Throughout 2018, deadlines for compliance with the SEC updated rules related to modernized reporting, liquidity risk management and swing pricing will become effective. Over the past months, fund service providers across the industry have been collaborating with financial reporting vendors and data providers to provide the required measurements and reporting for clients.
The SEC is requiring the reporting of new data points and disclosures, some of which became effective August 1, 2017. These include, but are not limited to:
Disclosing securities lending fees and expenses in the prospectus/statement of additional information (or N-CSR for closed-end funds)
Identifying securities on loan in the schedule of investments
Displaying the reference rate and spread of variable rate securities in the schedule of investments
Categorizing securities sold short
Disclosing gains and losses on holdings of affiliated issuers in the financial statements
Enhancing disclosure requirements for derivatives
The SEC also mandated a number of new disclosures through the use of two new filings, Form N-PORT, which replaces Form N-Q, and Form N-CEN, which replaces Form N-SAR. These became effective for most funds on June 1, 2018. Form N-PORT will be required to be completed monthly within 30 days after month-end and must be made available to the SEC upon request until filings are made to the SEC at a later date. In addition to portfolio holdings, Form N-PORT will require additional data metrics that were not mandatory on Form N-Q, including:
Securities lending counterparties
Form N-CEN will replace Form N-SAR and will need to be filed annually within 75 days of a fund’s fiscal year-end. A wide range of fund information is required, including compliance information, risk assessments, use of lines of credit or interfund lending. Also required will be information about a fund’s directors, identity of the CCO, principal underwriter and auditor, any material legal proceedings and any fidelity bond claims.
Technical specifications for the new forms were released by the SEC. Vendors and fund service providers have begun assessing the specifications and preparing to meet the requirements.
The SEC also mandated a number of new requirements and disclosures related to liquidity risk management. The initial compliance date for most funds is Dec. 1, 2018. Funds will be required to adopt and implement a written liquidity risk management program and classify each portfolio investment into one of four liquidity categories denoting the level of liquidity of the investment at current market conditions. The fund will also determine a minimum percentage of its net assets to invest in “highly liquid investments,” such as cash or investments reasonably expected to be settled to cash within three business days as well as maintain a 15 percent limit on holdings of illiquid investments, in order to avoid a breach. The SEC recently delayed the reporting of classifications of portfolio investments and the determination and monitoring of the “highly liquid investments” minimum by six months, with a compliance date of June 1, 2019.
Additionally, Form N-LIQUID will require funds to confidentially notify the SEC during instances where illiquid assets are in excess of 15 percent of net assets, when illiquid assets return to or are below 15 percent of net assets and when highly liquid investments fall below the designated minimum.
The SEC adopted amendments to allow certain open-end funds, under certain circumstances, to use swing pricing to adjust their NAV per share to effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity.
While amendments to the rules are significant, it is important for funds to be prepared. Rely on your service provider for details that will be relevant to your funds and determining the best solution for complying with new requirements.
Visit the ICI and SEC websites for more information on the amended rules: