I. Form N-PORT and Rescission of Form N-Q
The SEC proposes to replace Form N-Q, the form currently used by management investment companies to report portfolio information for their first and third fiscal quarters, with Form N-PORT. Form N-PORT will be a new monthly portfolio reporting form filed by mutual funds (other than money market funds), exchange-traded funds (“ETFs”), and closed-end funds. These funds will be required to report their portfolio information to the SEC in Extensible Markup Language (“XML”) format 30 days after the close of each month. Only data for the third month of each fiscal quarter would be publicly available, and the data would become publicly available 60 days after the fiscal quarter end. The delay is designed to minimize the potential that such data is used for front-running or other predatory trading practices.
Form N-PORT will require a fund to report information about each investment held by the fund as of the close of the preceding month, including security identifiers and asset and issuer type. A fund will also be required to report, as relevant, information about:
a. the terms of derivative investments, including counterparties;
b. securities lending and repurchase agreements, including data on counterparty exposures;
c. the delta of options;
d. gains or losses and changes in unrealized appreciation or deprecation for derivative investments;
e. pricing data of portfolio securities;
f. whether an investment is a restricted security or illiquid asset;
g. portfolio-level and position-level risk measures; and
h. portfolio-level measures of duration and spread duration across maturities.
II. Amendments to Regulation S-X
The SEC proposes amendments to Regulation S-X, which prescribes the form and content for financial statements required in registration statements and shareholder reports. The amendments would, among other things, standardize derivatives disclosures and require prominent placement of these disclosures in a fund’s financial statements (as opposed to placing these disclosures in the notes). Funds will be required to include in their financial statements new standardized schedules for investments in derivatives, and to identify any illiquid investments and any security that is on loan or whose fair value was determined using significant unobservable inputs. In addition, a fund will have to add new notes to its financial statements that address its securities lending activities, including disclosure of income generated from and fees paid in connection with securities lending.
III. Form N-CEN and Rescission of Form N-SAR
New Form N-CEN will replace Form N-SAR, the semi-annual census report form. On Form N-CEN, funds will annually report census-type information in a structured XML format. Form N-CEN will require funds to report certain background and other identifying information, and provide information regarding, among other things:
a. matters submitted to a vote of security holders;
b. material legal proceedings;
c. reliance on financial support from affiliated entities;
d. certain accounting and valuation items;
e. any payments made to shareholders or reprocessed shareholder accounts resulting from an NAV error;
f. service providers, including persons providing pricing services; and
g. whether a fund’s CCO has changed.
Form N-CEN also will require information about securities lending activity, including fees associated with such activity and a fund’s relationship with securities lending service providers. ETFs and the new exchange-traded managed funds will provide additional information regarding authorized participants and characteristics of creation units.
IV. Website Transmission of Shareholder Reports
The SEC took a major step towards allowing funds to use the Internet in lieu of expensive paper mailings by proposing Rule 30e-3 under the 1940 Act. If adopted, a fund could satisfy its obligations to transmit reports to shareholders by posting on its website such reports and its portfolio holdings for the past year. To rely on Rule 30e-3, a fund will have to:
- make its shareholder reports publicly available, free of charge, at a specified website;
- obtain shareholder consent to electronic delivery;
- notify consenting shareholders of the change to electronic delivery and online availability of shareholder reports; and
- send a paper copy of the report to any shareholder upon request, free of charge.
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If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.
