Division of Investment Management Releases Investment Company Reporting Modernization FAQs
On July 18, 2017, the staff of the SEC’s Division of Investment Management released guidance in the form of frequently asked questions relating to the investment company reporting modernization reforms adopted in October 2016. Below is a summary of certain of the issues addressed by the staff in the FAQs.
• Form N-PORT: Funds in groups of related investment companies with net assets of more than $1 billion as of the most recent fiscal year-end have a compliance date of June 1, 2018. Because Form N-PORT must be filed within 30 days of each month-end, such funds would file their first report on Form N-PORT, with data as of June 30, 2018, no later than July 30, 2018. Funds in groups of related investment companies with less than $1 billion of net assets have a compliance date of June 1, 2019.1
• Form N-CEN: The compliance date is June 1, 2018 for all funds, and compliance is based on reporting period-end. Because Form N-CEN must be filed within 75 days of a fiscal year-end, a fund with a June 30 fiscal year-end must make its first filing for the fiscal year ended June 30, 2018 no later than September 13, 2018. A fund with a May 31 fiscal year-end would need to make its first Form N-CEN filing for the fiscal year ending May 31, 2019.
• Amendments to Regulation S-X: The compliance date is August 1, 2017, and compliance is based on reporting period-end. For instance, financial statements included in a report on Form N-CSR for the period ended June 30, 2017, would not need to comply with the amendments to Regulation S-X, even though that report is required to be filed by September 8, 2017 (i.e., 70 days after the periodend date). Rather, the new disclosure is required in all annual or semi-annual financial statements covering periods ending on or after August 1, 2017.
• Securities Lending Disclosure in Forms N-1A, N-3 and N-CSR: The compliance date is August 1, 2017, and compliance is based on reporting period-end. For open-end funds and separate accounts offering variable annuity contracts, the new disclosure is required in annual updates for fiscal years ending on or after August 1, 2017. For closed-end funds, the new disclosure is required in annual or semi-annual shareholder reports covering periods ending on or after August 1, 2017.
Other Filing Considerations
• Form N-Q: Once a fund begins filing reports on Form N-PORT, it no longer must file reports on Form N-Q even though the rescission date for Form N-Q is not until August 1, 2019. For example, a fund that is part of a group of investment companies with more than $1 billion would file a Regulation S-X-compliant portfolio schedule as Exhibit F to Form N-PORT relating to the third and ninth fiscal months beginning June 1, 2018, instead of a Form N-Q.
In addition, money market funds will no longer file reports on Form N-Q after the form is rescinded on August 1, 2019. For example, a money market fund with an August 31 fiscal year-end will make its final Form N-Q filing for the quarter ending May 31, 2019. This is because the filing will be due on July 30, 2019, 60 days after the reporting period end, which is before the rescission date for Form N-Q.
• Form N-SAR: Form N-SAR is scheduled to be rescinded on June 1, 2018. Accordingly, for funds with April 30 or May 31 fiscal year-ends, the Form N-SAR for fiscal year 2017–18 would be due after the rescission date. Nevertheless, in 2018, such funds will have the option of filing either a Form N-SAR 60 days after the fiscal year-end or a Form N-CEN 75 days after the fiscal year-end.
• Form N-CSR Certification: When a fund ceases filing Forms N-Q, the Form N-CSR certification must cover any change in internal control over financial reporting that occurred during the most recent fiscal half-year, rather than the most recent fiscal quarter as currently required.
• The SEC staff stated that it would not object if a fund distinguishes between the basis on which it calculates portfolio holdings and the basis on which it calculates risk metrics. Consequently, a fund that uses T+1 accounting for daily NAV calculations and for the reporting of portfolio holdings on Form N-PORT may calculate and report security- and portfolio-level risk metrics required by the form on a T+0 basis, subject to compliance with the general instructions to the form.
• The FAQs noted that some trusts that have multiple series all with the same fiscal year-end currently include in their shareholder reports and on Form N-Q portfolio schedules for each of the different series, as well as one set of financial statement notes that cover all of the different series combined into one document. The SEC staff confirmed that funds may continue this practice when filing their Form N-PORT Part F attachments.
• As stated in the adopting release for Form N-PORT, Form N-PORT filings made during the first six months after the June 1, 2018 compliance date (i.e., the reports covering the months ending June 30, 2018 through November 30, 2018) will not be made public. The first Form N-PORT that will be made publicly available will be the first report covering the third month of a fund’s fiscal quarter that ends on or after December 31, 2018. However, even during the six-month non-public filing period, portfolio holding information on the Part F attachment for the first and third quarters of a fund’s fiscal year will be made public.
• If no market value is available for a portfolio holding as of month-end, a fund may report values of portfolio holdings using the same internal methodologies consistent with how the fund reports internally and to current and prospective investors.
• Form N-PORT requires funds to report certain information about the collateral for securities subject to repurchase agreements. Funds should report this information separately for each category of investments (e.g., asset backed securities, corporate debt securities) but may aggregate the principal amount and value of collateral for each category of investments, even if the collateral is issued by multiple issuers.
• For Form N-PORT and in the amendments to Regulation S-X, the reporting of the notional amount is required for many different derivatives instruments, but can be calculated in different ways. The SEC staff indicated that unless the form or applicable rules specifically require calculating the notional amount in a particular manner, there is no prescribed calculation that funds must follow.
Regulation S-X Amendments
• Regulation S-X requires that funds disclose, in certain circumstances, the identities of the 50 largest components of the index or basket of investments underlying derivative instruments. For this purpose, funds should use the absolute value of short positions to determine the notional value of such positions. Different metrics may be used to calculate the magnitude of other index or custom basket components; for example, notional value should be used for swaps, while par value or value should be used for bonds and equity securities, respectively.
• Regulation S-X also requires funds to identify each investment that cannot be sold because of restrictions or conditions applicable to the investment. For this purpose, derivative instruments that may be exited through means other than sales need not be identified as restricted.
• Form N-CEN requires funds to report information on sub-transfer agents. This reporting requirement relates solely to arrangements where the functions of a fund’s primary transfer agent are supported by one or more sub-transfer agents and not to other intermediary arrangements with, e.g., brokerdealer firms that are often referred to as “sub-accounting” or “Sub-TA” arrangements.
• If a variable insurance product no longer files post-effective prospectus updates because, e.g., the variable insurance product is no longer being sold, the variable insurance product must still file annual reports on Form N-CEN.
The FAQs are available at: https://www.sec.gov/investment/investment-company-reporting-modernization-faq.
1The FAQs also state that, when determining whether a fund is part of a “group of related investment companies” that has reached the $1 billion threshold that distinguishes larger and smaller entities for Form N-PORT compliance date purposes, assets of private funds relying on Sections 3(c)(1) or 3(c)(7) of the 1940 Act should be excluded from the calculation.