form N-SAR, and Amendments to the Exhibit 
Requirements of Form N-CSR
    We are adopting a compliance date of June 1, 2018 to comply with 
the new Form N-CEN reporting requirements. We expect that this 
compliance period, consistent with the 18 month compliance period that 
we proposed, will provide an adequate period of time for funds, 
intermediaries, and other service providers to conduct the requisite 
operational changes to their systems and to establish internal 
processes to prepare, validate, and file reports on Form N-CEN with the 
Commission. We are adopting the same compliance date for the related 
amendments to other rules and forms we are adopting today, including 
the rescission of Form N-SAR and related rules referencing Form N-
SAR.\1250\
---------------------------------------------------------------------------

    \1250\ We similarly are rescinding Form N-SAR (referenced in 17 
CFR 274.101) with a timing that is consistent with this adoption.
---------------------------------------------------------------------------

    We also are adopting a compliance date of June 1, 2018 to comply 
with the modified reporting requirement for a registrant to file as an 
exhibit to Form N-CSR the letter reporting a change in independent 
registered public accountants. This exhibit was already required to be 
reported semi-annually on Form N-SAR, and as such, we do not expect 
that registrants will require significant amounts of time to modify 
systems or establish internal processes to prepare exhibit filings on 
Form N-CSR in accordance with our amendments.
    Unlike Form N-PORT, we are not providing a tiered compliance date 
based on asset size. We believe that it is less likely that smaller 
fund complexes will need additional time to comply with the 
requirements to file Form N-CEN because the requirements are similar to 
the current requirements to file Form N-SAR, and we expect that filers 
will prefer the updated, more efficient filing format of Form N-CEN. We 
are therefore requiring all funds, regardless of size, to file reports 
on Form N-CEN with the same compliance period.
    Furthermore, unlike Form N-PORT, we are not keeping reports filed 
during a phase in period after the compliance date nonpublic. Much of 
the information that will be filed on Form N-CEN is currently already 
reported by funds on Form N-SAR, and thus funds should already have 
processes and procedures in place to reduce the risk of inadvertent 
errors. In addition, filings on Form N-CEN are not expected to be as 
technically complex nor present comparable challenges in terms of 
reporting and data validation as filings on Form N-PORT. However, as 
with Form N-PORT, we anticipate allowing funds to file test submissions 
on Form N-CEN on a voluntary basis for a period of time before the 
compliance date.
    Some commenters suggested that the compliance period be extended to 
the later of 30 months after the adoption of Form N-CEN, or 18 months 
after the effective date of amendments requiring funds to report 
liquidity information on Form N-CEN.\1251\ We decline to adopt these 
suggestions. As discussed above, much of the information that will be 
reported on Form N-CEN is currently already reported by funds on Form 
N-SAR, and was reported by funds pursuant to a six-month compliance 
period upon our adoption of Form N-SAR.\1252\ One commenter also 
estimated in the Form N-PORT context that implementing processes to 
report structured information in an XML format would take six months 
following publication of the final XML data structure.\1253\ We 
therefore continue to believe, based in part upon this comment and also 
our prior experience with implementation of reporting requirements for 
Form N-SAR, that 18 months is an appropriate compliance period for Form 
N-CEN.
---------------------------------------------------------------------------

    \1251\ See, e.g., Fidelity Comment Letter (suggesting a 
compliance date of 30 months after the adoption of Form N-CEN); MFS 
Comment Letter (same); CAI Comment Letter (same); IDC Comment Letter 
(same); Comment Letter of David W. Blass, General Counsel, 
Investment Company Institute (Jan. 13, 2016) (suggesting the later 
of 30 months after the adoption of Form N-CEN or 18 months after the 
adoption of amendments requiring funds to report liquidity 
information on Form N-CEN).
    \1252\ See Form N-SAR; Temporary Suspension of Quarterly 
Reporting Obligations of Certain Registered Investment Companies 
Pending Receipt of Comments on Proposed Final Action, Investment 
Company Act Release No. 14299 (Jan. 4, 1985) [50 FR 1442 (Jan. 11, 
1985)].
    \1253\ See SIFMA Comment Letter I (estimating how long it would 
take to implement processes to report structured information in an 
XML format for Form N-PORT).
---------------------------------------------------------------------------

3. Regulation S-X, Statement of Additional Information, and Related 
Amendments
    As discussed above, our amendments to Regulation S-X are largely 
consistent with existing fund disclosure practices. As such, we do not 
expect that funds, intermediaries, or service providers will require 
significant amounts of time to modify systems or establish internal 
processes to prepare financial statements in accordance with our 
proposed amendments to Regulation S-X. Accordingly, we are adopting a 
compliance date for our amendments to Regulation S-X of August 1, 2017. 
This is consistent with our proposed compliance period of eight months. 
The same compliance date will apply to conforming amendments related to 
our amendments to Regulation S-X, including the related amendments to 
the Statement of Additional Information (and Form N-CSR for closed-end 
funds) we are adopting today.
    One commenter supported the proposed compliance date for the 
amendments to Regulation to S-X, although the commenter suggested that 
implementation be required for each fund with its next fiscal year end 
following the proposed compliance date.\1254\ However, the commenter's 
rationale for a rolling compliance date was not that funds needed more 
time to comply, but rather that enhanced disclosure pursuant to the 
amendments to Regulation S-X should be initially provided over an 
entire fiscal year, as opposed to just a portion of the first fiscal 
year during which the amendments become effective.
---------------------------------------------------------------------------

    \1254\ See Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    Many other commenters requested that the compliance date be 
extended, with four commenters suggesting a compliance period of 18 
months after the effective date of the amendments, one commenter 
recommending 24 months, and another commenter recommending 36 
months.\1255\ Commenters supported their requests

[[Page 81969]]

for a longer compliance date by asserting that the information that 
will be reported pursuant to the amendments to Regulation S-X overlaps 
with the information that will be reported on Form N-PORT, and thus the 
compliance date for Regulation S-X should be identical to the 
compliance date for Form N-PORT.\1256\
---------------------------------------------------------------------------

    \1255\ See Fidelity Comment Letter (recommending a compliance 
date of 18 months after the effective date); Oppenheimer Comment 
Letter (same); State Street Comment Letter (same); MFS Comment 
Letter (same, although with implementation on a rolling basis based 
on the fund's fiscal year end); SIFMA Comment Letter I (recommending 
the compliance date for the amendments to Regulation S-X be the same 
as SIFMA's recommended compliance date for Form N-PORT, namely 24 
months after the effective date or six months after publication of 
the final XML data structure for Form N-PORT); Invesco Comment 
Letter (recommending 36 months, after the effective date with 
implementation on a rolling basis based on the fund's fiscal year 
end).
    \1256\ See SIFMA Comment Letter I; State Street Comment Letter.
---------------------------------------------------------------------------

    We decline to adopt these suggestions. Although some of the 
information that will be reported pursuant to the amendments to 
Regulation S-X overlaps with the information that will be reported on 
Form N-PORT, many of the amendments to Regulation S-X are unrelated to 
what will be reported in Form N-PORT. More significantly, as discussed 
above, our amendments to Regulation S-X are generally consistent with 
existing disclosure practices of many funds. As such, we do not expect 
that funds, intermediaries, or service providers will require 
significant amounts of time to modify systems or establish internal 
processes to prepare financial statements in accordance with our final 
amendments to Regulation S-X.
    Additionally, some of the amendments we are adopting to Form N-CEN 
and the Statement of Additional Information (and Form N-CSR for closed-
end funds) were originally proposed as part of our amendments to 
Regulation S-X, and we received no objections to our proposed timeframe 
for compliance for those portions of the amendments to Regulation S-X. 
Furthermore, the amendments to the Statement of Additional Information 
and Form N-CSR, like the amendments to Regulation S-X, do not entail 
the complications of having to develop and test an XML schema or EDGAR 
validation behaviors, as is the case for our reporting requirements 
regarding information that will be reported on Form N-PORT and Form N-
CEN.

III. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic effects, including the 
benefits and costs and the effects on efficiency, competition, and 
capital formation that will result from the adopted changes to the 
current reporting regime. Changes to the current reporting regime 
include new Form N-PORT, the rescission of Form N-Q, amendments to the 
certification and exhibit filing requirements for Form N-CSR, 
amendments to Regulation S-X, new Form N-CEN, and the rescission of 
Form N-SAR. The economic effects of the adopted changes are discussed 
below.
    The Commission is modernizing the content and format requirements 
of reports and disclosures by funds, and the manner in which 
information is filed with the Commission and disclosed to the public. 
The amendments are designed to enhance the Commission's ability to 
effectively oversee and monitor the activities of investment companies 
in order to better carry out its regulatory functions and to aid 
investors and other market participants to better assess the benefits, 
costs, and risks of investing in different fund products. In summary, 
and as discussed in greater detail in section II above, the Commission 
is adopting the following changes to its rules and forms:
     We are requiring registered management investment 
companies and ETFs organized as UITs, other than money market funds and 
SBICs, to report monthly portfolio information in a structured data 
format on a new form, Form N-PORT.
     We are rescinding Form N-Q. We are also lengthening the 
look-back for Sarbanes-Oxley certifications on Form N-CSR to six months 
to cover the gap in certification coverage that would otherwise occur 
once Form N-Q is rescinded.
     We are revising Regulation S-X to require new, 
standardized enhanced disclosures regarding fund holdings in 
derivatives instruments; update the disclosures for other investments; 
and amend the rules regarding the general form and content of fund 
financial statements.
     We are rescinding Form N-SAR and replacing it with new 
Form N-CEN, which will require the annual reporting of similar and 
additional census information in an updated, structured data format.
     We are adopting amendments to Forms N-1A, N-3, and N-CSR 
(for closed-end funds) to require certain disclosures in fund 
Statements of Additional Information regarding securities lending 
activities.
    The current disclosure of information by funds serves as the 
baseline against which the costs and benefits as well as the impact on 
efficiency, competition, and capital formation are discussed. The 
baseline includes the current set of requirements for funds to file 
reports on Forms N-CSR, N-Q, and N-SAR with the Commission and the 
content of such reports, including Regulation S-X, and in particular, 
its schedule of investments. The baseline also includes guidance from 
Commission staff and other industry groups that have established 
industry practices for the disclosure of a fund's schedule of 
investments and financial statements. Lastly, the baseline includes the 
current practice of some funds to voluntarily disclose additional 
information, and the requirement that actively managed ETFs, and many 
index ETFs, disclose their portfolios on a daily basis. For example, 
some funds disclose monthly or quarterly portfolio investment 
information on their Web sites or to third-party information providers, 
and disclose additional information (e.g., particular information on 
derivative positions) in fund financial statements that is not 
currently required under Regulation S-X. The parties that will be 
affected by the new rules, forms, and amendments are funds that have 
registered or will register with the Commission; the Commission; and 
other current and future users of fund information including investors, 
third-party information providers, and other potential users; and other 
market participants that could be affected by the change in fund 
disclosures.
    We discuss separately below the economic effects of each of the 
following new rules, forms, and amendments: The introduction of Form N-
PORT, the rescission of Form N-Q, the amendments to Form N-CSR, the 
amendments to Regulation S-X, the introduction of Form N-CEN, the 
rescission of Form N-SAR, and the amendments to multiple registration 
statement forms. We identify for each of the new rules, forms, and 
amendments the baseline from which the economic effects will be 
discussed and the parties most likely to be affected.
    As noted above, the assets of registered investment companies 
exceeded $18 trillion at year-end 2015, having grown from about $5.8 
trillion at the end of 1998.\1257\ In addition, approximately 93 
million individuals own shares of registered investment companies, 
representing 55 million or 44% of U.S. households.\1258\ Among 
investment companies, we estimate that, as of December 2015, there were 
3,113 active investment companies registered with the Commission, of 
which 1,642 were open-end funds, 750 were closed-end funds (including 1 
SBIC), and 721 were UITs (including 5 exchange-traded funds).\1259\ We 
further estimate that those registered investment companies included 
17,052 funds or series thereof, of which 1,594 were exchange-traded 
funds (including eight organized as

[[Page 81970]]

UITs), 5,188 were UITs, 750 were closed-end funds, 481 were money 
market funds, and 9,039 were other mutual funds. The following table 
summarizes the entities likely to be affected by the new forms, 
rescissions, and amendments.
---------------------------------------------------------------------------

    \1257\ See supra footnote 4.
    \1258\ See id.
    \1259\ Based on data obtained from registrants' filings with the 
Commission on Form N-SAR.
[GRAPHIC] [TIFF OMITTED] TR18NO16.012

    The Commission relies on information included in reports filed by 
funds to monitor trends, identify risks, inform policy and rulemaking, 
and assist Commission staff in examination and enforcement efforts of 
the asset management industry. An essential factor to the Commission's 
ability to carry out its regulatory functions is regular, timely 
information about portfolio holdings and general, census information 
about funds. In general, the new rules, forms, and amendments will 
modernize the fund reporting regime and, among other effects, will 
result in an increased transparency of fund portfolios and investment 
practices. The increased transparency will improve the ability of the 
Commission to fulfill its regulatory functions. These functions include 
the development of policy and guidance, the staff's review of fund 
registration statements and disclosures, and the Commission's 
examination and enforcement programs. We believe that the increase in 
transparency will also improve the ability of investors to select funds 
for investment, and therefore improve their ability to allocate capital 
across funds and other investments to more closely reflect their 
investment risk preferences. We also believe that the increase in 
transparency will enhance competition among funds to attract investors.
    At the outset, the Commission notes that, where possible, it has 
sought to quantify the costs, benefits, and effects on efficiency, 
competition, and capital formation expected to result from each of the 
new rules, forms, and amendments and its reasonable alternatives. As 
discussed in further detail below, in many cases the Commission is 
unable to quantify the economic effects because it lacks the 
information necessary to provide a reasonable estimate.
    The economic effects depend upon a number of factors that we cannot 
estimate or quantify. Factors include the extent to which investor 
protection would increase along with the ability of the Commission to 
oversee the fund industry; the amount of new information that would 
become available as a result of requiring such information in 
regulatory filings (as opposed to information that is provided 
voluntarily); the change in the availability of fund information to all 
investors, institutional and individual; and the extent to which 
investors are able to use the information to make more informed 
investment decisions either through direct use or through third-party 
service providers. Therefore, much of the discussion below is 
qualitative in nature although we

[[Page 81971]]

describe where possible the direction of these effects.
    In the Proposing Release, we requested general comment on the 
feasible alternatives to the information we proposed to require funds 
to report that would minimize the reporting burdens on funds while 
maintaining the anticipated benefits of the reporting and disclosure, 
as well as the utility of the information proposed to be included in 
reports to the Commission, investors, and the public in relation to the 
costs to funds of providing the reports.\1260\ In adopting today's 
rules, forms, and amendments, we considered, among other things, such 
alternatives, utility, and costs.
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    \1260\ See Proposing Release, supra footnote 7, at nn. 160-161.
---------------------------------------------------------------------------

B. Form N-PORT, Rescission of Form N-Q, and Amendments to Form N-CSR

1. Introduction and Economic Baseline
    Form N-PORT will require registered management investment companies 
and ETFs organized as UITs, other than money market funds and SBICs, to 
report portfolio investment information to the Commission on a monthly 
basis. As discussed, only information reported for the last month of 
each fiscal quarter will be made available to the public in order to 
minimize potential costs associated with making the information public, 
including front-running or reverse engineering of a fund's investment 
strategies. Reports will be filed in a structured data format using XML 
to allow for easier aggregation and manipulation of the data. As 
discussed above, we are also rescinding Form N-Q but requiring that 
funds attach their complete portfolio holdings to Form N-PORT for the 
first and third fiscal quarters in accordance with Regulation S-X. We 
are also amending the form of certification in Form N-CSR to require 
each certifying officer to state that he or she has disclosed in the 
report any change in the registrant's internal control over financial 
reporting that occurred during the most recent fiscal half-year to fill 
the gap in certification coverage that would otherwise occur once Form 
N-Q is rescinded.\1261\ As discussed above, we also are moving the 
management's statement regarding a change in accountant, which 
originally was an exhibit filed on Form N-SAR and was proposed as an 
attachment to Form N-CEN, to an exhibit to Form N-CSR.\1262\ In 
addition, as discussed above, we are adopting amendments to require 
closed-end funds to report on Form N-CSR certain disclosures regarding 
securities lending activities.\1263\
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    \1261\ Amended Item 11(b) of Form N-CSR; amended paragraph 4(d) 
of certification exhibit of Item 11(a)(2) of Form N-CSR.
    \1262\ Item 12(a)(4) of Form N-CSR; see also supra section 
II.D.4.b.
    \1263\ See Item 12 of Form N-CSR; see also supra footnote 1181 
and accompanying text and section II.F.
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    The current set of requirements under which registered management 
investment companies (other than money market funds and SBICs) and ETFs 
organized as UITs publicly report their complete portfolio investments 
to the Commission on a quarterly basis and certain other information on 
a semi-annual basis,\1264\ as well as the current practice of some 
investment companies to voluntarily disclose portfolio investment 
information either on their Web sites or to third-party information 
providers on a more frequent basis, is the baseline from which we will 
discuss the economic effects of new Form N-PORT.\1265\ The parties that 
could be affected by the introduction of Form N-PORT are registered 
management investment companies (other than money market funds and 
SBICs) and ETFs organized as UITs, that have registered or will 
register with the Commission; the Commission; and other current and 
future users of investment company portfolio investment information 
including investors, third-party information providers, and other 
interested potential users; and other market participants that could be 
affected by the change in fund disclosure of portfolio investment 
information.
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    \1264\ Form N-PORT will also require information that is 
currently being reported on Form N-SAR such as information on fund 
flows, assets, and liabilities. The current requirement to report 
this information as part of Form N-SAR is also part of this 
baseline.
    The baseline also includes the current obligation of Form N-Q 
filers to make certifications regarding (1) the accuracy of the 
portfolio holdings information reported on that form, and (2) the 
fund's disclosure controls and procedures and internal control over 
financial reporting.
    \1265\ Additionally, many funds currently provide information 
concerning derivatives investments, similar to the requirements we 
are adopting in our amendments to Regulation S-X. See discussion 
supra section II.C.2.
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    Currently, the Commission requires registered management investment 
companies (other than money market funds and SBICs) to report their 
complete portfolio investments to the Commission on a quarterly 
basis.\1266\ These funds are required to provide this information in 
reports on Form N-Q as of the end of the first and third fiscal 
quarters of each year \1267\ and in reports on Form N-CSR as of the end 
of the second and fourth fiscal quarters of each year.\1268\ Both forms 
require that the reported schedule of portfolio investments conform to 
the requirements of Regulation S-X, and the schedule for the close of 
the fiscal year must be audited (but those schedules for the other 
three fiscal quarters need not be).\1269\ These reports are generally 
required to be filed on the EDGAR system and are made publicly 
available upon receipt.\1270\ Reports on Form N-CSR may be filed up to 
70 days after the end of the reporting period,\1271\ and reports on 
Form N-Q may be filed up to 60 days after the end of the reporting 
period.
---------------------------------------------------------------------------

    \1266\ See General Instruction A to Form N-CSR; Item 6 of Form 
N-CSR; General Instruction A to Form N-Q; Quarterly Portfolio 
Holdings Adopting Release, supra footnote 421.
    \1267\ Item 1 of Form N-Q.
    \1268\ Item 6 of Form N-CSR.
    \1269\ Instruction to Item 6(a) of Form N-CSR; Item 1 of Form N-
Q.
    \1270\ See rule 101(a)(i) of Regulation S-T [17 CFR 
232.101(a)(i)].
    \1271\ Form N-CSR must be filed within 10 days after the 
shareholder report is sent to shareholders, and the shareholder 
report must be sent within 60 days after the end of the reporting 
period. Rule 30b2-1(a); rule 30e-1(c).
---------------------------------------------------------------------------

    Forms N-CSR and N-Q are required to be filed in HTML or ASCII/SGML 
format.\1272\ In order to prepare reports in HTML and ASCII/SGML, 
reporting persons generally need to reformat information from the way 
the information is stored for normal business use.\1273\ The resulting 
format, when rendered in an end user's Web browser, is comprehensible 
to a human reader, but it is not suitable for automated processing. 
These formats do not allow the Commission or other interested data 
users to combine information from more than one report in an automated 
way to, for example, construct a database of fund portfolio positions 
without additional formatting.
---------------------------------------------------------------------------

    \1272\ See rule 301 of Regulation S-T; EDGAR Filer Manual 
(Volume II) version 27 (June 2014), at 5-1.
    \1273\ In so doing, reporting persons typically strip out 
incompatible metadata (i.e., syntax that is not part of the HTML or 
ASCII/SGML specification) that their business systems use to ascribe 
meaning to the stored data items and to represent the relationships 
among different data items.
---------------------------------------------------------------------------

    We received no comments that specifically addressed the baseline 
described in the Proposing Release. We believe that the economic 
effects from the introduction of new Form N-PORT will largely result 
from the disclosure of portfolio investment information in a structured 
data format, as well as the additional information that investment 
companies will report relative to current reporting practices. We also 
believe that the economic effects will depend on the extent to which 
the portfolios and investment activities of investment

[[Page 81972]]

companies become more transparent as a result of the increase in the 
amount and availability of portfolio investment information, and the 
ability of Commission staff, investors, and others to utilize the 
information. The current reporting requirements for investment 
companies, however, limit the ability of Commission staff to evaluate 
the potential economic effects. For example, the non-structured data 
format of reported portfolio investment information and the lack of 
standardized reporting requirements for certain types of portfolio 
investments all reduce the ability of Commission staff to aggregate 
information across the fund industry and to evaluate the economic 
effects of the regulatory changes.
    The new rules, forms, and amendments will increase the amount of 
portfolio investment information available for some investment 
companies more so than others. For example, investment companies that 
utilize derivatives as part of their investment strategy, or that 
otherwise engage in alternative strategies, will provide more 
information about their businesses than other investment companies. 
Information from Form N-SAR provides some indication as to the current 
use of derivatives by investment companies. Form N-SAR requires 
investment companies to identify permitted investment policies, and if 
permitted, investment policies engaged in during the reporting period. 
As of the second half of 2015, on average 76.5% of investment companies 
reported as permitted investment policies involving the writing or 
investing in options or futures, and on average 5.3% of investment 
companies reported engaging in each one of these policies during the 
report period.\1274\ In addition, the total net assets of alternative 
funds from which more information would become available were as of 
year-end 2015 approximately $219 billion or 1.3% of the total net 
assets of the mutual fund market.\1275\ Although the percentage of net 
assets of alternative funds relative to the mutual fund market is 
currently small, the percentage of flows to alternative funds was 11.9% 
in 2013, 4.0% in 2014, and 6.1% in 2015.\1276\
---------------------------------------------------------------------------

    \1274\ See Item 70 of Form N-SAR for a list of permitted 
investment policies, and if permitted, the investment policies 
engaged in during the reporting period. The percentages are 
calculated from the percentage of funds that report affirmatively to 
either of the two parts for Items 70.B though 70.I. There is little 
difference in the proportion of investment companies that reported 
as permitted the investment practices relating to Items 70.B through 
70.I. The greatest proportion of funds reported engaging in writing 
or investing in stock index futures (14.0%) and engaging in writing 
or investing in interest rate futures (12.5%), and the smallest 
proportion of funds reported engaging in writing or investing in 
other commodity futures (1.6%) and engaging in writing or investing 
in options on stock index futures (0.7%). Aggregate condensed 
balance sheet information reported on Form N-SAR indicates that 
funds held $3.4 billion in options on equities and options on all 
futures (Item 74.G and Item 74.H) or 0.018% of net assets from the 
second half of 2015. Aggregate condensed balance sheet information 
reported on Form N-SAR from the second half of 2015 also indicates 
that funds had $54.1 billion in short sales (Item 74.R.(2)) and $3.8 
billion in written options (Item 74.R.(3)), or 0.291% and 0.020% of 
net assets, respectively. The estimates are approximate.
    \1275\ See supra footnote 39. These statistics were obtained 
from staff analysis of Morningstar Direct data, and are based on 
fund categories as defined by Morningstar.
    \1276\ See id.
---------------------------------------------------------------------------

    Information from a White Paper prepared by staff in the Division of 
Economic and Risk Analysis also describes current fund use of 
derivatives.\1277\ For example, based on data from Morningstar, the 
number of funds that can be categorized as engaging in alternative 
investment strategies increased from 2010 to 2014 at an annual rate of 
17%, whereas the total number of all funds increased at an average 
annual rate of 8%.\1278\ In addition, based on a random sample of funds 
drawn from Form N-CSR filings, 32% of funds held one or more 
derivatives, and the average aggregate exposure from derivatives, 
financial commitment transactions and other senior securities was 23% 
of net asset value. Evidence from the random sample also indicates that 
funds engaging in alternative investment strategies tended to use 
derivatives more often than other fund types, which the White Paper 
described collectively as ``Traditional'' mutual funds.
---------------------------------------------------------------------------

    \1277\ See White Paper entitled ``Use of Derivatives by 
Investment Companies,'' which was prepared by staff in the Division 
of Economic and Risk Analysis and was placed in the comment file for 
the Use of Derivatives by Registered Investment Companies and 
Business Development Companies, Investment Company Release No. 31933 
(Dec. 11, 2015) [80 FR 80883 (Dec. 28, 2015)]. Daniel Deli, et al., 
Use of Derivatives by Registered Investment Companies, Division of 
Economic and Risk Analysis (2015) (``DERA White Paper''), available 
at http://www.sec.gov/dera/staff-papers/white-papers/derivatives12-2015.pdf.
    \1278\ In 2010, 591 of the 8,577 sample funds were defined as 
engaging in alternative investment strategies, and in 2014 1,125 of 
the 11,573 sample funds were defined as engaging in alternative 
investment strategies.
---------------------------------------------------------------------------

2. Benefits
    As discussed, Form N-PORT will improve the information that 
registered management investment companies and ETFs organized as UITs 
(other than money market funds and SBICs) disclose to the Commission. 
The increase in the reporting frequency, the update to the structure of 
the information that reporting funds will disclose, and the additional 
information that reporting funds do not currently disclose, discussed 
in further detail below, will improve the ability of the Commission to 
understand, analyze, and monitor the fund industry. We believe that the 
information we receive on these reports will facilitate the oversight 
of reporting funds and will assist the Commission, as the primary 
regulator of such funds, to better effectuate its mission to protect 
investors, maintain fair, orderly and efficient markets, and facilitate 
capital formation, through better informed policy decisions, more 
specific guidance and comments in the disclosure review process, and 
more targeted examination and enforcement efforts.
    To the extent that monthly portfolio investment information is not 
currently available, the requirement that funds make available monthly 
portfolio investment information to the Commission on Form N-PORT will 
improve the ability of the Commission to oversee reporting funds by 
increasing the timeliness of the information available, and by 
providing a larger number of data points. The expanded reporting also 
will increase the ability of Commission staff to identify trends in 
investment strategies and fund products as well as industry 
outliers.\1279\ As discussed above, the quarterly portfolio reports 
that the Commission currently receives on Forms N-Q and N-CSR can 
become stale due to changes in the holdings of portfolio securities or 
fluctuations in the values of the portfolio's investments. Requiring 
monthly filings on Form N-PORT will increase the timeliness of the 
information the Commission receives from funds. More timely portfolio 
investment information will improve the ability of Commission staff to 
oversee the fund industry by monitoring industry trends, informing 
policy and rulemaking, identifying risks, and assisting Commission 
staff in examination and enforcement efforts.
---------------------------------------------------------------------------

    \1279\ See, e.g., supra section II. Although likely not a 
significant effect, the increase in the frequency of portfolio 
investment disclosure to the Commission could also reduce the 
ability of investment companies to alter or ``window-dress'' 
portfolio investments in an attempt to disguise investment 
strategies and risk profiles. To the extent that managers may 
window-dress to affect public perception, managerial incentives for 
doing so would not change because the frequency of public disclosure 
of portfolio investment information would remain the same. See, 
e.g., Vikas Agarwal, Gerald D. Gay, and Leng Ling, Window Dressing 
in Mutual Funds, Rev. of Fin. Stud., Vol. 27(11), 3133-3170 (2014).
---------------------------------------------------------------------------

    The ability of Commission staff to effectively use the information 
reported

[[Page 81973]]

in Form N-PORT depends on the ability of staff to compile and aggregate 
information into a single database that can then be used to conduct 
industry-wide analyses. Otherwise, the information would only improve 
the ability of staff to analyze a single or a small number of funds at 
any one time. Several commenters agreed that the structuring of the 
information will improve the ability of the Commission to compile and 
aggregate information across all reporting funds, and to analyze 
individual funds or a group of funds, and will increase the overall 
efficiency of staff to analyze the information.\1280\ For example, the 
ability to compare portfolio investment information across reporting 
funds or for a single fund across report dates will improve the ability 
of the Commission to identify funds for examination and to identify 
trends in the fund industry. The Commission is requiring that filers 
disclose information using the Commission's XML schema. Based on the 
comments received and the Commission's experience, the Commission 
believes that requiring the information to be disclosed in an XML 
format will facilitate enhanced search capabilities, and statistical 
and comparative analyses across filings. With the data structured in 
XML, the Commission and the public can immediately download the 
information directly into databases and analyze it using various 
software packages. This enhances both the Commission's and the public's 
abilities to conduct large-scale analysis and immediate comparison 
across funds and date ranges.
---------------------------------------------------------------------------

    \1280\ See, e.g., ICI Comment Letter (``Receiving this 
information in XML format will facilitate the Commission's ability 
to efficiently analyze fund portfolio information on a regular 
basis.''); Morningstar Comment Letter; but see Federated Comment 
Letter.
---------------------------------------------------------------------------

    The usefulness of structured data depends on the care with which 
filers report the data. If filers were to report data that did not 
conform to the Commission's XML schema, data quality would be 
diminished and would impair the Commission's and the public's ability 
to aggregate, compare, and analyze the data. As a result, the 
Commission's XML schema also incorporates certain validations to help 
ensure consistent formatting among all filings, in other words, to help 
ensure data quality. Validations are restrictions placed on the 
formatting for each data element so that comparable data is presented 
comparably. However, these formatting validations are not designed to 
ensure the underlying accuracy of the data; they can only help ensure 
data quality. These validations cannot exist in the current reporting 
formats for Form N-CSR and Form N-Q.
    XML is an open standard \1281\ that is maintained by an 
organization other than the Commission and undergoes constant review. 
As updates to XML or industry practice develop, the Commission's XML 
schema will also be updated to reflect those developments, with the 
outdated version of the schema replaced in order to maintain data 
quality and consistency.
---------------------------------------------------------------------------

    \1281\ The term ``open standard'' is generally applied to 
technological specifications that are widely available to the 
public, royalty-free, at no cost.
---------------------------------------------------------------------------

    As we discussed above in section II.A.3, we considered, as several 
commenters suggested, alternative formats to XML, such as XBRL.\1282\ 
While the XBRL format allows funds to capture the rich complexity of 
financial information presented in accordance with GAAP, we believe 
that XML is more appropriate for the reporting requirements that we are 
adopting. Form N-PORT, as well as Form N-CEN, as adopted, will contain 
a set of relatively simple characteristics of the fund's portfolio- and 
position-level data, such as fund and class identifying information 
that is more suited for XML. While XBRL has more enhanced validation 
features, the simpler reporting elements on Form N-PORT and Form N-CEN 
do not require those enhanced features to ensure similar levels of 
formatting consistency.
---------------------------------------------------------------------------

    \1282\ See, e.g., XBRL US Comment Letter; Deloitte Comment 
Letter; but see Morningstar Comment Letter (``Extensible Business 
Reporting Language has had very limited success, and certain aspects 
of the standard are too lenient for regular data validation.'').
---------------------------------------------------------------------------

    In light of the benefits of structured data, we acknowledge that 
Form N-PORT duplicates some information filed in other forms, while 
also requiring funds to report information that is not currently 
required to be reported to the Commission, including portfolio- and 
position-level risk metrics and additional information describing debt 
securities and derivatives, securities lending activities, repurchase 
and reverse repurchase agreements, the pricing of securities, and fund 
flows and returns. Requesting data in a structured format may promote 
additional efficiency among investment companies to the extent that the 
new, standardized reporting requirements facilitate more automated 
report assembly, validation, and review processes for the disclosure 
and transmission of filings. Furthermore, filing this information in an 
XML format will allow the Commission staff to more efficiently review 
and analyze data for industry trends, and to better understand the 
risks of a particular fund (in the context of the fund's investment 
strategy), a group of funds, and the fund industry by being able to 
conduct large-scale analysis more easily, which will help in 
identifying outliers or trends that could warrant further investigation 
in a more immediate fashion.\1283\
---------------------------------------------------------------------------

    \1283\ See supra section II.A.2.c. See also, e.g., BlackRock 
Comment Letter (``Importantly, the greater depth and frequency of 
information requested by the Commission will help the Commission 
better identify and monitor emerging risks associated with specific 
RICs or categories of RICs as well as asset management 
activities.''); Wells Fargo Comment Letter (``we believe that the 
enhanced disclosure requirements of the Proposals represent 
appropriate valuable information for the Commission to have in order 
to assess trends in risks, for example, across the mutual fund 
industry.''); CFA Comment Letter (supporting transparency of 
derivatives holdings); Morningstar Comment Letter. See also ICI 
Comment Letter (``Much of the additional information the SEC 
proposes to collect can enhance its ability to monitor and oversee 
the fund industry.''). But see Federated Comment Letter (``A 
majority of the Commission's proposed amendments to Form N-1A, N-
PORT, and N-CEN would require a large effort from funds while 
offering data that is, at best, of little utility, and, at worst, 
misleading. Many of these deficiencies relate to flaws inherent in a 
security-level disclosure scheme.'').
---------------------------------------------------------------------------

    The requirement to report portfolio- and position-level risk 
metrics will provide Commission staff with a set of quantitative 
measurements that provide information about the risk exposures of a 
fund. The risk metrics will improve the ability of Commission staff to 
efficiently analyze information for all reporting funds based on 
exposure to certain risks, and to determine whether additional guidance 
or policy measures are appropriate to improve disclosures. We are 
requiring funds to report risk measures, rather than the raw inputs 
used to calculate risk measures, because the calculation of position-
level measures of risk for some derivatives, including derivatives with 
unique or complicated payoff structures, sometimes requires time-
intensive computational methods or additional information that Form N-
PORT will not require.\1284\ While the Commission would retain greater 
flexibility if funds were required to report substantially more 
detailed information regarding raw inputs on Form N-PORT,\1285\ it 
could be difficult for the Commission to efficiently calculate these 
same measures and funds would incur an

[[Page 81974]]

increase in reporting costs. We recognize that requiring funds to 
report these risk measures increases reporting burdens, but as 
discussed above, based on staff experience and outreach, we understand 
that most funds currently calculate risk measures for such securities 
and hence do not believe that the burden is significant.
---------------------------------------------------------------------------

    \1284\ One commenter stated that the Commission should not 
require that funds report risk sensitivity measures, and instead 
calculate the risk sensitivity measures using raw inputs (Vanguard 
Comment Letter). The commenter noted that the Commission would 
therefore be able to calculate the measures consistently and in 
doing so draw ``apples-to-apples'' comparisons.
    \1285\ See id.
---------------------------------------------------------------------------

    The requirement for investment companies to provide risk metrics at 
the position-level and at the portfolio-level will improve the ability 
of staff to efficiently identify the risk exposures of funds regardless 
of the types of investments held or that could be introduced to the 
marketplace. The portfolio-level measures of risk will also improve the 
ability of staff to efficiently identify interest rate and credit 
spread exposures at the fund level and conduct analyses without first 
aggregating position-level measures. Also, staff could use the risk 
measures in combination to conduct additional analyses. For example, 
Commission staff can use the two measures of interest rate duration 
(i.e., DV01 and DV100) to generate a proxy for interest rate convexity.
    We have, however, made certain modifications to the proposed 
reporting requirements regarding the reporting of risk metrics in 
response to comments received. For example, as discussed in detail 
above, we are requiring the reporting of fewer key rates to reduce the 
reporting burden for funds, adopting a 1% de minimis threshold for 
reporting risk metrics for each currency to which the fund is exposed, 
and raising the threshold for fixed income allocation for risk 
reporting from 20% to 25% to align the reporting requirement with 
current disclosures required in the prospectus. To the extent that 
adopting a de minimis amount for reporting risk metrics for each 
currency will prevent the Commission, investors, and other users from 
seeing an exhaustive view of fund's currency risk exposures, there 
could be a reduction in the informational benefit to the Commission, 
investors, and other users relative to the proposal. However, relative 
to the baseline, we believe the economic effects of the disclosure of 
currency risk metrics are substantially similar with or without the 
adoption of a de minimis. Similarly, there could be a reduction in the 
informational benefit to the Commission, investors, and other users 
relative to the proposal to the extent that certain funds that would 
have had to report risk metrics under the 20% threshold do not have to 
report them under the 25% threshold, although we again believe that 
such a change will not significantly impact the benefits of this 
disclosure relative to the baseline because it is unlikely that funds 
that make investments in debt instruments as a significant part of 
their investment strategy have less than 25% of their NAV invested in 
such instruments. We believe, however, that such modifications are 
appropriate in light of the lower reporting burden for funds. 
Conversely, the Commission is adding a requirement to report DV100 in 
addition to DV01 to provide information about larger changes in 
interest rates, as well as information about nonparallel shifts in the 
yield curve. While funds will have an increased reporting cost to 
report DV100 in addition to DV01 relative to the proposal, as DV100 is 
a standard measure of interest rate sensitivity and a common measure of 
duration we do not believe the cost to funds relative to the baseline 
will change. Furthermore, we believe that this modification will 
provide the Commission with the ability to analyze data about larger 
shifts in the yield curve, as well as changes in the shape of the yield 
curve. Similarly, while funds will have a decreased reporting cost in 
light of our modification to require the reporting of fewer key rates, 
we do not believe that the decrease in information collected by the 
Commission will substantially affect our ability to analyze how debt 
portfolios will react to different interest rate changes and credit 
spreads along the Treasury curve, given that the rates at which funds 
will report these metrics are, in general, largely representative of 
bond funds' overall exposures.
    Form N-PORT will require reporting funds to provide the contractual 
terms for debt securities and many of the more common derivatives 
including options, futures, forwards, and swaps; the reference 
instrument for convertible debt securities and derivatives; and 
information describing the size of the position. This information will 
provide Commission staff the ability to identify funds with interest 
rate risk exposure or exposure to other risks such as those pertaining 
to a company, industry, or region.
    As discussed, for securities lending activities and reverse 
repurchase agreements, Form N-PORT will require counterparty 
identification information, contractual terms, and information 
describing the collateral and reinvestment of the collateral. The 
additional information could improve the ability of Commission staff to 
assess fund compliance with the conditions that they must meet to 
engage in securities lending, as well as better analyze the extent to 
which funds are exposed to the creditworthiness of counterparties, the 
loss of principal of the reinvested collateral, and leverage creation 
through the reinvestment of collateral.
    Form N-PORT will also require additional identification information 
regarding the reporting fund, the issuers of the fund's portfolio 
investments, and the investments themselves, including the reference 
instruments for convertible debt securities and derivatives 
investments. The adopting release differs from the proposal with 
respect to the treatment of reference assets that are custom baskets or 
nonpublic indexes of securities in that for those that represent more 
than 1%, but less than 5%, of the fund's NAV, funds will be required to 
disclose the top 50 components of the basket and, in addition, those 
components that exceed 1% of the notional value of the index. For 
nonpublic indexes or custom baskets that represent greater than 5% of 
the fund's NAV, all components will be required to be disclosed. For 
nonpublic custom baskets or indexes that represent less than 1% of the 
fund's NAV, no disclosure is required. Although this modification will 
provide the Commission, investors, and other users with less than 
complete transparency into any such derivative investment that 
represents between 1% and 5% of a fund's NAV, given that this 
modification will still allow the Commission to collect information on 
a large portion of the significant reference assets for these 
investments, we do not believe this change will significantly impact 
the benefits derived relative to those discussed in the proposal. The 
additional identification information will benefit the Commission by 
improving the ability of staff to link the information from Form N-PORT 
to information from other sources that identify market participants and 
investments using these same identifiers, such as Form N-CEN. The 
additional identification information will improve upon the current 
requirement for funds to provide just the issuer name, and as such will 
aid the Commission in identifying both the issuers of fund portfolio 
investments and the investments themselves. As a result, Commission 
staff will be better able to identify and compare funds that have 
exposures to particular investments or issuers regardless of the 
whether the exposure is direct or indirect such as through a derivative 
security.
    Investors, third-party information providers, and other potential 
users will also experience benefits from the

[[Page 81975]]

introduction of Form N-PORT.\1286\ While the frequency of the public 
disclosure of portfolio information will not change, we believe that 
the structured data format of this information will allow investors and 
other potential users to more efficiently analyze portfolio investment 
information. Investors and other potential users will also have 
disclosure of additional information that is currently not included in 
the schedule of investments reported on Form N-Q and Form N-CSR. The 
structure of the information, as well as the additional information, 
will increase the transparency of a fund's investment strategies and 
improve the ability of investors and other potential users to more 
efficiently identify its risk exposures.
---------------------------------------------------------------------------

    \1286\ See also Morningstar Comment Letter (stating that modern 
electronic reporting should apply to all registered investment 
companies, as investors use open-end funds, ETFs, closed-end funds, 
and UITs as ``tools to build portfolios.'').
---------------------------------------------------------------------------

    Form N-PORT will benefit investors, to the extent that they use the 
information, to better differentiate investment companies based on 
their investment strategies and other activities. For example, 
investors will be able to more efficiently identify funds that use 
derivatives and the extent to which they use derivatives as part of 
their investment strategies.\1287\ In general, we expect that 
institutional investors and other market participants will directly use 
the information from Form N-PORT more so than individual investors. For 
individual investors who choose not to access the data in an XML 
format, those investors can access similar information through the 
additional disclosure requirements in an unstructured format for 
investment companies, including the requirement for investment 
companies to attach to Form N-PORT complete portfolio holdings in 
accordance with Regulation S-X for the first and third fiscal 
quarters.\1288\ Investors, and in particular individual investors, 
could also indirectly benefit from the information in Form N-PORT to 
the extent that third-party information providers and other interested 
parties obtain, aggregate, provide, and report on the information. 
Investors could also indirectly benefit from the information in Form N-
PORT to the extent that other entities, including investment advisers 
and broker-dealers, utilize the information to help investors make more 
informed investment decisions.
---------------------------------------------------------------------------

    \1287\ Form N-PORT will also eliminate the reporting gap between 
money market funds, which report portfolio investment information in 
an XML format on Form N-MFP, and funds engaging in similar 
investment strategies such as ultra-short bond funds, which will be 
required to file reports on Form N-PORT.
    \1288\ See discussion supra section II.A.2.j.
---------------------------------------------------------------------------

    We received a number of comments supporting quarterly public 
disclosure of Form N-PORT, but requesting that certain information 
items be kept nonpublic.\1289\ In response to these comments, and in 
contrast to the proposing release, three items reported on Form N-PORT 
will be kept nonpublic: Delta, country of risk, and the explanatory 
notes related to delta and country of risk. Given that the Commission 
will still collect this information, we do not believe there will be a 
significant economic impact relative to the Proposing Release due to 
keeping these data items nonpublic, as the Commission is the primary 
user of these data elements. A discussion of the issue of public versus 
nonpublic data can be found in section II.A.4.
---------------------------------------------------------------------------

    \1289\ See, e.g., ICI Comment Letter (portfolio risk metrics, 
delta, liquidity determinations, country of risk and derivatives 
financing rates should be kept non-public); BlackRock Comment Letter 
(risk metrics); Invesco Comment Letter (portfolio level risk 
metrics, derivatives information, illiquidity determinations, and 
securities lending information should remain non-public); 
Oppenheimer Comment Letter (risk metrics, illiquidity 
determinations, country of risk determinations, derivatives payment 
terms (including financing rates), and securities lending fees and 
revenue sharing splits should be kept non-public).
---------------------------------------------------------------------------

    One clarifying change that has been made from the proposing release 
in response to commenters is the addition of an instruction that funds 
may use their own methodologies in General Instruction G. General 
Instruction G now provides that funds may respond to Form N-PORT using 
their own internal methodologies and the conventions of their service 
providers, provided the information is consistent with information that 
they report internally and to current and prospective investors, and 
the Fund's methodologies and conventions are consistently applied and 
the Fund's responses are consistent with any instructions or other 
guidance relating to the Form. To the extent this instruction decreases 
the comparability of the data collected, there could be some reduction 
in benefit relative to the proposal, although funds will likely benefit 
from the decreased reporting burden associated with explicitly allowing 
them to rely on their existing practices.
    The portfolio investment information that investment companies 
report to the Commission is informative in describing the investment 
strategy funds implement,\1290\ and investors could use the information 
to select funds based on security selection, industry focus, level of 
diversification, and the use of leverage and derivatives.\1291\ We 
believe that an increase in the ability of investors to differentiate 
investment companies could allow investors to allocate capital across 
reporting funds more in line with their risk preferences and increase 
the competition among funds for investor capital. In addition, by 
improving the ability of investors to understand the risks of 
investments and hence their ability to allocate capital across funds 
and other investments more efficiently, we believe that the 
introduction of Form N-PORT could also promote capital formation.
---------------------------------------------------------------------------

    \1290\ Academic research indicates that the portfolio investment 
information funds provide to the Commission, such as on Form N-CSR 
and Form N-Q, has value even though the information is publicly 
available only after a time-lag. See infra footnotes 1307-1314. Just 
as investors can use the information to front-run, predatory trade, 
or copycat/reverse engineer of the trading strategy of a reporting 
fund, investors of funds can also use the information to identify 
funds for investment.
    \1291\ Empirical research shows that fund flows are sensitive to 
many factors including past fund performance and investor search 
costs. See, e.g., Erik R. Sirri & Peter Tufano, Costly Search and 
Mutual Fund Flows, 53 J. of Fin., 1589 (1998); Zoran Ivkovi[cacute] 
& Scott Weisbenner, Individual Investor Mutual Fund Flows, 92 J. of 
Fin. Econ., 223 (2009); George D. Cashman, Convenience in the Mutual 
Fund Industry, 18 J. of Corp. Fin., 1326 (2012).
---------------------------------------------------------------------------

    Rescission of Form N-Q, along with its certifications of the 
accuracy of the portfolio schedules reported for each fund's first and 
third fiscal quarters, may result in some cost savings by funds in 
terms of administrative or filing costs. However, we expect any such 
savings, if any, to be minimal, because each fund will still be 
required to file portfolio schedules prepared in accordance with 
Sec. Sec.  210.12-12 to 12-14 of Regulation S-X for the fund's first 
and third fiscal quarters, by attaching those schedules as attachments 
to its reports on Form N-PORT for those reporting periods.
3. Costs
    Form N-PORT will require registered management investment companies 
and ETFs organized as UITs, other than money market funds and SBICs, to 
incur one-time and ongoing costs to comply with the new filing 
requirements. Funds will incur additional ongoing costs to report 
portfolio investment information on a monthly basis on Form N-PORT 
instead of a quarterly basis as currently reported on Forms N-Q and N-
CSR. Funds that voluntarily provide information to third-party 
information providers and on fund Web sites, including monthly 
portfolio investments, and additional information in fund financial 
statements, including additional information regarding derivatives 
similar to the requirements that we are adopting today, will bear

[[Page 81976]]

fewer costs than those funds that do not.\1292\ The Commission is aware 
that even funds that do so report will nonetheless likely incur 
additional costs on reports on Form N-PORT than on voluntary 
submissions, such as validation and signoff processes, given that 
reports on Form N-PORT will be a required regulatory filing and will 
require different data than the funds are currently providing to third-
party information providers. However, over time, the filings could 
become highly automated and could involve fewer costs.\1293\
---------------------------------------------------------------------------

    \1292\ Monthly portfolio investment information is available for 
approximately 42% of funds covered by The CRSP Survivor-Bias-Free US 
Mutual Fund Database as of the fourth quarter of 2015. The database 
covers more than 10,000 open-ended mutual funds during this time 
period. This estimate suggests that a large proportion of funds 
already report monthly portfolio investment information, although it 
is unclear whether monthly information is reported following each 
month or if information relating to several months is periodically 
reported at a later date. Calculated based on data from The CRSP 
Survivor-Bias-Free US Mutual Fund Database (copyright) 2015 Center 
for Research in Security Prices (CRSP[supreg]), The University of 
Chicago Booth School of Business. One commenter also cited the 
proportion of funds that are currently reporting monthly portfolio 
investment information, 6,500 of 12,000 portfolios, as well as the 
proportion of funds that report portfolio investment monthly 
information within 45 days, 6,200 of 6,500. Morningstar Comment 
Letter.
    \1293\ Costs related to such processes are included in the 
estimate below of the paperwork costs related to Form N-PORT, 
discussed below.
---------------------------------------------------------------------------

    Funds will incur costs to file reports on Form N-PORT in a 
structured data format. Based on staff experience with other XML 
filings, however, these costs are expected to be minimal given the 
technology that will be used to structure the data.\1294\ XML is a 
widely used data format, and based on the Commission's understanding of 
current practices, most reporting persons and third party service 
providers have systems already in place to report schedules of 
investments and other information. Systems should be able to 
accommodate XML data without significant costs, and large-scale changes 
will likely not be necessary to output structured data files. In an 
effort to reduce some of the potential burdens on smaller entities, we 
are extending the compliance period to begin filing reports on Form N-
PORT to thirty months after the effective date for groups of funds with 
assets under $1 billion.\1295\ The additional time could increase the 
ability of these investment companies to comply with the filing 
requirements by providing more time for system and operation changes 
and from observing larger fund groups.
---------------------------------------------------------------------------

    \1294\ See, e.g., Form PF Adopting Release, supra footnote 80, 
at text following n. 357 (discussing the costs to advisers to 
private funds of filing Form PF in XML format); Money Market Fund 
Reform 2010 Release, supra footnote 447, at nn. 341-344 and 
accompanying text (discussing the costs to money market funds of 
filing reports on Form N-MFP in XML format).
    \1295\ See supra section II.H.1.
---------------------------------------------------------------------------

    Form N-PORT will also require the disclosure of certain information 
that is not currently required by the Commission. To the extent that 
the new form will require information to be reported that is not 
currently contained in fund accounting or financial reporting systems, 
funds will bear one-time costs to update systems to adhere to the new 
filing requirements. The one-time costs will depend on the extent to 
which investment companies currently report the information required to 
be disclosed. The one-time costs will also depend on whether and to 
what extent an investment company would need to implement new systems 
and to integrate information maintained in separate internal systems or 
by third parties to comply with the new requirements. For example, 
based on staff outreach to funds, we believe that funds will incur 
systems or licensing costs to obtain a software solution or to retain a 
service provider in order to report data on risk metrics, as risk 
metrics are not currently required to be reported on the fund financial 
statements. Our experience with and outreach to funds indicates that 
the types of systems funds use for warehousing and aggregating data, 
including data on risk metrics, varies widely.
    In some instances, such as in the case of increased disclosures 
regarding derivatives investments and information concerning the 
pricing of investments, the Commission is requiring parallel 
disclosures in the fund's schedule of investments prepared pursuant to 
Regulation S-X; accordingly, we expect funds will generally incur one 
set of costs to adhere to the reporting of new information on Form N-
PORT and in its schedule of investments. For other information, such as 
the reporting of particular asset classifications, identification of 
investments and reference instruments, and risk measures, the 
information will be disclosed on Form N-PORT only.
    The Commission is sensitive to the costs that funds will incur to 
prepare, review, and file reports on Form N-PORT. Relative to the 
proposal, the Commission is making modifications to these final rules 
that should reduce the burden on investment companies to file reports 
on Form N-PORT. In particular, and in response to commenters,\1296\ we 
have raised the threshold for requiring reporting of portfolio level 
risk metrics and are providing a de minimis for requiring reporting of 
risk metrics for currency exposures. We are also modifying the 
requirements with respect to reference assets that are custom baskets 
or nonpublic indexes of securities so that for such investments that 
constitute more than 1%, but less than 5% of the fund's NAV, funds will 
be required to report only the top 50 components of the basket and, in 
addition, those components that represent more than 1% of the notional 
value of the index. We believe this will result in a decreased burden 
for filers relative to the proposal. In addition, and as requested by 
commenters, funds will report portfolio information on Form N-PORT on 
the same basis they use in NAV calculations under rule 2a-4 (generally 
a T+1 basis), which will alleviate the need of the majority of funds to 
alter reporting systems to report on a T+0 basis.\1297\ Although we did 
not specify the appropriate basis for reporting in the proposing 
release, commenters suggested that reporting on the same basis used in 
NAV calculations (generally a T+1 basis) was preferable to T+0, and we 
are sensitive to their concerns. Finally, we are adopting a new General 
Instruction G that clarifies that in reporting information on Form N-
PORT, the fund may respond using its own internal methodologies and the 
conventions of its service providers, provided the information is 
consistent with information that they report internally and to current 
and prospective investors, and the fund's methodologies and conventions 
are consistent with any instructions or other guidance relating to the 
Form. We believe that this alteration eases the reporting burden on 
funds by allowing them to rely on their existing practices and could 
result in a cost savings for filers relative to the proposal as it 
makes clear that they do not have to alter systems or methodology for 
reporting information items on Form N-PORT.
---------------------------------------------------------------------------

    \1296\ See, e.g., Oppenheimer Comment Letter; MFS Comment 
Letter; Wells Fargo Comment Letter.
    \1297\ Fidelity Comment Letter (requesting that funds be 
permitted to report on a T+1 basis); MFS Comment Letter (same); 
Pioneer Comment (same); Invesco Comment Letter (same).
---------------------------------------------------------------------------

    To the extent possible, we have attempted to quantify these costs. 
Based on updated industry statistics, we estimate that 11,382 funds 
will file Form N-PORT.\1298\ As discussed below, we estimate that these 
funds will incur certain costs associated with preparing, reviewing, 
and filing reports on Form N-PORT.\1299\ Assuming that 35% of

[[Page 81977]]

funds (3,984 funds) will choose to license a software solution to file 
reports on Form N-PORT, we estimate costs to funds choosing this option 
of $56,682 per fund for the first year \1300\ with annual ongoing costs 
of $47,465 per fund.\1301\ We further assume that 65% of funds (7,398 
funds) will choose to retain a third-party service provider to provide 
data aggregation and validation services as part of the preparation and 
filing of reports on Form N-PORT, and we estimate costs to funds 
choosing this option of $55,492 per fund for the first year \1302\ with 
annual ongoing costs of $39,214 per fund.\1303\ In total, we estimate 
that funds will incur initial costs of $636,350,904 and ongoing annual 
costs of $479,205,732.\1304\
---------------------------------------------------------------------------

    \1298\ See infra footnote 1495 (explaining calculation of 11,382 
funds).
    \1299\ See infra section V.A.1. Commenters questioned the 
estimates in the proposal relating to the paperwork costs associated 
with preparing, reviewing, and filing reports on Form N-PORT. See 
Invesco Comment Letter; Simpson Thacher Comment Letter. These 
comments are discussed infra section IV.A.1.
    \1300\ See infra footnotes 1473-1476, 1486, 1494 and 
accompanying text. This estimate is based upon the following 
calculations: $56,682 = $4,805 in external costs + $51,876.50 in 
internal costs ($51,876.50 = (15 hours x $308/hour for a senior 
programmer) + (38.5 hours x $317/hour for a senior database 
administrator) + (30 hours x $271/hour for a financial reporting 
manager) + (30 hours x $201/hour for a senior accountant) + (30 
hours x $160/hour for an intermediate accountant) + (30 hours x 
$306/hour for a senior portfolio manager) + (24 hours x $288/hour 
for a compliance manager)). The hourly wage figures in this and 
subsequent footnotes are from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified by Commission 
staff to account for an 1800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
    \1301\ See infra footnotes 1477, 1486 and accompanying text. 
This estimate is based upon the following calculations: $47,465 = 
$4,805 in external costs + $42,660 in internal costs ($42,660 = (30 
hours x $271/hour for a financial reporting manager) + (30 hours x 
$201/hour for a senior accountant) + (30 hours x $160/hour for an 
intermediate accountant) + (30 hours x $306/hour for a senior 
portfolio manager) + (24 hours x $288/hour for a compliance manager) 
+ (24 hours x $317/hour for a senior database administrator)).
    \1302\ See infra footnotes 1480-1482, 1487, 1494 and 
accompanying text. This estimate is based upon the following 
calculations: $55,492 = $11,440 in external costs + $44,051.50 in 
internal costs ($44,051.50 = (30 hours x $308/hour for a senior 
programmer) + (46 hours x $317/hour for a senior database 
administrator) + (16.5 hours x $271/hour for a financial reporting 
manager) + (16.5 hours x $201/hour for a senior accountant) + (16.5 
hours x $160/hour for an intermediate accountant) + (16.5 hours x 
$306/hour for a senior portfolio manager) + (16.5 hours x $288/hour 
for a compliance manager)).
    \1303\ See infra footnotes 1483, 1487 and accompanying text. 
This estimate is based upon the following calculations: $39,214 = 
$11,440 in external costs + $27,774 in internal costs ($27,774 = (18 
hours x $271/hour for a financial reporting manager) + (18 hours x 
$201/hour for a senior accountant) + (18 hours x $160/hour for an 
intermediate accountant) + (18 hours x $306/hour for a senior 
portfolio manager) + (18 hours x $288/hour for a compliance manager) 
+ (18 hours x $317/hour for a senior database administrator)).
    \1304\ These estimates are based upon the following 
calculations: $636,350,904 = (3,984 funds x $56,682 per fund) + 
(7,398 funds x $55,492 per fund). $479,205,732 = (3,984 funds x 
$47,465 per fund) + (7,398 funds x $39,214 per fund).
---------------------------------------------------------------------------

    Although there will be no change to the frequency or time-lag for 
which investment company security position information is publicly 
disclosed, the increase in the amount of publicly available information 
and the greater ability to analyze the information as a result of its 
structure may facilitate activities such as ``front-running,'' 
``predatory trading,'' and ``copycatting/reverse engineering of trading 
strategies'' by other investors.\1305\ Investors that trade ahead of 
funds could reduce the profitability of funds by increasing the prices 
at which funds purchase securities and by decreasing the prices at 
which funds sell securities. These activities can reduce the returns to 
shareholders who invest in actively managed funds, making actively 
managed funds less attractive investment options.\1306\ Portfolio 
investment information, along with flow information, can also create 
opportunities for other market participants to front-run the sales of 
funds that experience large outflows and the purchases of funds that 
experience large inflows,\1307\ or create opportunities for other 
market participants to engage in predatory trading that could further 
hinder fund ability to unwind positions.\1308\ For example, Form N-PORT 
will result in the disclosure of additional information, such as 
pertaining to derivatives and securities lending activities, which 
could more clearly reveal the investment strategy of reporting funds 
and their risk exposures.\1309\ We note, however, that much, though not 
all, of the information that Form N-PORT requires is already reported 
by funds on Form N-CSR and Form N-Q.\1310\ The structured data format 
of portfolio investments disclosure could improve the ability of other 
investors to obtain and aggregate the data, and identify specific funds 
to front-run or trade in a predatory manner. These activities could 
reduce the profitability from developing new investment strategies, and 
therefore could reduce innovation and adversely impact competition in 
the fund industry.
---------------------------------------------------------------------------

    \1305\ One commenter questioned the potential impact of monthly 
public disclosure of Form N-PORT on the ability of other investors 
to engage in predatory trading or copycatting activities citing to 
the large proportion of funds that currently report monthly 
portfolio investment information (Morningstar Comment Letter). 
Although a large percentage of funds report monthly portfolio 
investment information, a large percentage of funds currently do 
not. See supra footnote 1292. The incentives of funds to report 
portfolio investment information on a more frequent basis is 
dependent on many factors including their perception of the impact 
of more frequent public disclosure on future returns. Other 
commenters expressed concern that the increase in the amount of 
publicly available information and the greater ability to analyze 
the information as a result of its structure would increase front-
running, predatory trading, and copycatting/reverse engineering of 
trading strategies by other investors and suggested that reports 
filed on Form N-PORT be made non-public (Schwab Comment Letter; T. 
Rowe Price Comment Letter). Another commenter recommended the 
quarterly reporting of monthly information to reduce these concerns 
(Dodge & Cox Comment Letter).
    \1306\ See, e.g., Potential Effects of More Frequent Disclosure, 
supra footnote 490.
    \1307\ See, e.g., Joshua Coval & Erik Stafford, Asset Fire Sales 
(and Purchases) in Equity Markets, 86 J. of Fin. Econ., 479 (2007).
    \1308\ See, e.g., Markus K. Brunnermeier & Lasse Heje Pedersen, 
Predatory Trading, 60 J. of Fin. 1825 (2005).
    \1309\ See, e.g., Simpson Thacher Comment Letter (``We further 
note that public disclosure of detailed information about each 
derivatives position will provide competitors of funds significantly 
enhances ability to reverse-engineer strategies.''); Pioneer Comment 
Letter.
    \1310\ See supra footnote 27 and accompanying text.
---------------------------------------------------------------------------

    A trading strategy that follows the publicly reported holdings of 
actively managed funds can also earn similar if not higher after 
expense returns.\1311\ An implication of this observation is that the 
public disclosure of portfolio investment information could induce 
free-riding by investors that use the information and reduce the 
potential benefit from developing new investment strategies and 
engaging in proprietary market research. The effect of free-riding 
would reduce the ability of investment companies with longer investment 
horizons to benefit from researching investment opportunities and 
developing new strategies more so than investment companies with 
shorter investment horizons because of the increased likelihood that 
the disclosed portfolio investment information would reveal their long-
term investment strategies.\1312\
---------------------------------------------------------------------------

    \1311\ See, e.g., Mary Margaret Frank, et al., Copycat Funds: 
Information Disclosure Regulation and the Returns to Active 
Management in the Mutual Fund Industry, 47 J. Law and Econ. 515 
(2004).
    \1312\ See, e.g., Vikas Agarwal, et al., Mandatory Portfolio 
Disclosure, Stock Liquidity, and Mutual Fund Performance, 70 J. of 
Fin. Econ. 2733 (Dec. 2015) (``Agarwal et al.''), available at 
http://onlinelibrary.wiley.com/doi/10.1111/jofi.12245/pdf; Marno 
Verbeek & Yu Wang, Better than the Original? The Relative Success of 
Copycat Funds, 37 J. of Bank. & Fin., 3454 (2013) (``Verbeek & 
Wang'').
---------------------------------------------------------------------------

    A comparison can be made between the economic effects from the 
introduction of Form N-PORT and the economic effects from the 
introduction of Form N-Q in May 2004 which increased the reporting 
frequency of portfolio investment information to the Commission from 
semiannual to quarterly. The introduction of Form N-Q resulted in an 
increase in the amount

[[Page 81978]]

of information that could have been acted upon by other investors. For 
example, studies suggest that the ability of copycat funds to 
outperform actively managed funds increased after the introduction of 
Form N-Q,\1313\ and additional studies suggest that the performance of 
those funds with better previous performance or that invest in low-
information stocks decreased following the introduction of Form N-
Q.\1314\ The increase in the frequency of portfolio investment 
information as a result of Form N-Q resulted in an increase in the 
amount of portfolio investment information available. Although Form N-
PORT will not increase the frequency of public disclosure, Form N-PORT 
will increase the amount of portfolio investment information available. 
In addition, Form N-PORT, unlike Form N-Q, will also increase the 
accessibility of the information as a result of its structured data 
format. By maintaining the status quo with respect to the frequency and 
timing of the disclosure of publicly available portfolio information, 
we aim to mitigate added costs while allowing the Commission, the fund 
industry, and the marketplace to assess the impact of the structured, 
more detailed data reported on Form N-PORT, and the extent to which 
these changes might affect the likelihood of predatory trading. The 
additional information and the structure of the information that is 
required under Form N-PORT, however, could improve the ability of 
investors to obtain, aggregate, and analyze all fund investments. Thus, 
Form N-PORT could negatively affect actively managed funds by 
increasing the ability of other investors to front-run, predatory 
trade, and copycat/reverse engineer trading strategies, and in 
particular those funds that would have more additional information 
disclosed, such as funds that use derivatives as part of their 
investment strategies.\1315\ We believe, however, that even though the 
reported information will be more easily and efficiently accessed and 
aggregated given the nature of structured data, the contribution of 
structured data to front-running, predatory trading, and reverse-
engineering will be minimal compared to the baseline given that funds 
currently have a quarterly public reporting frequency with a 60-day 
reporting delay. The Commission has considered the needs of the 
Commission, investors, and other users of portfolio investment 
information and the potential that other investors may use the 
information to the detriment of the reporting funds.
---------------------------------------------------------------------------

    \1313\ See Verbeek & Wang, supra footnote 1312.
    \1314\ See Agarwal et al., supra footnote 1312. Low information 
stocks include stocks with smaller market capitalization, less 
liquidity, and less analyst coverage. The authors also observed that 
the liquidity of stocks with higher fund ownership increased 
following the introduction of Form N-Q. Although the increase in 
liquidity will benefit investors by reducing trading costs, this 
benefit stems as a result of the costly disclosure of potential 
investment opportunities.
    \1315\ See supra footnote 1314 and accompanying text.
---------------------------------------------------------------------------

    Form N-PORT will require the disclosure of information that is 
currently nonpublic and could result in additional or other costs to 
funds and to market participants. For example, we proposed that Form N-
PORT would require a fund to report the identities and weights of all 
of the individual components in custom baskets or indexes comprising 
the reference instruments underlying the fund's derivative investments, 
as well as each component that represents more than one percent of the 
reference asset based on the notional value of the derivatives, unless 
the reference instrument is an index or custom basket whose components 
are publicly available on a Web site and are updated on that Web site 
no less frequently than quarterly, or the notional amount of the 
derivative represents 1% or less of the net asset value of the 
fund.\1316\ Commenters informed us that index providers assert 
intellectual property rights to many indexes or custom baskets used as 
reference instruments in derivative investments to index providers, and 
are subject to licensing agreements between the index provider and the 
fund.\1317\ As further noted by commenters, we acknowledge that 
disclosing the components of a nonpublic index or custom basket could 
result in costs to both the index provider, whose indexing strategy 
could be imitated, and the fund, whose investments could be front-
run.\1318\ Moreover, as stated by commenters, disclosing the underlying 
components of such an index or custom basket could subject the fund to 
one-time costs associated with renegotiating licensing agreements and 
the ongoing payment of fees in order to obtain the rights to disclose 
the components of the index or custom basket.\1319\ Additionally, the 
increased transparency in nonpublic indexes and custom baskets could 
ultimately decrease the incentives of index providers to license the 
use of such indexes or custom baskets to funds as well as fund demand 
for securities products that incorporate these indexes. We are unable 
to quantify the extent to which these reporting requirements could 
affect the costs associated with licensing agreements, fees, and 
incentives.
---------------------------------------------------------------------------

    \1316\ See supra footnote 355 and accompanying text.
    \1317\ See MSCI Comment Letter; SIFMA Comment Letter I; ICI 
Comment Letter.
    \1318\ See, e.g., SIFMA Comment Letter I; see also Antti 
Petajisto, The Index Premium and its Hidden Cost for Index Funds, 18 
J. of Empirical Fin. 271 (2011). Petajisto analysis suggests that 
mechanically induced demand changes to demand, such as index fund 
rebalancing, can result in price effects. If predictable, then other 
investors could take advantage of the changes to the proprietary 
indexes by front-running future trades.
    \1319\ See ICI Comment Letter. The Commission does not have 
information available to provide a reliable estimate of the 
increased costs of such licensing agreements because funds are 
currently not required to disclose the agreements or the components 
of the index or custom basket.
---------------------------------------------------------------------------

    Although our determination to keep certain items nonpublic was 
based on factors other than competitive concerns,\1320\ by keeping 
delta and country of risk nonpublic relative to the proposal, as 
recommended by commenters, potential costs of disclosing previously 
nonpublic information may have been mitigated as well. We recognize 
that Form N-PORT, as well as the amendments to regulation S-X, will 
require funds to report certain information regarding fees and 
financing terms for certain derivatives contracts, particularly OTC 
swaps, which are not currently required to be publicly disclosed.\1321\ 
As asserted by commenters, the increased transparency could increase 
the competition among swap and security-based swap dealers to offer 
favorable fees and financing terms, as the fees and financing terms 
offered to one fund would be known to other funds negotiating the terms 
of such contracts.\1322\ There is a possibility, however, that 
counterparties may choose not to transact with funds as a consequence 
of this disclosure, in which funds would have fewer potential 
counterparties to work with and the fees paid by funds would likely 
rise.
---------------------------------------------------------------------------

    \1320\ See generally supra section II.A.
    \1321\ See, e.g., MFS Comment Letter; Invesco Comment Letter; 
ICI Comment Letter.
    \1322\ See, e.g., MFS Comment Letter; Invesco Comment Letter.
---------------------------------------------------------------------------

    Form N-PORT also requires funds to disclose the variable financing 
rates for swaps that pay or receive financing payments.\1323\ Some 
commenters noted that variable financing rates for swap contracts are 
commercial terms of a deal that are negotiated between the fund and the 
counterparty to the swap.\1324\ Disclosure of favorable variable

[[Page 81979]]

financing rates could result in costs to the fund in the form of less 
favorable variable financing rates for future transactions, but may 
also improve the ability of other funds to negotiate more favorable 
terms. However, the increased transparency could increase the 
competition among swap and security-based swap dealers to offer 
favorable fees and financing terms thereby decreasing the fees paid by 
funds. Counterparties could also choose not to transact with funds as a 
consequence of this disclosure, in which case competition for 
counterparties would increase and the fees paid by funds would rise.
---------------------------------------------------------------------------

    \1323\ See Item C.11.f.i. of Form N-PORT.
    \1324\ See, e.g., MFS Comment Letter; Invesco Comment Letter; 
and ICI Comment Letter (public benefit of disclosure does not 
outweigh potential competitive harm).
---------------------------------------------------------------------------

    Finally, some commenters noted that reporting of distressed debt 
issued by private companies could affect the private company's 
relationship with the fund. For example, one commenter argued that the 
public disclosure of default, arrears, or deferred coupon payments 
raises competitive concerns when a debt security is issued by a 
borrower that is a private company, as private borrowers may avoid 
registered funds in order to limit public disclosure if the company 
becomes distressed.\1325\ The commenter noted that public disclosure 
that a borrower is or may be financially distressed could increase 
prepayment risk and be disruptive to the fund's or adviser's 
relationship with the borrower.\1326\ Moreover, this disclosure could 
also harm private issuers by disclosing their financial distress to 
vendors and key employees and customers.\1327\ While we recognize that 
the disclosure of a private issuer in distress could result in costs 
for the issuer in the forms discussed above (e.g. a potentially 
negative impact on existing outside relationships or a decrease in 
prospective future borrowers), we believe that it is important that 
Commission staff have access to information relating to fund 
investments that are in default or arrears in order to monitor 
individual fund and industry risk. Moreover, funds investors will 
benefit from the transparency into the financial health of the fund's 
investments which will allow them to make more fully informed decisions 
regarding their investment. Moreover, default or arrears relating to a 
fund's investments in private issuer debt are already publicly 
available on a fund's quarterly financial statements, further 
mitigating any potential new costs to the fund or its private 
counterparties.\1328\
---------------------------------------------------------------------------

    \1325\ See Simpson Thacher Comment Letter.
    \1326\ See id.
    \1327\ See id.
    \1328\ See rule 12-12, n. 5 of Regulation S-X.
---------------------------------------------------------------------------

    As discussed, we expect that institutional investors and other 
market participants will directly use the information from Form N-PORT 
more so than individual investors as a result of the format and 
associated readability.\1329\ To the extent that third-party 
information providers obtain and present the information in a format 
that individual investors could understand, then individual investors 
will also benefit from the information that funds report on Form N-
PORT. We recognize that some commenters were concerned that individual 
investors may misinterpret the portfolio investment information that 
funds report on Form N-PORT, possibly including portfolio and position 
level risk metrics, country of risk and portfolio return information. 
As discussed above, we have determined to keep position-level reporting 
of delta and of country of risk nonpublic.\1330\ Regarding the other 
information, however, while there is some possibility of 
misinterpretation, we believe investors could benefit from the 
information and, accordingly determined that the disclosure of such 
information is appropriate and in the public's interest.
---------------------------------------------------------------------------

    \1329\ As discussed in section I.B.1., while we do not 
anticipate that many individual investors will analyze data using 
Form N-PORT, we believe that individual investors will benefit 
indirectly from the information collected on reports on Form N PORT, 
through enhanced Commission monitoring and oversight of the fund 
industry and through analyses prepared by third-party service 
providers and other parties, such as industry observers and 
academics.
    \1330\ See, e.g., IDC Comment Letter (warning of possible 
investor confusion from public disclosure of risk metrics); SIFMA 
Comment Letter I (same); Invesco Comment Letter (same); Schwab 
Comment Letter (same); ICI Comment Letter (same); CRMC Comment 
Letter (warning of possible investor confusion from public 
disclosure of portfolio return information); SIFMA Comment Letter I 
(same).
---------------------------------------------------------------------------

    For funds that invest in debt instruments or derivatives we are 
modifying our requirements from the proposing release in several ways 
that may affect the costs borne by affected filers. For example, as 
discussed in detail above, we are requiring the reporting of fewer key 
rates in order to reduce the reporting burden for funds, adding de 
minimis for reporting such metrics for certain currencies, and raising 
the threshold for fixed income allocation for risk reporting from 20% 
to 25% to align the reporting requirement with current disclosures 
required in the prospectus, which could reduce the number of funds that 
must report such metrics. We are also requiring filers to report DV100 
in addition to DV01, which will result in an additional reporting cost 
relative to the proposal; however, we believe that the extent of such 
reporting costs will be mitigated because DV100 is among the most 
common measures of interest rate sensitivity and that it will not be 
costly to report. Similarly, we are adding the requirement to report 
net realized gain (or losses) and net change in unrealized appreciation 
(or depreciation) attributable to derivatives by derivative instrument, 
in addition to by asset category as proposed, which will add an 
incremental cost relative to the proposal; however, as discussed above, 
we understand from commenters that funds already keep this information 
by derivative instrument type, which should mitigate the incremental 
increase in cost relative to the proposal.\1331\
---------------------------------------------------------------------------

    \1331\ See supra section II.A.2.e.
---------------------------------------------------------------------------

    As discussed above, although Form N-Q would be rescinded, it would 
also require funds to file portfolio schedules prepared in accordance 
with Sec. Sec.  210.12-12 to 12-14 of Regulation S-X for the fund's 
first and third fiscal quarters, by attaching those schedules to its 
reports on Form N-PORT for those reporting periods. The schedules 
attached to Form N-PORT would be largely identical to the information 
currently reported on Form N-Q to ensure that such information 
continues to be presented using the form and content which investors 
are accustomed to viewing in reports on Form N-Q, and we have modified 
this requirement from the Proposing Release to allow funds 60 days from 
the end of the reporting period to file this attachment, as opposed to 
30 days as proposed. This should lower the burden of preparing such 
attachments relative to the proposal, without any change in benefit, as 
the attachment is intended for investors and quarter-end Form N-PORT 
filings are made public 60 days after the end of the reporting period.
    Rescission of Form N-Q would eliminate certifications of the 
accuracy of the portfolio schedules reported for the first and third 
fiscal quarters. Rescission would also result in funds certifying their 
disclosure controls and procedures and internal control over financial 
reporting semi-annually (at the end of the second and fourth quarters) 
rather than quarterly. To the extent that such certifications improve 
the accuracy of the data reported, removing such certifications could 
have negative effects on the quality of the data reported. Likewise, if 
the reduced frequency of the certifications affects the process by 
which controls and procedures are assessed, requiring such 
certifications semi-annually rather than quarterly could reduce the 
effectiveness of the fund's disclosure controls and

[[Page 81980]]

procedures and internal control over financial reporting. However, we 
expect such effects, if any, to be minimal because certifying officers 
would continue to certify portfolio holdings for the fund's second and 
fourth fiscal quarters and would further provide semi-annual 
certifications concerning disclosure controls and procedures and 
internal control over financial reporting that would cover the entire 
year.
    Lastly, registrants also will be required to file the management's 
statement regarding a change in independent public accountant as an 
exhibit to reports on Form N-CSR. This exhibit filing requirement 
originated in Form N-SAR. Commission staff believes that moving this 
reporting requirement from Form N-SAR to Form N-CSR does not have new 
economic implications from the proposal. We have, however, attributed 
an annual burden of an additional one-tenth of an hour per registrant 
\1332\ and approximately an additional $32.40 per registrant \1333\ in 
reporting paperwork costs to Form N-CSR as a result of the 
modification.
---------------------------------------------------------------------------

    \1332\ See infra footnote1612 and accompanying text.
    \1333\ See infra footnote 1609 and accompanying text.
---------------------------------------------------------------------------

4. Alternatives
    The Commission has explored other ways to modernize and improve the 
utility and the quality of the portfolio investment information that 
funds provide to the Commission and to investors.\1334\ Commission 
staff examined how portfolio investment information reported to the 
Commission could be improved to assist the Commission in its 
rulemaking, inspection, examination, policymaking, and risk-monitoring 
functions, and how technology could be used to facilitate those ends. 
Commission staff also examined enhancements that would benefit 
investors and other potential users of this information, including 
updating the reporting obligations of funds to keep pace with the 
changes in the fund industry. We have considered many alternatives to 
the individual elements contained in this release, and those 
alternatives are discussed above in the sections pertinent to the major 
components of this rulemaking.\1335\ Alternatives to the filing of Form 
N-PORT and the disclosure of portfolio investment information relate to 
the timing and frequency of the reports, the public disclosure of the 
information, and the information that Form N-PORT would request.
---------------------------------------------------------------------------

    \1334\ We discuss other alternatives to the adopted changes to 
the current regulatory regime in section III.F, below. Other 
alternatives include the information that funds will report on Form 
N-PORT relative to the information that funds will report on Form N-
CEN, and alternative formats for structuring the data.
    \1335\ See generally supra section II.
---------------------------------------------------------------------------

    Funds will file reports on Form N-PORT no later than 30 days after 
the close of each month. The monthly reporting and the 30-day reporting 
lag will increase the timeliness of the information and improve the 
ability of the Commission to oversee investment companies. Alternatives 
include extending the filing period from thirty days, as recommended by 
many commenters, or shortening the filing period, which no commenters 
specifically recommended,\1336\ and to require the filing of monthly 
portfolio investment information at a quarterly frequency, as 
recommended by another commenter.\1337\ While a shorter filing period 
would provide more timely information to the Commission, it would also 
increase the burden on funds that need time to collect, verify, and 
report the required information to the Commission. Conversely, a longer 
filing period or a decrease in the frequency in which funds provide 
monthly information would give funds more time to report the 
information and may decrease the potential costs from front-running, 
predatory trading, and copycatting/reverse engineering of trading 
strategies by other investors,\1338\ but may also decrease the ability 
of the Commission to oversee investment companies and to identify risks 
a fund is facing, particularly during times of market stress, as the 
information is more likely to be stale or outdated. As discussed above 
in section II.A.3, we believe that the monthly reporting of Form N-PORT 
with a 30-day filing period appropriately balances the staff's need for 
timely information against the appropriate amount of time for funds to 
collect, verify, and report information to the Commission.
---------------------------------------------------------------------------

    \1336\ See, e.g., State Street Comment Letter (supporting a 30-
day reporting lag, but requesting an additional 15 days for the 
first year of reporting); Morningstar Comment Letter (supporting a 
30- or 45-day reporting lag); Vanguard Comment Letter (supporting a 
45-day reporting lag); CRMC Comment Letter (supporting a 60-day 
reporting lag); Dechert Comment Letter (generally supporting a 
longer reporting period, or alternatively a longer compliance period 
to enable the systems necessary to produce accurate information to 
be developed and implemented).
    \1337\ See, e,g., Dodge & Cox Comment Letter (supporting 
quarterly filings of monthly data).
    \1338\ See, e.g., Dodge & Cox Comment Letter (advocating for 
quarterly filings of monthly data due, in part, to concerns 
regarding potential data breaches regarding monthly portfolio data); 
Morningstar Comment Letter (supporting public disclosure of 
portfolio investment information at the monthly frequency, citing to 
the large number of funds already reporting monthly portfolio 
investment information without significant delay as evidence of a 
lack of industry concern relating to front-running or copycatting).
---------------------------------------------------------------------------

    As discussed above in section II.A.2.a and in response to comments 
received, the final amendments now include an instruction that funds 
report portfolio information on Form N-PORT on the same basis used in 
calculating NAV under rule 2a-4 (generally a T+1 basis). Alternatives 
include requiring all funds to file reports on Form N-PORT on a T+0 
basis or, providing the reporting fund the explicit option to file 
reports on Form N-PORT on either a T+0 basis or a T+1 basis, as 
recommended by a commenter.\1339\ Although requiring funds to file 
reports on Form N-PORT on a T+0 basis would be consistent with the 
current filing requirements for Form N-CSR and Form N-Q and thus would 
result in information that is reported on a more consistent basis 
across reports, the shorter time to file Form N-PORT relative to Form 
N-CSR and Form N-Q could require funds to alter reporting systems and 
result in additional filing costs, as pointed out by several 
commenters.\1340\ In addition, although providing funds the option to 
report on either a T+0 or a T+1 basis would eliminate the potential 
costs for all funds to alter systems to report on either a T+0 or a T+1 
basis, providing funds the option to report on either a T+0 or a T+1 
basis would result in information that is less comparable between 
funds.
---------------------------------------------------------------------------

    \1339\ SIFMA Comment Letter II.
    \1340\ See, e.g., Fidelity Comment Letter; Pioneer Comment 
Letter; and Invesco Comment Letter.
---------------------------------------------------------------------------

    Funds will have 18 to 30 months after the effective date to comply 
with the new reporting requirements for Form N-PORT. The compliance 
period varies with fund size, with smaller fund entities having an 
additional 12 months to comply with the new reporting requirements. An 
alternative would be to not allow for tiered compliance and require all 
investment companies to begin filing reports on Form N-PORT within 18 
months. Other alternatives would be to extend the compliance period for 
all investment companies, as recommended by many commenters.\1341\ As 
discussed above, we believe it is appropriate to tier the compliance 
period to provide the smaller fund complexes more time to make the 
system and internal process changes necessary to prepare reports on 
Form N-PORT. We also continue to believe that 18 months would provide 
an adequate period of time for larger fund entities,

[[Page 81981]]

intermediaries, and other service providers to update systems to 
conduct the requisite operational changes to their systems and to 
establish internal processes to prepare, validate, and file reports on 
Form N-PORT with the Commission. Nonetheless, as discussed above, we 
intend to keep the first six months of filings reported on Form N-PORT 
after the compliance date nonpublic, to allow funds and the Commission 
to refine the technical specifications and data validation 
processes.\1342\
---------------------------------------------------------------------------

    \1341\ See, e.g., IDC Comment Letter; Dreyfus Comment Letter; 
Fidelity Comment Letter; Oppenheimer Comment Letter; Vanguard 
Comment Letter; MFS Comment Letter; Mutual Fund Directors Forum 
Comment Letter; ICI Comment Letter; and SIFMA Comment Letter I.
    \1342\ See supra section II.H.1.
---------------------------------------------------------------------------

    Another alternative for tiered compliance would be to set the 
threshold at a level different than $1 billion. A higher threshold, 
such as $20 billion, as recommended by one commenter,\1343\ would 
increase the number of entities that could benefit from the additional 
time to update systems to adhere to the additional filing requirements, 
but would also decrease the amount of portfolio investment information 
that would be available to the Commission, investors, and other 
interested parties in a structured data format. A lower threshold, on 
the other hand, would have the opposite effects. As discussed above, 
the Commission believes that a $1 billion threshold for tiered 
compliance will address the need for structured portfolio investment 
information while providing smaller entities in most need of additional 
time a better opportunity to update systems.
---------------------------------------------------------------------------

    \1343\ Simpson Thacher Comment Letter.
---------------------------------------------------------------------------

    The information that funds report on Form N-PORT for the last month 
of each fiscal quarter will be made publicly available (with the 
exception of delta, country of risk, and associated explanatory notes) 
60 days after month-end (thirty days after the filing deadline). 
Additional alternatives include making more of the portfolio and other 
information reported on the form either nonpublic or public, including 
making all or none of the information reported on Form N-PORT each 
month publicly available, as discussed above in section II.A.3.\1344\
---------------------------------------------------------------------------

    \1344\ Commenters had mixed views on the public disclosure of N-
PORT information; those comments are discussed supra section II.A.3.
---------------------------------------------------------------------------

    In response to comments received we have removed delta, country of 
risk, and the associated explanatory notes from the public reporting 
requirements, but we believe that making more of the portfolio and 
other information reported on Form N-PORT nonpublic would reduce the 
amount of information investors have access to when making investment 
decisions. However, as discussed above, making more of the portfolio 
and other information reported on the form public, including making all 
of the information reported on Form N-PORT each month publicly 
available, could increase the risk of front-running, predatory trading, 
and copycatting/reverse engineering of trading strategies by other 
investors, as well as the public disclosure of proprietary or sensitive 
information.\1345\ We believe that making the vast majority of items 
reported on Form N-PORT public, as well as keeping eight of the twelve 
months of data collected by the Commission on Form N-PORT nonpublic, 
balances the public's need for and the usefulness of the information 
without unnecessarily subjecting funds to potentially harmful trading 
strategies by other market participants.
---------------------------------------------------------------------------

    \1345\ See infra section III.C.3.
---------------------------------------------------------------------------

    Form N-PORT will require funds to report additional portfolio 
investment information relative to what is currently reported in Form 
N-CSR and Form N-Q. Alternatives include not requiring some of this 
additional information, or requiring information in addition to what 
will be required to be reported as currently adopted. Other 
alternatives would be to request information that is more granular, 
information that is more aggregate, and information that is more 
consistent with other current regulatory forms or that substitutes 
compliance with other current regulatory regimes.\1346\ Although we 
recognize that there are various alternative reporting requirements 
imposed in other contexts and by other regulators, the reporting 
requirements imposed by Form N-PORT have been designed specifically to 
meet the Commission's regulatory needs with regards to monitoring and 
oversight of registered funds. As discussed above, the information 
reported on Form N-PORT will increase the ability of Commission staff 
to better understand the risks of a particular fund, a group of funds, 
and the fund industry. Investors, third-party information providers, 
and other potential users will also experience benefits from the 
introduction of Form N-PORT. For example, to the extent that investors 
use the information, Form N-PORT will improve the ability of investors 
to differentiate funds based on their investment strategies and other 
activities. Although the new information that will be reported on Form 
N-PORT could increase the initial and ongoing reporting costs for 
investment companies, and could increase the likelihood of front-
running, predatory trading, and copycatting/reverse-engineering by 
other investors, the Commission continues to believe that the 
information is important to fully describe a fund's investments. The 
Commission also believes that the reporting requirements of Form N-PORT 
are appropriate given each filer's status as a registered investment 
company with the Commission and not as a private fund.\1347\
---------------------------------------------------------------------------

    \1346\ One commenter suggested that the Commission should use 
the same interest rate and credit spread risk metrics as is required 
in Form PF (BlackRock Comment Letter). Another commenter suggested 
that the Commission and the CFTC should agree on and implement a 
substituted compliance regime (SIFMA Comment Letter I).
    \1347\ See supra footnote 485 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, the Commission is requiring funds to report 
risk metrics at the portfolio and position level on Form N-PORT. In 
response to commenters' suggestions, we are now requiring the 
disclosure of measures of duration for a smaller number of key interest 
rates than we had originally proposed. However, an alternative would be 
to request those key rates detailed in the proposing release, or even 
additional measures. As discussed above, we believe that the number of 
key rates that we are adopting today will provide us with sufficient 
information and flexibility while also reducing the reporting burden. 
Other alternatives that would increase the reporting of risk-
sensitivity measures include requiring funds to report additional 
portfolio level measures that describe the sensitivity of a reporting 
fund at additional basis point changes in interest rates and credit 
spreads, and a measure (or measures) of convexity, and include 
requiring funds to report additional position level measures such as 
vega, as requested by one commenter.\1348\ Investment companies could 
also report fewer portfolio or position level risk-sensitivity 
measures, such as a single or total portfolio level measure of interest 
rate and credit spread duration, as recommended by some 
commenters,\1349\ or instead report the underlying data to calculate 
the measures, as recommended by another commenter.\1350\
---------------------------------------------------------------------------

    \1348\ See State Street Comment Letter (requesting that funds 
also be required to report credit spread, delta, duration, yield to 
maturity, option adjusted spread, exposure, delta-adjusted exposure, 
duration equivalents, foreign exchange sensitivity/risk, and vega).
    \1349\ See Simpson Thacher Comment Letter; Fidelity Comment 
Letter; Dreyfus Comment Letter; ICI Comment Letter; and Wells Fargo 
Comment Letter.
    \1350\ See Vanguard Comment Letter (suggesting that the 
Commission calculate risk metrics from information that funds report 
on Form N-PORT).
---------------------------------------------------------------------------

    As discussed above and in response to commenters' suggestions, we 
have made

[[Page 81982]]

a modification from the proposed requirement to report only DV01 to now 
require filers to report both DV01 and DV100 on Form N-PORT. The 
Commission believes that DV100 is among the most common measures of 
interest rate sensitivity and that it will, in conjunction with DV01, 
provide more useful information about non-parallel shifts in the yield 
curve than smaller measures, such as DV25 and DV5, while not requiring 
filers that do not calculate convexity internally to begin doing so. 
However, while potentially useful, requiring all funds to report 
further additional portfolio- or position-level risk-sensitivity 
measures would increase the burden on all funds and not significantly 
improve the ability of Commission staff to monitor the funds in most 
market environments, and in particular for funds which do not 
extensively use derivatives as part of their investment strategy (while 
we are requiring funds to report DV100, we believe the marginal cost of 
reporting it is minimal because we understand that many funds likely 
already calculate it). Although the burden to investment companies to 
report risk metrics would decrease if fewer or no risk-sensitivity 
measures were required by the Commission, the staff believes that the 
benefits from requiring the measures that we are including in Form N-
PORT today, including the ability of Commission staff to efficiently 
identify and size specific investment risks, justify the costs to 
investment companies to provide the information. Lastly, we believe 
that requiring funds to provide the risk measures would improve the 
ability of the Commission, investors, or other potential users to 
efficiently analyze the information rather than requiring funds to 
provide the inputs that might be necessary for interested parties to 
calculate these measures themselves,\1351\ and would enhance the 
ability of Commission staff to efficiently identify risk exposures, 
especially during times of market stress.
---------------------------------------------------------------------------

    \1351\ See supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    Other alternatives to the reporting of portfolio level risk-
sensitivity measures relate to the allocation thresholds for funds to 
report portfolio interest rate risk exposures and currency risk 
exposures. Given commenters' recommendations, we are raising the 
threshold for fixed income allocation for risk reporting from 20% to 
25%, and providing a de minimis threshold for reporting currency risk 
of 1%. We could, however, require lower/higher thresholds that would 
result in more/fewer funds reporting interest rate or currency risk 
exposures, respectively. As discussed above, the Commission believes 
that the reporting thresholds for Form N-PORT provide Commission staff 
the ability to analyze interest rate and currency exposures while 
reducing reporting burdens and the potential that funds inadvertently 
trigger the reporting requirement when the exposures are not part of 
its principal investment strategy.
    Form N-PORT will also require funds to report terms and conditions 
of each derivative investment that are important to understanding the 
payoff profile of the derivative, including the reference 
instrument.\1352\ As discussed above, for reference instruments that 
are indexes or custom baskets of securities that are not publicly 
available, Form N-PORT will require funds to report all the components 
of the index or custom basket if the investment constitutes more than 
5% of the fund's NAV, and the top 50 components of the index or custom 
basket and any components that represent more than 1% of the notional 
value of the index or custom basket if the investment represents more 
than1% but less than 5% of the fund's NAV. Alternatives would be for 
funds to report fewer or additional components of the underlying 
indexes or custom baskets.
---------------------------------------------------------------------------

    \1352\ We are requiring similar information on a fund's schedule 
of investments. See supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    Lastly, funds will no longer be required to file reports on Form N-
Q. An alternative is for funds to continue reporting Form N-Q along 
with Form N-PORT at the end of first and third fiscal quarters. 
Commission staff believes, however, that the new reporting requirements 
for portfolio investment information, including the amendments to the 
certification requirements of Form N-CSR, would cause Form N-Q to 
become redundant if not outdated, and therefore impose costs on funds 
to file reports that would result in little benefit. Although requiring 
that certifying officers state that they have disclosed in the report 
any change in the registrant's internal control over financial 
reporting that occurred during the most recent fiscal half-year will 
increase the burden of filing Form N-CSR, these certifications will 
fill the gap in certification coverage regarding the registrant's 
internal control over financial reporting that would otherwise exist 
once Form N-Q is rescinded.

C. Amendments to Regulation S-X

1. Introduction and Economic Baseline
    Regulation S-X prescribes the form and content required in 
financial statements. The amendments to Regulation S-X will require new 
disclosures regarding fund holdings in open futures contracts, open 
forward foreign currency contracts, and open swap contracts, and 
additional disclosures regarding fund holdings of written and purchased 
option contracts; update the disclosures for other investments with 
conforming amendments, as well as reorganize the order in which some 
investments are presented; and amend the rules regarding the general 
form and content of fund financial statements, including requiring 
prominent placement of investments in derivative investments in a 
fund's financial statements, rather than allowing such schedules to be 
placed in the notes to the financial statements.\1353\
---------------------------------------------------------------------------

    \1353\ See supra section II.C. As discussed above, rule 12-13 of 
Regulation S-X requires limited generic information on the fund's 
investments other than securities. To address issues of inconsistent 
disclosures and lack of transparency, the amendments will have a 
consistent presentation of a fund's disclosures of open futures 
contacts, foreign currency forward contracts, and swaps. In 
addition, while many of the amendments to Regulation S-X are similar 
to the proposed disclosures in Form N-PORT (e.g., enhanced 
derivatives disclosures), the amendments to Regulation S-X will be 
in an unstructured but consistently presented format (as opposed to 
Form N-PORT's structured data).
---------------------------------------------------------------------------

    The current set of requirements under Regulation S-X, as well as 
the current practice of many funds \1354\ to voluntarily disclose 
additional portfolio investment information in fund financial 
statements and to follow industry guidance and other industry 
practices, is the baseline from which we discuss the economic effects 
of amendments to Regulation S-X.\1355\ The parties that could be 
affected by the amendments to Regulation S-X include funds that file or 
will file reports with the Commission and update or will update 
registration statements on file with the Commission, the Commission, 
current and future investors of investment companies, and other market 
participants that could be affected by the increase in the disclosure 
of portfolio investment information. We did not receive any specific 
comments on the proposed

[[Page 81983]]

economic baseline for the amendments to Regulation S-X.
---------------------------------------------------------------------------

    \1354\ As we discussed supra footnote 524, while ``funds'' are 
defined in the preamble as registered investment companies other 
than face-amount certificate companies and any separate series 
thereof--i.e., management companies and UITs, we note that our 
amendments to Regulation S-X apply to both registered investment 
companies and BDCs. See supra footnotes 699 and 700. Therefore, when 
discussing fund reporting requirements in the context of our 
amendments to Regulation S-X, we are also including changes to the 
reporting requirements for BDCs.
    \1355\ See discussion supra section II.C.1.
---------------------------------------------------------------------------

    Previously, Regulation S-X did not prescribe specific information 
to be disclosed for many investments in derivatives, which could result 
in inconsistent reporting between funds and reduced transparency of the 
information reported, and in some cases could result in insufficient 
information concerning the terms and underlying reference assets of 
derivatives to allow investors to understand the investment.
    We expect that many of the economic effects from the amendments to 
Regulation S-X will largely result from an increase in investor ability 
to make investment decisions dependent on the more transparent 
disclosure in financial statements, as noted by commenters.\1356\ As 
discussed above, the total economic effects will depend on the extent 
to which the portfolios and investment practices of all investment 
companies become more transparent, and the ability of investors, and in 
particular individual investors, to utilize financial statements to 
compare funds and to make investment decisions. The economic effects 
will also depend on the extent to which investment companies already 
voluntarily provide disclosures that will be required by the 
amendments, and the extent to which the amendments to Regulation S-X 
standardize financial statements across funds. As a result of these 
factors, some of which are difficult to quantify or unquantifiable, the 
discussion below is largely qualitative although certain one-time and 
ongoing costs associated with the amendments are quantified below.
---------------------------------------------------------------------------

    \1356\ See, e.g., PwC Comment Letter (''We believe that the 
Proposed Rule will generally provide investors with greater access 
to information relating to their investments and investment 
advisors.''); Deloitte Comment Letter.
---------------------------------------------------------------------------

2. Benefits
    The amendments to Regulation S-X will benefit investors by updating 
the information funds disclose in the financial statements of 
registration statements and shareholder reports. Several commenters 
noted that the amendments will benefit investors through increased 
transparency and comparability of fund financial statements, 
particularly for individual investors that we would not expect to use 
the information in Form N-PORT because of its structured data 
format.\1357\ In particular, the additional information that Regulation 
S-X will require for open option contracts both written and purchased, 
open futures contracts, open forward foreign currency contracts, open 
swap contracts, and other investments will increase the transparency of 
the fund's portfolio investments and risk exposures.\1358\
---------------------------------------------------------------------------

    \1357\ See PwC Comment Letter; EY Comment Letter.
    \1358\ See, e.g., EY Comment Letter and Morningstar Comment 
Letter for statements in support of these ideas, and MFS Comment 
Letter and ICI Comment Letter for statements against, as well as the 
discussion in Section II.C.2.
---------------------------------------------------------------------------

    Other amendments will also improve the transparency into the fund's 
investments. For example, we are requiring funds to identify each 
investment whose value was determined using significant unobservable 
inputs.\1359\ Likewise, we are requiring that funds separately identify 
restricted investments.\1360\ In addition, in a modification from the 
proposal, we are now including a requirement that should benefit 
investors and other users of the information by providing more 
transparency to a fund's investments in debt securities, and in 
particular variable rate securities. As discussed more fully below and 
in section II.C.3, in light of comments we received and in order to 
give investors both the ability to understand the investment's current 
return (through end-period rate) and to better understand how interest 
rate changes could affect the investment's future returns, we are 
adopting an instruction that would require a fund, for its investments 
in variable rate securities, to both describe the referenced rate and 
spread and provide the end of period interest rate for each investment, 
or include disclosure of each referenced rate at the end of the 
period.\1361\
---------------------------------------------------------------------------

    \1359\ See, e.g., rule 12-13, n. 7 of Regulation S-X; see also 
rules 12-13A, n. 5; 12-13B, n. 3; 12-13C, n. 6; and 12-13D, n. 7 of 
Regulation S-X.
    \1360\ See rule 12-13, n. 6 of Regulation S-X; see also rules 
12-13A, n. 4; 12-13B, n. 2; 12-13C, n. 5; and 12-13D, n. 6 of 
Regulation S-X.
    \1361\ See rules 12-12, n. 4 and 12-12B, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    In a change from the proposal and Form N-PORT, we are requiring 
funds to separately list the top 50 components and the components that 
represent more than 1% of the notional value of the referenced assets 
underlying swap and option contracts, rather than separately listing 
every component. We believe that this alteration benefits investors by 
making it easy for them to understand and evaluate the specific risk 
exposures of a fund from certain swap and option contracts, while 
simultaneously reducing the reporting burden for funds.
    We believe that the changes to the form and content of financial 
statements in Article 6 of Regulation S-X will similarly benefit 
investors, particularly individual investors who in general may not 
have the tools and resources possessed by institutional investors, 
through greater transparency in a fund's financial statements. For 
example, we are requiring funds to disclose their investments in 
derivatives in the financial statements, as opposed to in the notes to 
the financial statements.\1362\ To the extent funds do not do this 
already, we believe, and commenters agreed, that more prominent 
placement of investments in derivatives in the financial statements 
(immediately following the schedules for investments in securities of 
unaffiliated investors and securities sold short), will benefit 
investors through increased visibility of fund investments in 
derivatives and comparability between funds.\1363\ Likewise, we are 
eliminating the financial statement disclosure of ``Total investments'' 
on the balance sheet under ``Assets''.\1364\ As we discuss in more 
detail in section II.C.6, recognizing that funds could present 
investments in derivatives under both assets and liabilities on the 
balance sheet, eliminating this disclosure will benefit investors by 
providing a more complete representation of the effect of these 
investments on a balance sheet.\1365\ Other parties that will be 
affected by the amendments to Regulation S-X include the Commission and 
other market participants that would use shareholder reports and 
registration statements to obtain fund information. Although the 
amendments to Regulation S-X will primarily benefit investors and 
particularly individual investors, the Commission and other market 
participants could use the information reported in a fund's financial 
statements, and would benefit from an increase in transparency into a 
fund's financial statements. For example, Commission staff could 
utilize the information in a fund's financial statements during 
examinations.
---------------------------------------------------------------------------

    \1362\ See rule 6-10(a) of Regulation S-X; see also discussion 
supra section II.C.6; see also ICI Comment Letter (supporting the 
requirement to present derivatives schedules in the fund's financial 
statements).
    \1363\ See State Street Comment Letter; ICI Comment Letter.
    \1364\ See rule 6-04 of Regulation S-X; see also discussion 
supra section II.C.6.
    \1365\ See id.
---------------------------------------------------------------------------

    Commission staff believes that a large number of funds currently 
adhere to industry practices from which the amendments to Regulation S-
X are derived. The amendments to Regulation S-X, therefore, will 
effectively standardize the information that all funds disclose on 
financial statements, and make the schedule of investments and 
financial statement disclosures consistent and thus more comparable

[[Page 81984]]

across funds, as noted by commenters.\1366\ Similar to new Form N-PORT, 
the amendments to Regulation S-X, to the extent that they increase the 
transparency and consistency of shareholder reports across funds, could 
improve the ability of investors, particularly individual investors, to 
differentiate investment companies and make investment decisions either 
by themselves or by way of third-party information providers. An 
increase in the ability of investors to differentiate investment 
companies and allocate capital across reporting funds closer to their 
risk preferences will increase the competition among funds for investor 
capital. In addition, by improving the ability of investors to 
understand investment risks and hence their ability to allocate capital 
across funds and other investments more efficiently, we also believe 
that the introduction of Form N-PORT could also promote capital 
formation.
---------------------------------------------------------------------------

    \1366\ See, e.g., EY Comment Letter.
---------------------------------------------------------------------------

3. Costs
    We believe that registrants on average will likely incur minimal 
costs from our amendments to Regulation S-X because, as discussed 
above, based upon staff experience, we believe that a majority of funds 
are already providing the information that will be required by the 
amendments to Regulation S-X in their financial statements.\1367\ The 
costs to a fund of complying with the new rules will depend upon the 
extent to which funds are already making such disclosures 
currently.\1368\ As discussed above, the Commission will require 
parallel disclosures in Form N-PORT, and funds will incur one set of 
costs, both one-time and ongoing, to obtain the information that will 
be disclosed in Form N-PORT and in financial statements. In addition, 
other costs that relate to the disclosure of portfolio investment 
information, including the ability of other investors to front-run, 
trade predatorily, and copycat/reverse engineer trading strategies of 
funds, will primarily relate to Form N-PORT because of the additional 
ability of other interested third-parties and market participants to 
efficiently obtain, aggregate, and analyze the information as a result 
of its structured data format as compared to the non-structured data 
format of portfolio investment information reported in financial 
statements.
---------------------------------------------------------------------------

    \1367\ In order to reduce burdens on funds, we also endeavored, 
where appropriate, to require consistent derivatives holdings 
disclosures between Form N-PORT and Regulation S-X.
    \1368\ Moreover, as we discussed above in section III.C.1, we 
expect minimal audit costs as a result of our amendments to 
Regulation S-X because many funds are already voluntarily providing 
this information in their audited financial statements.
---------------------------------------------------------------------------

    For example, as discussed above in section II.C.2.a, in response to 
commenters' concerns relating to the burdens associated with our 
proposed requirement that funds list all components underlying a 
nonpublic index or custom basket,\1369\ we are instead requiring funds 
to separately list the top 50 components and the components that 
represent more than 1% of the notional value of the referenced assets 
underlying swap \1370\ and option contracts.\1371\ Commenters noted, 
and we agree, that the potential volume of all of the components 
underlying nonpublic indexes and custom baskets were disclosed would 
make the fund's financial statements difficult to understand.\1372\ 
Thus requiring funds to report only the most significant components 
could benefit investors by making it easier for them to understand and 
evaluate the specific risk exposures of a fund from certain swap and 
option contracts.\1373\ Moreover, limiting the reporting of nonpublic 
indexes and custom baskets will reduce fund auditing costs by 
eliminating the burdens of requiring an auditor to verify every 
component of a nonpublic index, which could potentially include 
thousands of investments.
---------------------------------------------------------------------------

    \1369\ See, e.g., PwC Comment Letter; Oppenheimer Comment 
Letter; ICI Comment Letter; and AICPA Comment Letter.
    \1370\ See rule 12-13C, n. 3 of Regulation S-X; see also 
discussion supra section II.C.2.d.
    \1371\ See rule 12-13, n. 3 of Regulation S-X; see also 
discussion supra section II.C.2.a.
    \1372\ See AICPA Comment Letter; and PwC Comment Letter.
    \1373\ Id.
---------------------------------------------------------------------------

    We further believe this change provides the necessary benefit 
without being unduly burdensome. We understand that index providers 
might assert intellectual property rights to certain indexes, and these 
may be subject to licensing agreements between the index provider and 
the fund.\1374\ Disclosing the underlying components of an index could 
subject the fund to costs associated with negotiating or renegotiating 
licensing agreements in order to publicly disclose the components of 
the index.\1375\ The Commission does not have information available to 
provide a reliable estimate of the increased costs of licensing 
agreements because funds currently are not required to disclose the 
agreements or the components of the index. In addition, disclosing the 
components of a nonpublic index may include costs to both the index 
provider, whose indexing strategy could be reverse-engineered, and the 
fund, whose rebalancing trades could be front-run.\1376\ Finally, the 
possibility exists that index providers will refuse to permit 
disclosure and the funds might not be able to use such indexes any 
longer. This could potentially drive up competition for index 
providers, in turn raising costs for funds. Requiring the disclosure of 
only those proprietary components that meet a materiality threshold 
could help alleviate some of these costs and concerns. However, the 
underlying components would be more accessible in Form N-PORT as a 
result of its structured data format as compared to the non-structured 
data format of the information in financial statements, so we believe 
that the costs of disclosing the information will therefore primarily 
relate to Form N-PORT, and reporting of components will be more 
comprehensive in Form N-PORT, as discussed in greater detail above.
---------------------------------------------------------------------------

    \1374\ See discussion supra sections II.A.2.g.iv and II.C.2.a.
    \1375\ See id.
    \1376\ See id.
---------------------------------------------------------------------------

    As another example, the amendments include an instruction to 
disclose the variable financing rates for swaps that pay or receive 
financing payments.\1377\ It is our understanding that variable 
financing rates for swap contracts are often commercial terms of a deal 
that are negotiated between the fund and the counterparty to the 
swap.\1378\ Disclosure of favorable variable financing rates could 
result in costs to the fund in the form of less favorable variable 
financing rates for future transactions, but may also improve the 
ability of other funds to negotiate more favorable terms. Similar to 
the introduction of Form N-PORT, the increased transparency could 
increase the competition among swap and security-based swap dealers to 
offer favorable fees and financing terms thereby decreasing the fees 
paid by funds. Counterparties could also, however, choose not to 
transact with funds as a consequence of this disclosure, in which case 
competition for counterparties would increase and the fees paid by 
funds would rise. As with the disclosure of the components of an index, 
we believe that the majority of the costs associated with disclosures 
of variable financing rates, including the increase in competition for 
favorable fees and terms, will instead derive from

[[Page 81985]]

the similar requirements in Form N-PORT.\1379\
---------------------------------------------------------------------------

    \1377\ See rule 12-13C, n. 3 of Regulation S-X.
    \1378\ See, e.g., MFS Comment Letter; Invesco Comment Letter; 
and ICI Comment Letter (public benefit of disclosure does not 
outweigh potential competitive harm).
    \1379\ See Item C.11.f.i of Form N-PORT; see also discussion 
supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    In response to commenters concerns, we also made changes from the 
proposal to eliminate several disclosures. For example, we are amending 
our proposed instruction which would require funds to categorize the 
schedule by type of investment, the related industry, and the related 
country or geographic region.\1380\ We agreed with commenters that 
requiring categorization of both the industry and geographic region (as 
opposed to categorizing one) would add considerable length to the 
schedule of investments, which could ultimately undermine the 
schedule's usefulness to investors.\1381\ In the interest of reducing 
burdens for investors and making financial statements easier to review, 
we are not adopting this proposed requirement.
---------------------------------------------------------------------------

    \1380\ See supra section II.C.3.
    \1381\ See Oppenheimer Comment Letter; State Street Comment 
Letter; Vanguard Comment Letter; MFS Comment Letter; and BlackRock 
Comment Letter.
---------------------------------------------------------------------------

    We similarly determined to eliminate an instruction in Regulation 
S-X requiring funds to include tax basis disclosures. As discussed 
above in section II.C.4, this instruction is contained in current rules 
12-12, 12-12C, and 12-13 and we proposed to extend the instruction to 
proposed rules 12-12A, 12-13A, 12-13B, 12-13C, and 12-13D. We were, 
however, persuaded by commenters that this disclosure of tax basis by 
investment type would not provide meaningful disclosure to investors, 
while increasing the volume and complexity of financial 
statements.\1382\ In the interest of reducing burdens to both investors 
and funds, while making financial statements easier for investors to 
understand, we are eliminating the tax basis instruction from the 
current rules and not adopting it for the other rules.
---------------------------------------------------------------------------

    \1382\ See, e.g. PwC Comment Letter; EY Comment Letter; CRMC 
Comment Letter; State Street Comment Letter; and MFS Comment Letter.
---------------------------------------------------------------------------

    We also proposed to require funds to identify illiquid 
investments.\1383\ We received several comments noting that, among 
other things, this disclosure would be difficult and costly to audit, 
as auditors would be required to determine the validity of the fund's 
liquidity determinations for each investment.\1384\ We were persuaded 
by comments relating to the costs of auditing liquidity disclosures 
and, as discussed further in the Liquidity Adopting Release we are 
adopting concurrently, also believe that such position-level 
information regarding liquidity is better suited for nonpublic 
reporting to the Commission in Form N-PORT.
---------------------------------------------------------------------------

    \1383\ See supra section II.C.4.
    \1384\ See, e.g., PwC Comment Letter; ICI Comment Letter; and 
AICPA Comment Letter.
---------------------------------------------------------------------------

    Finally, in order to provide more transparency to a fund's 
investments in debt securities, we had proposed an instruction 
requiring a fund to disclose, for its investment in variable rate 
securities, the referenced rate and spread.\1385\ We received several 
comments supporting our proposal to provide the reference rate and 
spread for variable rate securities, reasoning that the disclosure of 
the components of the variable rate would be easier for investors and 
other interested parties to determine the investment's current rate at 
any given time (as opposed to the rate at the end of the reporting 
period).\1386\ However, another commenter suggested that the end-period 
interest rate is the most appropriate variable rate security disclosure 
for shareholders.\1387\ As discussed more fully in section II.C.3, in 
order to give investors both the ability to understand the investment's 
current return (through end-period rate) and to better understand how 
interest rate changes could affect the investment's future returns, we 
have made a change to the proposed instruction so that it now requires 
a fund to both describe the reference rate and spread and provide the 
end of period interest rate for each investment, or include disclosure 
of each reference rate at the end of the period.\1388\ Requiring a fund 
to disclose both the period-end rate and reference rate and spread will 
necessarily add costs relating to a fund's financial statement and 
auditing costs, albeit, we expect that cost to be minimal because these 
pieces of information are generally not difficult to obtain and verify 
as, based on staff experience, we believe that this information is 
currently collected by funds and commonly available in a fund's 
accounting system.
---------------------------------------------------------------------------

    \1385\ See proposed rule 12-12, n. 4; see also supra section 
II.C.3.
    \1386\ See State Street Comment Letter; see also Morningstar 
Comment Letter (Disclosure would allow investors to identify when 
cash flows associated with a fund's returns are fixed or variable).
    \1387\ See Wells Fargo Comment Letter.
    \1388\ See rules 12-12, n. 4 and 12-12B, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    Funds will incur one-time and ongoing costs to comply with the 
amendments to Regulation S-X in addition to the costs attributable to 
new Form N-PORT. For the amendments to Regulation S-X, funds will incur 
one-time and ongoing costs to obtain the additional information that 
will be disclosed on shareholder reports and registration statements, 
and that will also not be disclosed on Form N-PORT; and funds will also 
incur one-time costs to format for presentation all additional 
information that will be reported in financial statements. In addition, 
we will require funds, to the extent they do not already do so, to 
present the schedules associated with rules 12-13 through 12-13D and 
12-14 in the financial statements, as opposed to in the notes to the 
financial statements.\1389\ Funds that do not currently present their 
schedule of investments in this manner will incur a one-time cost of 
modifying the presentation of their financial statements to conform to 
the amendments.
---------------------------------------------------------------------------

    \1389\ See rule 6-10 of Regulation S-X; see also discussion 
supra section II.C.6.
---------------------------------------------------------------------------

    Additionally, we proposed to add a new disclosure requirement that 
was designed to increase transparency into a fund's securities lending 
and cash collateral management activities.\1390\ Some commenters 
expressed concerns relating to the location of the required disclosure 
in the fund's financial statements in particular.\1391\ One commenter 
in particular noted that additional costs of auditing the disclosure of 
these fees ``would most likely outweigh any benefits of reporting this 
information.'' \1392\ While we continue to believe that investors and 
other interested parties will benefit from disclosures relating to a 
fund's securities lending and cash collateral management activities, 
after consideration of the issues raised by commenters, including the 
added auditing costs that funds would incur, we determined that it is 
more appropriate to require these disclosures be made in a fund's 
Statement of Additional Information (or, with respect to closed-end 
funds, a fund's reports on Form N-CSR) rather than to require their 
inclusion in its financial statements.\1393\
---------------------------------------------------------------------------

    \1390\ See proposed rule 6.03(m) of Regulation S-X; see also 
supra section II.C.6.
    \1391\ See Deloitte Comment Letter (noting that indirect fees 
``are typically a management's estimate that is imprecise''); EY 
Comment Letter (stating that ``the proposed disclosures would result 
in the presentation of detailed information with varying degrees of 
usefulness that could detract from other material information 
presented in the financial statements'' and recommending that ``the 
Commission use other reporting mechanisms more suited for that 
purpose'').
    \1392\ See Deloitte Comment Letter.
    \1393\ See supra section II.F.
---------------------------------------------------------------------------

    To the extent possible, we have attempted to quantify these costs. 
As discussed below in section IV.C, we estimate that management 
investment companies will incur certain one-time additional paperwork 
and other costs

[[Page 81986]]

associated with preparing, reviewing, and filing semi-annual reports in 
accordance with the amendments to Regulation S-X in the amount of 
approximately $1,911 per fund \1394\ and $22,662,549 in the 
aggregate.\1395\ We similarly estimate that management investment 
companies will incur certain ongoing paperwork and other costs 
associated with preparing, reviewing, and filing semi-annual reports in 
accordance with our amendments to Regulation S-X in the amount of 
approximately $683 per fund \1396\ and $8,099,697 in the 
aggregate.\1397\ Likewise, we estimate that UITs will incur certain 
one-time additional paperwork and other costs associated with 
preparing, reviewing, and filing semi-annual reports in accordance with 
the amendments to Regulation S-X in the amount of approximately $1,911 
per fund \1398\ and $1,377,831 in the aggregate.\1399\ We similarly 
estimate that UITs will incur certain ongoing paperwork and other costs 
associated with preparing, reviewing, and filing semi-annual reports in 
accordance with the amendments to Regulation S-X in the amount of 
approximately $683 per UIT \1400\ and $492,443 in the aggregate.\1401\
---------------------------------------------------------------------------

    \1394\ See infra footnote 1562 and accompanying text. The 
estimate is based upon the following calculations: ($1,911 = ($560 = 
3.5 hours x $160/hour for an Intermediate Accountant) + ($1,351 = 
3.5 hours x $386/hour for an Attorney)). The hourly wage figures in 
this and subsequent footnotes are from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits, and overhead.
    \1395\ See id. These estimates are based upon the following 
calculations: $22,662,549 = (11,859 funds x $1,911 per fund).
    \1396\ See id. The estimate is based upon the following 
calculations: ($683 = ($200 = 1.25 hours x $160/hour for an 
Intermediate Accountant) + ($483 = 1.25 hours x $386/hour for an 
Attorney). The hourly wage figures in this and subsequent footnotes 
are from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by Commission staff to account 
for an 1800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead.
    \1397\ See id. These estimates are based upon the following 
calculations: $8,099,697 = (11,859 funds x $683 per fund).
    \1398\ See infra footnote 1577 and accompanying text. The 
estimate is based upon the following calculations: ($1,911 = ($560 = 
3.5 hours x $160/hour for an Intermediate Accountant) + ($1,351= 3.5 
hours x $386/hour for an Attorney)). The hourly wage figures in this 
and subsequent footnotes are from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified by Commission 
staff to account for an 1800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
    \1399\ See id. These estimates are based upon the following 
calculations: $1,377,831 = (721 UITs x $1,911per UIT).
    \1400\ See id. The estimate is based upon the following 
calculations: ($683 = ($200 = 1.25 hours x $160/hour for an 
Intermediate Accountant) + ($483 = 1.25 hours x $386/hour for an 
Attorney). The hourly wage figures in this and subsequent footnotes 
are from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by Commission staff to account 
for an 1800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead.
    \1401\ See id. These estimates are based upon the following 
calculations: $492,443 = (721 UITs x $683 per UIT).
---------------------------------------------------------------------------

4. Alternatives
    The Commission has also explored other ways to modernize and 
improve the utility, quality, and consistency of the information that 
funds report to the Commission and to investors in the financial 
statements required in shareholder reports and other registration 
statements. Commission staff examined how the information funds provide 
to the Commission and to investors could be made more informative and 
more consistent across funds. Alternatives to the amendments to 
Regulation S-X relate to the compliance period to adhere to the new 
amendments and to the information that funds report in the financial 
statements.
    Funds will have 8 months after the effective date to comply with 
the amendments to Regulation S-X. An alternative would be to extend the 
compliance period, as suggested by several commenters.\1402\ We 
believe, however, that most entities would not need additional time to 
modify systems to adhere to the amendments to Regulation S-X because, 
with the exception of the disclosure of index components, the proposed 
amendments are largely consistent with current fund disclosure 
practices. As such, we do not expect that funds, intermediaries, or 
service providers will require significant amounts of time to modify 
systems or establish internal processes to prepare financial statements 
in accordance with our final amendments to Regulation S-X. Another 
alternative would be to provide a tiered compliance period to provide 
smaller fund complexes more time, as we do for Form N-PORT. However, we 
do not believe that smaller entities would relatively benefit from 
additional time, since while fixed costs in general are proportionately 
higher for smaller entities, the amendments to Regulation S-X do not 
add additional fixed costs, but rather the amendments are largely 
consistent with current disclosure practices. Extending the compliance 
period for all entities or for smaller entities, however, would delay 
the benefits to investors (and to the Commission and to other market 
participants) from the increased transparency and standardization of 
shareholder reports and other financial statements.
---------------------------------------------------------------------------

    \1402\ Fidelity Comment Letter; Oppenheimer Comment Letter; 
State Street Comment Letter; MFS Comment Letter; Invesco Comment 
Letter; SIFMA Comment Letter I; and Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    The amendments to Regulation S-X will update the information funds 
disclose in financial statements. Alternatives to the amendments to 
Regulation S-X include the disclosures of different information. For 
example, the amendments to Regulation S-X will require funds to report 
information describing derivative contracts including, in some 
instances, the components of reference indexes that surpass certain 
materiality thresholds. As alternatives, we could require funds to only 
disclose a brief description of the index, require a different 
threshold for identifying the components of the swap or options 
contract, or require the reporting of all components. Although the 
alternatives that would increase the reporting of the components of 
reference indexes would increase the transparency for investors into 
the assets underlying a swap or options contract including the 
underlying risks of the fund, these alternatives would increase the 
costs of funds to report the information. However, although the 
alternatives that would decrease the reporting of the components of 
reference indexes would decrease the costs to funds to report the 
information, these alternatives would decrease the ability of investors 
to understand fund portfolio investments. We believe that the 
amendments to Regulation S-X adopted today provide investors with 
sufficient information to broadly understand funds' investments without 
unduly burdening funds.
    Amendments to Regulation S-X will also not require funds to report 
information describing their securities lending activities in the 
financial statements, as proposed, but will instead require funds to 
report the information in the Statement of Additional Information (or, 
for closed-end funds, their reports on Form N-CSR). An alternative, 
similar to proposed rule 6.03(m), would be for funds to report 
information describing their securities lending activities as part of 
the financial statements. However, the requirement that securities 
lending information would be disclosed as part of financial statements 
would increase the costs to audit and report the information.\1403\ 
Another alternative

[[Page 81987]]

would be for funds to not provide the information altogether. However, 
we believe that the information is important to investors, the 
Commission, and other interested parties to understand the economic 
implications of a fund's securities lending activities. To the extent 
that investors utilize this information or that it benefits the 
Commission, we believe that the Statement of Additional Information 
(or, for closed-end funds, reports on Form N-CSR) is an appropriate 
place to disclose this information.
---------------------------------------------------------------------------

    \1403\ Deloitte Comment Letter.
---------------------------------------------------------------------------

    Similarly, amendments to Regulation S-X will also not require funds 
in their financial statements to identify illiquid securities, as was 
initially proposed. An alternative is to adopt the proposed approach 
and require funds in their financial statements to identify illiquid 
securities. The disclosure of the liquidity of securities on financial 
statements, however, could increase the costs to audit financial 
statements.\1404\ In addition, some commenters asserted the disclosure 
of security liquidity could cause investors, and in particular 
individual investors, to misinterpret the information as 
objective.\1405\ As discussed in the Liquidity Adopting Release, we are 
adopting portfolio-level liquidity reporting on Form N-PORT which we 
believe mitigates many of the commenters' concerns and is a more 
appropriate method of public reporting.\1406\ Accordingly, we are not 
adopting the proposed instructions in Regulation S-X relating to the 
liquidity of investments.
---------------------------------------------------------------------------

    \1404\ Deloitte Comment Letter; ICI Comment Letter; and AICPA 
Comment Letter.
    \1405\ PwC Comment Letter; Oppenheimer Comment Letter; MFS 
Comment Letter; Deloitte Comment Letter; Invesco Comment Letter; 
Schwab Comment Letter; ICI Comment Letter; and AICPA Comment Letter.
    \1406\ See discussion in section II.C.4.
---------------------------------------------------------------------------

    Lastly, amendments to Regulation S-X will include instructions to 
funds to make a separate disclosure for income from non-cash dividends 
and payment-in-kind interest on the statement of operations. Funds will 
report income from payment-in-kind interest or non-cash dividends only 
if the income exceeds 5 percent of the fund's investment income, as 
suggested by commenters who requested a materiality threshold, which is 
consistent with the other income disclosures under rule 6-07.1.\1407\ 
An alternative, similar to the proposal, would be for funds to make a 
separate disclosure for all income from payment-in-kind interest or 
non-cash dividends regardless of the amount.
---------------------------------------------------------------------------

    \1407\ Several commenters suggested the materiality threshold 
including MFS Comment Letter; PwC Comment Letter; State Street 
Comment Letter; ICI Comment Letter; and AICPA Comment Letter; see 
also section II.C.6.
---------------------------------------------------------------------------

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

1. Introduction and Economic Baseline
    Form N-CEN requires funds to report census information to the 
Commission on an annual basis. Although Form N-CEN includes many of the 
same data elements as the current census-type reporting form, Form N-
SAR, it replaces items that are outdated or no longer informative with 
items of greater importance for the oversight and examination of 
investment companies, and eliminates certain items that are also 
reported to the Commission in other forms. Investment companies will 
file reports on Form N-CEN in a structured, XML format to allow for 
easier aggregation and manipulation of the data. Form N-SAR will be 
rescinded.
    The current set of requirements for funds to file reports on Form 
N-SAR is the baseline from which we discuss the economic effects of 
Form N-CEN.\1408\ The parties that could be affected by the 
introduction of Form N-CEN and the rescission of Form N-SAR include 
funds that currently file reports on Form N-SAR and funds that will 
file reports on Form N-CEN; the Commission; and, other current and 
future users of fund census information including investors, third-
party information providers, and other interested potential users.
---------------------------------------------------------------------------

    \1408\ Management companies must file reports on Form N-SAR 
semi-annually, and UITs must file reports on Form N-SAR annually. 
See current rule 30b1-1 for management companies, and see current 
rule 30a-1 for UITs.
---------------------------------------------------------------------------

    At the time it was adopted, Form N-SAR was intended to reduce 
reporting burdens and better align the information reported with the 
characteristics of the fund industry. As the fund industry has 
developed, including the development of new products, so has the need 
to update the information the Commission requires in order to improve 
its ability to monitor the compliance and risks of reporting funds. The 
format in which information is reported in Form N-SAR is also outdated, 
which reduces the ability of Commission staff to obtain and aggregate 
the information. Likewise, the technology in which Form N-SAR is filed 
does not allow for certain validation checks, reducing the data quality 
of the information (e.g., the Form N-SAR application is unable to check 
related fields for arithmetic consistency) and therefore the ability of 
Commission staff to compare the information across funds is 
constrained.
    The economic effects from the introduction of new Form N-CEN and 
the rescission of Form N-SAR will largely result from an update to the 
format of the information reported, as well as the update to the census 
information that investment companies will report. The economic effects 
will therefore depend on the extent to which investment companies 
become more transparent, and the ability of Commission staff and 
investors to utilize the updated disclosures. Form N-CEN requires 
census information about the fund industry reported in a structured 
data format. However, while Form N-SAR information is also reported in 
a structured data format, Form N-CEN information will be reported in 
XML format, a much more modern and useful data format, and one that 
allows for more efficient data collection than does the baseline 
format, aggregation, manipulation, and rendering. Therefore, although 
the introduction of Form N-CEN will increase the transparency of the 
fund industry by making the information reported therein more readily 
available, more easily shared or retrieved, and more relevant, we 
cannot quantify the significance of its economic implications.
2. Benefits
    The Commission is rescinding Form N-SAR and replacing it with new 
Form N-CEN to improve the quality and the utility of the information 
investment companies report to the Commission. The improvement in the 
quality and utility of the information will allow Commission staff to 
better understand industry trends, inform policy, and assist with the 
Commission's examination program.
    Similar to Form N-PORT, the ability of the Commission to most 
effectively use the information is dependent on the ability of staff to 
compile and aggregate the information into a single database. The 
structuring of the information in an XML format will improve the 
ability and efficiency of Commission staff to obtain and analyze the 
information. An improved structured data format could also promote 
additional efficiency to the extent that the new standardized reporting 
requirements encourage more automated report assembly, validation, and 
review processes for the disclosure and transmission of 
information.\1409\ In

[[Page 81988]]

ways similar to those discussed above in relation to Form N-PORT, an 
XML format also improves the quality of census information obtained by 
the Commission by providing constraints as to how information can be 
provided and by allowing for built-in validation.\1410\
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    \1409\ See, e.g., CFA Comment Letter (noting that requiring 
information to be reported through a structured data format will 
allow better collection and analysis of information); see also XBRL 
US Comment Letter (expressing the belief that a structured data 
format will make data computer-readable, consistent and comparable 
across different reporting entities).
    \1410\ See, e.g., Morningstar Comment Letter (noting that the 
XML format will reduce the amount of defective reporting currently 
possible in Form N-SAR); see also XBRL US Comment Letter (while 
specifically recommending an XBRL structured format, noting that 
checking the validity of data may still be required but, with 
structured data, the process can be automated, thereby reducing 
costs and at the same time increasing the consistency of the data 
produced).
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    Form N-CEN also modernizes the census information that funds 
provide and increases its utility to Commission staff, investors, and 
other interested parties by reflecting the changes to the fund industry 
in a structured data format. The Commission will use the information in 
Form N-CEN to improve its understanding of fund industry trends and 
practices, and assist with the Commission's examination program. 
Commission staff has identified specific information that could improve 
its ability to effectively oversee funds.
    Along with the other information, Form N-CEN adds new requirements 
for information specifically relating to the ETF primary markets, 
including more detailed information on authorized participants and 
creation unit requirements.\1411\ We believe that the additional 
information on ETFs will allow the Commission to better understand and 
assess the ETF market and also inform the public about certain 
characteristics of the ETF primary markets.\1412\ Additionally, Form N-
CEN, like Form N-SAR, has particular sections for closed-end funds, 
SBICs, and UITs in order to obtain information about the particular 
characteristics of these entities to assist our staff in monitoring the 
activities of these funds and preparing for examinations.
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    \1411\ See discussion supra section II.D.4.e.
    \1412\ Some commenters supported the inclusion of ETF-specific 
information in Form N-CEN. See supra footnote 1061 and accompanying 
text; but see infra footnote 1429 and accompanying text.
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    Form N-CEN also adds new requirements for information relating to a 
management company's securities lending activities, including 
information concerning the management company's securities lending 
agents and cash collateral managers.\1413\ We are also requiring the 
monthly average value of securities on loan, the net income from 
securities lending, and the monthly average net assets in the 
fund.\1414\ Together with the requirements on securities lending 
activities in Form N-PORT and in fund Statements of Additional 
Information,\1415\ this information will benefit the Commission's 
oversight abilities and, potentially, future policymaking concerning 
securities lending. Moreover, we believe that this information could 
inform investors and other interested parties about the use of and 
potential risks associated with a management company's securities 
lending activities.\1416\
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    \1413\ See Item C.6 of Form N-CEN.; see also discussion supra 
section II.D.4.c.iii.
    \1414\ The monthly average value of securities on loan and the 
net income from securities lending are being moved from Form S-X to 
Form N-CEN, while the monthly average net assets is a newly reported 
value, and while not specifically related to securities lending 
activity, it will facilitate the use of the monthly average value of 
securities on loan.
    \1415\ See supra section II.A.2.d; section II.A.2.g.v; and 
section II.F.
    \1416\ Some commenters expressed general support for reporting 
securities lending information on Form N-CEN; some commenters 
expressed certain concerns about particular proposed requirements 
and we have modified the securities lending requirements in certain 
respects after consideration of commenters' views. See supra section 
II.D.4.c.iii.
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    We expect funds will also benefit from replacing Form N-SAR with 
Form N-CEN through reduced expenses. First, we estimate that Form N-CEN 
has a lower cost per filing than Form N-SAR, as a result of filing in 
an XML format, as opposed to the outdated format of Form N-SAR, and the 
elimination of certain items on Form N-SAR that funds will not report 
on Form N-CEN. Second, funds that are management companies will 
experience a decrease in paperwork-related expenses from the decrease 
in the reporting frequency of census information from semi-annual to 
annual.\1417\ As discussed in detail below, we estimate that paperwork 
expenses associated with reporting on Form N-CEN will be, in the 
aggregate, about $14.6 million each year.\1418\ By contrast, we 
estimate that paperwork expenses associated with reporting on Form N-
SAR are about $25.5 million each year.\1419\ Accordingly, we estimate, 
on net, annual paperwork expense savings to funds associated with the 
adoption of Form N-CEN and rescission of Form N-SAR will be about $10.9 
million.\1420\ We recognize that these ongoing annual expense savings 
will be partially offset by one-time expenses in the first year to file 
reports on Form N-CEN. We estimate that these expenses would be, in the 
aggregate, about $20.2

[[Page 81989]]

million.\1421\ As indicated by commenters, the 75-day period to file 
Form N-CEN will also benefit funds by staggering the reports that funds 
file with the Commission at the end of each fiscal year.\1422\
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    \1417\ See supra notes 768-769 and accompanying text for a 
discussion of commenters' views on the filing frequency. See also 
ICI Comment Letter (stating that reporting this data on an annual, 
rather than a semi-annual basis, would significantly lessen 
reporting burdens for funds).
    \1418\ Below, we estimate that 3,113 funds will file reports on 
Form N-CEN each year. See infra footnote 1532. Below, we estimate 
that funds will, on average, incur 12.37 burden hours per fund per 
year to comply with the reporting requirements of Form N-CEN. See 
infra footnote 1532 and accompanying text. Therefore, in the 
aggregate, we estimate that such funds would incur about 38,508 
burden hours to comply with these requirements. This estimate is 
based on the following calculation: 3,113 funds x 12.37 hours per 
fund per year = 38,508 hours per year. The Commission estimates the 
wage rate associated with these burden hours based on salary 
information for the securities industry compiled by the Securities 
Industry and Financial Markets Association. The estimated wage 
figure is based on published rates for senior programmers and 
compliance attorneys, modified to account for an 1,800-hour work 
year; multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead; and adjusted to account for the effects of 
inflation, yielding effective hourly rates of $308 and $340, 
respectively. See Securities Industry and Financial Markets 
Association, Report on Management & Professional Earnings in the 
Securities Industry 2013. We estimate that senior programmers and 
compliance attorneys would divide their time equally, yielding an 
estimated hourly wage of $324. ($308 per hour for senior programmers 
+ $340 per hour for compliance attorneys) / 2 = $324 per hour. Based 
on the Commission's estimate of 38,508 burden hours per year and the 
estimated wage rate of $324 per hour, the total annual paperwork 
expenses for funds associated with the internal hour burden imposed 
by the reporting requirements of Form N-CEN are about $12,476,592. 
This estimate is based upon the following calculation: 38,508 hours 
per year x $324 per hour = $12,476,592. Below, we also estimate that 
funds will incur aggregate annual external costs of $2,088,176 to 
comply with the requirements of Form N-CEN. See infra footnote 1538 
and accompanying text. Thus the total estimated annual paperwork 
expenses associated with the reporting requirements of Form N-CEN 
are $14,564,768. This estimate is based upon the following 
calculation: $12,476,592 associated with internal burden + 
$2,088,176 external cost burden = $14,564,768.
    \1419\ Below, we estimate that, in the aggregate, funds 
currently incur about 78,561 burden hours to comply with the 
requirements of Form N-SAR. See infra footnote 1541 and accompanying 
text. The Commission estimates the wage rate associated with these 
burden hours based on salary information for the securities industry 
compiled by the Securities Industry and Financial Markets 
Association. The estimated wage figure is based on published rates 
for senior programmers and compliance attorneys, modified to account 
for an 1,800-hour work year; multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead; and adjusted to 
account for the effects of inflation, yielding effective hourly 
rates of $308 and $340, respectively. See Securities Industry and 
Financial Markets Association, Report on Management & Professional 
Earnings in the Securities Industry 2013. We estimate that senior 
programmers and compliance attorneys would divide their time 
equally, yielding an estimated hourly wage of $324. ($308 per hour 
for senior programmers + $340 per hour for compliance attorneys) / 2 
= $324 per hour. Based on the Commission's estimate of 78,561 burden 
hours and the estimated wage rate of $324 per hour, the total annual 
paperwork expenses for funds associated with the internal hour 
burden imposed by the reporting requirements of Form N-SAR are about 
$25,453,764. This estimate is based upon the following calculation: 
78,561 hours per year x $324 per hour = $25,453,764.
    \1420\ This estimate is based upon the following calculation: 
$25,453,764 in annual paperwork expenses associated with Form N-SAR 
- $14,564,768 in annual paperwork expenses associated with Form N-
CEN = $10,888,996 in annual paperwork expenses.
    \1421\ Below, we estimate that 3,113 funds will file reports on 
Form N-CEN each year. See infra footnote 1532. Below, we estimate 
that funds will, on average, incur 20 additional one-time burden 
hours per fund in the first year to comply with the reporting 
requirements of Form N-CEN. See infra footnote 1528 and accompanying 
text. Therefore, in the aggregate, we estimate that such funds would 
incur about 62,160 one-time burden hours to comply with these 
requirements. This estimate is based on the following calculation: 
3,113 funds x 20 one-time burden hours per fund = 62,260 one-time 
hours. The Commission estimates the wage rate associated with these 
burden hours based on salary information for the securities industry 
compiled by the Securities Industry and Financial Markets 
Association. The estimated wage figure is based on published rates 
for senior programmers and compliance attorneys, modified to account 
for an 1,800-hour work year; multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead; and adjusted to 
account for the effects of inflation, yielding effective hourly 
rates of $308 and $340, respectively. See Securities Industry and 
Financial Markets Association, Report on Management & Professional 
Earnings in the Securities Industry 2013. We estimate that senior 
programmers and compliance attorneys would divide their time 
equally, yielding an estimated hourly wage of $324. ($308 per hour 
for senior programmers + $340 per hour for compliance attorneys) / 2 
= $324 per hour. Based on the Commission's estimate of 62,260 one-
time burden hours and the estimated wage rate of $324 per hour, the 
total one-time paperwork expenses for funds associated with the 
internal hour burden imposed by the reporting requirements of Form 
N-CEN are about $20,172,240. This estimate is based on the following 
calculation: 60,260 one-time hours x $324 per hour = $20,172,240 
one-time expenses.
    \1422\ CAI Comment Letter; T. Rowe Price Comment Letter; Invesco 
Comment Letter; and ICI Comment Letter.
---------------------------------------------------------------------------

    The rescission of Form N-SAR and the introduction of Form N-CEN, to 
the extent relevant, could provide benefits to investors, to third-
party information providers, and to other potential users from an 
update to the census information that investment companies report and 
from an update to its structured data format. Similar to Form N-PORT, 
we expect that institutional investors and other market participants 
could use the information from Form N-CEN more so than individual 
investors. However, individual investors may indirectly benefit from 
the increase in information to the extent that it becomes available 
through third-party information providers, as these information 
providers will likely have the capabilities to efficiently collect the 
data from Form N-CEN and present it for investors in user-friendly 
format. For certain investors and other potential users that would 
obtain and use the information that funds report in Form N-CEN 
directly, the update to the structure of the information should improve 
their ability to efficiently aggregate the information across all 
investment companies given the difficulty associated with extracting 
information from reports on Form N-SAR, due to its idiosyncratic 
reporting format.\1423\
---------------------------------------------------------------------------

    \1423\ See, e.g., Morningstar Comment Letter (noting that the 
XML format will provide more accessible data to the public).
---------------------------------------------------------------------------

    The changes to the reporting of census information, including the 
reporting of the information in a modern structured data format, could 
improve the ability of investors to differentiate investment companies 
and could therefore lead to an increase in competition among funds for 
investor capital. In addition, these changes could enhance the ability 
of investors to understand the investment risks and practices (for 
example, securities lending activities) of investment companies, and 
therefore could improve the ability of investors to efficiently 
allocate capital. Consequently, the reporting changes could promote 
capital formation.
3. Costs
    As discussed above, we expect the new Form N-CEN will be less 
costly to file than Form N-SAR has been, because Form N-CEN will be 
filed annually while Form N-SAR is filed semi-annually.\1424\ ETFs and 
closed-end funds, however, may have higher expenses in filing reports 
on Form N-CEN relative to other investment companies, as they will 
generally be required to provide more information than previously 
reported.\1425\ There could also be costs as a result of the change in 
the frequency of disclosure of census information. For example, the 
Commission will receive census information on an annual instead of 
semi-annual basis, and therefore to the extent that the information 
changes intra-annually the information will be more dated than if the 
information was reported to the Commission on a semi-annual 
basis.\1426\ As discussed above, we believe that the costs related to 
reducing the frequency of the information received on Form N-SAR are 
not significant as this information is unlikely to change frequently. 
Also, funds' reporting costs may be reduced by the elimination, in Form 
N-CEN, of certain items from Form N-SAR that are no longer needed by 
Commission staff or are outdated in their current form.\1427\ In 
addition, as discussed above, we are moving the change in independent 
public accountant attachment proposed on Form N-CEN to Form N-CSR so 
that an accountant's letter regarding a change in accountant will 
become available to the public semi-annually rather than 
annually,\1428\ which we expect will affect reporting and other costs 
only minimally. Additionally, we recognize that we are adding some 
additional information items from the proposal, such as average net 
assets and CRD numbers for directors, which will result in minor 
increases in reporting costs relative to the proposal.
---------------------------------------------------------------------------

    \1424\ See, e.g., Dreyfus Comment Letter (noting that the 
rescission of Form N-SAR and Form N-Q and replacement with Form N-
CEN would result in a net reduction of 504 filings annually for the 
company).
    \1425\ See supra section II.D.4.e for a discussion of the ETF 
requirements.
    \1426\ However, as discussed supra footnote 770, this cost is 
mitigated, in part, by the fact that certain items from Form N-SAR 
that the Commission staff has deemed necessary on a more frequent 
basis are included instead in reports on Form N-PORT.
    \1427\ See discussion supra section II.D.5. One commenter did, 
however, suggest we reconsider the exclusion of several of these 
items. Comment Letter of Morningstar, Inc. (July 20, 2015).
    \1428\ See supra section II.D.4.b.
---------------------------------------------------------------------------

    As discussed above, some commenters objected to the inclusion of 
the requirement for each ETF to report the dollar value of the ETF 
shares that each authorized participant purchased and redeemed from the 
ETF during the reporting period, expressing concerns that reporting 
authorized participant activities on Form N-CEN could discourage 
authorized participants from participating in the ETF market, leading 
to further concentration in the authorized participant community or 
authorized participants moving their ETF-related trading activities to 
banks or ``clearing'' authorized participants.\1429\ We expect that any 
effects of these reporting requirements on authorized participant 
participation in the ETF primary market will be minimal. We continue to 
believe, moreover, that collection of this additional information may 
allow the Commission staff to monitor how ETF purchase and redemption 
activity is distributed across authorized participants and, for 
example, the extent to which a particular ETF--or ETFs as a group--may 
be reliant on one or more particular authorized participants, and we 
believe that adopting the new reporting requirements is appropriate in 
light of these benefits notwithstanding the possibility that public 
availability of the information might affect the ETF primary markets in 
the manner those commenters suggest.
---------------------------------------------------------------------------

    \1429\ See supra footnote 1072 and accompanying text.
---------------------------------------------------------------------------

    Form N-CEN could impose costs on investors and other potential 
users of the information to obtain the information from a new or 
additional source, including the information that

[[Page 81990]]

will not be included on Form N-CEN but would be available through other 
filings. The information that will not be included on Form N-CEN and 
that will not be available elsewhere will impose costs on investors and 
other potential users from a loss of information to the extent that the 
information is found to be useful.\1430\ One commenter expressed 
concern that obtaining this information from various sources would 
reduce its availability to investors and other interested parties, but 
could be available through third-party information providers.\1431\ We 
have attempted to mitigate the potential cost relating to the loss of 
information by eliminating only those items which are either available 
elsewhere, not frequently used by Commission staff, or provide minimal 
benefit relative to the burdens of reporting such information.
---------------------------------------------------------------------------

    \1430\ Some of the information that funds will no longer report 
on a census-form, such as loads paid to captive or unaffiliated 
brokers, has been found by interested third-parties, including 
researchers, to be important in their analysis of the fund industry. 
See, e.g., Susan E. K. Christoffersen, Richard Evans & David K. 
Musto, What do Consumers' Fund Flows Maximize? Evidence from Their 
Brokers' Incentives, 68 J. of Fin. 201 (2013). See discussion supra 
section II.D.5.
    \1431\ See, e.g., Morningstar Comment Letter.
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4. Alternatives
    Similar to Form N-PORT, the Commission has explored other ways to 
modernize and improve the utility and the quality of the census 
information that funds provide to the Commission and to investors. 
Commission staff examined how census information reported to the 
Commission could be improved to assist the Commission in its oversight 
activities, as well as how the information could benefit investors and 
other potential users of the information. Alternatives to the filing of 
Form N-CEN and the reporting of census information relate to the timing 
and frequency of the reports, the public disclosure of the information, 
the information that Form N-PORT would request, and the rescission of 
Form N-SAR.
    Unlike Form N-SAR, on which management companies file reports on a 
semi-annual basis, management companies will report information on Form 
N-CEN on an annual basis. An alternative to the annual reporting of 
census information in Form N-CEN is a semi-annual reporting of the 
information similar to Form N-SAR. However, as we discussed above, the 
census-type nature of the information that we will collect from funds 
in Form N-CEN should not change as frequently as, for example, 
portfolio holdings information.\1432\ Requiring management companies to 
report census information semi-annually would therefore place a burden 
on funds without a commensurate increase in the value of the 
information received by the Commission.
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    \1432\ Unlike Form N-SAR, Form N-CEN will not require funds 
report information relating to fee and expense information. 
Morningstar Comment Letter suggested semi-annual reporting of Form 
N-CEN should fee and expense information be required on Form N-CEN.
---------------------------------------------------------------------------

    We also considered alternatives to extend or shorten the filing 
period of Form N-CEN from 75 days. While a shorter filing period, such 
as 60 days (similar to the proposal) would provide more timely 
information to the Commission,\1433\ it would also place a burden on 
funds that need time to collect, verify, and report the required 
information to the Commission. Several commenters supported extending 
the filing period to at least a 75-day period, arguing, among other 
things, that a longer time period would help stagger the filing 
deadline from other end-of-month filing requirements, ensure that all 
accounting-related questions could be addressed more completely, and 
allow the appropriate time needed to update systems to report 
information in an XML format.\1434\ As discussed above, we have been 
persuaded by commenters to adopt a filing period of 75 days after the 
fiscal year-end (for management companies) and calendar year-end (for 
UITs). We believe that the 75-day filing period for Form N-CEN would 
appropriately balance the staff's need for timely information against 
the appropriate amount of time for funds to collect, verify, and report 
information to the Commission.
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    \1433\ Several commenters supported the 60-day filing period 
(Carol Singer Comment Letter and State Street), other commenters 
supported a longer filing period (MFS Comment Letter; CAI Comment 
Letter; T. Rowe Price Comment Letter; Invesco Comment Letter; and 
ICI Comment Letter). One justification for a longer filing period 
provided by commenters is the time needed to update systems to 
report information in an XML format (MFS Comment Letter; Invesco 
Comment Letter; and ICI Comment Letter).
    \1434\ MFS Comment Letter; CAI Comment Letter; T. Rowe Price 
Comment Letter; Invesco Comment Letter; and ICI Comment Letter.
---------------------------------------------------------------------------

    Funds will have 18 months after the effective date to comply with 
the new reporting requirements for Form N-CEN. An alternative would be 
to tier the compliance period, similar to the compliance period for 
Form N-PORT, dependent on entity size. However, as discussed above, we 
believe that it is less likely that smaller entities would need 
additional time to file Form N-CEN because the requirement to file Form 
N-CEN is similar to the current requirement to file Form N-SAR, and we 
expect that filers will prefer the updated, more efficient filing 
format of Form N-CEN.\1435\ An additional alternative would be to 
extend the compliance period. Some commenters suggested that the 
compliance period be extended to the later of 30 months after adoption 
of Form N-CEN, or 18 months after the effective date of amendments 
requiring funds to report liquidity information on Form N-CEN.\1436\ 
Given that much of the information that will be reported on Form N-CEN 
is currently already reported by funds on Form N-SAR, funds should 
already have processes and procedures in place to reduce the risk of 
inadvertent errors. In addition, filings on Form N-CEN are not expected 
to be as technically complex nor present comparable challenges in terms 
of reporting and data validation as filings on Form N-PORT. As such, we 
expect that eighteen months will provide an adequate period of time for 
funds, intermediaries, and other service providers to conduct the 
requisite operational changes to their systems and to establish 
internal processes to prepare, validate, and file reports on Form N-CEN 
with the Commission.
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    \1435\ No commenters expressed an opinion specifically related 
to the filing format of N-CEN versus N-SAR.
    \1436\ See, e.g., Fidelity Comment Letter (suggesting a 
compliance date of 30 months after the adoption of Form N-CEN); MFS 
Comment Letter (same); CAI Comment Letter (same); IDC Comment Letter 
(same); ICI Comment Letter (suggesting the later of 30 months after 
the adoption of Form N-CEN or 18 months after the adoption of 
amendments requiring funds to report liquidity information on Form 
N-CEN).
---------------------------------------------------------------------------

    Funds will be required to report to the Commission information in 
Form N-CEN that will provide staff an ability to identify investment 
risks and engage in further outreach as necessary. Not requiring the 
information would substantially reduce the ability of the Commission to 
oversee the fund industry. In addition, the information reported on 
Form N-CEN could be important to investors to differentiate investment 
companies. An alternative to adopting Form N-CEN would be to revise 
Form N-SAR. The Commission believes, however, that the outdated 
technology associated with Form N-SAR requires the introduction of a 
new form in order to increase the benefits from the changes made to the 
reporting of census information. In addition, there were no commenters 
who explicitly stated that Form N-SAR should not be replaced by Form N-
CEN.
    The information that funds report on Form N-CEN will be made 
publicly available. Additional alternatives include making some or all 
of the

[[Page 81991]]

census information reported on the form nonpublic. Specific information 
that could be made nonpublic includes securities lending 
information,\1437\ service provider information,\1438\ and ETF 
authorized participant information.\1439\ Making more information 
reported on Form N-CEN nonpublic would reduce the amount of information 
available to investors and therefore reduce the ability of investors to 
differentiate investment companies. For example, one commenter 
recommended that details concerning indemnification protection should 
be made nonpublic.\1440\ Nonetheless, we continue to believe that 
public reporting is a necessary part of improving transparency 
regarding a fund's securities lending activities. Specifically, we 
believe that the information regarding indemnification provisions is 
relevant to investors evaluating the risks associated with securities 
lending and comparing those risks across funds.
---------------------------------------------------------------------------

    \1437\ Some commenters suggested that certain securities lending 
information be kept non-public, including information describing 
third-party lending arrangements (Fidelity Comment Letter).
    \1438\ Some commenters suggested that certain service provider 
information be kept non-public, including the identities of the 
pricing services used (Interactive Data Comment Letter) and the 
compensation and other fee and expense arrangements (IDC Comment 
Letter).
    \1439\ Some commenters suggested that disclosure of information 
on authorized participants could discourage APs from participating 
in the ETF market (Invesco Comment Letter and BlackRock Comment 
Letter), while others suggested that disclosure of the creation and 
redemption activity of each AP is not helpful and is confusing to 
investors (BlackRock Comment Letter). See supra footnote 1429 and 
accompanying text.
    \1440\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    One set of alternatives is to require funds to report additional 
information on Form N-CEN, including additional new information that is 
not currently reported on Form N-SAR.\1441\ Another set of alternatives 
is to require funds to report less information on Form N-CEN. For 
example, commenters expressed concern about providing new information 
related to securities lending, service providers, and ETF authorized 
participants, and one alternative is to not require this information to 
be provided.\1442\ One commenter, however, expressed concern about the 
exclusion from Form N-CEN of particular items on Form N-SAR.\1443\ As 
discussed above, the adoption of Form N-CEN and the rescission of Form 
N-SAR will improve the quality and utility of the information 
investment companies report to the Commission. Although additional 
information could further increase the benefits of Form N-CEN to 
Commission staff, investors, and other interested parties, the benefits 
may not justify the initial and ongoing costs for investment companies 
to report the information because the Commission believes that the 
information we are requesting strikes an appropriate balance between 
the current information needs of Commission staff as well as the 
developments in the fund industry and the reduction of reporting 
burdens for registrants, particularly where information may be 
similarly disclosed or reported elsewhere.\1444\
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    \1441\ Morningstar Comment Letter expressed concern that some of 
the information that would have been eliminated under the proposal 
would decrease the availability of the information for investors and 
other interested parties.
    \1442\ See, e.g., Fidelity Comment Letter; Interactive Data 
Comment Letter; and BlackRock Comment Letter; supra footnote 1429 
and accompanying text.
    \1443\ Morningstar Comment Letter expressed concern that the 
exclusion of several Form N-SAR items would then require a manual 
aggregation of information that would put comprehensive analysis of 
the information out of reach for investors and fund boards unless 
they were using services from third-party providers that could 
aggregate such data.
    \1444\ See, e.g., supra footnotes 941, 968, 989, 1000-1003 and 
accompanying text.
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E. Amendments to Forms Regarding Securities Lending Activities

1. Introduction and Economic Baseline
    We are also adopting amendments to Forms N-1A and N-3 to require 
certain disclosures in fund Statements of Additional Information 
regarding securities lending activities, as well as amendments to Form 
N-CSR to require the same information from closed-end funds.\1445\ We 
proposed that similar requirements be included in fund financial 
statements as part of the proposed amendments to Regulation S-X in 
order to allow investors to better understand the income generated 
from, as well as the expenses associated with, a fund's securities 
lending activities.\1446\ Some commenters stated that some of the 
proposed requirements would yield estimates that may be costly to 
audit, and that lengthy disclosure concerning securities lending 
activity in a fund's financial statements could detract from other 
financial statement disclosures.\1447\ After consideration of these 
issues raised by commenters, we are adopting these disclosure 
requirements as amendments to the fund registration forms (viz., Forms 
N-1A and N-3) or, in the case of closed-end funds, as amendments to 
Form N-CSR, rather than as amendments to Regulation S-X.\1448\
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    \1445\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; Item 
12 of Form N-CSR; see also supra section II.F.
    \1446\ The proposed requirements would have included disclosure 
in the fund's financial statements of (1) the gross income from 
securities lending, including income from cash collateral 
reinvestment; (2) the dollar amount of all fees and/or compensation 
paid by the fund for securities lending activities and related 
services, including borrower rebates and cash collateral management 
services; (3) the net income from securities lending activities; (4) 
the terms governing the compensation of the securities lending 
agent, including any revenue sharing split, with the related 
percentage split between the fund and the securities lending agent, 
and/or any fee-for-service, and a description of services included; 
(5) the details of any other fees paid directly or indirectly, 
including any fees paid directly by the fund for cash collateral 
management and any management fee deducted from a pooled investment 
vehicle in which cash collateral is invested; and (6) the monthly 
average of the value of portfolio securities on loan. See proposed 
rule 6-03(m) of Regulation S-X; Proposing Release, supra footnote 7, 
at 33624.
    \1447\ See Deloitte Comment Letter; EY Comment Letter.
    \1448\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; Item 
12 of Form N-CSR.
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    The final rules will require funds to disclose gross and net income 
from securities lending activities, fees and compensation in total and 
broken out by enumerated types, and a description of the services 
provided to the fund by the securities lending agent. The quantitative 
disclosure requirements are discussed above in section II.F and also 
illustrated in Table 2 below.

[[Page 81992]]

[GRAPHIC] [TIFF OMITTED] TR18NO16.013

    Modifications from the proposed rule include, for example, 
replacing the proposed requirement that funds disclose the terms 
governing the compensation of the securities lending agent--including 
any revenue split--with a requirement to report actual fees paid during 
the fund's prior fiscal year,\1449\ because commenters persuaded us 
that backward-looking dollar-based requirements would yield clearer 
disclosure than would the proposed requirements and may also enhance 
disclosure comparability across funds for investors and reduce 
preparation complexity for funds. Additionally, as discussed above, 
while the proposed requirements would have included disclosure of all 
fees and/or compensation paid for securities lending and related 
services, we have determined that it is appropriate to clarify in the 
final rules the specific categories of fees and/or compensation that 
are required to be disclosed.\1450\
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    \1449\ Compare proposed rule 6-03(m)(4) of Regulation S-X with 
Item 19(i)(1)(ii) of Form N-1A; Item 21(j)(i)(B) of Form N-3 (same); 
Item 12(a)(1) of Form N-CSR.
    \1450\ Compare proposed rule 6-03(m)(2) with Item 19(i)(1)(ii) 
of Form N-1A; Item 21(j)(i)(B) of Form N-3; and Item 12(a)(1) of 
Form N-CSR.
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    The current set of fund registration statement and reporting 
requirements under Forms N-1A, N-3, and N-CSR (for closed-end funds) is 
the baseline from which we discuss the economic effects of today's 
amendments. The parties that could be affected by these amendments 
include funds that file or will file or update registration statements 
with the Commission (and closed-end funds that file or will file 
reports on Form N-CSR), the Commission itself, current and future 
investors of investment companies, and other market participants that 
could be affected by the increase in the disclosure of fund securities 
lending activity information.
    We expect that many of the economic effects from the amendments to 
Forms N-1A, N-3, and N-CSR will largely result from an increase in 
investor ability to make investment decisions dependent on the more 
transparent disclosure in fund Statements of Additional Information (or 
in Form N-CSR for closed-end funds), and the extent to which this 
transparency enhances the ability of the Commission to utilize the 
updated disclosures. As discussed above, the economic effects will 
depend on the extent to which the securities lending practices of all 
investment companies become more transparent, and the ability of 
investors--and, in particular, individual investors--to utilize 
Statements of Additional Information (and reports on Form N-CSR for 
closed-end funds) to compare funds and to make investment decisions. As 
a result of these factors, some of which are unquantifiable, the 
discussion below is largely qualitative.
2. Benefits
    The amendments to Forms N-1A, and N-3, and N-CSR will benefit 
investors by enhancing the information funds disclose in the Statements 
of Additional Information (and reports on Form N-CSR for closed-end 
funds). We continue to believe that because net earnings from 
securities lending can contribute to the investment performance of a 
fund, the Commission, investors and others would benefit from the 
additional transparency of securities lending fees on the income from 
these activities. We further believe that the benefits of this 
additional transparency justify the potential unintended consequences, 
highlighted by commenters and discussed above, of public disclosure of 
certain information.\1451\
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    \1451\ See supra footnotes 1212-1219 and accompanying text.
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    We have made modifications from the proposed requirements designed 
to, among other things, enhance comparability of the disclosed 
information and potentially ameliorate some concerns commenters 
expressed about the proposed required public disclosure of the terms 
governing compensation of the securities lending agent. A commenter 
suggested that we could facilitate comparability by specifying the fees 
for particular services that must be disclosed,\1452\ and we agree. We 
believe that these clarifications will enhance comparability of the 
disclosed fees and compensation across funds, and indirectly benefit 
investors to the extent that other entities, including investment 
advisers and broker-dealers, utilize the

[[Page 81993]]

information to help investors make more informed investment decisions.
---------------------------------------------------------------------------

    \1452\ See Fidelity Comment Letter.
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    The comparability of the disclosed fee and expense information may 
also depend on the nature of the services provided to a particular fund 
in connection with its securities lending activities. Accordingly, to 
further enhance the comparability of the disclosed information and 
allow users to better assess fee and expense information, we have 
determined to specify that this information should be provided on the 
basis of the services actually provided to the fund in its most recent 
fiscal year and the discussion above provides some examples of the 
types of services that could be enumerated to illustrate such 
services.\1453\
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    \1453\ Item 19(i)(2) of Form N-1A (requiring disclosure of the 
services provided to the fund by the securities lending agent (for 
example and as applicable, locating borrowers, monitoring daily the 
value of the loaned securities and collateral, requiring additional 
collateral as necessary, cash collateral management, qualified 
dividend management, negotiation of loan terms, selection of 
securities to be loaned, recordkeeping and account servicing, 
monitoring dividend activity and material proxy votes relating to 
loaned securities, and arranging for return of loaned securities to 
the fund at loan termination)); Item 21(j)(ii) of Form N-3 (same); 
Item 12(b) of Form N-CSR (same).
---------------------------------------------------------------------------

    As mentioned above, we are persuaded that backward-looking dollar-
based requirements would yield clearer disclosure than would the 
proposed requirements and may also enhance disclosure comparability 
across funds for investors and reduce preparation complexity for funds. 
This change from the proposal allows investors and others to derive the 
informational benefit from the disclosure without any potentially 
sensitive negotiated contractual terms being made public.
3. Costs
    We believe that registrants on average will likely incur minimal 
costs from our amendments to Forms N-1A and N-3, including certain 
paperwork and other expenses discussed below.\1454\
---------------------------------------------------------------------------

    \1454\ See infra footnotes 1460-1461 and accompanying text. See 
also supra section III.B.3 for related cost analysis associated with 
amendments to Form N-CSR.
---------------------------------------------------------------------------

    Several commenters expressed concern that the proposed disclosure 
requirements could yield information that would suggest, inaptly, that 
fees and expenses related to securities lending activities among funds 
are readily compared and contrasted.\1455\ While there is the potential 
for investor confusion with any disclosure, we believe we have 
mitigated these concerns through changes that we are making from the 
proposal, such as switching from terms of compensation to backward-
looking dollar based requirements and providing clarification in the 
final rules as to the types of fees and/or compensation that must be 
enumerated.
---------------------------------------------------------------------------

    \1455\ See MFS Comment Letter; PwC Comment Letter.
---------------------------------------------------------------------------

    Another commenter expressed concerns that the proposed fee and 
expense information could be used to evaluate the terms of a fund's 
lending arrangements and could, without access to additional 
information, result in potentially inappropriate conclusions that a 
fund negotiated its arrangements poorly or was otherwise disadvantaged 
in its negotiations.\1456\ That commenter noted that the revenue split 
can depend on numerous factors, including the range, amount, and 
attractiveness of the securities a fund complex as a whole may make 
available for loan.\1457\ We believe that the modifications we have 
made from the proposal, discussed above in Section II.F.2, help 
ameliorate these concerns.
---------------------------------------------------------------------------

    \1456\ PwC Comment Letter (particularly with respect to the 
proposed terms of compensation disclosure requirement); see also RMA 
Comment Letter (concerning borrower rebates).
    \1457\ PwC Comment Letter.
---------------------------------------------------------------------------

    Commenters also expressed concerns with the proposed requirements 
based on the currently nonpublic character of some of the information 
that would be required to be disclosed publicly, particularly the 
proposed requirement to disclose the terms governing compensation of 
the securities lending agent.\1458\ Commenters argued that some funds 
currently enjoy privately negotiated competitive advantages with 
securities lending services or counterparties that could be jeopardized 
should their arrangements with their securities lending agents be made 
public.\1459\ First, we note that, as discussed herein, we have 
modified the rule from the proposal and are no longer requiring certain 
pieces of information be disclosed--specifically, the terms of the 
revenue split and the terms governing the compensation of the 
securities lending agent more generally. We acknowledge, as these 
commenters have asserted, that enhanced transparency into securities 
lending arrangements could put funds at a competitive disadvantage by 
affecting the relative negotiating posture of funds that procure 
securities lending services, or dissuade counterparties from engaging 
in securities lending altogether, which could drive up the costs of 
lending services for funds. We believe, however, that the modifications 
to the proposed requirements that we are making today eliminate the 
disclosures from the proposed requirements that some commenters 
indicated could be the most sensitive while retaining the required 
information that we think will be most useful to investors in 
understanding the expenses associated with fund securities lending 
activities. This dollar-based requirement would also eliminate the 
requirement that potentially sensitive negotiated contractual terms be 
disclosed.
---------------------------------------------------------------------------

    \1458\ See AICPA Comment Letter (particularly with respect to 
the terms governing the compensation of the securities lending 
agent); Fidelity Comment Letter (particularly with respect to the 
revenue split); ICI Comment Letter; Invesco Comment Letter; MFS 
Comment Letter; SIFMA Comment Letter I; Simpson Thacher Comment 
Letter (particularly with respect to the revenue split); Wells Fargo 
Comment Letter.
    \1459\ See AICPA Comment Letter; Fidelity Comment Letter; ICI 
Comment Letter; Invesco Comment Letter; MFS Comment Letter; SIFMA 
Comment Letter I; Simpson Thacher Comment Letter; Wells Fargo 
Comment Letter.
---------------------------------------------------------------------------

    As mentioned above, we are persuaded that backward-looking dollar-
based requirements would yield clearer disclosure than would the 
proposed requirements, thus mitigating potential costs related to 
misinterpretation or a false sense of precision by investors. In 
addition, this switch from terms of compensation to backward-looking 
dollar-based requirements could yield a cost savings for filers by 
possibly reducing preparation complexity relative to the proposal.
    We expect that funds would incur certain paperwork and other 
expenses in connection with the new requirements. For funds that file 
registration statements on Forms N-1A and N-3, as discussed in detail 
below, we estimate that these paperwork expenses would be, in the 
aggregate, about $1.3 million each year.\1460\ Funds

[[Page 81994]]

would also incur initial one-time costs associated with establishing 
systems and procedures for compliance. We estimate that these expenses 
would be, in the aggregate, about $3.9 million.\1461\ For closed-end 
funds that file annual reports on Form N-CSR, we estimate that the new 
requirements will increase the hour burden associated with the 
paperwork costs of Form N-CSR for closed-end funds by an additional 2 
burden hours with an additional internal cost burden of $648 per fund 
in the first year,\1462\ and an additional 0.5 hours with an additional 
internal cost burden of $162 per fund for filings in subsequent 
years.\1463\
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    \1460\ Below, we estimate that 9,502 and 16 funds per year could 
file registration statements on Forms N-1A and N-3, respectively. 
See infra text following footnote 1591. Below, we estimate that 
funds will, on average, incur 0.5 burden hours per fund per year to 
comply with the new registration statement requirements. See id. 
Therefore, in the aggregate, we estimate that such funds would incur 
about 5,038 burden hours to comply with these requirements. (9,502 
funds + 16 funds) x 0.5 burden hours per fund per year = 4,759 
burden hours per year. The Commission estimates the wage rate 
associated with these burden hours based on salary information for 
the securities industry compiled by the Securities Industry and 
Financial Markets Association. The estimated wage figure is based on 
published rates for intermediate accountants and attorneys, modified 
to account for an 1,800-hour work year; multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead; and 
adjusted to account for the effects of inflation, yielding effective 
hourly rates of $160 and $386, respectively. See Securities Industry 
and Financial Markets Association, Report on Management & 
Professional Earnings in the Securities Industry 2013. We estimate 
that intermediate accountants and attorneys would divide their time 
equally, yielding an estimated hourly wage of $273 per hour. ($160 
per hour for intermediate accountants + $386 per hour for attorneys) 
/ 2 = $273 per hour. Based on the Commission's estimate of 4,759 
burden hours per year and the estimated wage rate of $273 per hour, 
the total annual paperwork expenses for funds associated with the 
new registration statement requirements are approximately 
$1,299,207. 4,759 hours per year x $273 per hour = $1,299,207 per 
year.
    \1461\ Below, we estimate that funds will, on average, incur 1.5 
one-time burden hours in the first year to comply with the new 
registration statement requirements. See infra text following 
footnote 1591. Therefore, in the aggregate, we estimate that such 
funds will incur about 15,114 one-time burden hours to comply with 
these requirements. (9,502 funds + 16 funds) x 1.5 one-time burden 
hours = 14,277 one-time burden hours. Based on the Commission's 
estimate of 14,277 one-time burden hours and the estimated wage rate 
of $273 per hour, the total one-time paperwork expenses for funds 
associated with the new registration statement requirements are 
approximately $3,897,621. 14,277 one-time burden hours x $273 per 
hour = $3,897,621.
    \1462\ See infra footnote 1610 and accompanying text; see also 
infra section IV.D.7.
    \1463\ See infra footnote 1611 and accompanying text; see also 
infra section IV.D.7.
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4. Alternatives
    The Commission has also explored other ways to modernize and 
improve the utility, quality, and consistency of the information that 
funds report to the Commission and to investors in the financial 
statements required in shareholder reports and other registration 
statements. Commission staff examined how the information funds provide 
to the Commission and to investors could be made more informative and 
more consistent across funds. Alternatives to the amendments to Forms 
N-1A, N-3, and N-CSR to require certain disclosures relate to 
information that funds report and the location in which the information 
is reported.
    One alternative would be simply to not adopt any new securities 
lending disclosure amendments. We believe, however, that information 
regarding securities lending activities can provide investors with 
insights into fund activities, foster comparability across funds, and 
contribute to investors making informed investment decisions.
    We are adopting amendments to Forms N-1A, N-3, and Form N-CSR to 
require certain disclosures regarding securities lending activities. 
Alternatively, we could require these disclosures to be made in the 
financial statements, in Form N-PORT, or in Form N-CEN. Given that our 
objective was to make this information available to investors and other 
users of the data, after consideration of comments we have decided that 
the Statement of Additional Information (and, with respect to closed-
end funds, reports on Form N-CSR) is an appropriate place for funds to 
be required to disclose this information.
    Finally, we could adopt different reporting requirements. For 
example, we could, as proposed, have required funds to disclose the 
terms of compensation in securities lending agreements rather than the 
backward-looking, dollar-based values. However, as discussed 
previously, commenters suggested, that doing so could result in the 
loss of privately negotiated competitive advantages or a decrease in 
the number of counterparties willing to participate in the securities 
lending market, and we believe that the requirements, as adopted 
eliminate the disclosures from the proposed requirements that 
commenters indicated could be the most sensitive while retaining the 
required information that we think will be most useful to investors in 
understanding the expenses associated with fund securities lending 
activities. Hence, we have decided against such an alternative.

F. Other Alternatives to the Reporting Requirements

    The Commission has explored additional ways to modernize and 
improve the utility and the quality of the information that funds 
provide to the Commission and to investors. The Commission has 
considered many alternatives to the individual elements contained in 
new Form N-PORT, amendments to Regulation S-X, and new Form N-CEN; 
alternatives specific to each of the new reporting requirements are 
discussed above. The following discussion addresses other significant 
alternatives which involve aspects of fund reporting that pertain to 
more than one of the new reporting requirements.
    The Commission considered the information that will be required on 
Form N-PORT as compared to the information on Form N-CEN. Commission 
staff considered the benefits to having the information more frequently 
updated as well as the cost to funds to report the information. 
Although the reporting of information on a more frequent basis imposes 
additional costs on funds, Commission staff believes the information 
that will be reported more frequently on Form N-PORT, relative to the 
annual reporting on Form N-CEN, is necessary for the Commission's 
oversight activities and could be important to other interested third-
parties. Commission staff also considered the benefits of 
identification information to link information between forms and with 
other sources of information, with the costs to funds to obtain and 
report the identification information on the new forms.
    The Commission is requiring that investment companies file Form N-
PORT and Form N-CEN in an XML structured data format. One alternative 
is to not structure the information. As discussed, the ability of 
Commission staff, investors, third-party information providers, and 
other potential users to utilize the information is dependent on the 
efficiency with which the information investment companies provide can 
be compiled and aggregated. Commission staff believes that the affected 
parties would experience substantially less benefit from the reporting 
of investment company information if the information is not structured 
because of the time it would take to parse the information and the 
potential for errors in data due to the fact that unstructured data 
cannot be validated during the filing process. In addition, based on 
the Commission's understanding of current practices, it is likely that 
many investment companies and third party service providers have 
systems in place to accommodate the use of XML. Furthermore, based on 
our experiences with Forms N-MFP and PF, both of which require filers 
to report information in an XML format, we continue to believe that 
requiring funds to report information on Forms N-PORT and N-CEN in an 
XML format will provide the information that we seek in a timely and 
cost-effective manner. Therefore, requiring information in a format 
such as XML should impose minimal costs. The Commission will require 
funds to file certain attachments to their reports on Form N-PORT and 
Form N-CEN, and these attachments would not be required in a structured 
data format. The Commission believes that only marginal benefits would 
result from requiring funds to file these attachments in a structured, 
XML format due to the narrative format of the information provided.

[[Page 81995]]

    The technology used to structure the data could affect the benefits 
and costs associated with the adopted rules, and we have therefore 
considered alternative formats for structuring the data.\1464\ Some 
commenters suggested XBRL, a tagged system that is based on XML and was 
created specifically for the purpose of reporting financial and 
business information,\1465\ so as to leverage existing data definitions 
and reduce implementation costs.\1466\ However, as noted earlier we 
believe that requiring funds to report information on Form N-PORT in 
XML will be both efficient and cost-effective for funds. Sending a data 
file from a sender to a recipient requires many conditions to be 
satisfied, and among those of crucial importance to regulatory data 
collection are compact transmission and efficient validation. XML 
Schema provides a widely used validation framework for XML, and is 
supported in all modern programming languages. The nature of the 
information we are collecting also lends itself to XML schema for 
almost all validation,\1467\ and the arithmetic validations not 
supported natively in XML Schema are straightforwardly expressible in 
any number of languages. For this data set, the additional flexibility 
offered by a broader XML based framework such as XBRL incurs data 
volume and processing overhead with little incremental benefit; for 
example, the information funds will report will be as of a single 
reporting date, the units of measurement are predetermined or are 
constrained by the data type, and there is little value in customizing 
the content or presentation.
---------------------------------------------------------------------------

    \1464\ One commenter suggested a pre-formatted web portal or web 
form as well as the further development of inline structured data to 
ease reporting burdens (Schnase Comment Letter). We believe, 
however, that the volume of data for a fund to report on Form N-PORT 
would not lend itself to a manual entry approach, although we are 
considering the possibility of providing an online form for filers 
to use at their option for filing Form N-CEN, as we have with some 
other Commission Forms, such as Form 13F.
    \1465\ See, e.g., XBRL US Comment Letter; Deloitte Comment 
Letter; but see Morningstar Comment Letter (``Extensible Business 
Reporting Language has had very limited success, and certain aspects 
of the standard are too lenient for regular data validation.'').
    \1466\ For example, public companies currently use XBRL 
taxonomies to file reports with the SEC, including investment 
companies that voluntarily file structured data on Form N-CSR.
    \1467\ Some commenters discussed the additional benefits from 
the types of validation that can be conducted with XBRL (XBRL US 
Comment Letter and AICPA Comment Letter).
---------------------------------------------------------------------------

    Finally, one commenter stated that we should not require funds to 
directly report information on their own behalf, but instead require 
other entities such as transfer agents and custodians to report 
information on behalf of funds.\1468\ Given our expertise and 
experience in regulating, examining, and overseeing funds, including 
fund reporting, recordkeeping, and compliance, we continue to believe 
that obtaining such information directly from funds is appropriate.
---------------------------------------------------------------------------

    \1468\ See Federated Comment Letter (``It would also reduce the 
reporting burden on funds for the Commission to acquire information 
directly from custodians and transfer agents, which are proficient 
in maintaining and reporting portfolio holdings and other 
information.'').
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IV. Paperwork Reduction Act

    New forms Form N-CEN and Form N-PORT contain ``collections of 
information'' within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\1469\ In addition, the amendments to Articles 6 and 12 of 
Regulation S-X will impact the collections of information under rules 
30e-1 and 30e-2 of the Investment Company Act,\1470\ and the amendments 
to Forms N-1A, N-2, N-3, N-4, N-6, and N-CSR under the Investment 
Company Act and Securities Act will impact the collections of 
information under those forms. Furthermore, implementation of new Forms 
N-PORT and N-CEN will coincide with rescission of Forms N-Q and N-SAR, 
thus eliminating the collections of information associated with those 
forms and impacting the collections of information under Form N-CSR.
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    \1469\ 44 U.S.C. 3501 through 3521.
    \1470\ The paperwork burden from Regulation S-X is imposed by 
the rules and forms that relate to Regulation S-X and, thus, is 
reflected in the analysis of those rules and forms. To avoid a PRA 
inventory reflecting duplicative burdens and for administrative 
convenience, we have previously assigned a one-hour burden to 
Regulation S-X.
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    The titles for the existing collections of information are: ``Form 
N-Q--Quarterly Schedule of Portfolio Holdings of Registered Management 
Investment Company'' (OMB Control No. 3235-0578); \1471\ ``Form N-SAR 
under the Investment Company Act of 1940, Semi-Annual Report for 
Registered Investment Companies'' (OMB Control No. 3235-0330); Rule 
30e-1 under the Investment Company Act of 1940, Reports to Stockholders 
of Management Companies'' (OMB Control No. 3235-0025); ``Rule 30e-2 
pursuant to Section 30(e) of the Investment Company Act of 1940. 
Reports to Shareholders of Unit Investment Trusts'' (OMB Control No. 
3235-0494); ``Form N-CSR under the Securities Exchange Act of 1934 and 
under the Investment Company Act of 1940, Certified Shareholder Report 
of Registered Management Investment Companies'' (OMB Control No. 3235-
0570); ``Form N-1A under the Securities Act of 1933 and under the 
Investment Company Act of 1940, Registration Statement of Open-End 
Management Investment Companies'' (OMB Control No. 3235-0307); ``Form 
N-2 under the Investment Company Act of 1940 and Securities Act of 
1933, Registration Statement of Closed-End Management Investment 
Companies'' (OMB Control No. 3235-0026); ``Form N-3 Under the 
Securities Act of 1933 and Under the Investment Company Act of 1940, 
Registration Statement of Separate Accounts Organized as Management 
Investment Companies'' (OMB Control No. 3235-0316); ``Form N-4 (17 CFR 
239.17b) Under the Securities Act of 1933 and (17 CFR 274.11c) Under 
the Investment Company Act of 1940, Registration Statement of Separate 
Accounts Organized as Unit Investment Trusts'' (OMB Control No. 3235-
0318); ``Form N-6 (17 CFR 239.17c) Under the Securities Act of 1933 and 
(17 CFR 274.11d) Under the Investment Company Act of 1940, Registration 
Statement of Separate Accounts Organized as Unit Investment Trusts that 
Offer Variable Life Insurance Policies'' (OMB Control No. 3235-0503). 
The titles for the new collections of information are: ``Form N-CEN 
Under the Investment Company Act, Annual Report for Registered 
Investment Companies'' (OMB Control No. 3235-0729 for N-CEN) and ``Form 
N-PORT Under the Investment Company Act, Monthly Portfolio Investments 
Report'' (OMB Control No. 3235-0730).
---------------------------------------------------------------------------

    \1471\ Currently, there is a collection of information 
associated with rule 30b1-5 under the Investment Company Act. See 
rule 30b1-5, `Quarterly Report' Originally submitted and approved as 
Proposed Rule 30b1-4 under the Investment Company Act of 1940, 
`Quarterly Report' '' (OMB Control No. 3235-0577). Rule 30b1-5 is 
the rule that requires certain funds to file Form N-Q. Among other 
things, we are rescinding Form N-Q and requiring certain funds to 
file Form N-PORT pursuant to new rule 30b1-9. With this in mind, we 
are discontinuing the information collection for rule 30b1-5.
---------------------------------------------------------------------------

    We published notice soliciting comments on the collection of 
information requirements in the Proposing Release and submitted the 
proposed collections of information to the Office of Management and 
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 
CFR 1320.11. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
    The Commission is adopting new forms Form N-CEN and Form N-PORT and 
amendments to Regulation S-X and the relevant registration forms, as 
well as the rescission of Forms N-Q and Form N-SAR, as part of a set of 
reporting and disclosure reforms. These

[[Page 81996]]

reforms are designed to harness the benefits of advanced technology and 
to modernize the fund reporting regime in order to help investors and 
other market participants better assess different fund products and to 
assist the Commission in carrying out our regulatory functions. We 
discuss below the collection of information burdens associated with 
these reforms.

A. Portfolio Reporting

1. Form N-PORT
    Certain funds will be required to file an electronic monthly report 
on Form N-PORT within thirty days after the end of each month. Form N-
PORT is intended to improve transparency of information about funds' 
portfolio holdings and facilitate oversight of funds. The information 
required by Form N-PORT will be data-tagged in XML format. The 
respondents to Form N-PORT will be management investment companies 
(other than money market funds and small business investment companies) 
and UITs that operate as ETFs. Compliance with Form N-PORT will be 
mandatory for all such funds. Responses to the reporting requirements 
will be kept confidential for reports filed with respect to the first 
two months of each quarter; the third month of the quarter will not be 
kept confidential, but made public sixty days after the quarter end.
    In the Proposing Release, we estimated that 10,710 funds \1472\ 
would be required to file, on a monthly basis, a complete report on 
proposed Form N-PORT reporting certain information regarding the fund 
and its portfolio holdings. Based on our experience with other 
structured data filings, we estimated that funds would prepare and file 
their reports on proposed Form N-PORT by either (1) licensing a 
software solution and preparing and filing the reports in house, or (2) 
retaining a service provider to provide data aggregation, validation 
and/or filing services as part of the preparation and filing of reports 
on proposed Form N-PORT on behalf of the fund. We estimated that 35% of 
funds (3,749 funds) would license a software solution and file reports 
on proposed Form N-PORT in house.\1473\ We further estimated that each 
fund that files reports on proposed Form N-PORT in house would require 
an average of approximately 44 burden hours to compile (including 
review of the information), tag, and electronically file a report on 
proposed Form N-PORT for the first time \1474\ and an average of 
approximately 14 burden hours for subsequent filings.\1475\ Therefore, 
we estimated the per fund average annual hour burden associated with 
proposed Form N-PORT for 3,749 fund filers would be 198 hours for the 
first year\1476\ and 168 hours for each subsequent year.\1477\ 
Amortized over three years, the average aggregate annual hour burden 
would be 178 hours per fund.\1478\
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    \1472\ This estimate includes 8,731 mutual funds (excluding 
money market funds), 1,411 ETFs and 568 closed-end funds and is 
based on ICI statistics as of December 31, 2014, available at http://www.ici.org/research/stats.
    \1473\ See Money Market Fund Reform 2014 Release, supra footnote 
33, at 47945 (adopting amendments to Form N-MFP and noting that 
approximately 35% of money market funds that report information on 
Form N-MFP license a software solution from a third party that is 
used to assist the funds to prepare and file the required 
information).