SEC’s Proposed Modernized Reporting Regime: Effects on ETF Sponsors

July 21, 2015

The U.S. Securities and Exchange Commission (SEC) on May 20, 2015 unanimously approved proposed rules, forms and amendments that are intended to modernize and enhance the reporting and disclosure of information by investment companies.1 The Proposal specifically cites the expansion of the exchange-traded fund (ETF) market as an example of how the asset management industry has grown more complex in recent years.2 Accordingly, the Proposal includes many new reporting and disclosure obligations that are applicable to ETFs. 

This Dechert OnPoint provides a brief discussion of some of the key components of the Proposal and how they could affect ETF sponsors.3 

New Reporting Requirements for ETFs 

New Form N-PORT and the Rescission of Form N-Q 

Form N-PORT would replace Form N-Q as a new portfolio holdings reporting form for registered investment companies. Under the Proposal, all investment companies, including ETFs, would be required to file reports on Form N‑PORT, regardless of whether they are organized as open-end management companies (as most ETFs are) or unit investment trusts. Form N-PORT would require investment companies to electronically file monthly (rather than quarterly under Form N-Q) portfolio investment information with the SEC in a structured data format, no less than 30 days after each month-end. Form N-PORT would require an investment company to report position-level information with respect to its underlying investments, including its securities lending, repurchase and reverse repurchase agreements. Further, Form N-PORT would require investment companies to report general information (such as total assets, liabilities and performance returns), and certain investment companies would be required to calculate and report risk metrics regarding investments in derivatives and debt instruments. 

Form N-PORT would require investment companies offering multiple series to file separate reports for each series, even if such filings would be duplicative. Currently, under Form N-Q, individual series do not make separate filings and Form N-Q filings must only be filed within 60 days of the first and third quarters of an ETF’s fiscal year. 

Amendments to Regulation S-X 

The Proposal includes certain amendments to Regulation S-X, which prescribes the content and form of financial statements as reported in investment company registration statements and shareholder reports. Many of the proposed amendments to Regulation S-X are consistent with the enhanced reporting regime outlined in Form N-PORT. As is the case with all investment companies, the proposed amendments would require standardized derivatives disclosure to be included in an ETF’s financial statements.4 For example, the Proposal includes schedules on which ETFs would be required to report their investments in open futures contracts, open forward foreign currency contracts, and open swap contracts.5 Further, the Proposal would enhance existing disclosure requirements for purchased and written option contracts. Depending on the type of derivative instrument, the proposed schedules request information that includes a transaction’s notional amount, counterparty, delta and strike price, among other things. The Proposal would also require an ETF to disclose its derivatives exposure with greater prominence in the ETF’s financial statements, eliminating the ability of an ETF to disclose this information in the notes to financial statements. 

Website Transmission of Shareholder Reports 

The Proposal contains a new proposed Rule 30e-3 under the Investment Company Act of 1940, as amended (1940 Act), which would permit, but not require, investment companies to satisfy current shareholder report delivery obligations by making annual and semi-annual reports and certain other materials available on a publicly accessible website free of charge. Investment companies that choose to rely on the rule would need to comply with certain conditions relating to availability, shareholder consent and notice. Reliance on the rule would also require an investment company to send a paper copy of its most recent shareholder report to any requesting shareholder, within three business days of receiving such request. 

New Form N-CEN and Rescission of Form N-SAR 

Under the Proposal, Form N-CEN would replace Form N-SAR as the form on which ETFs report census-type information. The Proposal would require all ETFs to file reports on Form N-CEN in structured data format. As is the case with all other types of investment companies, ETFs would be required to complete the following portions of Form N-CEN: 

  • Part A: information on the reporting period covered. 
  • Part B: general background information on the registrant (e.g., name, address, location of books and records, central index key and legal entity identifier (LEI)). 
  • Part C (not applicable to Small Business Investment Companies): general identifying information, including identifying information for individual series. 
  • Part G: attachments to the filing (much like those currently required by Form N‑SAR). 

Further, in the Proposal, the SEC stated that it believed it appropriate to “tailor some of the comprehensive information reporting requirements in proposed new Form N-CEN to the special characteristics of ETFs.” Part E of Form N-CEN requires the reporting of information specific to ETFs, including: 

  • Identifying information about each of the ETF’s authorized participants (e.g., full name, SEC file number, CRD number, LEI if applicable, and dollar amounts purchased and redeemed during the reporting period). 
  • Information on the ETF’s creation unit size (e.g., total value of creation units purchased and redeemed primarily in-kind and primarily with cash during the reporting period, as well as transaction fees charged). 
  • Performance information as compared to an Index ETF’s benchmark. 

As with proposed Form N-PORT, multiple series investment companies would need to file a separate Form N-CEN for each series. However, unlike Form N-SAR, which must be filed semi-annually, Form N-CEN would only have to be filed annually, 60 days after the end of an ETF’s fiscal year-end. 

Potential Effect on ETF Sponsors 

ETF sponsors will need to evaluate the additional compliance costs related to the Proposal, including with respect to incremental costs and burdens of reporting such information to the SEC. For instance, the new risk metric calculations and derivatives disclosures would certainly cause ETF sponsors to incur additional compliance costs. Moreover, ETFs would be subject to additional reporting requirements under Part E of Form N-CEN – beyond the requirements applicable to mutual funds. It would also become necessary for sponsors to adjust their recordkeeping so that they can easily report information required by the new forms. Certain sponsors may need to hire more staff to meet the additional administrative and compliance burdens. Further, the total costs attributable to the monthly filings required under Form N-PORT have the potential to be significant. 

Overall, the Proposal, if finalized, would require ETF sponsors to build new reporting systems, thereby raising compliance costs. The exact scope of the burden remains uncertain, but the Proposal could be the SEC’s first step in its renewed focus on the ETF industry. The Proposal was followed by another SEC release seeking public comment on topics related to the listing and trading of exchange-traded products.6 The latter release also noted the rapid growth of the ETF market and sought information relating to the trading of ETFs generally. The SEC’s recent proposals may hint at increased regulatory scrutiny over the ETF sector, which may lead to future action. 


1) Investment Company Reporting Modernization, Rel. No. IC-31610 (May 20, 2015) (Proposal).
2) See footnote 5 of the Proposal (noting that “[a]s of March 2015, there were over 1400 ETFs with over $2 trillion in assets. In the period of March 2014 to March 2015, assets of ETFs increased $352.43 billion or 20.6%.”).
3) For a detailed description of the substantive requirements included in the Proposal, please see Dechert OnPoint, U.S. SEC Approves Proposal to Modernize Investment Company Reporting Regime.
4) The SEC stated in the Proposal that it believes the amendments to Regulation S-X “will assist comparability among funds, and increase transparency for investors regarding a fund’s use of derivatives and the liquidity of certain investments.”
5) Currently, these types of investments are reported under Rule 12-13 of Regulation S-X (Investments other than securities). According to the Proposal, current financial statement disclosures under Rule 12-13 lack uniformity in both depth and scope, which can make it difficult for investors to understand the risks associated with an investment company’s derivatives holdings, both independently and in comparison to other investment companies.
6) See Request for Comment on Exchange-Traded Products, Rel. No. 34-75165 (June 12, 2015). For additional information regarding this release, please see Dechert OnPoint, U.S. SEC Seeks Public Comment on the Listing, Trading and Selling of Exchange-Traded Products.

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