5 exposures); ICI Comment Letter (report only total portfolio
duration and credit spread duration--i.e., single measures--rather
than multiple points along the yield curve).
---------------------------------------------------------------------------

    We continue to believe that requiring funds to provide further
detail about their exposures to interest rate changes along the risk-
free rate curve will provide the Commission with a better understanding
of the risk profiles of funds with different strategies for achieving
debt exposures. For example, funds targeting an effective duration of 5
years could achieve that objective in different ways--one fund could
invest predominantly in intermediate-term debt; another fund could
create a long position in longer-term bonds, matched with a short
position in shorter-term bonds. While both funds would have
intermediate-term duration, the risk profiles of these two funds, that
is, their exposures to changes in long-term and short-term interest
rates, are different. Having DV01 calculations along the risk-free
interest rate curve, as opposed to a single measure of duration
suggested by one commenter, will clarify this difference. Moreover, as
one commenter noted, ``DV01 and SD01 [spread duration] are likely the
measures that will be least subject to differences based on assumptions
within risk models employed by fund companies'' and therefore minimizes
variation based on the disparate risk metrics models used by
funds.\140\ The Commission staff will use this information to better
understand how funds are achieving their exposures to interest rates,
and to perform analysis across funds with similar strategies to
identify outliers for potential further inquiry, as appropriate.
---------------------------------------------------------------------------

    \140\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    We were, however, persuaded by commenters that reducing the number
of key rates that funds must report could reduce the reporting burden,
while still

providing the staff with sufficient information and flexibility to
analyze how debt portfolios will react to different interest rates and
credit spreads along the Treasury curve. We are therefore modifying
this requirement from the proposal to require fewer key rates--
specifically 3-month, 1-year, 5-year, 10-year, and 30-year--which will
provide, as commenters suggested, the rates most representative to bond
funds' overall exposures. The key rates Form N-PORT will require, as
adopted, are substantially similar to the key rates suggested by
commenters; \141\ however, we believe that some granularity for short
term debt is important, especially in the context of short and ultra-
short duration funds, and therefore, unlike the commenters' suggestions
for collapsing all short-term exposures to one-year, Form N-PORT will
require reporting for the 3-month maturity.\142\
---------------------------------------------------------------------------

    \141\ See Dreyfus Comment Letter; Simpson Thacher Comment
Letter; Fidelity Comment Letter.
    \142\ See Item B.3.a and Item B.3.bof Form N-PORT; see also Item
B.3.c of Form N-PORT; see also Fidelity Comment Letter (collapse the
1-, 3-, and 6-month exposures into the 1-year exposure, as a
detailed breakout inside 1-year is not informative for most
instruments); Dreyfus Comment Letter (focus should be on portfolio
level statistics; alternative six key rates 1-, 2-, 5-, 10-, 20, and
30-years).
---------------------------------------------------------------------------

    Form N-PORT will also require, as proposed, funds to provide the
key rate duration for each applicable currency in a fund. One commenter
recommended that we limit the duration to the top 5 currencies.\143\
Some commenters requested that we not include currency in the reporting
of duration for funds because currency risk is not relevant to
duration.\144\ Others supported a de minimis reporting threshold for
exposure to different currencies that would be based on the notional
value of the instruments, relative to NAV.\145\ These commenters noted
that including all currency exposures, regardless of size, would result
in a long list of exposures that would have little impact on a
fund.\146\ As a result, the commenters believed that the Commission
would receive data that would add little to the staff's ability to
understand a fund's portfolio risk, but would add significant reporting
and compliance burdens to funds.\147\
---------------------------------------------------------------------------

    \143\ See, e.g., SIFMA Comment Letter I.
    \144\ See, e.g., Dreyfus Comment Letter.
    \145\ See CRMC Comment Letter (supporting a 5% de minimis
threshold for currencies); MFS Comment Letter (same); SIFMA Comment
Letter I (same); ICI Comment Letter (5% or top 5 currencies or those
currencies representing at least 50% of the portfolio's exposure);
Morningstar Comment Letter (same); Oppenheimer Comment Letter (one
percent).
    \146\ Id.
    \147\ Id.
---------------------------------------------------------------------------

    We continue to believe that funds should generally be required to
provide the key rate duration for each applicable currency in the fund
in order to understand interest rate risk to funds with significant
currency risk. Nonetheless, we were persuaded by commenters that a de
minimis threshold is appropriate. Based on staff experience analyzing
similar data, however, we believe that a 5% de minimis, as suggested by
some commenters, could hinder the staff's ability to measure smaller
fund exposures that could have large effects across the fund industry
as a whole. We agree with one comment that Form N-PORT should provide
for a 1% de minimis threshold, calculated as the notional value of
relevant investments in each currency relative to the fund's NAV.\148\
We believe that setting the de minimis at this level will balance the
need for the staff to identify and monitor not only a fund's currency
risk, but also the risks of small fund positions that could aggregate
into large positions across the industry, as the Commission will still
be receiving information about the majority of a fund's currency
exposures with this threshold.
---------------------------------------------------------------------------

    \148\ SIFMA Comment Letter I.
---------------------------------------------------------------------------

    For both duration and spread duration, we proposed to require that
funds provide the change in value in the fund's portfolio from a 1
basis point change in interest rates or credit spreads, rather than a
larger change, such as 5 basis points or 25 basis points. As we noted
in the Proposing Release, based on staff outreach, we believed that a 1
basis point change is the methodology that many funds currently use to
calculate these risk measures at the position level for internal risk
monitoring and would provide sufficient information to assist the
Commission in analyzing fund exposures to changes in interest rate or
credit spreads.\149\ We requested comment on whether we should require
or permit funds to report a larger change in interest rates or credit
spreads, such as 5 or 25 basis points.
---------------------------------------------------------------------------

    \149\ See Proposing Release, supra footnote 7, at 33600. See
also Morningstar Comment Letter (``The use of a bottom-up approach
and the limited movement of 1 basis point are likely to provide
standardization.'').
---------------------------------------------------------------------------

    Additionally, while we did not propose requiring convexity, the
Commission also considered and requested comment on whether funds
should be required to report convexity, which facilitates more precise
measurement of the change in a bond price with larger changes in
interest rates because this measure captures changes in the shape of
the yield curve.\150\
---------------------------------------------------------------------------

    \150\ See Proposing Release, supra footnote 7, at 33600. More
specifically, convexity measures the non-linearities in a bond's
price with respect to changes in interest rates. See Frank J.
Fabozzi, The Handbook of Fixed Income Securities (8th ed., 2012) at
149-152.
---------------------------------------------------------------------------

    Commenters suggested that we adopt risk metrics that would provide
a better measure of risk over time than just DV01.\151\ For example,
one commenter, noting that, while DV01 and SDV01 are typically used as
daily risk measures, larger shifts in the curve, such as DV25 or DV50,
may be appropriate for measures with a significant lag, such as
reporting on Form N-PORT.\152\
---------------------------------------------------------------------------

    \151\ See Morningstar Comment Letter; see also Interactive Data
Comment Letter (noting that fund managers often consider moves
greater than 1 basis point when managing interest rate risks in
their portfolios, particularly for funds with exposure to bonds with
call or prepayment risk.).
    \152\ See Morningstar Comment Letter (also noting that DV01 and
SDV01 are less likely to be subject to model risk).
---------------------------------------------------------------------------

    We also received several comment letters recommending that we
include a measure of convexity as it is a valuable method of measuring
the change of the shifting yield curve, as well as a comment to require
stress tests of the portfolio of small and large changes in spreads,
interest rates, and volatility.\153\ We agree with commenters that a
measurement that captures larger changes in the yield curve will be
useful. We additionally agree with commenters that argued that a
measure for changes in the shape of the yield curve such as convexity
would be useful, but are sensitive to the burdens that requiring a
measurement of convexity may impose on filers that do not currently
calculate convexity internally.
---------------------------------------------------------------------------

    \153\ Interactive Data Comment Letter (``portfolio managers
consider convexity to be critical when measuring the interest rate
risk of their funds''); Dreyfus Comment Letter (``Convexity is
valuable as a risk measure because it captures the change in the
curvature (the `flattening' or `steepening') of the shifting yield
curve.'').
---------------------------------------------------------------------------

    Accordingly we believe that requiring a risk measure that shows the
effect of a larger change in interest rates, coupled with DV01 as we
proposed, both provides information that commenters said would be
useful (i.e., how the exposure changes with different changes in
interest rate), while not requiring filers that do not calculate
convexity internally to begin to do so. We are therefore adopting a
requirement that funds provide both DV01 \154\ (a one basis point
change in interest rate) and DV100 (a 100 basis point change in
interest rates).\155\ Based on staff experience, we believe that DV100
is among the most

common measures of interest rate sensitivity and it will, in
conjunction with DV01, provide more useful information about non-
parallel shifts in the yield curve than smaller measures, such as DV25
and DV50. Moreover, DV100 will allow the staff to capture larger
changes to interest rates (and corresponding ``shocks'' to the markets)
than DV25 and DV50. Finally, based on staff experience, it is our
belief that DV100 is a standard measure of interest rate sensitivity
and is a common measure of duration and is therefore unlikely to
require filers to change current internal measurement practices,
thereby mitigating the increase in reporting costs relative to the
proposal.
---------------------------------------------------------------------------

    \154\ See B.3.a of Form N-PORT.
    \155\ See B.3.b of Form N-PORT.
---------------------------------------------------------------------------

    We also proposed to require that funds provide a measure of spread
duration (commonly known as SDV01) at the portfolio level for each of
the same maturities listed above, aggregated by non-investment grade
and investment grade exposures.\156\ This would measure the fund's
sensitivity to changes in credit spreads (i.e., a measure of spread
above the risk-free interest rate). Again, similar to the example above
regarding the potential use of the DV01 metric, SDV01 can provide more
precise information regarding funds' exposures to credit spreads when
they engage in a strategy investing in investment-grade or non-
investment grade debt.
---------------------------------------------------------------------------

    \156\ As proposed, Form N-PORT would have included instructions
stating that ``Investment Grade'' refers to an investment that is
sufficiently liquid that it can be sold at or near its carrying
value within a reasonably short period of time and is subject to no
greater than moderate credit risk, and ``Non-Investment Grade''
refers to an investment that is not Investment Grade. See proposed
General Instruction E of Form N-PORT. As discussed above in section
H.A.2.a, we received comments relating to our proposed definition of
``Investment Grade''. For the reasons discussed above, we have
determined to remove these definitions from the Form.
---------------------------------------------------------------------------

    One commenter stated that spread duration is a more representative
measure of bond fund portfolio risk than duration alone because it
``captures both interest rate risk and credit risk'' and that staff
should therefore use spread duration when analyzing funds.\157\
However, that commenter and others recommended that we require funds to
report a single spread duration for the portfolio, as spread rates are
generally calculated as a parallel shift, making calculations at key
rates less useful than they are for analyzing shifts in interest
rates.\158\ Because credit spreads can vary based on the maturity of
the bonds, we continue to believe that providing credit spread measures
for the key rates along the yield curve, as with DV01, will help the
Commission and its staff better analyze credit spreads of investments
in funds than a single measure for the entire portfolio. For example,
this data could be helpful for analyzing shifts in credit spreads for
non-investment grade and investment grade debt, respectively, over the
yield curve, as credit spreads for investment grade and non-investment
grade debt do not always shift in parallel or in lock step,
particularly during times of market stress.\159\
---------------------------------------------------------------------------

    \157\ See Dreyfus Comment Letter.
    \158\ See supra footnotes 134-137; see, e.g., Wells Fargo
Comment Letter (noting that, unlike interest rate spreads, credit
spreads are not typically calculated at all key rates); Fidelity
Comment Letter (``A single CR01 without reference to maturity is a
standard risk metric and should be familiar to market
participants.''); Dreyfus Comment Letter (recommending a single
measure for spread duration); ICI Comment Letter (same).
    \159\ The delineation between non-investment grade and
investment grade debt is similar to information regarding private
fund exposures gathered on Form PF, which could be helpful for
comparing and analyzing credit spreads between public and private
funds. See, e.g., Item 26 of Form PF.
---------------------------------------------------------------------------

    For the same reasons discussed above for interest rate risk,
however, we are limiting the required key rates for credit spread risk
to 3-month, 1-year, 5-year, 10-year, and 30-year.\160\ Commenters also
suggested either only requiring spread duration (as opposed to both
credit and spread duration) or further refining the measure of credit
spreads, for example, by breaking out government related spreads from
other investment-grade spreads.\161\ However, we continue to believe
that our current measure of spread risk provides adequate information
to the staff, investors, and other potential users to better understand
industry and fund credit spreads, and the risk associated with credit
spreads, while appropriately balancing the costs of calculating such
measures. We are therefore adopting the credit spread risk as proposed,
subject to the previously discussed key rate refinements discussed
above.\162\
---------------------------------------------------------------------------

    \160\ See B.3.c of Form N-PORT.
    \161\ See, e.g., Fidelity Comment Letter (Suggesting breaking
out government-related credit spreads from other investment-grade
credit spreads because it would be more useful for monitoring fund
credit risk); Dreyfus Comment Letter (``Spread duration is a more
important measure of overall bond fund portfolio risk than duration
alone because it captures both interest rate risk and credit
risk.'').
    \162\ See Item B.3.c of Form N-PORT.
---------------------------------------------------------------------------

    We also proposed to include an instruction to Item B.3 to assist
funds with calculating the threshold and to allow better comparability
among funds. One commenter recommended that our proposed calculation
for the threshold, which the proposal defined as ``notional value,''
include the ``contract value of each futures contract for which the
underlying reference asset or assets are debt securities or an interest
rate.'' \163\ The commenter noted that funds may use fixed income
futures for similar purposes as fixed income swaps, for example, to
adjust duration, and including futures in the calculation would give
the Commission more accurate reporting and is consistent with how the
industry typically does these types of calculations.\164\ We agree and
are modifying our instructions to require that funds include futures in
the calculation of notional value.\165\
---------------------------------------------------------------------------

    \163\ See CRMC Comment Letter.
    \164\ Id.
    \165\ We have also decided to make a clarifying change by using
the term ``value'' as opposed to the proposal's ``notional value.''
We believe that this could reduce confusion in the reporting of
these measures. Since our proposed calculation of ``notional value''
requires the sum of ``absolute'' values, which may be different than
how funds currently define ``notional value,'' we are changing the
instructions from requiring notional value to requiring ``value,''
which is defined to include the notional value of certain
derivatives instruments. See Instruction to Item B.3 of Form N-PORT.
Moreover, this is consistent with Form PF which describes ``value''
in General Instruction 15. See General Instruction 15 of Form PF.
---------------------------------------------------------------------------

    Another commenter noted that non-investment grade portfolios often
hold ``equity-like securities,'' such as convertible bonds and
preferred stocks.\166\ The commenter argued that DV01 is not
appropriate for these types of portfolios and requested that Form N-
PORT clarify how funds should calculate interest-rates in such
situations.\167\ Other commenters suggested that we further refine our
proposed methodology by providing more details relating to the relevant
interest rate and credit spread calculations such as whether the credit
spread to be shifted is the nominal or option adjusted spread
(OAS).\168\ In determining the proposed methodology for the measures of
duration and spread duration, staff engaged in outreach to asset
managers and risk service providers that provide risk management and
other services to asset managers and

institutional investors. The proposed methodology was based on staff
experience in using duration and spread duration, as well as this
outreach to better understand common fund practices for calculating
such measures.
---------------------------------------------------------------------------

    \166\ See Fidelity Comment Letter.
    \167\ Id.
    \168\ See, e.g., Interactive Data Comment Letter (Clarify
whether interest rate shifts should be applied to a par yield curve
or a spot yield curve and specify that the measurement procedure
should include shifting rates both upward and downward. Clarify
whether the curve segments should be defined based on maturity or
average life, particularly for amortizing assets such as MBS and
consider excluding certain issues, such as US treasuries; clarify
whether the credit spread to be shifted is the nominal or option
adjusted spread (OAS) and recommending OAS.); State Street Comment
Letter (requesting clarity whether the Commission wants notional
value versus delta adjusted or duration equivalent value, but also
suggesting that the SEC should not be too prescriptive and give
managers discretion within guidelines, so long as they can validate
and justify their approach.).
---------------------------------------------------------------------------

    While the Commission continues to believe that the methodologies
for reporting duration and spread duration will allow for better
comparability across funds, as discussed above, we are adopting a new
instruction to Form N-PORT, subject to the specific instruction in Item
B.3 to calculate value, that funds may use their own internal
methodologies and the conventions of their service providers, which
should help minimize reporting burdens.\169\ As in Form PF, we believe
that this approach strikes an appropriate balance between easing the
burdens on funds by allowing them to rely on their existing practices
while still providing the Commission's staff with comparable data
across the industry.\170\ However, we agree with the commenter that
requested that we clarify whether the shift is the nominal or option-
adjusted spread. We believe that measuring credit risk by shifting
option adjusted spread provides a more robust measure of credit risk
for investments with embedded optionality because it captures how
embedded options alter the payment obligations of counterparties.\171\
Thus measuring credit risk by shifting the option adjusted spread will
allow the Commission and other interested parties to more accurately
monitor this effect. We are therefore adding one clarification to Item
B.3.c., Credit Spread Risk, to clarify that funds should provide the
change in value of the portfolio from a 1 basis point change in credit
spreads where the shift is applied to the option adjusted spread.\172\
---------------------------------------------------------------------------

    \169\ See General Instruction G of Form N-PORT.
    \170\ See Form PF Adopting Release, supra footnote 80, at n. 187
and accompanying text Based on staff experience, we believe that we
will still find the data useful even when funds use different
methodologies, despite the fact that varying methodologies could
reduce the comparability of data across funds because this data will
still provide information that can be compared to a fund's previous
filings, as well as a baseline measurement for the industry that can
be monitored for changes from one month to the next.
    \171\ See also Interactive Data Comment Letter.
    \172\ See Item B.3.c of Form N-PORT.
---------------------------------------------------------------------------

    While we proposed that funds provide a calculation of each of these
measures at a portfolio level, we also considered whether to require,
and requested comment on the alternative that, instead, funds report
these risk metrics for each debt instrument or derivative that has an
interest rate or credit exposure.\173\ We had asked what the benefits
would be to having more precise data for analysis of various movements
in interest rates and credit spreads.
---------------------------------------------------------------------------

    \173\ See Proposing Release, supra footnote 7, at 33601.
---------------------------------------------------------------------------

    Several commenters supported reporting at the portfolio-level
rather than at the position-level.\174\ One commenter suggested that,
rather than report risk measures at the portfolio-level, funds should
report risk exposures at the position-level, as this is current
industry practice and would therefore not be burdensome.\175\ Other
commenters generally noted that providing position specific details
would better enable investors and service providers to calculate risk,
without relying on the reporting fund's models or assumptions.\176\
Finally, another commenter recommended that the Commission, with
respect to derivatives, focus on metrics based on a portfolio-level
analysis, as such an analysis would more accurately reflect a fund's
use of, and net exposure to, derivatives.\177\
---------------------------------------------------------------------------

    \174\ See, e.g., SIFMA Comment Letter I (supporting the
Commission's proposal to require funds to provide the Commission
with portfolio level risk metrics and requesting that the
information not be made public); Wells Fargo Comment letter
(supporting the Commission's request for duration and spread
duration, but suggesting that the calculation for providing risk
metrics be defined differently).
    \175\ See Interactive Data Comment Letter (recommending that the
Commission consider several alternatives, including requiring funds
to report aggregate risk metrics at the asset class level and
composite portfolio-level, and to require risk metric calculations
to account for the ``interactions among the investments being
aggregated.'').
    \176\ See Morningstar Comment Letter; Vanguard Comment Letter.
    \177\ See Simpson Thacher Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we believe that most funds
likely calculate these risk metrics at a position-level. However, we
recognize that even if such calculations are available at a position-
level, reporting these metrics could cause funds to make additional
systems changes to collect such position-level data for reporting, as
well as potential burdens related to increased review time and quality
control in submitting the reports. Therefore, on balance, we continue
to believe that requiring funds to provide this information for each
maturity at the portfolio level would provide a sufficient level of
granularity for purposes of Commission staff analysis. We also believe
that there are certain efficiencies for the Commission, its staff,
investors, and other potential users to having funds report the
portfolio-level calculations relative to reporting position-level
calculations, as this could allow for more timely and efficient
analysis of the data by not requiring users of the information to
calculate the portfolio-level measures from the position-level
measures.\178\
---------------------------------------------------------------------------

    \178\ Commenters also requested that we clarify that the fixed
income exposure as calculated by a top tier in a fund-of-fund
investment structure would not include the top tier fund's exposure
to the underlying fund's exposure to debt. See ICI Comment Letter;
MFS Comment Letter. Since Item B.3 requires aggregated portfolio-
level risk metrics, we generally would not expect funds to look
through to the underlying funds' holdings. Rather, funds only will
need to look to the top level fund investments in calculating their
exposure to risk measures.
---------------------------------------------------------------------------

    In order to allow better comparability among funds, some commenters
recommended that the Commission omit risk metrics in favor of more data
on the specific investments, stating that raw data would allow the
staff, investors, and other potential users to perform their own risk
calculations. \179\ According to the commenters, providing position
specific details would better enable investors and service providers to
calculate risk, without relying on the reporting fund's models or
assumptions.\180\ While we agree that reporting raw data on specific
investments would provide users of the data with more flexibility in
calculating risk, we do not believe that the benefits of reporting this
information sufficiently justify the burdens of requiring funds to
report substantially more detailed information on Form N-PORT at this
time. Moreover, as discussed above, we believe that requiring funds to
report the portfolio-level risk measures required on Form N-PORT, as
well as delta for options, warrants, and convertible securities, which
is discussed further below in section II.A.2.g.iv, provides the
Commission, investors, and other potential users with a sufficient
level of granularity for purposes of analysis at this time.
---------------------------------------------------------------------------

    \179\ See, e.g., Vanguard Comment Letter; Morningstar Comment
Letter (``Rather than collecting model assumptions or additional
standardization of the calculations, we believe providing additional
detail with position information, specifically for bespoke
derivatives and syndicated loans, will enable investors and service
providers to independently calculate risk measures based on a model
of the investor's choice.'').
    \180\ Id.
---------------------------------------------------------------------------

    Finally, commenters requested that we collect alternative risk
metrics, such as the same interest rate and credit risk questions as
are required by Form PF in order to improve the interoperability of the
data collected for private funds and registered investment
companies.\181\

However, while some of our Form N-PORT risk metric disclosures are
based on Form PF, for the reasons stated above, the position-level
information that we will receive in reports on Form N-PORT make more
detailed reporting unnecessary for registered funds.\182\ Another
commenter suggested that we focus on alternative portfolio-level risk
metrics, such as Value at Risk (``VaR'').\183\ Based on staff
experience, for purposes of monitoring a fund's sensitivity to changes
in interest rates and credits spreads, we believe that requiring funds
to calculate duration and spread duration along key rates will provide
the Commission with more sensitive information than would be provided
by an overall portfolio-level risk metric such as VaR. Accordingly, we
are not adopting these suggested alternative risk metrics.
---------------------------------------------------------------------------

    \181\ See, e.g., BlackRock Comment Letter (Commission should use
the same interest rate and credit risk questions as is required in
Item 42 of Form PF; Commission should consider implementing a
reporting requirement to obtain a comprehensive measure of fund's
use of leverage); Simpson Thacher Comment Letter. Item 42 of Form PF
requires an adviser to report the impact on the fund's portfolio
from specified changes to certain identified market factors, if
regularly considered in formal testing in the fund's risk
management, broken down by the long and short components of the
qualifying fund's portfolio. See Item 42 of Form PF; see also Form
PF Adopting Release, supra footnote 80, at nn. 270-272 and
accompanying text.
    \182\ Unlike with Form PF, which does not require position-level
reporting, with Form N-PORT the staff will be able to calculate
alternative risk measures using the detailed position-level
information provided in reports on Form N-PORT.
    \183\ See Simpson Thacher Comment Letter (derivatives reporting
should focus on portfolio-level risk metrics, such as ``value-at-
risk'' models).
---------------------------------------------------------------------------

d. Securities Lending
    To increase the rate of return on their portfolios, some funds
engage in securities lending activities whereby a fund lends certain of
its portfolio securities to other financial institutions such as
broker-dealers. To protect the fund from the risk of borrower default
(i.e., the borrower failing to return the borrowed security or
returning it late), the borrower posts collateral with the fund in an
amount at least equal to the value of the borrowed securities, and this
amount of collateral is adjusted daily as the value of the borrowed
securities is marked to market.\184\ Funds generally demand cash as
collateral. A fund will typically invest cash collateral that it
receives in short-term, highly liquid instruments, such as money market
funds or similar pooled investment vehicles, or directly in money
market instruments.
---------------------------------------------------------------------------

    \184\ See SIFMA, Master Securities Loan Agreement, Sec. Sec.  4
(Collateral), 9 (Mark to Market) (2000) (``Master Securities Loan
Agreement''), available at http://www.sifma.org/Services/Standard-Forms-and-Documentation/MRA,-GMRA,-MSLA-and-MSFTAs/MSLA_Master-Securities-Loan-Agreement-(2000-Version). See also Division of
Investment Management, SEC, Securities Lending by U.S. Open-End and
Closed-End Investment Companies (2014) (``Securities Lending
Summary''), available at http://www.sec.gov/divisions/investment/securities-lending-open-closed-end-investment-companies.htm.
---------------------------------------------------------------------------

    A fund's income from these activities may come from fees paid by
the borrowers to the fund and/or from the reinvestment of
collateral.\185\ Many funds engage an external service provider--
commonly called a ``securities lending agent''--to administer the
securities lending program. The securities lending agent is typically
compensated by being paid a share of the fund's securities lending
revenue after the borrower has been paid any rebate owed to it.\186\
---------------------------------------------------------------------------

    \185\ If a security is not in high demand, a lender typically
pays the borrower a cash collateral fee, commonly called a
``rebate.'' The rebate is negotiated and can be negative (i.e., a
fee paid from the borrower to the lender) when demand for the loan
of a particular security is especially great or its supply
especially constrained. See Master Securities Loan Agreement, supra
footnote 184, at Sec.  5 (Fees for Loan).
    \186\ See Securities Lending Summary, supra footnote 184.
---------------------------------------------------------------------------

    Securities lending may implicate certain provisions of the
Investment Company Act, and funds that engage in securities lending do
so in reliance on Commission staff no-action letters, and in some
circumstances, exemptive orders.\187\ Funds that rely on these letters
and orders are subject to conditions on a number of aspects of their
securities lending activities, including loan collateralization and
termination, fees and compensation, board approval and oversight, and
voting of proxies.
---------------------------------------------------------------------------

    \187\ For example, the transfer of a fund's portfolio securities
to a borrower implicates section 17(f) of the Investment Company
Act, which generally requires that a fund's portfolio securities be
held by an eligible custodian. A fund's obligation to return
collateral at the termination of a loan implicates section 18 of the
Investment Company Act, which governs the extent to which a fund may
incur indebtedness. See id.
---------------------------------------------------------------------------

    Currently, the information that funds are required to report about
securities lending activity, whether in a structured format or
otherwise, is limited. For example, funds disclose on Form N-SAR
whether they are permitted under their investment policies to, and
whether they did engage during the reporting period in, securities
lending activities.\188\ Funds generally also disclose additional
information regarding their securities lending programs in their
registration statements.\189\ In addition, consistent with current
industry practices, many funds identify particular securities that are
on loan in their schedules of portfolio investments prepared pursuant
to Regulation S-X. These disclosures do not address other pertinent
considerations, such as the extent to which a fund lends its portfolio
securities, the borrower to which the fund is exposed, the fees and
revenues associated with those activities, and the significance of
securities lending revenue to the investment performance of the fund.
---------------------------------------------------------------------------

    \188\ Item 70.N of Form N-SAR.
    \189\ See, e.g., Item 9(c) (disclosures regarding risks), Item
16(b) (disclosures of investment strategies and risks), Item 17(f)
(disclosures of proxy voting policy), and Item 28(h) (exhibits of
other material contracts) of Form N-1A.
---------------------------------------------------------------------------

    As proposed, to address these data gaps and provide additional
information to the Commission, investors, and other potential users
regarding a fund's securities lending activities, we are requiring
funds to report certain borrower information and position-level
information monthly on Form N-PORT.\190\ Also, as to other securities
lending information for which annual reporting would be sufficient
because it is unlikely to change on a frequent basis (e.g., name and
other identifying information for a fund's securities lending agent),
funds will report such information annually on Form N-CEN, as proposed
and as discussed below in section II.D. In addition, as discussed below
in section II.C.6, we have made a modification from the proposal to
require certain information about the income from and fees paid in
connection with securities lending activities, and the monthly average
of the value of portfolio securities on loan, be disclosed as part of
the fund's Statement of Additional Information (or, for closed-end
funds, reports on Form N-CSR) or in Form N-CEN, instead of a fund's
financial statements as we had originally proposed.\191\
---------------------------------------------------------------------------

    \190\ See infra text following footnote 195 (discussing the
reporting of counterparty information); section II.A.2.g (discussing
the proposed requirements regarding position-level information).
Commenters to the FSOC Notice also suggested that enhanced
securities lending disclosures could be beneficial to investors and
counterparties. See, e.g., SIFMA/IAA FSOC Notice Comment Letter
(``Disclosures related to securities lending practices, if
appropriately tailored, could potentially assist investors and
counterparties in making informed choices about where they deploy
their assets and how they engage in lending practices.''); Comment
Letter of the Vanguard Group, Inc. to FSOC Notice (Mar. 25, 2015)
(``Vanguard FSOC Notice Comment Letter'') (asserting that securities
lending as a whole suffers from a lack of readily available data,
and supporting further efforts to gather data and study the practice
of securities lending).
    \191\ See infra footnotes 724-725 and accompanying text
(discussing new required disclosures in funds' Statement of
Additional Information (or, for closed-end funds, funds' reports on
Form N-CSR) that will allow investors to better understand the
income generated from, as well as the expenses associated with,
securities lending activities) and 1224-1225 and accompanying text
(discussing new required disclosures of monthly average value of
portfolio securities on loan in Form N-CEN).

---------------------------------------------------------------------------

    The new reporting requirements we are adopting are intended, in
part, to increase the transparency of information available related to
the lending of securities by funds as a subset of the universe of
market participants engaged in securities lending activities.\192\
Commenters were generally supportive of increased reporting about
securities lending activities, although they suggested modifications to
certain aspects of the proposal and expressed concerns with some of the
specific proposed reporting.\193\ These comments, and the modifications
we are making in response to comments, are discussed in more detail
below.
---------------------------------------------------------------------------

    \192\ See, e.g., section 984(b) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Public Law 111-203, 124 Stat.
1376, 1933 (2010) (directing the Commission to promulgate rules
designed to increase the transparency of information available to
brokers, dealers, and investors, with respect to the loan or
borrowing of securities).
    \193\ See, e.g., infra footnotes 199-201 and accompanying and
following text (recommending that the collection of securities
lending information should be limited to the top 5 or 10 securities
lending borrowers with the greatest exposure) and footnotes 205-208
and accompanying and following text (suggestions regarding how to
report non-cash collateral posted by securities lending borrowers).
---------------------------------------------------------------------------

    Borrower Information.\194\ One risk that funds engaging in
securities lending are exposed to is counterparty risk because
borrowers could fail to return the loaned securities. In this event,
the lender would keep the collateral. In the U.S., cash collateral is
more typical than non-cash collateral and loans are often over-
collateralized. The collateral requirements thereby mitigate the extent
of a fund's counterparty risk. This risk is further mitigated for the
fund if the fund's securities lending agent indemnifies the fund
against default by the borrower.
---------------------------------------------------------------------------

    \194\ In the Proposing Release, we referred to ``securities
lending counterparties,'' but have made a clarifying change to
``securities lending borrowers'' in the form. As discussed above,
when funds are engaged in securities lending transactions, they are
securities lenders because they lend their portfolio securities to
other financial institutions, such as broker-dealers, who are
securities borrowers. The change in terminology is not intended to
alter the substance of reporting from what we proposed.
---------------------------------------------------------------------------

    As we explained in the Proposing Release, while we believe there is
value to having information on borrowers of fund securities to monitor
risk, as well as information with which to evaluate compliance with
conditions set forth in staff no-action letters and exemptive
orders,\195\ we proposed to require that funds report the full name and
LEI (if any) of each borrower, as well as the aggregate value of all
securities on loan to the particular borrower, rather than at the loan
level.\196\ We believe that reporting of borrower information at an
aggregate portfolio level will provide the Commission, investors, and
other potential users with information to better understand the level
of potential counterparty risk assumed as part of the fund's securities
lending program, with a lower relative burden on funds than requesting
such information on a per loan level.
---------------------------------------------------------------------------

    \195\ See generally Securities Lending Summary, supra footnote
184.
    \196\ Item B.4 of proposed Form N-PORT.
---------------------------------------------------------------------------

    Commenters generally supported our proposal to increase reporting
relating to securities lending borrowers, although one commenter
questioned the usefulness of borrower information given that securities
lending agreements are generally indemnified by securities lending
agents.\197\ Most commenters also specifically supported our approach
of assessing the counterparty risk of securities lending transactions
on an aggregate basis for each borrower, as opposed to a loan-by-loan
or security-by-security basis.\198\
---------------------------------------------------------------------------

    \197\ See, e.g., Comment Letter of Independent Directors of the
BlackRock Equity-Liquidity Funds (Oct. 2, 2015) (``Blackrock
Directors Comment Letter'') (supporting this aspect of our
proposal); BlackRock Comment Letter (same); Fidelity Comment Letter
(same); Comment Letter of the Risk Management Association (Aug. 11,
2015) (``RMA Comment Letter'') (same); SIFMA Comment Letter I
(same); Comment Letter of CFA Institute (Aug. 10, 2015) (``CFA
Comment Letter'') (same). But see MFS Comment Letter (arguing that
disclosure of borrower information may not be relevant in
understanding a fund's counterparty exposure, because if the fund
has been indemnified then the counterparty exposure rests with the
lending agent).
    \198\ See, e.g., BlackRock Comment Letter; Morningstar Comment
Letter.
---------------------------------------------------------------------------

    However, many commenters recommended limiting the collection of
securities lending information to the top 5 or 10 securities lending
borrowers presenting the greatest exposure.\199\ These commenters
argued that the top 5 securities lending borrowers generally represent
the majority of a fund's securities lending exposure and that further
disclosure would impose unnecessary costs on funds and shareholders to
the extent it would be capturing borrowers to which the fund does not
have material exposure.\200\ Likewise, several commenters suggested
that borrower information for securities lending transactions should
only be reported by funds whose securities lending exposure exceeded a
certain minimum threshold.\201\
---------------------------------------------------------------------------

    \199\ See, e.g., ICI Comment Letter (limit to the top 5
securities lending borrowers); RMA Comment Letter (top 5 or 10
borrowers); Fidelity Comment Letter (top 5 borrowers; broader
securities lending disclosures would not provide a meaningful
indicator of risk in securities lending because security loans are
fully collateralized and also funds may be indemnified by lending
agents); State Street Comment Letter (top 5 or ten borrowers). But
see Morningstar Comment Letter (applauding the Commission's proposal
to require counterparty information for all securities lending
borrowers).
    \200\ See, e.g., Invesco Comment Letter (the top 5 securities
lending borrowers generally represent 68% of a fund's securities
lending exposure); ICI Comment Letter (additional disclosures beyond
the top 5 borrowers would impose unnecessary costs on funds and
shareholders).
    \201\ See Wells Fargo Comment Letter (portfolio level reporting
of aggregate securities lending activity should only be required for
funds with a minimum threshold of 10% of assets on loan);
Oppenheimer Comment Letter (funds should report only the top 5
borrowers and not disclose anything if outstanding securities loans
do not exceed 1% of net assets).
---------------------------------------------------------------------------

    We continue to believe that funds that engage in securities lending
should be required to report information for all of its securities
lending borrowers. In response to commenters' observations that many
funds are indemnified for their securities lending transactions, we
note that not all funds are so indemnified. Separately, we believe that
information on borrowers is useful even if there is an indemnification
by the agent. For example, such information is helpful in generally
monitoring the degree to which funds are involved in securities lending
transactions and the identities of borrowers engaged in such
transactions. Allowing funds to exclude certain borrower information
would limit the applicability and completeness of the information
reported on Form N-PORT regarding counterparty risk, both to an
individual fund and to the fund industry. We are not persuaded by
commenters' arguments that reporting of all borrowers would be unduly
burdensome or costly, as we believe funds would need to collect this
information both to understand its own counterparty risk and for its
own oversight of securities lending. For these reasons, we are
requiring funds to report aggregate borrower exposure for all
securities lending borrowers, as proposed.
    Several commenters also suggested that borrower information for
securities lending information should be nonpublic. In particular,
these commenters expressed concerns that securities lending
counterparties (i.e., borrowers) may wish to avoid having details of
their exposures being made public, including to competitors.\202\ We
are not persuaded by these arguments. First, we note that the new
reporting requirements we are adopting today are intended, in part, to
increase the transparency of information available related to the
lending and borrowing of

securities.\203\ Making borrower information for the securities lending
information reported on Form N-PORT nonpublic would defeat this
objective.
---------------------------------------------------------------------------

    \202\ See BlackRock Comment Letter; SIFMA Comment Letter I; RMA
Comment Letter.
    \203\ See supra footnote 192 and accompanying text.
---------------------------------------------------------------------------

    Second, based on our experience with securities lending, we are not
persuaded by commenters claiming that a fund's activities in securities
lending would be harmed because certain securities borrowers do not
want to be identified. We note that we are not requiring identification
of securities borrowers by loan, but rather on an aggregated basis. We
also note that certain funds currently publicly identify securities
lending borrowers twice per year in the notes to their annual and semi-
annual financial statements, as permitted by GAAP.\204\ We are unaware
of any evidence that these disclosures have had any effects on
borrowers' decisions to borrow from registered investment companies in
the manner those commenters suggest, and thus we continue to believe
that requiring funds to make such information publicly available is
appropriate because these disclosures will improve transparency to
investors and other users.
---------------------------------------------------------------------------

    \204\ See, e.g., SIFMA Comment Letter I.
---------------------------------------------------------------------------

    As discussed in greater detail below, we also received various
suggestions regarding how to report non-cash collateral posted by
securities lending borrowers.\205\ One commenter pointed out that funds
typically do not account for non-cash collateral as a fund asset
because funds generally do not ``control'' the non-cash collateral and
thus do not bear any investment risk for it.\206\ For this reason, the
commenter asserted that it would be inconsistent with accounting and
reporting standards for funds to report non-cash collateral received
for loaned securities as portfolio investments on Form N-PORT, as we
proposed.\207\ We agree with the commenter and are modifying Form N-
PORT from the proposal to add a new Item requiring funds to report the
aggregate principal amount and aggregate value of each type of non-cash
collateral received for loaned securities that is not treated as a fund
asset.\208\
---------------------------------------------------------------------------

    \205\ See infra footnote 413 and accompanying and following
text.
    \206\ See ICI Comment Letter.
    \207\ See Item C.12.b of proposed Form N-PORT.
    \208\ See Item B.4.b of Form N-PORT. Funds will report the
category of instrument that most closely represents the collateral,
selected from among the following (asset-backed securities; agency
collateralized mortgage obligations; agency debentures and agency
strips; agency mortgage-backed securities; U.S. Treasuries
(including strips); other instrument). If ``other instrument,''
funds will also include a brief description, including, if
applicable, whether it is an irrevocable letter of credit.
---------------------------------------------------------------------------

    Several commenters also requested that Form N-PORT collect
additional information regarding securities lending activities. One
commenter recommended that funds report average monthly aggregate
dollar amounts on loan and fee split information, as well as a brief
summary of the fund's securities lending program, including risk and
strategy.\209\ Another commenter suggested that the aggregate value of
securities lent should be accompanied by the aggregate value of
collateral pledged.\210\ One commenter requested that funds report the
average daily value of securities lending collateral over the reporting
period, rather than a snapshot as of the last day of the reporting
period, and asserted that securities lending collateral can be used as
a proxy for the percentage of the portfolio that is on loan, which is
the true quantity of interest.\211\
---------------------------------------------------------------------------

    \209\ See Comment Letter of John C. Adams (July 8, 2015) (``John
Adams Comment Letter'').
    \210\ See Morningstar Comment Letter.
    \211\ See Comment Letter of Richard B. Evans (Oct. 20, 2015).
---------------------------------------------------------------------------

    We are not adopting such additional reporting requirements on Form
N-PORT. As discussed further below, the amendments to the Statement of
Additional Information (and, for closed-end funds, Form N-CSR) that we
are adopting today will require funds to make certain disclosures in
connection with their securities lending activities and cash collateral
management, and Form N-CEN also requires information about a fund's
securities lending program, including the average monthly value of
securities on loan. Although the additional information requested by
commenters may be useful to certain investors or other users, we are
sensitive to the burdens on funds of additional reporting requirements.
Some of the information requested by commenters, such as a brief
summary of the fund's securities lending program, including risk and
strategy, is already disclosed in fund registration statements.\212\
Certain other information requested by commenters, such as the
aggregate value of securities lent and the aggregate value of
collateral pledged, can be calculated by adding up the structured
information reported for each individual securities lending
transaction.\213\ Furthermore, other information requested by
commenters, such as the percentage of the portfolio securities on loan
over the reporting period, can be derived from information that will be
reported in a structured format as part of this rulemaking.\214\
Although we understand that requiring funds to report additional
information may be useful to certain users of such information, Form N-
PORT is primarily designed to meet the data needs of the Commission and
its staff. As such, the securities lending information we are requiring
to be reported on Form N-PORT is designed to balance what we anticipate
would be useful for our regulatory oversight purposes, namely obtaining
more information specifically regarding counterparties, amounts on
loan, and how collateral is reinvested, against the expected burdens of
reporting such information. Accordingly, we decline to modify Form N-
PORT to require the additional securities lending disclosures requested
by commenters.
---------------------------------------------------------------------------

    \212\ See supra footnote 189 and accompanying text.
    \213\ See Item C.12.a (value of the investment representing cash
collateral), Item C.12.b (value of the securities representing non-
cash collateral), and Item C.12.c (value of the securities on loan)
of Form N-PORT.
    \214\ See Item B.1 of Form N-PORT (net assets); Item C.6.f of
Form N-CEN (monthly average value of securities on loan).
---------------------------------------------------------------------------

    We also received several comments requesting that we revise Form N-
PORT to phase in reporting of securities lending borrowers' LEIs.
Commenters urged that this requirement be delayed until LEIs have been
fully integrated into the global financial system and lending agents
and funds have implemented the necessary systems enhancements to
facilitate LEI reporting.\215\ Commenters also expressed concerns that
reporting LEI information for securities lending counterparties (i.e.,
borrowers) may cause borrowers to become less likely to borrow from
registered funds and more likely to borrow from lenders who are not
required to make similar disclosures, in order to avoid having details
of the borrowers' exposures being made public.\216\
---------------------------------------------------------------------------

    \215\ See State Street Comment Letter; BlackRock Comment Letter;
RMA Comment Letter.
    \216\ See State Street Comment Letter; RMA Comment Letter.
---------------------------------------------------------------------------

    For the same reasons discussed above regarding commenters'
suggestions not to require disclosure of securities borrowers, we are
not persuaded by such arguments. While the Commission is the primary
user of the form, the new reporting requirements we are adopting today
are intended, in part, to increase the transparency of information
available related to the lending and borrowing of securities.\217\ In
particular, the uniform public reporting of borrowers' LEIs will
facilitate the identification of such borrowers, which is part of the
purpose of such reporting. As discussed above, providing exemptions or
deferring implementation

of this requirement would hinder the ability of Commission staff as
well as investors and other potential users of this information to use
the data on Form N-PORT as discussed above.\218\ Furthermore, as
indicated above, Form N-PORT instructs funds to report LEIs ``if any''
for borrowers, and thus already acknowledges and makes accommodations
for the fact that LEI identifiers may not be available in some contexts
as LEIs are continuing to be integrated into the global financial
system.
---------------------------------------------------------------------------

    \217\ See supra footnote 192 and accompanying text.
    \218\ See supra footnote 68 and accompanying and following text.
---------------------------------------------------------------------------

e. Return Information
    As proposed, we are requiring funds to provide monthly total
returns for each of the preceding three months.\219\ If the fund is a
multiple class fund, it will report returns for each class.\220\ Funds
with multiple classes will also report their class identification
numbers.\221\ Funds will calculate returns using the same standardized
formulas required for calculation of returns as reported in the
performance table contained in the risk-return summary of the fund's
prospectus and in fund sales materials.\222\
---------------------------------------------------------------------------

    \219\ See Item B.5.a of Form N-PORT.
    \220\ See id.
    \221\ See Item B.5.b of Form N-PORT.
    \222\ See Item 26(b)(1) of Form N-1A; Instruction 13 to Item 4
of Form N-2; Item 26(b)(i) of Form N-3. Return information reported
on Form N-PORT will reflect swing pricing for funds that elect to
swing price pursuant to the contemporaneous release we are adopting
today regarding swing pricing for open-end funds. See Swing Pricing
Adopting Release, supra footnote 9., at section II.A.3.g.
---------------------------------------------------------------------------

    We are requiring this information on Form N-PORT because we believe
it will be useful to have such information in a structured format to
facilitate comparisons across funds. For example, analysis of return
information over time among similar funds could reveal outliers that
might merit further inquiry by Commission staff, and this type of
analysis can be done much more efficiently and timely when the
information is reported in a structured format. Additionally,
performance that appears to be inconsistent with a fund's investment
strategy or other benchmarks can form a basis for further inquiry and
monitoring.\223\ Although mutual funds currently report certain return
information in a structured format periodically as part of their risk/
return summaries, we believe that having return information reported on
a monthly basis by all registered funds will allow the Commission staff
to more easily and effectively monitor the fund industry as a whole, as
described above.\224\
---------------------------------------------------------------------------

    \223\ Similar risk analytics were used in the Commission's
Aberrational Performance Inquiry, an initiative by the Division of
Enforcement's Asset Management Unit to identify hedge funds with
suspicious returns. See, e.g., SEC, SEC Charges Hedge Fund Adviser
and Two Executives with Fraud in Continuing Probe of Suspicious Fund
Performance, Press Release: 2012-209 (Oct. 17, 2012), available at
http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171485332.
    \224\ See generally Interactive Data for Mutual Fund Risk/Return
Summary, Investment Company Act Release No. 28617 (Feb. 11, 2009)
[74 FR 7748 (Feb. 19, 2009)] (requiring funds to submit to the
Commission a structured data file for any registration statement or
post-effective amendment on Form N-1A that includes or amends
information in Form N-1A's risk/return summary); SEC, Interactive
Data and Mutual Fund Risk/Return Summaries, available at https://www.sec.gov/spotlight/xbrl/mutual-funds.shtml.
---------------------------------------------------------------------------

    Because only quarter-end reports on Form N-PORT will be made
public, we are requiring, as proposed, that funds provide return
information for each of the preceding three months.\225\ This rolling
three month requirement will provide investors and other potential
users with monthly return information, so that they will have access to
each month's return on a quarterly basis. Otherwise, we are concerned
that investors might potentially confuse the month's disclosed return
as representing the return for the full quarter.
---------------------------------------------------------------------------

    \225\ See Item B.5.a of Form N-PORT. Although generally only
information reported on Form N-PORT for the third month of each
fund's fiscal quarter will be publicly available, the concerns
associated with more frequent public disclosure are related to the
disclosure of portfolio holdings information and will not apply to
the disclosure of fund return information. See generally footnote
1305 and accompanying and following text (discussing the risks of
predatory trading practices such as front-running and the ability of
non- investors to reverse engineer and copycat fund's investment
strategies).
---------------------------------------------------------------------------

    Commenters had mixed reactions regarding the reporting of monthly
total returns. Several commenters expressed concern that reporting
three months of returns could cause investors to unduly focus on short-
term results and recommended that returns for longer periods of time be
reported instead.\226\ One commenter recommended that funds should
report only a single month of returns in order to lower compliance
costs and because investors are likely to use other sources (such as
fund or third-party Web sites) to find return information rather than
Form N-PORT.\227\ Another commenter agreed with our proposed approach
of requiring funds to report total returns as opposed to gross returns,
noted that monthly fund performance data is already generally publicly
available, and concluded that the quarterly public release of monthly
performance data reported on Form N-PORT would result in the release of
information that had already been made available to the public.\228\
---------------------------------------------------------------------------

    \226\ See CRMC Comment Letter (monthly return information could
cause investors to focus on short-term results and therefore should
not be publicly reported or, in the alternative, should be reported
together with fund level long-term results); Wells Fargo Comment
Letter (funds should provide returns for a rolling 12-month period
as of the end of each month); Dreyfus Comment Letter (short-term
performance can mislead investors); SIFMA Comment Letter I (monthly
return information should not be made public or, in the alternative,
should be disclosed annually on Form N-CEN).
    \227\ See Comment Letter of Confluence Technologies, Inc. (Aug.
11, 2015) (``Confluence Comment Letter'').
    \228\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    We are adopting this requirement as proposed. As acknowledged by
commenters, many funds and market data providers already generally
disclose monthly performance data to investors, and daily performance
data is often available as well.\229\ The greater granularity provided
by monthly data will enhance the ability of Commission staff to use
return information to reveal outliers and detect performance that
appears to be inconsistent with a fund's investment strategy or other
benchmarks, as discussed above. More generally, frequent disclosure of
performance data over shorter time periods can better capture
variations in performance that would not be apparent with returns
reported over longer time periods.
---------------------------------------------------------------------------

    \229\ See, e.g., Morningstar Comment Letter (Morningstar's
monthly performance data, as well as most of the industry's data, is
generally made available on investor-facing Web sites by the third
business day after month end. Daily performance data is also
provided for 99.6% of open-end investment companies by 9 p.m. EST.);
SIFMA Comment Letter I (certain funds make monthly returns available
on their Web sites).
---------------------------------------------------------------------------

    Accordingly, we are not persuaded by commenters' recommendations to
require funds to report return information on Form N-PORT over longer
time horizons, as opposed to on a monthly basis. We are similarly not
persuaded by arguments that reporting fund performance data for three
months will ``[provide no] direct or indirect value to [fund]
investors'' as opposed to reporting one month of fund performance
information.\230\ As discussed above, although Form N-PORT is primarily
designed to assist the Commission and its staff, we believe that
investors and other potential users may benefit from the information
reported on Form N-PORT as well, either by analyzing Form N-PORT
directly or through analyses prepared by third-party service providers.
Because Form N-PORT will be available on a quarterly basis but will
provide month-end return information, we remain

concerned that investors might potentially confuse one month's returns
as representing the fund's returns for the full quarter. For each of
these reasons, we are requiring funds to report monthly return
information for each of the preceding three months, as proposed.
---------------------------------------------------------------------------

    \230\ See Confluence Comment Letter.
---------------------------------------------------------------------------

    We are also requiring, substantially as proposed, that funds
report, for each of the preceding three months, monthly net realized
gain (or loss) and net change in unrealized appreciation (or
depreciation) attributable to derivatives for certain categories. We
proposed that this information would be reported by asset category
(i.e., commodity contracts, credit contracts, equity contracts, etc.).
We are modifying the proposal to require funds to report this
information by both asset category and also by type of derivative
instrument (i.e., forward, future, option, swap, etc.).\231\ This
information will help the Commission staff, investors, and other
potential users better understand how a fund is using derivatives in
accomplishing its investment strategy and the impact of derivatives on
the fund's returns. In order to provide a point of comparison, and as
proposed, we are also requiring that funds report, for each of the last
three months, monthly net realized gain (or loss) and net change in
unrealized appreciation (or depreciation) for investments other than
derivatives.\232\
---------------------------------------------------------------------------

    \231\ See Item B.5.c of Form N-PORT.
    \232\ See Item B.5.d of Form N-PORT.
---------------------------------------------------------------------------

    Comments on this aspect of the proposal were mixed. Some commenters
opposed the reporting requirement, stating that it would not provide a
valuable reference point from which to assess whether the derivatives
included in a fund's portfolio have contributed to returns, especially
when derivatives are used for hedging purposes.\233\ One commenter
expressed general support for the derivatives reporting requirements in
N-PORT, including this proposed requirement, stating that this
information would, among other things, allow the Commission to better
assess trends, given the potential risks associated with certain uses
of derivatives.\234\
---------------------------------------------------------------------------

    \233\ See Wells Fargo Comment Letter; Dreyfus Comment Letter.
    \234\ See CFA Comment Letter (additionally supporting disclosure
of derivatives reporting on N-PORT to investors).
---------------------------------------------------------------------------

    Several commenters, in response to a request for comment,
recommended that the Commission require funds to report the monthly net
realized gain (or loss) and net change in unrealized appreciation (or
depreciation) attributable to derivatives by type of derivative
instrument (i.e., forward, future, option, swap, etc.), rather than by
asset category (i.e., commodity contracts, credit contracts, equity
contracts, etc.). This is because funds typically report derivatives in
their financial statements by type of derivative instrument rather than
asset category. As a result, according to commenters, systems are
currently aligned to capture and report this information by instrument
type, whereas reporting information by asset category would require
large changes to the existing accounting systems, which these
commenters believed would involve costs that would not be justified by
the resulting benefits.\235\ Finally, some commenters believed that
gains (or losses) and appreciation (or depreciation) attributable to
derivatives should not be made public because such information would
not be meaningful to investors and could potentially convey proprietary
information about the fund's trading strategies that could be used for
predatory trading or to reverse engineer the fund's investment
strategy.\236\
---------------------------------------------------------------------------

    \235\ See SIFMA Comment Letter I; ICI Comment Letter; MFA
Comment Letter.
    \236\ See SIFMA Comment Letter I; MFA Comment Letter.
---------------------------------------------------------------------------

    We disagree with commenters questioning the utility of reporting
gains (or losses) and appreciation (or depreciation) attributable to
derivatives. We continue to believe that this information will help
Commission staff, investors, and other potential users better
understand how a fund is using derivatives in accomplishing its
investment strategy and the impact of derivatives on the fund's
returns. We recognize that providing this information by asset category
is not how funds currently maintain this data in their systems and
therefore will involve more systems changes and costs relative to
providing this information by type of derivative instrument alone;
however, we disagree that such information does not have a benefit that
justifies this burden. Providing this information by asset category
will be helpful in understanding the relationship between derivatives--
and, as discussed further below, the types of derivative instruments--
that provide exposure to a particular asset category and direct
investments in the same asset category. For example, information
attributable to equity derivatives contracts could be compared to
returns attributable to direct investments in equities. Further,
reporting returns by derivative instrument alone would not provide any
information about the market risk factors that had caused the gain or
loss.
    Although we recognize that there will be some initial burden in
modifying systems to provide information by asset category, we note
that funds are currently already required to compile this information
by asset category twice a year, pursuant to FASB Topic ASC 815.\237\
While we understand from the comments that many funds currently compile
this manually, we believe, based on staff experience, that such
processes could be automated over time to facilitate the more frequent
reporting. In particular, we note that Form N-PORT, as proposed and
adopted, will separately require funds to categorize each derivative
investment by asset category, which should reduce the incremental
burden of providing return information by asset category.\238\
---------------------------------------------------------------------------

    \237\ See ASC 815 (Derivatives and Hedging).
    \238\ See Item C.4.a of Form N-PORT (requiring reporting of
asset category of each investment among enumerated categories,
including derivative-commodity, derivative-credit, derivative-
equity, derivative-foreign exchange, derivative-interest rate,
derivatives-other).
---------------------------------------------------------------------------

    Additionally, after consideration of the comments, we are modifying
this item from the proposal to require funds to report this information
by type of derivative instrument within each asset category. We believe
that providing both elements--asset category and derivative instrument
type--will make this information more informative than by reporting by
either asset category or instrument type in isolation. For example,
consider a fund that uses derivatives in two asset categories (e.g.,
equities and commodities) and two types of derivative instruments
(e.g., futures and options). If the asset category or instrument type
were reported alone, users of the information would be unable to
discern if the fund is deriving its returns by using equity options and
commodity futures or equity futures and commodity options--or in what
proportion. Reporting both pieces of information together allows the
Commission, investors, and other users to determine from which
category-type combination the fund is drawing (or hedging) its
exposure. Further, knowing the instrument type in combination with
asset category can be important for understanding the risks associated
with obtaining exposure to a particular asset category because
different derivative instruments can have different risks associated
with them, such as different counterparty risk, or a linear risk
profile (e.g. futures) versus a non-linear risk profile (e.g.,
options). Additionally, having such information by instrument and asset
category will be useful in understanding situations ranging from a
market

disruption for a particular type of derivative instrument (e.g., a
market disruption affecting a futures market) to a price shock
impacting a particular asset category (e.g., commodities).
Consequently, we believe that requiring such information by both
derivative instrument type and asset category will provide more
complete information relative to providing either type in isolation to
Commission staff, investors, and other potential users seeking to
better understand how a fund is using derivatives in accomplishing its
investment strategy and the impact of derivatives on the fund's
returns.
    Moreover, based on staff review of fund financial statements, we
have observed that in compliance with the requirements of FASB Topic
ASC 815, upon which this reporting requirement was based, funds
generally show gains (losses) and appreciation (depreciation) in
tabular format by both asset category and type of derivative
instrument. Because, as noted by commenters, many funds already have
systems in place to classify derivatives by instrument type, we believe
that requiring such information to be reported on Form N-PORT along
with asset category will not add a significant incremental burden
relative to providing, as proposed, such information by asset category
alone.\239\
---------------------------------------------------------------------------

    \239\ See SIFMA Comment Letter I; ICI Comment Letter.
---------------------------------------------------------------------------

    Regarding comments concerning public disclosure of the information,
we disagree with the commenter that argued such disclosures could
reveal information that could be used for reverse engineering or
predatory trading.\240\ We are not aware of this information being used
for such purposes, nor did the commenter explain how the disclosure of
such information could reveal information about the fund's trading
strategies that would allow traders to ``front-run'' or ``copycat'' the
fund. Separately, we note that the information will be delayed in terms
of public disclosure and that the return information will be
aggregated, which should mitigate the possibility that such information
could be used by predatory traders to the detriment of the fund.
---------------------------------------------------------------------------

    \240\ See SIFMA Comment Letter I.
---------------------------------------------------------------------------

    Likewise, we disagree with the commenter that asserted such
information would not be meaningful to investors.\241\ The Commission
believes, and one commenter agreed, that this information will be
useful for identifying funds in which a significant amount of gains and
losses came from exposures to derivative contracts, and will allow
Commission staff, investors, and other potential users to better
understand the relationship between the type of derivative instrument
and asset category in terms of the impact on the fund's returns.
Furthermore, we are not persuaded by commenters' arguments that such
information would be misleading to investors if made publicly
available. As discussed above, funds will also be reporting similar
information attributable to investments other than derivatives, which
we believe could help investors compare returns attributable to
derivatives with returns attributable to a fund's other investments.
Furthermore, although gains (or losses) and appreciation (or
depreciation) from derivatives may have different implications
depending on whether derivatives are being used for investment purposes
or as a hedge for other positions in the portfolio, disclosure of such
information should help improve the ability of investors to understand
and assess the use of derivatives in funds' investment strategies.
---------------------------------------------------------------------------

    \241\ Id.
---------------------------------------------------------------------------

f. Flow Information
    As proposed, Form N-PORT will require funds to separately report,
for each of the preceding three months, the total net asset value of:
(1) Shares sold (including exchanges but excluding reinvestment of
dividends and distributions); (2) shares sold in connection with
reinvestments of dividends and distributions; and (3) shares redeemed
or repurchased (including exchanges).\242\ This information is similar
to what is currently reported on Form N-SAR, and is generally to be
reported subject to the same instructions that currently govern
reporting of flow information on that form.\243\ We are requiring this
information on Form N-PORT because we believe that this information
will be more helpful if reported on a monthly basis rather than
retrospectively on an annual basis on Form N-CEN.
---------------------------------------------------------------------------

    \242\ See Item B.6 of Form N-PORT.
    \243\ Similar to Form N-SAR, Form N-PORT will instruct funds to
report amounts after any front-end sales loads had been deducted and
before any deferred or contingent deferred sales loads or charges
had been deducted. Shares sold will include shares sold by the fund
to a registered UIT. Funds will also include as shares sold any
transaction in which the fund acquired the assets of another
investment company or of a personal holding company in exchange for
its own shares. Funds will include as shares redeemed any
transaction in which the fund liquidated all or part of its assets.
Exchanges will be defined as the redemption or repurchase of shares
of one fund or series and the investment of all or part of the
proceeds in shares of another fund or series in the same family of
investment companies. Form N-PORT will also include a new clarifying
instruction, providing that if shares of the fund are held in
omnibus accounts, funds will use net sales or redemptions/
repurchases from such omnibus accounts for purposes of calculating
the fund's sales, redemptions, and repurchases. Cf. Item B.6 of Form
N-PORT and Item 28 of Form N-SAR (requiring reporting of monthly
sales and repurchases of the Registrant's/Series' shares for the
past six months).
---------------------------------------------------------------------------

    We believe that having flow information reported to us monthly will
help us better monitor trends in the fund industry. For example, it
could help us analyze types of funds that are becoming more popular
among investors and areas of high growth in the industry. It could help
us better examine investor behavior in response to market events.
Finally, in combination with other information that will be reported on
Form N-PORT regarding liquidity of fund positions pursuant to changes
to Form N-PORT set forth in the Liquidity Adopting Release, which we
are adopting today, flow information could also help us identify funds
that might be at risk of experiencing liquidity stress due to increased
redemptions.\244\
---------------------------------------------------------------------------

    \244\ See Liquidity Adopting Release, supra footnote 9.
---------------------------------------------------------------------------

    Commenters generally supported our proposed reporting requirements
for monthly flow information.\245\ However, many commenters noted that
funds are generally unable to look through omnibus accounts to the
underlying investors, and thus requested confirmation that flow
information be reported on a net basis for shares of the fund held in
omnibus accounts.\246\ We agree with these commenters, and in response
to these comments, Form N-PORT now includes a clarifying instruction to
this effect.\247\
---------------------------------------------------------------------------

    \245\ See ICI Comment Letter; SIFMA Comment Letter I; Wells
Fargo Comment Letter; BlackRock Comment Letter.
    \246\ See State Street Comment Letter; MFS Comment Letter; Wells
Fargo Comment Letter; SIFMA Comment Letter I; ICI Comment Letter;
Morningstar Comment Letter. But see BlackRock Comment Letter
(recommending that the Commission mandate that transfer agents,
distributors, or some other entity aggregate information by investor
types redeeming from and subscribing to funds so that funds could
look through omnibus accounts and report more detailed flow
information).
    \247\ See supra footnote 243.
---------------------------------------------------------------------------

    One commenter asked the Commission to mandate that transfer agents,
distributors, or some other entity (e.g., a central data repository)
track omnibus flow information by type of underlying investor (i.e.,
401(k) plans/individual retirement accounts, pension funds, insurance
companies, other institutional investors, and retail investors).\248\
The commenter suggested that this information be provided to fund
managers, who would then report

this information on Form N-PORT. The commenter concluded that this
information would help funds and others to create predictive models to
better understand potential future redemptions, which in turn would
help funds with liquidity risk management.
---------------------------------------------------------------------------

    \248\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    We acknowledge the merits of helping funds better manage potential
redemption risks, and further note that better transparency into
intermediary omnibus accounts by each type of underlying investor would
help the Commission better understand subscription and redemption
activity and how it varies across distribution platforms and market
environments. However, the commenter's suggestion is beyond the scope
of this rulemaking, although we note that the Commission is currently
seeking a range of input with respect to omnibus intermediary account
relationships, including through the recently issued advance notice of
proposed rulemaking and concept release with respect to transfer agent
regulations, which seeks comment in various areas including the
processing of book entry securities, broker-dealer recordkeeping for
beneficial owners, and the role of transfer agents to mutual
funds.\249\
---------------------------------------------------------------------------

    \249\ See Transfer Agent Regulations Concept Release, Securities
Exchange Act Release No. 76743 (Dec. 22, 2015) [80 FR 81948 (Dec.
31, 2015)].
---------------------------------------------------------------------------

    Another commenter recommended that monthly flow information be
reported for only the last month of the reporting period, rather than
for the three prior months, on the grounds that reporting this
information for the three prior months would have ``no direct value to
investors.'' \250\ We are not persuaded by this suggestion. As
discussed above, although Form N-PORT is primarily designed to assist
the Commission and its staff, we believe that investors and other
potential users may benefit from the information reported on Form N-
PORT as well, either by analyzing Form N-PORT directly or through
analyses prepared by third-party service providers. Unlike other
information reported on Form N-PORT, which generally represents a
snapshot ``as of'' a certain date, flows are calculated over a period
of time. Because information reported on Form N-PORT will be publicly
available on a quarterly basis but will provide monthly flow
information, we are concerned that investors might potentially believe
that one month's flows represent the fund's flows for the full quarter.
For that reason, we are requiring funds to report monthly flow
information for each of the preceding three months, as proposed.
---------------------------------------------------------------------------

    \250\ See Confluence Comment Letter.
---------------------------------------------------------------------------

g. Schedule of Portfolio Investments
    Part C of Form N-PORT will require, as proposed, funds to report
certain information on an investment-by-investment basis about each
investment held by the fund and its consolidated subsidiaries as of the
close of the preceding month. As proposed, funds will respond to
certain questions that will apply to all investments (i.e., the
investment's identification, amount, payoff profile, asset and issuer
type, country of investment or issuer, fair value level, and whether
the investment was a restricted security). As proposed, funds will also
respond, as applicable, to additional questions related to specific
types of investments (i.e., debt securities, repurchase and reverse
repurchase agreements, derivatives, and securities lending).
    Also, as proposed, funds will have the option of identifying any
investments that are ``miscellaneous securities.'' \251\ Unless
otherwise indicated, funds will not report information related to those
investments in Part C, but will instead report such information in Part
D.\252\
---------------------------------------------------------------------------

    \251\ See Part D of Form N-PORT. See also supra footnote 99 and
accompanying text.
    \252\ See infra footnote 419 and accompanying and following
text.
---------------------------------------------------------------------------

i. Information for All Investments
    Form N-PORT will require, as proposed, funds to report certain
basic information about each investment held by the fund and its
consolidated subsidiaries. In particular, funds will report the name of
the issuer and title of issue or description of the investment, as they
are currently required to do on their reported schedules of
investments.\253\ To facilitate analysis of fund portfolios, it is
important for Commission staff to be able to identify individual
portfolio securities, as well as the reference instruments of
derivative investments through the use of an identifying code or
number, which is not currently required to be reported on the schedule
of investments. Fund shareholders and potential investors that are
analyzing fund portfolios or investments across funds could similarly
benefit from the clear identification of a fund's portfolio securities
across funds. The staff has found that some securities reported by
funds lack a securities identifier, and this absence has reduced the
usefulness of other information reported.
---------------------------------------------------------------------------

    \253\ See Item C.1 of Form N-PORT.
---------------------------------------------------------------------------

    To address this issue, and as proposed, we are requiring that funds
report additional information about the issuer and the security. Funds
will report certain securities identifiers, if available.\254\ For
example, for security-based swaps, funds may report the product ID if a
product ID for that contract is used by one or more security-based swap
data repositories.\255\ Identifiers for other types of derivatives may
also be used, if available.\256\ If a unique identifier is reported,
funds will also indicate the type of identifier used.\257\ Such an
identifier might be assigned by a security-based swap data repository
or be internally generated by the fund or provided by a third party,
but should be consistently used across the fund's filings for reporting
that investment so that the Commission, investors, and other potential
users of the information can track the investment from report to
report.
---------------------------------------------------------------------------

    \254\ See Item C.1.b, Item C.1.d, and Item C.1.e of Form N-PORT
(requiring reporting of identifiers such as LEI of the issuer,
CUSIP, ISIN, ticker or other unique identifier).
    \255\ See 17 CFR 242.900(aa) and (bb) (defining ``product'' and
``product ID,'' respectively). See also Regulation SBSR Adopting
Release, supra footnote 61 (discussing use of product IDs under
Regulation SBSR).
    \256\ See, e.g., CFTC, Q&A--Swap Data Recordkeeping and
Reporting Requirements, available at<EMAIL_ADDRESS>(discussing product
identifiers for swaps).
    \257\ See Item C.1.e.iii of Form N-PORT.
---------------------------------------------------------------------------

    We received comments regarding the use of unique identifiers
generally, and LEI in particular. As discussed above, many commenters
expressed support for the use of LEI for identification of funds,
registrants, and counterparties.\258\ However, one commenter asserted
that a portfolio-based approach, including data on counterparties to
whom funds have greatest exposures, would enable adequate monitoring of
potential threats better than obtaining counterparty LEI and specific
information for each bilateral transaction.\259\ Other commenters
expressed concerns regarding the ability of funds to verify the
accuracy of LEIs provided by third-parties.\260\ Another commenter
suggested that each security held by a fund should be identified by
ticker and CUSIP, or ISIN and SEDOL for foreign securities, together
with the primary exchange where the security is traded at the date of
the filing.\261\ Another commenter urged the Commission not to mandate
the use of certain unique identifiers for public and nonpublic funds,
such as the Financial

Instrumental Global Identifier (``FIGI'').\262\
---------------------------------------------------------------------------

    \258\ See footnote 64 and accompanying text.
    \259\ See CFA Comment Letter.
    \260\ See Oppenheimer Comment Letter; MFS Comment Letter; ICI
Comment Letter.
    \261\ See Russ Wermers Comment Letter.
    \262\ See State Street Comment Letter (asserting that there are
few third-party providers who currently use such unique identifiers
and concluding that requiring the usage of such unique identifiers
would give those providers an unfair competitive advantage relative
to the rest of the industry). Information about the FIGI is
available on the Object Management Group's Web site, a not-for-
profit technology standards consortium. See generally Object
Management Group, Documents Associated with Financial Industry
Global Identifier (FIGI) Version 1.0--Beta 1 (Sept. 2014), available
at http://www.omg.org/spec/FIGI/1.0/Beta1/.
---------------------------------------------------------------------------

    As discussed above, we are adopting a portfolio-based approach in
the securities lending context, including data on counterparties to
whom funds have greatest exposures. However, we believe that the
uniform reporting of LEIs by fund series and registrants, as well as
securities issuers and fund counterparties, will further enhance our
monitoring and analytical capabilities by providing a consistent means
of identification that will facilitate the linkage of data reported on
Form N-PORT with data from other filings and sources that is or will be
reported elsewhere. We acknowledge that LEIs have not yet been fully
integrated into the global financial system, and accordingly the form
contains a qualifier that an LEI be reported, ``if any.'' We believe,
however, that LEIs will become more widely used by regulators and the
financial industry and note that our rulemaking will not require funds
to report LEIs, if any, until 18 months following the effective date.
    However, we understand that funds will in some instances be relying
upon service providers and other third-parties who will be providing
funds with LEI information to be reported to the Commission and
publicly disclosed to investors and other possible users, and we
understand that funds may find it difficult to verify such information
other than to confirm that it has been generated and reported
consistently with the methodologies of the fund's service providers. As
discussed above, the fund may generally use its own methodology or the
methodology of its service provider, so long as the methodology is
consistently applied and is consistent with the way the fund reports
internally and to current and prospective investors.\263\ We do not
believe, as some commenters suggested, that it is necessary to require
specific alternative unique identifiers for securities or entities at
this time, other than those identified in Form N-PORT, because we
believe that allowing funds to select another identifier in the absence
of an ISIN, CUSIP, or ticker gives funds appropriate flexibility in
identifying such investments.
---------------------------------------------------------------------------

    \263\ See General Instruction G of Form N-PORT (``Funds may
respond to this Form using their own internal methodologies and the
conventions of their service providers, provided the information is
consistent with information that they report internally and to
current and prospective investors. However, the methodologies and
conventions must be consistently applied and the Fund's responses
must be consistent with any instructions or other guidance relating
to this Form.'').
---------------------------------------------------------------------------

    We are also requiring, as proposed, funds to report the amount of
each investment as of the end of the reporting period, as is currently
required under Regulation S-X.\264\ Funds will report the number of
units or principal amount for each investment, as well as the value of
each investment at the close of the period, and the percentage value of
each investment when compared to the net assets of the fund.\265\ Funds
will also report the currency in which the investment was denominated,
and, if not denominated in U.S. dollars, the exchange rate used to
calculate value.\266\ We received no comments on this aspect of our
proposal.
---------------------------------------------------------------------------

    \264\ See Item C.2 of Form N-PORT. See rule 12-12 of Regulation
S-X.
    \265\ See Item C.2.a-Item C.2.d of Form N-PORT. For derivatives,
as appropriate, funds will provide the number of contracts.
    \266\ See Item C.2.b and Item C.2.c of Form N-PORT.
---------------------------------------------------------------------------

    Also as proposed, we are requiring funds to report the payoff
profile of the investment, indicating whether the investment is held
long, short, or N/A, which will serve the same purpose as the current
requirement in Regulation S-X to disclose investments sold short.\267\
Funds will respond N/A for derivatives and will respond to relevant
questions that indicate the payoff profile of each derivative in the
derivatives portion of the form. These disclosures will identify short
positions in investments held by funds. We received no comments on
these disclosure requirements.
---------------------------------------------------------------------------

    \267\ See Item C.3 of Form N-PORT. See rule 12-12A of Regulation
S-X [17 CFR 210.12-12A].
---------------------------------------------------------------------------

    As proposed, funds will also report the asset type for the
investment: short-term investment vehicle (e.g., money market fund,
liquidity pool, or other cash management vehicle), repurchase
agreement, equity-common, equity-preferred, debt, derivative-commodity,
derivative-credit, derivative-equity, derivative-foreign exchange,
derivative-interest rate, structured note, loan, ABS-mortgage backed
security, ABS-asset backed commercial paper, ABS-collateralized bond/
debt obligation, ABS-other, commodity, real estate, other) and issuer
type (corporate, U.S. Treasury, U.S. government agency, U.S. government
sponsored entity, municipal, non-U.S. sovereign, private fund,
registered fund, other).\268\ We are also adopting a modification from
the proposal to add a ``derivatives-other'' category to encompass
derivatives that do not fall into the other categories of derivatives
enumerated in this Item, so as to allow Commission staff, investors,
and other users of the information reported on Form N-PORT to more
easily aggregate the fund's derivative investments. We have based these
categories in part on staff review of how funds currently categorize
investments on their schedule of investments, and in part on the
categories of investments required to be reported by private funds on
Form PF.\269\ These disclosures will allow the Commission, investors,
and other potential users to assess the composition of fund portfolios
in terms of asset and issuer types and also facilitate comparisons
among similar types of investments.
---------------------------------------------------------------------------

    \268\ See Item C.4.a and Item C.4.b of Form N-PORT.
    \269\ See, e.g., Item 26 of Form PF (requiring filers to report
exposures by asset type); Item 1 of Form N-Q (requiring filers to
report the schedules of investments required by sections 210.12-12
to 12-14 of Regulation S-X); Item 1 of Form N-CSR (requiring filers
to attach a copy of the report transmitted to stockholders pursuant
to rule 30e-1 under the Act).
---------------------------------------------------------------------------

    One commenter recommended the use of a well-defined taxonomy for
asset and issuer type, such as ISO 10962, or some truncation of the
six-character ISO Classification of Financial Instruments code.\270\
Although we acknowledge there could be benefits for data aggregation
and analysis to using an existing standardized taxonomy for users of
the form, Form N-PORT is primarily designed to meet the data needs of
the Commission and its staff. We have drafted the asset categories in
Form N-PORT specifically to address the Commission staff's data needs,
whereas many of the existing taxonomies include extraneous information
in some areas or insufficient information in other areas. For these
reasons, we are adopting the asset categories on Form N-PORT largely as
proposed.
---------------------------------------------------------------------------

    \270\ See Morningstar Comment Letter. See generally
International Standards Organization, Securities and related
financial instruments--Classification of financial instruments, ISO
10962:2015 (July 17, 2015), available at http://www.iso.org/iso/catalogue_detail.htm?csnumber=44799.
---------------------------------------------------------------------------

    Funds will also report, as proposed, for each investment, whether
the investment is a restricted security.\271\

This disclosure will provide investors and the Commission staff with
more information about liquidity risks associated with the fund's
investments.
---------------------------------------------------------------------------

    \271\ See Item C.6 of Form N-PORT. ``Restricted security'' will
have the definition provided in rule 144(a)(3) under the Securities
Act [17 CFR 230.144(a)(3)]. See General Instruction E of Form N-
PORT. See also amended rule 12-13, nn. 6 and 8 of Regulation S-X,
which will require similar disclosures in funds' schedules of
investments to identify securities that are restricted. Cf. footnote
290 and accompanying and following text.
---------------------------------------------------------------------------

    Also as proposed, each fund will report whether the investment is
categorized by the fund as a Level 1, Level 2, or Level 3 fair value
measurement in the fair value hierarchy under GAAP.\272\ Commission
staff could use this information to identify and monitor investments
that may be more susceptible to increased valuation risk and identify
potential outliers that warrant additional monitoring or inquiry.\273\
In addition, Commission staff will be better able to identify anomalies
in reported data by aggregating all fund investments industry-wide into
the various level categories. These disclosures will also provide
investors and the Commission staff with more information about which of
the fund's investments are more actively traded, and which investments
are less actively traded and thus potentially less liquid. Currently,
funds are required to categorize the fair value measurement of each
investment in the fair value hierarchy in their financial
statements.\274\ We believe that based on this requirement, funds
should have pricing information available to determine the
categorization of their portfolio investments as Level 1, Level 2, or
Level 3 within the fair value hierarchy.
---------------------------------------------------------------------------

    \272\ See ASC 820. An investment is categorized in the same
level of the fair value hierarchy as the lowest level input that is
significant to its fair value measurement. Level 1 inputs include
quoted prices (unadjusted) for identical investments in an active
market (e.g., active exchange-traded equity securities). Level 2
inputs include other observable inputs, such as: (i) Quoted prices
for similar securities in active markets; (ii) quoted prices for
identical or similar securities in non-active markets; and (iii)
pricing models whose inputs are observable or derived principally
from or corroborated by observable market data through correlation
or other means for substantially the full term of the security.
Level 3 inputs are unobservable inputs. We are amending Regulation
S-X to require that funds identify those investments whose value was
determined using significant unobservable inputs. See infra section
II.C.3.
    \273\ For a discussion of some of the challenges regulators may
face with respect to Level 3 accounting, see, e.g., Konstantin
Milbradt, Level 3 Assets: Booking Profits and Concealing Losses, 25
Rev. Fin. Stud. 55-95 (2011).
    \274\ ASC 820-10-50-2 (Fair Value Measurement-Disclosure-
General) requires for each class of assets and liabilities measured
at fair value, the level of the fair value hierarchy within which
the fair value measurements are categorized in their entirety (Level
1, 2, or 3).
---------------------------------------------------------------------------

    Several commenters supported this aspect of our proposal, noting it
would enhance portfolio transparency and allow investors, plans, and
fund fiduciaries to more accurately evaluate liquidity and valuation
risks in funds.\275\ Another commenter asserted that our proposal to
report the fair value level measurement for each individual investment
held by the fund would represent no incremental burden relative to the
current burden of reporting the total value of each fair value level
category, because reporting systems should already contain the
necessary information at the individual security level.\276\
---------------------------------------------------------------------------

    \275\ See Morningstar Comment Letter; Comment Letter of Harvest
Investments, Ltd. (Aug. 11, 2015) (``Harvest Comment Letter'').
    \276\ See State Street Comment Letter.
---------------------------------------------------------------------------

    However, one commenter cautioned that different fund families
currently employ different accounting practices when classifying
similar investments into fair value level hierarchies, and warned that
the Commission staff should reconsider expectations that disclosure of
these fair value levels would create comparability among different
funds with regards to fair value level hierarchy classifications.\277\
Another commenter echoed the sentiment that fair value level
determinations reported by funds would likely differ from one fund
group to another, and concluded that these determinations should be
disclosed in aggregate by fair value level hierarchy classification as
opposed to on an individual security basis.\278\
---------------------------------------------------------------------------

    \277\ See Interactive Data Comment Letter.
    \278\ See Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    Several commenters also recommended that additional related
information be reported, such as the uncertainty of valuation for
thinly-traded securities and identification of the primary pricing
sources used in determining the fair value level hierarchy of the
investments.\279\ Lastly, one commenter noted that certain funds of
funds' investments may not have fair value level hierarchies assigned
to them pursuant to FASB Accounting Standards Update 2015-07, and
requested that Form N-PORT be revised to allow funds to report ``null''
to account for such investments.\280\
---------------------------------------------------------------------------

    \279\ See Comment Letter of Markit (Aug. 11, 2015) (``Markit
Comment Letter'') (for thinly-traded securities or investments in
assets with thinly-traded underlying assets, consider a disclosure
indicating the uncertainty of valuation); Harvest Comment Letter
(information about primary pricing sources should be made available,
and third-party pricing services used should be disclosed on an
individual security basis).
    \280\ See State Street Comment Letter.
---------------------------------------------------------------------------

    In response to the last comment, we are revising Form N-PORT to
allow funds to report ``N/A'' to this item if an investment does not
have a fair value level hierarchy assigned to it pursuant to FASB
Accounting Standards Update 2015-07. This revision will allow funds to
report fair value hierarchy information consistently across Form N-PORT
and their shareholder reports.\281\
---------------------------------------------------------------------------

    \281\ See Item C.8 of Form N-PORT.
---------------------------------------------------------------------------

    More generally, we acknowledge that there may be differences among
fair value level hierarchy classifications between funds, even for the
same investments, but believe that reporting of this information could
still help Commission staff, investors, and other potential users to
identify and monitor investments that may be more susceptible to
increased valuation risk and identify potential outliers that warrant
additional monitoring or inquiry.
    We decline to add the additional information suggested by
commenters related to valuation, such as more information regarding
thinly-traded securities or position-level information on price
sources. We believe that, unlike fair value hierarchy information,
which funds already need to track for reporting purposes, this
information is not currently reported by funds in any form and could be
burdensome to begin reporting relative to the additional value it may
provide. Accordingly, we decline to revise Form N-PORT to require funds
to report this additional information.
    As proposed, Form N-PORT would have required funds to report the
country that corresponds to the country of investment or issuer based
on the concentrations of the investment's risk and economic exposure,
and, if different, the country in which the issuer is organized. As
adopted, Form N-PORT will switch the sequence of those disclosures,
thus requiring funds to report the country in which the issuer is
organized and, if different, the country that corresponds to the
country of investment or issuer based on the concentrations of the
investment's risk and economic exposure.\282\ These disclosures will
provide the Commission staff with more information about country-
specific exposures associated with the fund's investments.
Specifically, the Commission believes that providing both the country
based

on concentrations of risk and economic exposure and also the country in
which the issuer is organized will assist the Commission in
understanding the country-specific risks associated with such
investments. For example, knowing the country of risk and economic
exposure, including the country in which an issuer is organized, is
important for understanding the effect of such investments in a
portfolio when that country might be going through times of economic
stress (e.g., monetary controls or sanctions) or political unrest or
other emergency circumstances.
---------------------------------------------------------------------------

    \282\ See Item C.5 of Form N-PORT. Also, as discussed further
below, we are making the country of risk and economic exposure a
nonpublic field in all Form N-PORT filings. Under the proposal, this
would have meant that funds would be publicly reporting nothing if
the country of risk and economic exposure were the same as the
country in which the issuer is organized, because in that situation
funds would only be reporting the country of risk and economic
exposure, which will be nonpublic in Form N-PORT. Accordingly, we
are requiring funds to report the country in which the issuer is
organized as the default, and, only if different, to also report the
country of risk and economic exposure.
---------------------------------------------------------------------------

    We received mixed comments on this aspect of our proposal.
Commenters generally supported the requirement to report the country in
which the issuer is organized.\283\ Commenters generally viewed the
determination of country of risk as inherently subjective, but differed
in terms of whether the Commission should provide a particular standard
for determining the country of risk or whether the Commission should
permit funds to report differing information for the same securities as
a result of the existing diversity of approaches currently used by
funds and service providers.\284\ Commenters also disagreed regarding
whether this information should be publicly reported or even reported
at all.\285\
---------------------------------------------------------------------------

    \283\ See, e.g., SIFMA Comment Letter I; Dreyfus Comment Letter;
Morningstar Comment Letter.
    \284\ See, e.g., Wells Fargo Comment Letter (the Commission
should include guidance and instructions for determining the country
with the greatest concentration of risks and economic exposure in
order to achieve consistent reporting across funds); Interactive
Data Comment Letter (the Commission should support the prevailing
diversity of approaches towards identifying country of risk as a
necessary consequence of such reporting); SIFMA Comment Letter I
(the Commission should either limit the disclosure requirement to
country of issuer organization or else clarify that funds may use
classifications generated by existing methodologies or available
service providers); ICI Comment Letter (it is important for funds to
have the flexibility to make these determinations using their own
good faith judgment).
    \285\ See, e.g., Interactive Data Comment Letter (supporting the
disclosure of country of risk); Schwab Comment Letter (public
disclosure may lead to investor confusion); Fidelity Comment Letter
(the Commission should require non-public disclosure of this
information until it is standardized); Morningstar Comment Letter
(opposing the reporting of country of risk to the extent this
information is proprietary and subjective, but supporting country of
issuance on the grounds that it is more objective).
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    Partly in response to these concerns, and as discussed above, we
are revising Form N-PORT to include instructions clarifying that in
reporting information on Form N-PORT, funds may generally use their own
internal methodologies and the conventions of their service providers,
provided that the information they report is consistent with
information that they report elsewhere (e.g., the fund's schedule of
portfolio holdings as prepared pursuant to Regulation S-X).\286\ For
example, we understand that for issuers with operations in multiple
countries, some funds commonly use the issuer's country of domicile for
purposes of internal recordkeeping and analysis and may choose to do
the same for reporting country of risk on Form N-PORT, whereas funds
that utilize other methodologies may prefer to rely upon their own
chosen methodologies instead. Additionally, as discussed further below
in section II.A.4, we are making the country of risk and economic
exposure a nonpublic field in all Form N-PORT filings.\287\
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    \286\ See General Instruction G of Form N-PORT (``Funds may
respond to this Form using their own internal methodologies and the
conventions of their service providers, provided the information is
consistent with information that they report internally and to
current and prospective investors. However, the methodologies and
conventions must be consistently applied and the Fund's responses
must be consistent with any instructions or other guidance relating
to this Form.''). See also supra footnote 77 and accompanying and
following text.
    \287\ See infra footnote 515 and accompanying and following
text.
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    More generally, several commenters sought confirmation that funds
would not be required to look through any entities in its portfolio
holdings except as specifically instructed in Form N-PORT.\288\ As
discussed above, Form N-PORT requires funds to disclose information
about ``each investment held by the Fund and its consolidated
subsidiaries.'' \289\ Thus, Form N-PORT requires funds to report
information about each underlying investment in a CFC, because CFCs are
consolidated subsidiaries in funds' financial statements for reporting
purposes.
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    \288\ See Invesco Comment Letter; Schwab Comment Letter; CRMC
Comment Letter; SIFMA Comment Letter I.
    \289\ See Part C of Form N-PORT (``For each investment held by
the Fund and its consolidated subsidiaries, disclose the information
requested in Part C.'').
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    The proposed form also would have required funds to identify each
investment that is ``illiquid.'' \290\ We note that the Liquidity
Adopting Release, which we are adopting today, addresses liquidity risk
management programs for open-end funds, which, among other things,
requires information about the liquidity of fund investments to be
reported on Form N-PORT.\291\
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    \290\ As proposed, Form N-PORT would have defined ``illiquid
asset'' as ``an asset that cannot be sold or disposed of by the Fund
in the ordinary course of business within seven calendar days, at
approximately the value ascribed to it by the Fund.'' This
definition is the same definition used in the liquidity guidance
issued by the Commission for open-end funds. See Revisions of
Guidelines to Form N-1A, Investment Company Act Release No. 18612
(Mar. 12, 1992) [57 FR 9829 (Mar. 20, 1992)] (``1992 Release'').
    \291\ See Liquidity Adopting Release, supra footnote 9.
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ii. Debt Securities
    In addition to the information required above, as proposed, Form N-
PORT would require additional information about each debt security held
by the fund in order to gain transparency into the payment flows and
potential convertibility into equity of such investments, as such
information can be used to better understand the payoff profile and
credit risk of these investments. First, funds would report the
maturity date and coupon (reporting the annualized interest rate and
indicating whether fixed, floating, variable, or none).\292\
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    \292\ See Item C.9.a and Item C.9.b of proposed Form N-PORT.
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    While commenters were generally supportive of this requirement,
they requested that we provide clear standards for reporting or more
granular classifications.\293\ For example, commenters noted that a
more granular classification scheme for debt instruments is useful for
investors in understanding the nature of the obligation supporting the
instrument, such as issuers, security type, guarantors, and the
investment's structure.\294\ However, while more granular
classifications could be useful to investors, we do not believe that
the additional information would be justified in light of the burdens
imposed because we believe that the classification being adopted
provides sufficient detail to allow the staff, investors, and other
potential users, to understand the nature of the fund investments. As a
result, we are adopting this requirement as proposed.\295\ Another
commenter recommended that we consider a minimum reporting threshold of
10% of

exposure to each security type for additional security-specific
reporting for debt securities, convertible securities, repurchase and
reverse repurchase agreements, and derivatives.\296\ However, as we
discuss below in section II.A.2.g.iv, we believe that it is important
that the Commission and investors have transparency in a fund's
investments and do not believe that a reporting threshold for such
instruments is appropriate, as it would not allow the Commission and
investors to fully understand a fund's risks. Moreover, security-level
reporting of a fund's underlying investments in such securities are
currently reported in a fund's financial statements.\297\
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    \293\ See SIFMA Comment Letter I (supporting all required
information with the exception of the disclosures relating to
securities in defaults and arrears); Wells Fargo Comment Letter;
Interactive Data Comment Letter (``In general, we believe that a
more granular classification scheme for debt instruments is useful
for investors in understanding the nature of the obligation
supporting the instrument''); State Street Comment Letter;
Morningstar Comment Letter.
    \294\ See Interactive Data Comment Letter (additional
disclosures should include classification of debt securities (e.g.,
corporate bonds, municipal securities), bond insurance, conduit
municipal filings, letters of credit, and identification of debt
ranking); State Street Comment Letter (additional disclosures should
include issuer, security type, security structure, guarantor,
country, sector, and rating).
    \295\ See Item C.9.a and Item C.9.b of Form N-PORT.
    \296\ See Wells Fargo Comment Letter.
    \297\ See generally Article 12 of Regulation S-X.
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    As proposed, funds would also indicate whether the security is
currently in default, whether interest payments for the security are in
arrears or whether any coupon payments have been legally deferred by
the issuer, as well as whether any portion of the interest is paid in
kind.\298\ Several commenters raised concerns regarding these
disclosures. For example, one commenter argued that the public
disclosure on default, arrears, or deferred coupon payments raises
competitive concerns when a debt security is issued by a borrower that
is a private company, as private borrowers may avoid registered funds
in order to limit public disclosure if the company becomes
distressed.\299\ The commenter noted that public disclosure that a
borrower is or may be financially distressed could increase prepayment
risk and be disruptive to the fund's or adviser's relationship with the
borrower.\300\ Moreover, this disclosure could also harm private
issuers by disclosing their financial distress to vendors and key
employees and customers.\301\ While we recognize that the disclosure of
a private issuer in distress could have a negative impact on the
issuer, we believe that it is important that Commission staff have
access to information relating to fund investments that are in default
or arrears in order to monitor individual fund and industry risk. It is
similarly important that fund's investors have access to this
information so that they can make fully informed decisions regarding
their investment. Moreover, default or arrears relating to a fund's
investments in private issuer debt are already publicly available on a
fund's quarterly financial statements.\302\
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    \298\ See Item C.9.c through Item C.9.e of proposed Form N-PORT.
    \299\ See Simpson Thacher Comment Letter.
    \300\ See id.
    \301\ See id.
    \302\ See rule 12-12, n. 5 of Regulation S-X.
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    Another commenter recommended eliminating the requirements relating
to whether a debt security is currently in default or any of the
interest payments are in arrears or have been deferred.\303\ The
commenter noted that these items require a subjective legal analysis on
an instrument-by-instrument basis, on which conclusions among funds may
vary and thus would not provide meaningful comparable information.\304\
For similar reasons, another commenter supported the proposal, but
recommended that the Commission should establish a clear standard for
designating when a security is deemed to be in arrears.\305\ As we
previously discussed, this type of analysis and public reporting is not
new to funds, as they are required to report results in their financial
statements and on their schedules of investments.\306\ Rather than
provide funds with a definition that may not be applicable in all
situations, or inconsistent with their financial statement reporting,
we believe that it is more appropriate to allow funds to continue to
use their own methodology in responding to these items on Form N-PORT,
subject to the limitations of General Instruction G.\307\
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    \303\ SIFMA Comment Letter I.
    \304\ Id.
    \305\ See Wells Fargo Comment Letter.
    \306\ See rule 12-12, n. 5 of Regulation S-X.
    \307\ See General Instruction G of Form N-PORT; see also supra
footnote 79 and accompanying test.
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