United States

Investment company reporting modernization reforms

INSIGHT ARTICLE  | 

Market participants and investors in registered investment vehicles may not be aware that a number of investment company reporting modernization reforms were adopted in Oct. 2016 and amended by the adoption of the new temporary rule 30b1-9(T) in Dec. 2017. Not implementing these relatively simple changes could have some potentially significant consequences: Noncompliance might prevent investors from working on exchanges.

The reforms consist of four main parts:

  1. Amendments to Regulation S-X
  2. Securities lending disclosures
  3. Form N-PORT
  4. Form N-CEN

The reform also amends certain other rules and forms. Following is a summary of the reforms, along with the timing of required implementation.

Amendments to Regulation S-X

The amendments to Regulation S-X (Reg S-X) were done as part of the Security Exchange Commission’s effort to modernize and improve the manner in which funds report holdings information to investors; specifically, related to disclosures in investments in derivatives. Articles 6 and 12 of Reg S-X were impacted by the amendment to: 

  1. Require new, standardized disclosures for fund holdings in open futures contracts, open forward foreign currency contracts, and open swap contracts.
  2. Update the disclosures for other investments and investments in and advances to affiliates, including the order in which some investments are presented.
  3. Amend the rules regarding the general form and content of fund financial statements (statement of assets and liabilities and the statement of operations).

The amendments 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. A summary of the main changes to Reg S-X are as follows:

  • Renumbering of the current schedules in Article 12 (see Exhibit A)
  • Break out the reporting of derivatives currently in Schedule 12-13 into separate schedules; including, new schedules for open futures contracts, open forward foreign currency contracts and open swap contracts (see Exhibits A and B)
  • Addition of business development companies (BDCs) to the scope of Article 6
  • Updates to Article 6 to incorporate Article 12 amendments

The SEC believes the effect of the amendments is to aid comparability among funds and increase the transparency for investors regarding a fund’s use of derivatives.

The compliance date for the amendments to Reg S-X is Aug. 1, 2017, based upon the funds reporting period-end date. Thus, financial statements in reports on Forms N-CSR, N-Q, 10-K or 10-Q for the period ended on or after Aug. 31, 2017 should comply with the amendments to Reg S-X since the period ends after the compliance date of Aug. 1, 2017.

As Article 6 and the sections of Article 12 impacted by the amendment of Reg S-X are specific to Registered Investment Companies, the changes are applicable to all funds registered with the SEC pursuant to the Investment Company Act of 1940 (The 40 Act), including BDCs. Excluded from the amendment of Article 6 are registered commodity pools that are not registered pursuant to The 40 Act.   

Securities lending activities

As part of the reform, the SEC adopted form amendments regarding disclosures of securities lending activities.  Such disclosures consist of:

  • Gross income from securities lending, including income from cash collateral reinvestment
  • 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
  • Net income from securities lending activities
  • 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
  • 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
  • The monthly average of the value of portfolio securities on loan

The disclosure requirements were adopted by the SEC as amendments to the fund registration forms to be included in the Statement of Additional Information (or reports on Form N-CSR for closed-end funds), rather than amendments to Reg S-X or inclusion in fund financial statements. The SEC also adopted required disclosures of the monthly average value on loan to be included in Form N-CEN and not included in the fund registration forms.

Consistent with the amendments to Reg S-X, the compliance date for the securities lending activities disclosure is Aug. 1, 2017, based upon the funds reporting period-end date.

Form N-PORT

The SEC has adopted Form N-PORT, which is a new portfolio holdings reporting form that will be filed by all registered management investment companies, other than money market funds, small business investment companies, and by UITs that operate as ETFs. Concurrently, the SEC is rescinding Form N-Q.  Funds offering multiple series are required to file a separate report for each series.

Form N-PORT requires reporting of a fund’s complete portfolio holdings and additional information concerning the portfolio holdings that is not currently required by Forms N-Q and N-CSR. Such additional information relates to derivative investments and certain risk metric calculations that measure a fund’s exposure and sensitivity to changing market conditions.

Reports on Form N-PORT are to be filed on a monthly basis with the SEC within 30 days after the close of each month, with every third month available to the public 60 days after the end of the fund’s fiscal quarter. BDCs are not required to report on Form N-PORT as they maintain periodic reporting on Forms 10-K and 10-Q pursuant to the Securities Exchange Act of 1934.

Compliance dates for the Form N-PORT is dependent upon the fund size. Funds that―together with other investment companies in the same group of related investment companies having net assets of $1 billion or more as of the end of the most recent fiscal year of the fund (referred to as “larger funds”)―have a compliance date of June 1, 2018. Pursuant to the adopted temporary rule 30b1-9(T), compliance with the reporting obligation will initially be met by the funds maintaining in their records the information required to be included in the Form N-PORT instead of submitting the information via EDGAR.  During this initial compliance period, funds will meet their EDGAR reporting obligations by continuing to file Form N-Q.  Larger funds will be required to begin submitting their first reports on Form N-PORT on EDGAR, discontinuing the filing of Form N-Q, by April 30, 2019, reflecting data as of March 1, 2019.  Smaller fund entities have a compliance date of March 1, 2020 with the first filing of reports on Form N-PORT as of April 20, 2020.

The SEC has decided to keep all Form N-PORT filings for the first six months following the compliance date non-public (Part F attachments will be public for the first and third quarters).

Form N-CEN

The SEC has adopted Form N-CEN, which is a new form on which all registered investment companies, except face-amount certificate companies, will report census-type information, as applicable.

Concurrently, the SEC is rescinding Form N-SAR. Funds offering multiple series are required to report information in Part C of the form separately for each series, even if the information is the same for two or more series.

Form N-CEN removes the reporting of outdated or limited usefulness of items formerly required by Form N-SAR or information that is reported on other SEC forms or otherwise available. The census information about the fund industry that the SEC will be able to gather from the Form N-CEN will enable the SEC to better understand industry trends, inform policy and assist with the SEC’s examination program.

Reports on Form N-CEN are to be filed on an annual basis with the SEC, within 75 days of the funds fiscal year end. BDCs are not required to report on Form N-CEN as they maintain periodic reporting on Forms 10-K and 10-Q pursuant to the Securities Exchange Act of 1934.

Compliance dates for the Form N-CEN is June 1, 2018 for all funds.  Compliance is based upon the funds reporting period-end date. Thus, a fund with a June 30 fiscal year end would make its first filing on Form N-CEN for the year ended June 30, 2018 by Sept. 13, 2018.

The immediate impact is on registered investment funds that file Forms 10-Qs or 10-Ks, given the amendments to Rule S-X. However, other registered investment companies such as mutual and closed end funds need to take note of the changes related to securities lending and financial reporting in 2018.

The S-X rule changes are not radically different from what was previously required, however noncompliance will likely get, at a minimum, comments from the SEC when they review public registrant’s next registration statement.

Market participants and investors in registered investment vehicles may not be aware that a number of investment company reporting modernization reforms were adopted in Oct. 2016 and amended by the adoption of the new temporary rule 30b1-9(T) in Dec. 2017. Not implementing these relatively simple changes could have some potentially significant consequences: Noncompliance might prevent investors from working on exchanges.

The reforms consist of four main parts:

  1. Amendments to Regulation S-X
  2. Securities lending disclosures
  3. Form N-PORT
  4. Form N-CEN

The reform also amends certain other rules and forms. Following is a summary of the reforms, along with the timing of required implementation.

Amendments to Regulation S-X

The amendments to Regulation S-X (Reg S-X) were done as part of the Security Exchange Commission’s effort to modernize and improve the manner in which funds report holdings information to investors; specifically, related to disclosures in investments in derivatives. Articles 6 and 12 of Reg S-X were impacted by the amendment to: 

  1. Require new, standardized disclosures for fund holdings in open futures contracts, open forward foreign currency contracts, and open swap contracts.
  2. Update the disclosures for other investments and investments in and advances to affiliates, including the order in which some investments are presented.
  3. Amend the rules regarding the general form and content of fund financial statements (statement of assets and liabilities and the statement of operations).

The amendments 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. A summary of the main changes to Reg S-X are as follows:

  • Renumbering of the current schedules in Article 12 (see Exhibit A)
  • Break out the reporting of derivatives currently in Schedule 12-13 into separate schedules; including, new schedules for open futures contracts, open forward foreign currency contracts and open swap contracts (see Exhibits A and B)
  • Addition of business development companies (BDCs) to the scope of Article 6
  • Updates to Article 6 to incorporate Article 12 amendments

The SEC believes the effect of the amendments is to aid comparability among funds and increase the transparency for investors regarding a fund’s use of derivatives.

The compliance date for the amendments to Reg S-X is Aug. 1, 2017, based upon the funds reporting period-end date. Thus, financial statements in reports on Forms N-CSR, N-Q, 10-K or 10-Q for the period ended on or after Aug. 31, 2017 should comply with the amendments to Reg S-X since the period ends after the compliance date of Aug. 1, 2017.

As Article 6 and the sections of Article 12 impacted by the amendment of Reg S-X are specific to Registered Investment Companies, the changes are applicable to all funds registered with the SEC pursuant to the Investment Company Act of 1940 (The 40 Act), including BDCs. Excluded from the amendment of Article 6 are registered commodity pools that are not registered pursuant to The 40 Act.   

Securities lending activities

As part of the reform, the SEC adopted form amendments regarding disclosures of securities lending activities.  Such disclosures consist of:

  • Gross income from securities lending, including income from cash collateral reinvestment
  • 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
  • Net income from securities lending activities
  • 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
  • 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
  • The monthly average of the value of portfolio securities on loan

The disclosure requirements were adopted by the SEC as amendments to the fund registration forms to be included in the Statement of Additional Information (or reports on Form N-CSR for closed-end funds), rather than amendments to Reg S-X or inclusion in fund financial statements. The SEC also adopted required disclosures of the monthly average value on loan to be included in Form N-CEN and not included in the fund registration forms.

Consistent with the amendments to Reg S-X, the compliance date for the securities lending activities disclosure is Aug. 1, 2017, based upon the funds reporting period-end date.

Form N-PORT

The SEC has adopted Form N-PORT, which is a new portfolio holdings reporting form that will be filed by all registered management investment companies, other than money market funds, small business investment companies, and by UITs that operate as ETFs. Concurrently, the SEC is rescinding Form N-Q.  Funds offering multiple series are required to file a separate report for each series.

Form N-PORT requires reporting of a fund’s complete portfolio holdings and additional information concerning the portfolio holdings that is not currently required by Forms N-Q and N-CSR. Such additional information relates to derivative investments and certain risk metric calculations that measure a fund’s exposure and sensitivity to changing market conditions.

Reports on Form N-PORT are to be filed on a monthly basis with the SEC within 30 days after the close of each month, with every third month available to the public 60 days after the end of the fund’s fiscal quarter. BDCs are not required to report on Form N-PORT as they maintain periodic reporting on Forms 10-K and 10-Q pursuant to the Securities Exchange Act of 1934.

Compliance dates for the Form N-PORT is dependent upon the fund size. Funds that―together with other investment companies in the same group of related investment companies having net assets of $1 billion or more as of the end of the most recent fiscal year of the fund (referred to as “larger funds”)―have a compliance date of June 1, 2018. Pursuant to the adopted temporary rule 30b1-9(T), compliance with the reporting obligation will initially be met by the funds maintaining in their records the information required to be included in the Form N-PORT instead of submitting the information via EDGAR.  During this initial compliance period, funds will meet their EDGAR reporting obligations by continuing to file Form N-Q.  Larger funds will be required to begin submitting their first reports on Form N-PORT on EDGAR, discontinuing the filing of Form N-Q, by April 30, 2019, reflecting data as of March 1, 2019.  Smaller fund entities have a compliance date of March 1, 2020 with the first filing of reports on Form N-PORT as of April 20, 2020.

The SEC has decided to keep all Form N-PORT filings for the first six months following the compliance date non-public (Part F attachments will be public for the first and third quarters).

Form N-CEN

The SEC has adopted Form N-CEN, which is a new form on which all registered investment companies, except face-amount certificate companies, will report census-type information, as applicable.

Concurrently, the SEC is rescinding Form N-SAR. Funds offering multiple series are required to report information in Part C of the form separately for each series, even if the information is the same for two or more series.

Form N-CEN removes the reporting of outdated or limited usefulness of items formerly required by Form N-SAR or information that is reported on other SEC forms or otherwise available. The census information about the fund industry that the SEC will be able to gather from the Form N-CEN will enable the SEC to better understand industry trends, inform policy and assist with the SEC’s examination program.

Reports on Form N-CEN are to be filed on an annual basis with the SEC, within 75 days of the funds fiscal year end. BDCs are not required to report on Form N-CEN as they maintain periodic reporting on Forms 10-K and 10-Q pursuant to the Securities Exchange Act of 1934.

Compliance dates for the Form N-CEN is June 1, 2018 for all funds.  Compliance is based upon the funds reporting period-end date. Thus, a fund with a June 30 fiscal year end would make its first filing on Form N-CEN for the year ended June 30, 2018 by Sept. 13, 2018.

The immediate impact is on registered investment funds that file Forms 10-Qs or 10-Ks, given the amendments to Rule S-X. However, other registered investment companies such as mutual and closed end funds need to take note of the changes related to securities lending and financial reporting in 2018.

The S-X rule changes are not radically different from what was previously required, however noncompliance will likely get, at a minimum, comments from the SEC when they review public registrant’s next registration statement.

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Newsletters

Investment Industry Insights
This bi-monthly newsletter focuses on accounting, tax and regulatory news for the asset management industry.


Financial Institution Insights
delivers news and information critical to community banking professionals. The bi-monthly newsletter tackles issues ranging from IT security to regulatory compliance to operational improvement.


AML & Regulatory Compliance News
Compliance news for the banking and investment industry. Gain insights about the latest compliance news and how it will affect your business.


How can we help you??

To discuss how our team can help your business, contact us by phone 800.274.3978 or



Events / Webcasts

IN-PERSON EVENT

RSM presents: AICPA Valuation Guide Breakfast and Learn

  • November 15, 2018

IN-PERSON EVENT

RSM roundtables with industry leaders

  • November 13, 2018