Too Short to Report: Statement on Adoption of Form N-PORT and Form N-CEN Reporting; Guidance on Open-End Fund Liquidity Risk Management Programs
Thank you, Chair Gensler, and good morning. When the market’s green arrows flip upside down and turn an alarming red, the demand for explanations and information is immediate. Common questions for the SEC are which funds will be affected and how significantly? We saw such calls for data and real-time analysis at the onset of the financial crisis, the COVID-19 pandemic and government response, and Russia’s invasion of Ukraine. As one who seeks answers in times of market stress, I am sympathetic to one of the stated goals of today’s rulemaking: ensuring the Commission can conduct informed analysis on funds’ portfolios as contemporaneous to the events as possible. But the Commission oversells the benefits of today’s amendments and gives too little attention to the costs, perhaps because the Commission failed genuinely to seek needed public input on these changes. Accordingly, I cannot support this rulemaking.
On November 2, 2022, the Commission proposed amendments to the open-end fund liquidity risk management regime.[1] Largely lost amidst the vigorous debate about swing pricing and hard close requirements were the proposed changes to Form N-PORT. Rather than re-propose to give commenters the opportunity to focus exclusively on the N-PORT amendments, the Commission is finalizing modified Form N-PORT changes without much commentary to help us weigh the costs and benefits.
Had we heard more from commenters, we might have concluded that the costs of these changes outweigh the benefits. The amendments will yield benefits, but they are limited. We already collect a tremendous amount of information from registered entities, and it is incumbent upon us to make full use of it before we demand more.
Funds now file Form N-PORT quarterly with up to a 60-day delay. Under the new requirements, filings will be due monthly within thirty days after the end of the month to which they relate. The benefits of the change are that the Commission’s information about fund portfolio holdings will be less stale than it would be under the current rule. But the information still will be stale. The Commission will receive information about what funds are holding at the time of a market event sooner than it would under current rules, but the Commission still will have to wait for at least a month for that information. In other words, the Commission, even under the accelerated filing timelines, will have to do legwork at the time of a market event to determine which funds hold what.
The accelerated filing schedule will not do much to “enable [the Commission] to further our mission to protect investors by assisting the Commission and its staff in carrying out its regulatory responsibilities related to the asset management industry.”[2] In the case of a discrete event like the Russian invasion, any market-wide shock would be immediate, and information still would be coming in no earlier than thirty days after the shock. Although shorter than the four months it would take under the current rule, the difference would be inconsequential with respect to the Commission’s ability to do its immediate analytical job at the time of the market shock.[3] The Commission’s other functions—exams, policy formulation, and enforcement actions—all operate at a speed that does not demand immediate information. The acknowledged possible increase in data errors that the shortened filing schedule will produce[4] degrades the reliability of the information for all the Commission’s functions.
The Commission already can get the information it needs in times of market stress. Under current recordkeeping rules, funds maintain monthly holding information and make it available upon Commission staff request. With access to existing Form N-PORT data, along with discrete pieces of instructive information—e.g., fund names—Commission staff can issue tailored enquiries concerning the make-up of relevant fund portfolios.[5] This option, the release protests, is “challenging for Commission staff,” which “encountered limits on its ability to identify the funds most directly affected” by market stress events.[6] The challenges to exploiting existing data may be real, but they are not beyond the talented staff’s ability to overcome. In any event, those challenges will persist under the new rule, which does not provide real-time information either (nor would it be the right thing to do for many reasons).
While the benefits of an amped-up filing schedule may be debatable, the costs of these amendments are not, especially for smaller fund complexes. Industry commenters of all sizes expressed concerns about the costs of these amendments While the Commission suggests that the costs associated with the new filing deadline are not so bad in light of existing recordkeeping obligations,[7] commenters provided detailed rebuttals emphasizing that “aggregat[ing] the information within 30 days for internal collection purposes” —which they must do under current rules— is a very different exercise than preparing that information for filing.[8] As one commenter pointed out, “Form N-PORT is an extraordinarily detailed report, requiring funds to provide a variety of information regarding assets and liabilities, performance and flows, portfolio holdings, portfolio risk metrics, liquidity and liquidity risk management, derivatives and derivatives risk management and securities lending.”[9] Ensuring that this complicated form has been completed correctly involves the focused involvement of multiple employees.[10]
Many of the employees charged with Form N-PORT filing duties “are also responsible for preparing (or contribute information to) funds’ annual and semi-annual reports, including the associated Schedules of Investments.”[11] In hopes of mitigating these calls on strained resources, some commenters requested an expansion of the new 30-day filing requirement to 45-days[12] or more for small entities.[13] We ignored those calls.
Other commenters pointed to the less quantifiable, but more fundamentally damaging, costs arising from the new public disclosure rules. The amendments will make funds’ monthly reports on Form N-PORT public 60 days after the end of each month. Currently, only information for the third month of a quarter is publicly available. Commenters are concerned “that monthly disclosure of portfolio holdings could result in information leakage that is harmful to funds and their shareholders.”[14] The risk is particularly great for certain types of funds, which is reflected in the different approaches to voluntary portfolio disclosure that funds take currently. Contrary to the comfort the Commission draws from the existing voluntary disclosure practices,[15] the variation in practice suggests that the costs of monthly public disclosure outweigh the benefits for some funds.[16] The public disclosure may prompt frontrunning and other predatory trading practices. The Commission “recognizes an increase in risk for a small universe of funds,”[17] but assures us that predatory trading is not all bad.[18] In so doing, the Commission continues to undervalue the work that goes into deciding which securities to buy and sell.
Capital markets participants should be rewarded for good investment decisions and punished for bad ones. The release threatens this broader principle of market discipline. One of the justifications for the change is that we need information during times of market stress so that we or our financial regulatory colleagues can do something. If history is any guide, that something is likely to be a bailout of some sort. And then our friends on the Financial Stability Oversight Council will use that rescue to argue for more control over open-end funds. Changes like the ones we are making today set the groundwork for replacing market discipline with regulatory micromanagement.[19]
In addition to the rule changes, the adopting release includes new guidance to clarify a number of issues related to the liquidity rule. I hope that this guidance is helpful and that we remain attentive to industry calls for clarity following the issuance of these amendments and guidance.
Despite my inability to support this rulemaking, I could not be more grateful to the Commission staff for their demonstrated care and professionalism. The women and men of the Divisions of Investment Management, and Economic and Risk Analysis, in particular, have done their best to address commenters in their formulation of these final amendments. I am particularly grateful for their patience. Despite their often-punishing drafting schedules they never failed to respond to my many questions promptly and thoughtfully.
I have several questions:
- As we collect more and more information from registered entities on more compressed timetables, I increasingly worry about our ability to protect that information.[20] What assurance can we provide to regulated entities that we are taking every effort to protect their confidential information?
- A 45-day lag between the end of the month and the Form N-PORT due date (as compared to the 30-day lag that we are adopting) would help to mitigate any damage should any information be misappropriated from Form N-PORT. Why are we not adopting a 45-day lag?
- Commenters raised concerns about the increased threat of predatory trading that the enhanced public reporting creates. In the release we say that we “minimiz[e] the risks of exposing funds to predatory trading by delaying public reporting by 60 days.” What do you say to those funds who argue that 60 days is not enough, particularly for certain types of funds? That depending upon the issuer, for instance, it can take far longer to purchase or sell a position without tipping their hand and increasing costs?
- Funds may be able to shield strategies from prying eyes for a year by “report[ing] as ‘miscellaneous securities’ an aggregate amount of portfolio investments that does not exceed 5% of the total value of the fund’s portfolio investments.”[21] Is the 5% ceiling sufficiently high to afford vulnerable funds the level of protection they require to pursue aggressive investing strategies?
- Today’s amendments made up a small portion of the original proposal. As swing pricing and establishing a hard close dominated the discussion, do we feel that commenters had sufficient opportunity to weigh in on the costs associated with expedited filing and increased public disclosure? Did we give any thought to re-proposal?
- What are the plans for conducting a retrospective review to understand the effects of this rulemaking?
[1] See Open-End Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting, Investment Company Act Release No. 34746 (Nov. 2, 2022) [87 FR 77172 (Dec. 16, 2022)].
[2] Release at 19-20 (“More frequent and timely reporting of portfolio holdings information to the Commission will enable us to further our mission to protect investors by assisting the Commission and its staff in carrying out its regulatory responsibilities related to the asset management industry. These responsibilities include examination, enforcement, and monitoring of funds; formulation of policy; and the staff’s review of fund registration statements and disclosures.”).
[3] The Commission explains that it was gleaning information about fund portfolio holdings at the time of the COVID-related market disruptions, which began in March 2020, from reports of fourth quarter 2019 holdings, and that funds did not report what they actually were holding at the pandemic’s onset until June 1, 2020 at the earliest. See Release at 8-9 (“Market disruptions related to the COVID-19 pandemic began in March 2020. Funds’ reports on Form N-PORT that would reflect these events were not due until June 1, 2020, at the earliest, and some funds’ reports were due as late as the end of July 2020. In contrast, the information that was available to Commission staff from Form N-PORT reports at the onset of the market disruptions reflected fund portfolios and activities as of several months earlier—ranging from the end of October 2019 to the end of December 2019. Thus, in many cases the available information was unlikely to reflect reasonably current portfolios and activities of funds because of the reporting delays.”). (Internal citations removed) Under the new rule, the Commission would have had information from January 2020 at the time of the pandemic’s onset and then would have seen the actual portfolio holdings by the end of April.
[4] See, e.g., Release at 27 (“We also recognize that requiring funds to file monthly Form N-PORT reports within 30 days of month end may increase the risk of reporting errors relative to the current quarterly filing requirement or a monthly reporting requirement with a longer filing delay (e.g., 45 or 60 days), as funds will be required to both gather the data and prepare it for filing within 30 days whereas today they must gather and record accurate data for recordkeeping purposes on this timeline.”).
[5] Moreover, sometimes affected funds reach out proactively. See, e.g., Van Eck Russia ETF and Van Eck Russia Small-Cap ETF, Series of Van Eck ETF Trust, and Van Eck Associates Corporation; Notice of Application and Temporary Order (Dec. 28, 2022) (requesting a temporary order that would, among other things, permit applicants to suspend the right of redemption of outstanding redeemable securities) https://www.sec.gov/files/rules/ic/2022/ic-34793.pdf.
[6] Release at 11 (“Given that there is insufficient market data to determine which funds to prioritize, it is challenging for Commission staff to determine the appropriate funds from which to request data. It also could be inefficient to analyze on a timely basis data sets based on individual data requests even if Commission staff were able to identify potentially affected funds. As a result, when market events have occurred, Commission staff has encountered limits on its ability to identify the funds most directly affected by the events and to explore potential Commission responses, including the potential benefits or necessity of a response.”). See also Release at 21 (“This analysis is facilitated by timely reports on Form N-PORT and often cannot be efficiently assembled in a timely manner from individual requests to funds even if the Commission were able to determine the funds or types of funds most likely to be affected.”).
[7] Release at 23 (“The requirement to file Form N-PORT reports within 30 days of month end builds on the existing regulatory framework, as funds are already required to adhere to the 30-day deadline for recordkeeping purposes. Thus, funds currently are required to gather and record the data within 30 days of month end, and fund records must be accurate. The costs involved with the final amendments, therefore, are limited to those associated with a more compressed time period to both gather the data and undertake additional processes associated with filing the data, such as data validation and tagging.”).
[8] See, e.g., Comment Letter from the Investment Company Institute at 88 (Feb. 14, 2023) (“While funds have been able to aggregate the information within 30 days for internal collection purposes, for filing purposes, they will need to take additional steps. For example, a fund must validate data and insert the Extensible Markup Language (XML) tagging.”) s72622-20157306-325651.pdf (sec.gov). (“ICI Comment”)
[9] Comment Letter from Invesco at 38-39 (Feb. 10, 2023) (“Form N-PORT is an extraordinarily detailed report, requiring funds to provide a variety of information regarding assets and liabilities, performance and flows, portfolio holdings, portfolio risk metrics, liquidity and liquidity risk management, derivatives and derivatives risk management and securities lending.”) https://www.sec.gov/comments/s7-26-22/s72622-20157090-325365.pdf. (Internal citations removed.) (“Invesco Comment”) See also Comment Letter from T. Rowe Price at 23-4 (Feb. 14, 2023) (“We contest the proposed changes because they are extremely costly and burdensome and are not necessary. The amount of data the T. Rowe Price Funds currently prepare and review for each monthly report within Form N-PORT is voluminous, at approximately 1.4 to 2.0 million data points across the 197 funds currently filing the Form. The existing processes in place to compile, prepare and perform oversight review of Form N-PORT data are already challenged to meet the monthly recordkeeping requirements for information to ultimately be included on Form N-PORT. The data included in Form N-PORT comes from multiple sources which complicates the process and makes it difficult to populate Form N-PORT as it is not feasible to simply download the relevant data for these purposes from the fund accounting agent’s accounting system.”)) https://www.sec.gov/comments/s7-26-22/s72622-20157330-325677.pdf. (Internal citation removed) (“T. Rowe Comment”)
[10] Invesco Comment at 39 (“Once obtained, derived and compiled, this information must be verified and prepared for filing in structured data format. Owing to the breadth and granularity of information required to be reported, several constituents within a fund complex (including fund financial reporting and accounting, investment risk management and performance measurement) and service providers (including custodians, administrators and securities lending agents) must contribute and collaborate to complete Form N-PORT.”).
[11] Id. See also Comment Letter from Principal Financial Group at 14 (Feb. 14, 2023) (“Reporting on Form N-PORT is an extensive and detailed process requiring significant resources including the acute involvement of many Principal AM staff, internal systems, external vendors, and service providers. Form N-PORT reporting also requires much oversight of service providers, including significant review and quality control prior to submitting a filing. When issues arise, which could be late in the reporting process, staff must investigate the root cause, consult various parties, resolve the issue, and complete the filing on a very tight timeline.”) https://www.sec.gov/comments/s7-26-22/s72622-20157255-325504.pdf; T. Rowe Comment at 24 (“Additionally, there are several layers of review by the service provider and the adviser prior to the filing of N-PORT with the SEC. Because of the overlap in information, the same staff and service providers are also involved in the preparation and filing processes for Forms N-MFP, N-CSR, N-CEN, 24f-2, CPO-PQR. In order to meet the proposed 30-day filing requirement, T. Rowe Price would need to increase headcount significantly to maintain the current, high-quality level of review. We estimate ongoing internal staffing costs of approximately $900,000 in order to meet the accelerated filing requirements and support the Form N-PORT Part Reg. S-X/GAAP compliant schedule of investments addressed below.”).
[12] See, e.g., Invesco Comment at 5 (“We appreciate the Commission’s desire to have funds file Form N-PORT on a monthly (rather than a quarterly) cadence to enhance the Commission’s ability to effectively oversee funds and monitor their activities. However, the Commission’s proposal to require Form N-PORT reporting within 30 days after each month end does not provide funds, their advisers and their service providers enough time to produce and file the reports and we request that funds have until the 45th day after each month end to file the form.”); Comment Letter from BlackRock at 21 (Feb. 14, 2023) (“Form N-PORT has grown in complexity since the SEC first adopted the form. In the intervening years, the SEC has introduced new and complex reporting items related to the derivatives and liquidity risk management rules, and Form N-PORT stands to grow further in complexity in light of recent SEC proposals (such as the Names Rule proposal). Moreover, numerous reporting items on Form N-PORT require the use of significant judgment in the analyses necessary to produce the reports. These changes, their complexity, and the judgment that the form requires mean that data quality reviews are an increasingly important part of the process, both for reporting funds (who want to avoid errors) and for the SEC (for which data integrity is undoubtedly important). Accordingly, the SEC should allow at least 45 days after month end for filing Form N-PORT in order to permit appropriate data review and correction and reduce the potential for errors in reporting.”) https://www.sec.gov/comments/s7-26-22/s72622-20157331-325678.pdf. (Internal citation removed); Comment Letter from PIMCO at 16 (Feb. 13, 2023) (“In addition, since Form N-PORT was adopted, several complex items have been added to the form, including those related to the liquidity risk management rule and derivatives rule. The proposed Form N-PORT updates associated with the recent Names Rule proposal and ESG Rule Proposal would further increase the form’s complexity. The increased data required in Form N-PORT filings, and such data’s complexity, make the review of such data all the more important and challenging. To help ensure sufficient time for appropriate data reviews and pre-filing error corrections, and in order to prevent immaterial inconsistencies between a fund’s Form N-PORT and Form N-CSR filings for periods with the same end date (which could result in unnecessary uncertainty and create inefficiencies), we would recommend a more extended Form N-PORT filing deadline after month end, such as 45 days generally and 60 days for any periods for which a Form N-CSR will be filed.”) https://www.sec.gov/comments/s7-26-22/s72622-20157189-325524.pdf. (“PIMCO Comment”); Comment Letter from Morgan Stanley at 23 (Feb. 14, 2023) (“Accordingly, we believe the SEC should not adopt either the proposed change in filing cadence and timing or the proposed expansion of Part F filings. If the SEC adopts the proposed changes in filing cadence and timing in spite of these concerns, then funds should be given at least 45 days after each month-end to file Form N-PORT to allow funds sufficient time to adequately prepare and review the information required.”) https://www.sec.gov/comments/s7-26-22/s72622-20157311-325594.pdf; Comment Letter from Fidelity at 35 (Feb. 14, 2023) (“In Fidelity’s experience, existing disclosure and reporting satisfy investor needs for fulsome and timely data. There is no evidence that the proposed additional data will enhance the shareholder experience. Should the SEC decide to require such changes, we urge the Commission to adopt a filing deadline of at least 45 days to allow appropriate time for preparation and review of all Form N-PORT information.”) https://www.sec.gov/comments/s7-26-22/s72622-20157344-325691.pdf.
[13] Comment Letter from Carol Singer (Dec. 13, 2022) (“While I do not have an issue with filing the Form N-PORT days after month end. Whereas the proposed change might not be an issue for me for some months, it would be a significant issue for the months following the Fund's year end and semi-annual reporting periods. During the month after year end, I need to direct my attention to preparing/reviewing documents for the Fund's annual audit, its Form N-CSR, the annual report materials including its proxy documents, the Fund's annual Board meeting and its meeting of its shareholders in addition to the routine daily work required. This proposal will not allow me sufficient time to prepare and file Form N-PORT for the month following its year end. There is a similar workload issue for the month following the semi-annual reporting period. *** Your favorable consideration to retain the due date for Form N-PORT at 60 days, at least for small reporting entities, will be very much appreciated.”) https://www.sec.gov/comments/s7-26-22/s72622-320450.htm.
[14] See, e.g., Comment Letter from J.P. Morgan Asset Management at 9 (Feb. 14, 2023) (“We are concerned that monthly disclosure of portfolio holdings could result in information leakage that is harmful to funds and their shareholders. Some funds forgo more frequent disclosure of portfolio holdings precisely due to these information leakage fears. Tripling the frequency of disclosure may cross a tipping point at which automated tools could be deployed to reverse engineer portfolio decisions and engage in predatory behavior such as front-running or free-riding. This concern is particularly acute for actively managed strategies, which seek to generate alpha through their proprietary research and market outlook.”) https://www.sec.gov/comments/s7-26-22/s72622-20157314-325657.pdf.
[15] See, e.g., Release at 38-9 (“[A] monthly, rather than a quarterly, Form N-PORT disclosure regime is now consistent with many funds’ existing practice of disclosing portfolio holdings on a monthly basis. Further, these existing disclosure practices—by both passive funds and active funds—suggest that many funds have concluded that the risks of predatory trading, including those risks resulting from the increased use of advanced technology since Form N-PORT was adopted, are justified by the benefits to investors of more information.”).
[16] See, e.g., Comment Letter from Dodge & Cox at 10 (Feb. 27, 2023) (“To protect this valuable intellectual property for the benefit of Fund shareholders, Dodge & Cox Funds do not disclose quarter-end portfolio holdings until fifteen days after the end of each quarter. Dodge & Cox Funds also do not provide nonpublic portfolio holdings to third party data aggregators that sell or publicly release such data. Actively managed funds with value-oriented managers tend to build and liquidate positions incrementally over time, making them more vulnerable to predatory trading than passively managed funds. Such funds, particularly larger funds that may take longer to fully implement their investment decisions, would be disproportionately harmed by the Proposal’s accelerated public disclosure provisions.”) https://www.sec.gov/comments/s7-26-22/s72622-20158319-326437.pdf; PIMCO Comment at 15-16 (“The fact that some funds voluntarily publish portfolio holdings more frequently demonstrates only that those funds have determined, with respect to their particular portfolios, that the benefit of more frequently publishing portfolio holdings information outweighs the accompanying risks; it in no way supports the notion that all funds derive a benefit from more frequent disclosure or that all funds can disclose such information more frequently without significant risks of front-running and free riding to the detriment of their shareholders.”)
[17] See, e.g., Release at 88 (“Nonetheless, we recognize an increase in risk for a small universe of funds. For example, one commenter stated that hedge funds and algorithmic traders seek to capitalize on proprietary trading decisions of fund managers by looking for information about the trading activity of large funds and that this commenter does not disclose portfolio holdings for any of its funds more frequently than required in order to protect its funds’ intellectual property for the benefit of investors.”). (Internal citations removed); Release at 85 (“In particular, because the final amendments will reduce that maximum potential time that a fund currently can use to build a position in a security without publicly disclosing the acquisition of the initial stake in this security from approximately five months to approximately three months for those securities that do not qualify to be reported as a miscellaneous securities, the risks related to copycatting or free-riding by other market participants may increase.”). (Internal citation removed)
[18] See Id. (“In fact, such copycatting activity on a 2-to-3 months delay may also facilitate price discovery to the benefit of the disclosing fund and its investors. While a fund would benefit the most from any price increase in the underlying security when copycat trades occur after the fund has finished building its entire position in this security, any early disclosure of the fund’s position that leads to copycatting may result in price appreciation affecting the part of the position already built sooner than would otherwise be the case. While there will still be costs in the cases where funds cannot fully establish their positions before the required disclosures become public, those costs will be mitigated by price appreciation affecting the part of the position already built prior to the disclosures.”).
[19] See, e.g., Release at 20-1 (“Further, stale data also can impede our ability to contribute fully to interagency collaboration often necessary to fashion appropriate responses to market events. During a major market event, more timely data would better inform whether coordinated interagency government actions may be necessary, and if so, the scale and parameters of those actions.”).
[20] See, e.g., ICI Comment at 90 (“We understand that the SEC has gained more experience with maintaining non-public information, but until the SEC demonstrates that it has an effective cybersecurity program, as continuously evaluated by an independent third party, we have significant misgivings about its ability to protect and maintain such competitively sensitive information. As the proposal highlights, the Commission previously has taken proactive steps to protect fund shareholders from the potential harms of misappropriated trading information by lengthening the time that funds have to file the information and shortening the time the Commission holds it.”). (Internal citations removed)
[21] See Release at note 108 (“Specifically, Form N-PORT permits funds to report as ‘miscellaneous securities’ an aggregate amount of portfolio investments that does not exceed 5% of the total value of the fund’s portfolio investments, provided that the securities included in this category are not restricted, have been held for not more than one year prior to the end of the reporting period of the related report, and have not previously been reported by name to the shareholders, or set forth in any registration statement, application, or report to shareholders or otherwise made available to the public.”).
Last Reviewed or Updated: Aug. 28, 2024