The SEC is issuing sweeping rules and amendments, including making firms show more about their fund derivatives holdings.
The SEC has proposed new and amended rules intended to modernize data reporting for open-end funds, which allow investors to redeem their shares daily and includes mutual funds and exchange-traded funds (ETFs).
The SEC proposals also cover liquidity risk management and swing pricing, and are “part of the Commission’s initiative to enhance its monitoring and regulation of the asset management industry,” the SEC says in a statement. “The new rules will enhance the quality of information available to investors and will allow the Commission to more effectively collect and use data reported by funds.”
The current requirements do not require “specific information for many types of derivatives, including swaps, futures, and forwards,” the commission notes. “Additionally, in order to make fund derivatives holdings easier to review, the amended rules would require derivative disclosures to be displayed prominently in the financial statements, rather than in the notes.”
The new rules and forms (and the amendments to existing rules and forms) proposed by the SEC will be published on the commission’s website and in the Federal Register, the SEC says.
“Most funds would be required to comply with the liquidity risk management program requirements on Dec. 1, 2018, while fund complexes with less than a $1 billion in net assets would be required to do so on June 1, 2019,” according to the proposals. “The final amendments, if adopted, would become effective 24 months after publication in the Federal Register. The compliance date for the form amendments would differ by form.”
Highlights of the new and proposed reporting rules for registered funds follow:
- The registration form used by open-end funds (form N-1A) would be amended to require funds to “describe their procedures for redeeming fund shares, the number of days in which the fund typically expects to pay redemption proceeds, and the methods for meeting redemption requests,” the commission says.
- The monthly portfolio holdings reporting form (form N-PORT) would be amended to “require a fund to report the aggregated percentage of its portfolio representing each of the four classification categories. Funds also would be required to report position-level liquidity classification information to the Commission and information regarding a fund’s highly liquid investment minimum on a confidential basis.”
- N-PORT would require “registered funds other than money market funds to provide portfolio-wide and position-level investment-holdings information on: the pricing of portfolio securities; repurchase agreements, securities lending activities, and counterparty exposures; derivatives contracts terms; and portfolio level and position level risk measures, in order to “better understand fund exposure to changes in market conditions.
- Information in the N-PORT reports “for the last month of each fund’s fiscal quarter would be available to the public after 60 days.”
- The annual census reporting form (form N-CEN, replacing form N-SAR) would be amended to “require funds to disclose information regarding the use of lines of credit and interfund borrowing and lending, and would require an ETF to report if it is an in-kind ETF under the rule.”
- N-CEN reports “within 75 days of the end of the fund’s fiscal year, rather than semi-annually as is currently required by Form N-SAR for most funds.
- The form on which funds currently report certain portfolio holdings for the first and third quarters (form N-Q) will be rescinded.
- A new form (N-LIQUID) would “generally require a fund to confidentially notify the Commission when the fund’s level of illiquid assets exceeds 15 percent of its net assets or when its highly liquid investments fall below its minimum for more than a brief period of time.”
- Funds and ETFs will be required to have “liquidity risk management programs that address multiple elements, including classification of the liquidity of fund portfolio investments and a highly liquid investment minimum.”
- The 15 percent limit on illiquid investments is strengthened by the new rules, the SEC says, which will require “enhanced disclosure regarding fund liquidity and redemption practices.”
- The SEC also will require “enhanced and standardized disclosures in financial statements and will add new disclosures in fund registration statements relating to a fund’s securities lending activities.”
In addition, the commission would require liquidity risk management programs for all open-end management investment companies, excluding money market and “in-kind ETFs.” Those liquidity risk management programs would include: “assessment, management, and periodic review of a fund’s liquidity risk”; “classification of the liquidity of fund portfolio investments”; “determination of a highly liquid investment minimum” and a limitation on illiquid investments; and board oversight.
The liquidity management rules are “designed to promote effective liquidity risk management for mutual funds and ETFs, reducing the risk that funds will not be able to meet shareholder redemptions and mitigating potential dilution of the interests of fund shareholders,” the commission says.
Also, a new swing pricing rule will permit mutual funds to use the “process of adjusting a fund’s net asset value to pass on to purchasing or redeeming shareholders costs associated with their trading activity.”
Swing pricing, the SEC notes, is “designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions and would be another tool to help funds manage liquidity risks.”
The rules “represent a sweeping change for the industry by requiring strong transparency provisions and enhanced investor protections,” SEC Chair Mary Jo White says in the commission’s statement. “Funds will more effectively manage liquidity risk and both Commission staff and investors will receive additional and better quality information about fund holdings.”
The extensive proposed rulemaking, unveiled in May 2015, can be found at https://www.sec.gov/rules/proposed/2015/33-9776.pdf .
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