SEC Announces Delay in Form N-PORT Filing Requirements
December 14, 2017
The U.S. Securities and Exchange Commission (SEC) on December 8, 2017 issued a temporary final rule (Temporary Rule) that provides a nine-month delay to the dates by which certain registered investment companies (funds) must file new Form N-PORT on the EDGAR system.1 Under the Temporary Rule, those funds subject to the original June 1, 2018 compliance date will still be required to gather and maintain all of the data required by Form N-PORT as of the original reporting date and such information will be subject to examination by the SEC staff.
Background
Form N-PORT and the Liquidity Risk Management Rule
On October 13, 2016, the SEC adopted Form N-PORT as part of a series of new rules and forms, as well as amendments to certain rules and forms, to modernize the reporting of information by funds and to improve the information that the SEC receives from funds (Data Reporting Modernization Rules).2 The Data Reporting Modernization Rules will require funds (other than money market funds and small business investment companies) to electronically file portfolio-wide and position-level information on a monthly basis with the SEC no later than 30 days after each month’s end. The adopting release for the Data Reporting Modernization Release provided that the compliance date for Form N-PORT is June 1, 2018 for funds that are part of a complex with $1 billion or more in assets (larger fund complex) and June 1, 2019 for all other funds (smaller fund complex).
Separately, but on the same day, the SEC adopted new rules governing open-end fund liquidity risk management programs, providing that open-end funds report certain liquidity data to the SEC on Form N‑PORT (Liquidity Risk Management Rule).3 Under the Liquidity Risk Management Rule, an open-end fund will be required to report each portfolio investment’s liquidity classification on Form N-PORT, as well as aggregate percentages of the fund’s portfolio investments in each liquidity category. Also, an open-end fund will be required to disclose on Form N-PORT the percentage of highly liquid investments segregated to cover, or pledged to satisfy margin requirements in connection with, derivatives transactions classified as moderately liquid, less liquid or illiquid. In addition, an open-end fund will be required to report its highly liquid investment minimum on Form N-PORT. The Liquidity Risk Management Rule’s compliance date is December 1, 2018 for larger fund complexes, and June 1, 2019 for smaller fund complexes.
Cybersecurity Awareness
In a letter to Chairman Clayton dated July 20, 2017,4 the ICI formally requested a delay in the compliance date of Form N-PORT and the easing of compliance obligations for certain provisions of the Data Reporting Modernization Rule until the SEC sufficiently addresses the industry’s concerns on data security. In particular, the ICI requested a one year delay and a change to the frequency of reporting on Form N-PORT from monthly to quarterly.5 The ICI noted that the information that will be reported on Form N-PORT is “valuable and sensitive” and requires adequate protection from the SEC and that any breach of the SEC’s data security would cause “irreparable harm.”6
On September 20, 2017, Chairman Clayton announced a breach to the EDGAR system that occurred in 2016.7 Less than a week later, on September 26, 2017, Chairman Clayton testified in Congress regarding a cyber intrusion of the EDGAR system that had resulted from a software issue in the test filing component of the EDGAR system, which provided unauthorized access to EDGAR filing information before it became public.8 On October 2, 2017, the SEC issued a press release with a further update by Chairman Clayton, which indicated that the SEC’s ongoing investigation had determined that the personal information (name, birthdate and Social Security Number) of two individuals was included in an EDGAR test filing accessed in the intrusion, contrary to the prior conclusion that no personal information had been accessed.9 In the Temporary Rule release, the SEC cited concerns about its own cybersecurity framework, as well as the possibility of improper access to sensitive fund information, as reasons for the delay to the filing dates. The SEC explained in the Temporary Rule release that it plans to use the additional time resulting from the delay to enhance its cybersecurity controls.
Implications of the Delay
The table below provides an overview of the Temporary Rule’s compliance and filing date requirements in comparison to the previous compliance and filing date requirements as set forth in the Data Reporting Modernization Rules and Liquidity Risk Management Rule.
1. Compliance date for Form N-PORT
Data Reporting Modernization Rules/Liquidity Risk Management Rule: June 1, 2018, for larger fund complexes; June 1, 2019 for smaller fund complexes
Temporary Rule: June 1, 2018, for larger fund complexes; March 1, 2020 for smaller fund complexes
2. Initial EDGAR filing date for Form N-PORT
Data Reporting Modernization Rules/Liquidity Risk Management Rule: July 30, 2018 (relating to June 30, 2018 data), for larger fund complexes; July 30, 2019 (relating to June 30, 2019 data) for smaller fund complexes
Temporary Rule: April 30, 2019 (relating to March 31, 2019 data), for larger fund complexes; April 30, 2020 (relating to March 31, 2020 data) for smaller fund complexes; Larger fund complexes must gather and maintain all of the data required by Form N‑PORT as of the original compliance date (i.e., July 30, 2018 relating to June 30, 2018 data)
3. Compliance date for liquidity classification requirements under the Liquidity Risk Management Rule
Data Reporting Modernization Rules/Liquidity Risk Management Rule: December 1, 2018, for larger fund complexes; June 1, 2019 for smaller fund complexes
Temporary Rule: No change
4. Initial EDGAR filing date for the liquidity classification reporting requirements on Form N‑PORT under the Liquidity Risk Management Rule
Data Reporting Modernization Rules/Liquidity Risk Management Rule: January 30, 2019 (relating to December 31, 2018 data), for larger fund complexes; July 30, 2019 (relating to June 30, 2019 data) for smaller fund complexes
Temporary Rule: April 30, 2019 (relating to March 31, 2019 data), for larger fund complexes; April 30, 2020 (relating to March 31, 2020 data) for smaller fund complexes; Larger fund complexes must gather and maintain all of the data required by the Liquidity Risk Management Rule as of the original compliance date (i.e., January 30, 2019 relating to December 31, 2018 data)
5. Rescission of Form N-Q
Data Reporting Modernization Rules/Liquidity Risk Management Rule: August 1, 2019; Larger fund complexes would not have needed to file Form N-Q after July 30, 2018; smaller fund complexes, including money market funds, would not have needed to file Form N-Q after July 30, 2019
Temporary Rule: May 1, 2020; Larger fund complexes will not need to file Form N-Q after April 30, 2019; smaller fund complexes (except money market funds) will not need to file Form N-Q after April 30, 2020; Money market funds may continue to rely on the original N-Q rescission date of August 1, 2019
6. Compliance date for amendments to Form N‑CSR
Data Reporting Modernization Rules/Liquidity Risk Management Rule: June 1, 2018, for larger fund complexes; June 1, 2019 for smaller fund complexes
Temporary Rule: March 1, 2019, for larger fund complexes; March 1, 2020 for smaller fund complexes
7. Compliance date for Form N-CEN
Data Reporting Modernization Rules/Liquidity Risk Management Rule: June 1, 2018 for all funds
Temporary Rule: No change
Form N-PORT
The Temporary Rule does not change Form N-PORT’s June 1, 2018 compliance date for larger fund complexes. Rather, the Temporary Rule requires an alternate method for larger fund complexes to fulfill their Form N-PORT filing obligations. In the press release announcing the Temporary Rule, Chairman Clayton stated that “[a]n important component of [the delay] is the requirement that larger fund groups maintain – and Commission staff have access to – the information required on Form N-PORT.”10 Accordingly, although the requirement for larger fund complexes to file Form N-PORT is delayed until April 30, 2019, larger funds complexes will still have to gather and maintain all the data required by Form N-PORT beginning July 30, 2018 (relating to the June 30, 2018 month-end data). This information will be subject to examination by SEC staff, and fund complexes must provide the SEC staff access to this information for a reasonable period of time, consistent with current record retention requirements applicable to funds. Moreover, while larger fund complexes are not required to prepare and retain the data required by Form N-PORT in an XML format, the SEC stated that doing so would facilitate the filing of Form N-PORT after the nine-month delay.
The Temporary Rule also delays the six-month nonpublic reporting period to align with the delay to filing Form N-PORT. Pursuant to the nonpublic reporting period, larger fund complexes are required to file reports on Form N-PORT with the SEC, but those reports are not disclosed publicly. Because larger fund complexes will now be required to submit the reports on the EDGAR system as of April 30, 2019, those reports for each month-end period from March 31, 2019 through September 30, 2019 will be kept nonpublic.
Unlike larger fund complexes, smaller fund complexes are not subject to the requirement to prepare and retain the information required to be reported on Form N-PORT prior to the new filing date. Rather, the Temporary Rule sets a new compliance date of March 1, 2020 for smaller fund groups; therefore, the first filing date for smaller complexes is April 30, 2020 (relating to the March 31, 2020 month-end data).
Liquidity Risk Management Rule
The Rule’s nine-month delay also impacts the information required to be filed on Form N-PORT pursuant to the Liquidity Risk Management Rule. As a result of the delay, larger fund complexes will have until April 30, 2019 (relating to March 31, 2019 month-end data) to file the liquidity data on Form N-PORT. However, larger fund complexes will have to prepare and retain the information required by the Liquidity Risk Management Rule in their records and make it available to the SEC upon request by the Liquidity Risk Management Rule’s compliance date (i.e., January 30, 2019 relating to December 31, 2018 month-end data).
Smaller fund complexes will still be subject to a compliance date of June 1, 2019 for the Liquidity Risk Management Rule. This means that smaller fund complexes will be required to prepare and retain the information required by the Liquidity Risk Management Rule in their records and make it available to the SEC upon request by the Liquidity Risk Management Rule’s compliance date beginning July 30, 2019 (relating to June 30, 2019 month-end data), and the first filing date for smaller complexes is April 30, 2020 (relating to the March 31, 2020 month-end data).
Rescission of Form N-Q
“To ensure that investors do not lose access to important information,” the SEC will require funds to continue filing public reports on the existing Form N-Q until funds begin filing reports on Form N-PORT using the EDGAR system. Accordingly, the rescission of Form N-Q is delayed until May 1, 2020.11 Larger fund complexes will not need to file Form N-Q after April 30, 2019 and smaller fund complexes will not need to file Form N-Q after April 30, 2020.
Additionally, the Temporary Rule delays by nine months Part F of Form N-PORT, which is an exhibit disclosing a fund’s complete portfolio holdings as of the close of the period covered by the report required to be included in Form N-PORT filings for the end of the first and third quarters of a fund’s fiscal year.
Amendments to Form N-CSR
To account for the delayed rescission of Form N-Q, the Temporary Rule delays by nine months the compliance dates for the amendments to Form N-CSR that require the certifications regarding any change in the fund’s internal control over financial reporting cover the full semi-annual period rather than the fiscal quarter. Therefore, the compliance dates for the amendments to Form N-CSR will be March 1, 2019, for larger fund complexes and March 1, 2020, for smaller fund complexes.
No Changes to Form N-CEN
The SEC made no changes to the requirements of new Form N-CEN or its compliance date, which is June 1, 2018 for all fund complexes (i.e., funds with a fiscal year end after June 1, 2018).
Conclusion
Considering the recent SEC and industry focus on the SEC’s cybersecurity vulnerabilities, the Temporary Rule and nine-month delay to Form N-PORT’s filing date may not surprise many in the fund industry. Although the SEC’s delay does not ease larger fund complexes’ increased data collection burden resulting from new Form N-PORT and the Liquidity Risk Management Rule, fund managers may appreciate the SEC’s commitment to protecting funds’ market-sensitive information.
Footnotes
1) Investment Company Reporting Modernization, Release No. IC-32936 (Dec. 8, 2017) (Temporary Rule Release). See also SEC Modifies Approach to Form N-PORT Filing Requirements (Dec. 8, 2017) (Press Release).
2) Investment Company Reporting Modernization, Investment Company Act Release 32314 (Oct. 13, 2016). For further information, please refer to Dechert OnPoint, SEC Adopts Rules and Forms to Modernize Reporting Requirements for Registered Investment Companies.
3) Investment Company Liquidity Risk Management Programs, Release No. IC-32315 (Oct. 13, 2016). For additional information on the SEC’s liquidity risk management rule, please refer to Dechert OnPoint, SEC Adopts New Rules and Rule Amendments to Require Registered Open-End Investment Companies to Establish Liquidity Risk Management Programs and Permit Them to use “Swing Pricing”.
4) Letter from Paul Schott Stevens, President and CEO, Investment Company Institute, to the Honorable Jay Clayton, Chairman, Securities and Exchange Commission (July 20, 2017).
5) Id.
6) Id.
7) Press Release, Securities and Exchange Commission, SEC Chairman Clayton Issues Statement on Cybersecurity (Sep. 20, 2017).
8) United States Senate, Committee on Banking, Housing and Urban Affairs, Hearing on “Oversight of the U.S. Securities and Exchange Commission” Sept. 26, 2017 (Statement of Chairman Jay Clayton, Chairman, Securities and Exchange Commission).
9) Press Release, Securities and Exchange Commission, Chairman Clayton Provides Update on Review of 2016 Cyber Intrusion Involving EDGAR System (Oct. 2, 2017).
10) See Press Release in Footnote 1 above.
11) Despite the delayed rescission of Form N-Q, money market funds will not need to file Form N-Q after August 1, 2019, which was the original rescission date for Form N-Q.
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