[Federal Register Volume 83, Number 132 (Tuesday, July 10, 2018)]
[Rules and Regulations]
[Pages 31859-31877]
[FR Doc No: 2018-14366]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 274

[Release No. IC-33142; File No. S7-04-18]
RIN 3235-AM30

Investment Company Liquidity Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to its forms designed to improve the reporting and
disclosure of liquidity information by registered open-end investment
companies. The Commission is adopting a new requirement that funds
disclose information about the operation and effectiveness of their
liquidity risk management program in their reports to shareholders. The
Commission in turn is rescinding the requirement in Form N-PORT under
the Investment Company Act of 1940 that funds publicly disclose
aggregate liquidity classification information about their portfolios.
In addition, the Commission is adopting amendments to Form N-PORT that
will allow funds classifying the liquidity of their investments
pursuant to their liquidity risk management programs to report multiple
liquidity classification categories for a single position under
specified circumstances. The Commission also is adding a new
requirement to Form N-PORT that funds and other registrants report
their holdings of cash and cash equivalents.

DATES: Effective Date: This rule is effective September 10, 2018.
    Compliance Dates: The applicable compliance dates are discussed in
section II.D of this final rule.

FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman, Senior Counsel, or
Thoreau Bartmann, Senior Special Counsel, at<PHONE_NUMBER>, Division
of Investment Management, Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to
Form N-PORT [referenced in 17 CFR 274.150] under the Investment Company
Act of 1940 [15 U.S.C. 80a-1 et seq.] (``Investment Company Act'' or
``Act'') and amendments to Form N-1A [referenced in 17 CFR 274.11A]
under the Investment Company Act and the Securities Act of 1933
(``Securities Act'') [15 U.S.C. 77a et seq.].

Contents

I. Background
II. Discussion
    A. Amendments to Liquidity Public Reporting and Disclosure
Requirements
    B. Amendments to Liquidity Reporting Requirements
    C. Treasury Asset Management Report and Evaluation of Other
Approaches
    D. Compliance Dates
III. Economic Analysis
    A. Introduction
    B. Economic Baseline
    C. Economic Impacts
    D. Reasonable Alternatives
IV. Paperwork Reduction Act
    A. Introduction
    B. Form N-PORT
    C. Form N-1A
V. Final Regulatory Flexibility Analysis
    A. Need for the Amendments
    B. Significant Issues Raised by Public Comment
    C. Small Entities Subject to the Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
    E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Authority
Text of Rules and Forms

I. Background

    On October 13, 2016, the Commission adopted new rules and forms as
well as amendments to its rules and forms to modernize the reporting
and disclosure of information by registered investment companies
(``funds''),\1\ including information about the liquidity of funds'
portfolios.\2\ In particular, the Commission adopted new Form N-PORT,
which requires mutual funds and ETFs to report monthly portfolio
investment information to the Commission in a structured data
format.\3\ The Commission also adopted 17 CFR 270.22e-4 (``rule 22e-
4'') and related reforms to enhance the regulatory framework for
liquidity risk management of funds.\4\ Among other things, rule 22e-4
requires a fund to classify each portfolio investment into one of four
defined liquidity categories, sometimes referred to as ``buckets.'' \5\
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    \1\ The term ``funds'' used in this release includes open-end
management companies, including exchange-traded funds (``ETFs''),
and excludes money market funds.
    \2\ Investment Company Reporting Modernization, Investment
Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18,
2016)] (``Reporting Modernization Adopting Release''). See also
Investment Company Liquidity Risk Management Programs, Investment
Company Act Release No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18,
2016)] (``Liquidity Adopting Release'').
    \3\ Registered money market funds and small business investment
companies are exempt from Form N-PORT reporting requirements.
    \4\ Specifically, we adopted rule 22e-4 and 17 CFR 270.30b1-10
(``rule 30b1-10''), new Form N-LIQUID, as well as amendments to
Forms N-1A, N-PORT, and N-CEN. See Liquidity Adopting Release, supra
footnote 2.
    \5\ Rule 22e-4 requires each fund to adopt and implement a
written liquidity risk management program reasonably designed to
assess and manage the fund's liquidity risk. A fund's liquidity risk
management program must incorporate certain specified elements,
including the requirement that a fund classify the liquidity of each
of the fund's portfolio investments into one of four defined
liquidity categories: Highly liquid investments, moderately liquid
investments, less liquid investments, and illiquid investments
(``classification''). This classification is based on the number of
days in which a fund reasonably expects an investment would be
convertible to cash (or, in the case of the less-liquid and illiquid
categories, sold or disposed of) without the conversion
significantly changing the market value of the investment. Rule 22e-
4 requires funds to establish a highly liquid investment minimum,
and includes requirements related to policies and procedures on
redemptions in kind and evaluation of the liquidity of new unit
investment trusts (``UITs''). Rule 22e-4 also includes other
required elements, such as limits on purchases of illiquid
investments, reporting to the board, and recordkeeping.
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    In connection with the liquidity classification requirement of rule
22e-4, a fund is required to report confidentially to the Commission
the liquidity classification assigned to each of the fund's portfolio
investments on Form N-PORT.\6\ As originally adopted, Form N-PORT
requires a fund to assign each portfolio holding to a single
classification bucket and publicly disclose the aggregate percentage of
its portfolio investments falling into each of the four liquidity
classification categories noted above.\7\ Form N-PORT did not require
funds to report the cash they hold.\8\
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    \6\ Item C.7 of Form N-PORT.
    \7\ Item B.8.a of Form N-PORT. This information would be
disclosed to the public only for the third month of each fiscal
quarter with a 60-day delay. Form N-PORT also required public
reporting of the percentage of a fund's highly liquid investments
that it has segregated to cover, or pledged to satisfy margin
requirements in connection with, derivatives transactions that are
classified as moderately liquid, less liquid, or illiquid
investments. Item B.8.b of Form N-PORT.
    \8\ Although the requirements of rule 22e-4 and Form N-PORT
discussed above are in effect, the compliance date has not yet
occurred. Accordingly, no funds are yet reporting this liquidity-
related information on Form N-PORT. We previously extended the
compliance date for certain classification-related provisions of
rule 22e-4 and their associated Form N-PORT reporting requirements
by six months. See Investment Company Liquidity Risk Management
Programs; Commission Guidance for In-Kind ETFs, Investment Company
Act Release No. 33010 (Feb. 22, 2018) [83 FR 8342 (Feb. 27, 2018)]
(``Liquidity Extension Release'').
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    Rule 22e-4 and the related rules and forms were designed to promote
effective liquidity risk management throughout the fund industry and to
enhance disclosure regarding fund liquidity and redemption
practices.\9\ However, since we adopted these requirements, interested
parties have

raised concerns that the public disclosure of a fund's aggregate
liquidity classification information on Form N-PORT may not achieve our
intended purpose and may confuse and mislead investors.\10\
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    \9\ See Liquidity Adopting Release, supra footnote 2, at n.112
and accompanying text.
    \10\ See Investment Company Liquidity Disclosure, Investment
Company Act Release No. 33046 (Mar. 14, 2018) [83 FR 11905 (Mar. 19,
2018)] (``Proposing Release'').
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    In light of these concerns,\11\ we proposed to replace the Form N-
PORT requirement for a fund to publicly report aggregate liquidity
portfolio classification information on a quarterly basis with new
disclosure in the fund's annual shareholder report that provides a
narrative discussion of the operation and effectiveness of the fund's
liquidity risk management program over the most recently completed
fiscal year.\12\ We also proposed additional amendments to Form N-PORT
that would allow a fund to report a single portfolio holding in
multiple classification buckets under defined circumstances where
splitting the holding into multiple buckets would provide the
Commission with more or equally accurate information at lower cost to
funds (and thus, to fund shareholders). Finally, we proposed additional
amendments to Form N-PORT designed to help us monitor trends in the use
of cash and cash equivalents and more accurately assess the composition
of a fund's highly liquid investment minimum (``HLIM'').\13\
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    \11\ Letters detailing these concerns, as well as letters on the
Proposing Release, are available at https://www.sec.gov/comments/s7-04-18/s70418.htm (File No. S7-04-18). See, e.g., Letter from SIFMA
AMG to Chairman Jay Clayton, Commissioner Stein, and Commissioner
Piwowar (Sept. 12, 2017) (urging the SEC not to publicly disclose
the liquidity classification information submitted via Form N-PORT);
Letter from the Investment Company Institute to The Honorable Jay
Clayton (July 20, 2017) (``ICI Pre-proposal Letter I'').
    \12\ See Proposing Release, supra footnote 10.
    \13\ See id.
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    We received 24 comment letters on the proposal. A significant
majority of commenters generally supported replacing public disclosure
of aggregate liquidity classification information on Form N-PORT with a
new narrative discussion of a fund's liquidity risk management program
in its report to shareholders.\14\ Some expressed concerns, however,
about the placement and content of the discussion regarding the
operation and effectiveness of the fund's liquidity risk management
program in the annual report, and provided alternatives for us to
consider.\15\ A few commenters objected to the proposed rescission of
public aggregate liquidity reporting on Form N-PORT, arguing that
classification information would be useful and understandable to
investors, and would not result in the potential negative consequences
suggested in the proposal.\16\ Commenters generally supported the other
proposed changes to Form N-PORT.\17\ In addition, the majority of
commenters urged us to re-examine more broadly the classification
requirements and related elements of rule 22e-4.\18\ We discuss in
Section II.C below additional efforts the Commission and its staff will
take in relation to rule 22e-4 and its requirements.
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    \14\ See e.g., Comment Letter of Investment Company Institute
(May 18, 2018) (``ICI Comment Letter''); Comment Letter of SIFMA AMG
(May 18, 2018) (``SIFMA AMG Comment Letter''); Comment Letter of
BlackRock Inc. (May 17, 2018) (``BlackRock Comment Letter'').
    \15\ See e.g., Comment Letter of the Capital Group Companies
(May 18, 2018) (``Capital Group Comment Letter''); Comment Letter of
Fidelity Investments (May 18, 2018) (``Fidelity Comment Letter'');
ICI Comment Letter; Comment Letter of the Investment Adviser
Association (May 18, 2018) (``IAA Comment Letter'').
    \16\ See Comment Letter of Better Markets (May 18, 2018)
(``Better Markets Comment Letter''); Comment Letter of Americans for
Financial Reform Education Fund (``AFR Comment Letter''); See
Comment Letter of Ya Li, J.D. Candidate, Boston College of Law (May
1, 2018) (``Ya Li Comment Letter'').
    \17\ See, e.g., Comment Letter of the Independent Directors
Council (May 17, 2018) (``IDC Comment Letter''), Fidelity Comment
Letter, and IAA Comment Letter (supporting our proposal to provide
funds with the option to split a holding into more than one
classification category in certain circumstances); ICI Comment
Letter and Comment Letter of State Street Corporation (May 18, 2018)
(``State Street Comment Letter'') (supporting our proposal to
require additional disclosure relating to holdings of cash and cash
equivalents not otherwise reported on Form N-PORT); SIFMA AMG
Comment Letter and BlackRock Comment Letter (supporting our proposal
to keep the percentage of the fund's highly liquid investments
segregated to cover, or pledged to satisfy margin requirements in
connection with, certain derivatives transactions non-public).
    \18\ See e.g., Comment Letter of Federated Investors, Inc. (May
15, 2018) (``Federated Comment Letter''); IAA Comment Letter;
Comment Letter of the Vanguard Group, Inc. (May 17, 2018)
(``Vanguard Comment Letter'').
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    Today, after considering comments we received, we are adopting
amendments to Forms N-PORT and N-1A largely as proposed.\19\ The
amendments will replace the requirement in Form N-PORT that a fund
publicly disclose on an aggregate basis the percentage of its
investments allocated to each liquidity classification category with a
new narrative discussion in the fund's shareholder report regarding its
liquidity risk management program.\20\
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    \19\ If any provision of rule 22e-4 or the related rules and
forms, including the amendments adopted today, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or the application of
such provisions to other persons or circumstances that can be given
effect without the invalid provision or application.
    \20\ We also are adopting, as proposed, a related change to make
non-public (but not eliminate) the disclosure required under Item
B.8 of Form N-PORT about the percentage of a fund's highly liquid
investments segregated to cover, or pledged to satisfy margin
requirements in connection with, certain derivatives transactions,
given that this information is only relevant when viewed together
with full liquidity classification information. See Item B.8.b of
Form N-PORT. The commenters that discussed this change supported
keeping it non-public. See, e.g., ICI Comment Letter.
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    The Commission also is adopting amendments to Form N-PORT that will
provide funds the flexibility to split a fund's portfolio holdings into
more than one classification category in three specified circumstances
when split reporting equally or more accurately reflects the liquidity
of the investment or eases cost burdens. Finally, we are adopting as
proposed a Form N-PORT requirement that funds, and other registrants,
disclose their holdings of cash and cash equivalents not reported in
Parts C and D of the Form.\21\ We discuss the comments and changes from
the proposal below.
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    \21\ See Proposing Release, supra footnote 10, at n.15 (noting
that the term ``registrant'' refers to entities required to file
Form N-PORT, including all registered management investment
companies, other than money market funds and small business
investment companies, and all ETFs (regardless of whether they
operate as UITs or management investment companies)).
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II. Discussion

A. Amendments to Liquidity Public Reporting and Disclosure Requirements

    Today we are replacing the requirement in Form N-PORT that a fund
publicly disclose on an aggregate basis the percentage of its
investments that it has allocated to each liquidity classification
category with new narrative discussion in the fund's shareholder report
regarding its liquidity risk management program.\22\ Funds already are
required to disclose a summary of the principal risks of investing in
the fund, including liquidity risk if applicable, in its
prospectus.\23\
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    \22\ See revised Item B.8 of Form N-PORT and new Item
27(d)(7)(b) of Form N-1A.
    \23\ See Item 4(b) of Form N-1A. In addition, Item 9(c) of Form
N-1A requires a fund to disclose all principal risks of investing in
the fund, including the risks to which the fund's particular
portfolio as a whole is expected to be subject and the circumstances
reasonably likely to affect adversely the fund's net asset value,
yield, or total return.
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    The new narrative discussion will include disclosure about the
operation and effectiveness of the fund's implementation of its
required liquidity risk management program. Additionally, we are
clarifying how funds should discuss liquidity events that materially
affected performance in the management's discussion of fund performance
(``MDFP'') section of the annual shareholder report.\24\ We expect

that the clarity we are providing and the shareholder report disclosure
we are adopting will improve funds' disclosure about liquidity events
that materially affect fund performance as well as the operation and
effectiveness of their liquidity risk management programs.\25\ These
disclosures will provide new and existing investors with a holistic
view of the liquidity risks of the fund and how effectively the fund's
liquidity risk management program managed those risks on an ongoing
basis over the reporting period. This revised approach is designed to
provide accessible and useful disclosure about liquidity risks and risk
management to investors, with appropriate context, so that investors
have a more comprehensive picture of the fund's liquidity risks and
their management and may understand the nature and relevance of these
risks to their investments.
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    \24\ See infra footnote 59 and accompanying text.
    \25\ See new Item 27(d)(7)(b) of Form N-1A.
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1. Public Aggregate Liquidity Profile
    As noted in the Proposing Release, since the Commission adopted
rule 22e-4 and the related reforms, Commission staff has engaged
extensively with interested parties and we have received letters from
industry participants discussing the complexities of the classification
process. These letters raised three general types of concerns that
informed our revised approach to public fund liquidity-related
disclosure. First, the commenters described how variations in
methodologies and assumptions used to conduct liquidity classification
can significantly affect the classification information reported on
Form N-PORT in ways that investors may not understand
(``subjectivity'').\26\ Second, they suggested that Form N-PORT may not
be the most accessible and useful way to communicate information about
liquidity risk and may not provide the necessary context for investors
to understand how the fund's classification results relate to its
liquidity risk and risk management (``lack of context'').\27\ Third,
they argued that because this reporting item on Form N-PORT singles out
liquidity risk, and does not place it in a broader context of the risks
and factors affecting a fund's risk, returns, and performance, it may
inappropriately focus investors on one investing risk over others
(``liquidity risk in isolation'').\28\
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    \26\ See Proposing Release, supra footnote 10, at nn.20-27 and
accompanying text.
    \27\ See id., at nn.28-30 and accompanying text.
    \28\ See id., at n.31 and accompanying text.
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    As we discussed in the Proposing Release, these concerns led us to
propose a new approach to liquidity-related disclosure. Most commenters
on the proposal agreed with our approach, and supported replacing
quarterly public disclosure of aggregate liquidity classification
information on Form N-PORT with a new requirement that funds discuss
the operation and effectiveness of their liquidity risk management
program in their shareholder reports.\29\ These commenters generally
reiterated the concerns that led us to propose these changes, stating
that the new approach would be less likely to confuse or mislead
investors.\30\ These commenters emphasized that classification data is
inherently subject to variability due to model design and the
assumptions used, and that this model risk introduces yet another
element of subjectivity to the classification process.\31\ Several
commenters also argued that the forward-looking nature of
classification data, which is based on assumptions about how fast a
fund could sell securities, makes the data inappropriate for public
consumption.\32\
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    \29\ See, e.g., IDC Comment Letter; BlackRock Comment Letter;
SIFMA AMG Comment Letter.
    \30\ See, e.g., IDC Comment Letter (``A narrative discussion
about a fund's liquidity risk management program would provide
shareholders with clearer, more understandable, and more useful
information about the fund--in plain English.'').
    \31\ See Comment Letter of MSCI (May 18, 2018) (``MSCI Comment
Letter'').
    \32\ See, e.g., ICI Comment Letter; SIFMA Comment Letter.
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    However, a few commenters objected to the proposed amendments,
arguing that investors would benefit from being able to access the
aggregated liquidity bucketing information of the funds in which they
invest.\33\ They argued that the Commission should err on the side of
providing more information to investors about their funds, rather than
less.\34\ While these commenters acknowledged that there may be
subjectivity in funds' classification decisions, they argued that
subjectivity is inherent in finance and the use of subjective judgments
was an intended consequence of the rule.\35\ One commenter stated that
replacing a ``quantitative measure with a qualitative discussion is an
inherently more subjective approach.'' \36\ One commenter also
suggested that investors are capable of understanding the aggregate
liquidity classification data and weighing its value in the context of
other types of disclosure and information available to them.\37\
Finally, one commenter asserted that, because the Commission had not
engaged in investor testing of classification data, any conclusions as
to its utility or the potential confusion to investors would not have
an empirical basis.\38\
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    \33\ See Ya Li Comment Letter; Better Markets Comment Letter;
AFR Comment Letter; Comment Letter of Bondview (May 17, 2018)
(``Bondview Comment Letter'').
    \34\ See Better Markets Comment Letter.
    \35\ See Better Markets Comment Letter; Bondview Comment Letter.
    \36\ See AFR Comment Letter.
    \37\ See Better Markets Comment Letter (arguing that investors
``can and do read and digest a broad range of information when
making investment decisions'' and stating that the aggregated
liquidity classification data ``can easily be understood as it
simply states the percentages of liquid-to-illiquid holdings a fund
has in its portfolio. Investors and those who serve them then can
add this liquidity classification information to their total mix of
information and make better and more informed investment
decisions.'').
    \38\ See Better Markets Comment Letter.
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    We continue to believe that it is important for investors to
understand the liquidity risks of the funds they hold and how those
risks are managed. We appreciate commenters' concerns regarding the
elimination of public disclosure of aggregate liquidity classification
reporting. We also recognize that subjectivity is inherent in many
financial decisions and is in fact desirable to some extent in the
classification information that is reported to us.\39\ However, the
subjectivity of the classification process when applied to this public
disclosure concerns us for several specific reasons.
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    \39\ Liquidity Adopting Release, supra footnote 2, at text
accompanying n.597.
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    First, the quantitative presentation of the aggregate liquidity
information may imply precision and uniformity in a way that obscures
its subjectivity. When disclosure is clearly subjective, we believe
investors are likely better able to understand and appreciate its
nature. In this case, however, we believe the presentation of
quantitative data may pose a significant risk of confusing and
misleading investors.\40\ Second, we continue to share the concern
expressed by many commenters that public dissemination of the aggregate
classification information, without an accompanying full explanation to
investors of the underlying subjectivity, model risk, methodological
decisions, and assumptions that shape this information, may potentially
be misleading to investors.\41\ Absent that kind of detailed contextual
explanation, we believe that such aggregate classification data may not
be useful for investors, as it would not result in an ``apples to
apples'' comparison between

funds, and may result in investor confusion if they believe it
does.\42\ Additionally, we continue to believe that public
dissemination of the aggregate classification information could create
perverse incentives to classify investments as more liquid, and may
inappropriately highlight liquidity risk compared to other, potentially
more salient risks of the fund.\43\ Finally, we are concerned that
disclosing funds' aggregate liquidity profile may potentially create
risks of coordinated investment behavior, if funds were to create more
correlated portfolios by purchasing investments that they believed
third parties, such as investors or regulators, may view as ``more
liquid.'' \44\
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    \40\ For example, because the aggregate liquidity profile would
be a backward looking review of a fund's liquidity presented only
quarterly, with a 60-day delay, it may be misleading if investors
were to base investing decisions on this information without being
provided a significant amount of additional context about its
staleness.
    \41\ See Proposing Release, supra footnote 10, at n.32.
    \42\ See Proposing Release, supra footnote 10, at text following
n.13.
    \43\ See Proposing Release, supra footnote 10.
    \44\ See ICI Pre-proposal Letter I. These risks may both
increase the possibility of correlated market movements in times of
stress and may potentially reduce the utility of the classification
data reported to us.
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    Additionally, we do not believe it is appropriate to adapt Form N-
PORT to add the level of detail and narrative context that we believe
would be necessary for investors to appreciate better the fund's
liquidity risk profile and the subjective nature of classification. The
commenters who addressed potentially adapting Form N-PORT generally
agreed that it may take significant detailed disclosure and nuanced
explanation to effectively inform investors about the subjectivity and
limitations of aggregate liquidity classification information so as to
allow them to properly make use of the information.\45\ Such a long
narrative discussion would not be consistent with the nature of, and
could undermine the purpose of, Form N-PORT.\46\ Also, to the extent
that such disclosure would need to be granular and detailed to
effectively explain the process of compiling the liquidity information,
it is not consistent with the careful balancing of investor interests
that the Commission performed in determining to require disclosure of
sensitive granular information, including position-level data, only on
a non-public basis.
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    \45\ See, e.g., MSCI Comment Letter (``While we are generally in
favor of promoting public transparency about fund liquidity, we
agree with [the proposal]. The classification involves a high level
of model risk . . . which does not allow a direct comparison of
results obtained from different funds unless more and more technical
information is provided on the nature of the models and the
parameters used to generate the result.'').
    \46\ See Proposing Release, supra footnote 10, at n.33 (noting
that ``due to the variability and subjective inputs required to
engage in liquidity classification under rule 22e-4, providing
effective information about liquidity classifications under that
rule to investors poses more difficult and different challenges than
the other data that is publicly disclosed on Form N-PORT, which is
more objective and less likely to vary between funds based on their
particular facts and circumstances''). See also Comment Letter of
J.P. Morgan Asset Management (May 18, 2018) (``J.P. Morgan Comment
Letter'') (``It would not be practical to provide an investor-
friendly explanation of each input, and associated effect on the
classification output. Absent this information, however, investors
may reasonably believe that they are looking at an objective
assessment of a fund's liquidity profile.'').
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    For these reasons, and in light of the concerns above, it is our
judgment that effective disclosure of liquidity risks and their
management would be better achieved through prospectus and shareholder
report disclosure rather than Form N-PORT. Most commenters agreed,
suggesting that shareholder report disclosure would have the benefit of
allowing funds to produce tailored disclosure suited to the particular
liquidity risks and management practices of the specific fund.\47\ This
would avoid use of a one-size-fits-all approach when providing
liquidity risk information to investors, and would avoid giving
investors the ``false impression that they can rely on the sole results
of time bucketing for comparing liquidity of different funds in making
their investment decisions.'' \48\ Accordingly, we are adopting the
amendments to Form N-PORT eliminating public disclosure of aggregate
liquidity classification information as proposed.
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    \47\ See, e.g., SIFMA AMG Comment Letter (``AMG believes the
proposal strikes the right balance and appropriately provides funds
the flexibility to tailor their disclosure in the most meaningful
way for their investors.''); IDC Comment Letter.
    \48\ See MSCI Comment Letter.
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2. Shareholder Report Liquidity Risk Disclosure
    We also are adopting, largely as proposed, a new requirement for
funds to discuss briefly the operation and effectiveness of a fund's
liquidity risk management program in the fund's report to shareholders.
In response to commenters, we are moving this discussion of the
operation and effectiveness of a fund's liquidity risk management
program from the MDFP section of the annual report to a new section of
the shareholder report (annual or semi-annual) following the discussion
of board approval of advisory contracts.\49\ As proposed, this
subsection will require funds to discuss the operation and
effectiveness of their liquidity risk management program over the
period covered. However, funds will have flexibility to cover an annual
period that does not coincide with the fund's most recently completed
fiscal year.\50\
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    \49\ New Item 27(d)(7)(b) of Form N-1A.
    \50\ The item will require a discussion of the operation and
effectiveness of the fund's liquidity risk management program during
the period covered as part of the board's annual review of the
funds' liquidity risk management program. Rule 22e-4(b)(2)(iii)
requires a fund board to review, no less frequently than annually, a
report prepared by the program administrator that addresses the
operation of the program and its adequacy and effectiveness.
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    The majority of commenters generally agreed with our proposed
requirement that funds provide a narrative discussion of the operation
and effectiveness of a fund's liquidity risk management program, noting
that such disclosure is a better way to provide investors with useful
and accessible liquidity information and reduces the risk of investor
confusion.\51\ However, some commenters suggested certain modifications
to our proposed disclosure, largely focused on its placement.\52\ These
commenters objected to including the narrative disclosure in the MDFP,
arguing that, in many cases, the required liquidity disclosures would
not concern primary drivers of fund performance. Commenters had a
variety of ideas on where disclosure on the operation and effectiveness
of the liquidity risk management program should be placed, with some
suggesting that it be in its own subsection within the annual
report,\53\ in the fund's Statement of Additional Information
(``SAI''),\54\ or in the section of the shareholder report discussing
the bases for the board's approval of the advisory contract.\55\
Several commenters also suggested that allowing funds to include the
new disclosure in either the fund's annual or

semiannual report would ease some of the cost burdens of compliance
with the new requirement by allowing funds to synchronize the new
shareholder report disclosure with liquidity reporting to the
board.\56\
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    \51\ See e.g., SIFMA AMG Comment Letter; Comment Letter of
Wellington Management Company LLP (May 18, 2018) (``Wellington
Comment Letter''); Fidelity Comment Letter; State Street Comment
Letter.
    \52\ One commenter suggested that the new narrative disclosure
included in the shareholder report be reported in a structured
format. See Comment Letter of XBRL US, Inc. (May 18, 2018) (``XBRL
US Comment Letter''). We are not creating an obligation to use a
structured format at this time, but will consider the issue in
connection with other Commission initiatives. See Fund Retail
Investor Experience and Disclosure Request for Comment, Investment
Company Act Release No. 33113 (June 5, 2018) [83 FR 26891 (June 11,
2018)].
    \53\ See e.g., J.P. Morgan Comment Letter; BlackRock Comment
Letter.
    \54\ See Comment Letter of T. Rowe Price Associates, Inc. (May
18, 2018) (``T. Rowe Comment Letter'').
    \55\ See e.g., IAA Comment Letter (stating that, because a
fund's liquidity risk management program is within the purview of
the fund's board, the new disclosure should ``recognize the board's
governance function and such disclosure should be included in the
section of the form that covers the process of fund operations and
factors considered by the board in its review of the liquidity risk
management program'').
    \56\ See, e.g., ICI Comment Letter (arguing that, if the
required liquidity risk management disclosure must be included in
the annual report, fund complexes offering multiple funds with
fiscal year-ends spread throughout the year will be frustrated in
their ability to leverage their board reporting for this new
shareholder report requirement); Capital Group Comment Letter
(noting that many fund families are expected to provide the annual
liquidity risk management report to the board of all their funds at
the same time once a year without regard to fiscal year ends).
---------------------------------------------------------------------------

    We believe the approach to shareholder report liquidity disclosure
that we are adopting addresses commenters' concerns. Funds are required
to discuss in their MDFP factors that materially affected performance
of the fund during the most recently completed fiscal year.\57\
Liquidity events are factors that may materially affect a fund's
performance. Accordingly, to the extent a liquidity event has such an
effect, this event must be discussed in the MDFP.\58\ This discussion
of liquidity events in the MDFP should include sufficient specificity
that investors can understand the liquidity event, how it affected
performance, and any other relevant market conditions. This is
consistent with the views of the commenters who asked that we clarify
that factors that affected performance would include liquidity events
and that such events should still be discussed in the MDFP section,
even if we were to move the required new disclosure to a new
section.\59\
---------------------------------------------------------------------------

    \57\ See Disclosure of Mutual Fund Performance and Portfolio
Managers, Investment Company Act Release No. 19382 (Apr. 6, 1993)
[58 FR 21927 (Apr. 26, 1993)] (noting that the MDFP requires funds
to ``explain what happened during the previous fiscal year and why
it happened'').
    \58\ See Item 27(b)(7)(i) of Form N-1A. See also Shareholder
Reports and Quarterly Portfolio Disclosure of Registered Management
Investment Companies, Investment Company Act Release No. 26372 (Aug.
9, 2004) [69 FR 49805 (Aug. 12, 2004)] (noting that ``investors rely
on MDFP to explain the investment operations and performance of a
mutual fund''). We understand that because liquidity events can
materially affect fund performance during a fiscal year, funds
currently discuss such events in their MDFP.
    \59\ See, e.g., T. Rowe Comment Letter (suggesting that
discussion of the overall structure and operations of the liquidity
risk management program should be in the fund's SAI, but that the
MDFP section could still contain disclosure of liquidity events and
the use of liquidity risk management tools that had a material
effect on the investment operations and performance of a fund);
Vanguard Comment Letter (suggesting that focusing the MDFP narrative
disclosure on material liquidity risks faced during the relevant
period would help ensure that this disclosure does not become
boilerplate).
---------------------------------------------------------------------------

    At the same time, we agree with those commenters who argued for
moving the more operational disclosure outside of the MDFP because this
information does not directly relate to performance results. Moving
disclosure about the operation and effectiveness of the liquidity risk
management program to a new subsection would be more effective and
would avoid concerns about unduly focusing investors on liquidity risk
and diluting the MDFP. Moving this disclosure to Item 27(d)(7) of Form
N-1A may have several other benefits. The MDFP is included only in
annual reports, not semi-annual reports. By moving this disclosure to a
new subsection that may be included in either a fund's annual or semi-
annual report,\60\ it will allow funds to synchronize the required
annual board review of liquidity risk management programs with the
production of this discussion in the shareholder report, reducing costs
and allowing funds to provide more effective disclosure.\61\ We believe
that this new narrative disclosure will complement existing liquidity
risk disclosure that funds already provide in their prospectus (if it
is a principal investment risk of the fund) and as part of their
discussion of the factors that materially affected performance in the
MDFP. It also should keep more operational disclosure separate from the
performance-related disclosure required in the MDFP section.
---------------------------------------------------------------------------

    \60\ See new Item 27(d)(7)(b) of Form N-1A. The discussion
required by Item 27(d)(7)(b) will be included in the shareholder
report following the board's review of the fund's liquidity risk
management program. Thus, for example, if the board reviews the
operation of the fund's liquidity risk management program during the
first half of a fund's fiscal year, the disclosure will be required
in the semi-annual report for that period. However, if a board
reviews the liquidity program more frequently than annually, the
disclosure need only be included in the annual or semi-annual
report, not both. See new Instruction to Item 27(d)(7)(b) of Form N-
1A (clarifying that ``[i]f the board reviews the liquidity risk
management program more frequently than annually, a fund may choose
to include the discussion of the program's operation and
effectiveness over the past year in one of either the fund's annual
or semi-annual reports, but does not need to include it in both
reports).
    \61\ Allowing this flexibility may result in the narrative
disclosure potentially not consistently being in a single document
(the annual report), but instead being in either the annual or semi-
annual report. This may lead to the risk that some investors may not
review this data if they read only one of these shareholder reports
and the narrative disclosure is in the other. Nonetheless, we
believe that the benefits of the flexibility we are providing today
(both in cost savings and potentially in better disclosure) justify
this risk.
---------------------------------------------------------------------------

    Several commenters suggested that we exempt funds that primarily
hold assets that are highly liquid investments (``highly liquid
funds'') and In-Kind ETFs from including this new narrative disclosure
about liquidity risk management programs in their shareholder
reports.\62\ They explained that because such funds face significantly
lower liquidity risks, and are already treated differently and subject
to less stringent requirements under rule 22e-4, it would be
appropriate to exempt them from the requirement.\63\ We are not
providing such an exemption. Highly liquid funds and In-Kind ETFs are
exempt from certain requirements under the liquidity rule, but both
still must have a liquidity risk management program. We believe that
investors would benefit from a discussion of the operation and
effectiveness of the liquidity risk management program of these funds,
much like any other fund.\64\ However, we note that all funds may
include tailored and proportionate discussion appropriate to the
liquidity risks they face and the scale of their program. Highly liquid
funds or In-Kind ETFs may face fewer, or different, liquidity risks
than other funds, and thus the discussion in their shareholder reports
may be proportionate or different than for other funds.
---------------------------------------------------------------------------

    \62\ See e.g., IDC Comment Letter; Vanguard Comment Letter; ICI
Comment Letter; Capital Group Comment Letter. Rule 22e-4, in
relevant part, defines a ``highly liquid investment'' as any cash
held by a fund and any investment that the fund reasonably expects
to be convertible to cash in current market conditions in three
business days or less without the conversion to cash significantly
changing the market value of the investment. Rule 22e-4(a)(6). The
rule defines an ``In-Kind ETF'' as an ETF that meets redemptions
through in-kind transfers of securities, positions and assets other
than a de minimis amount of cash and that publishes its portfolio
holdings daily. Rule 22e-4(a)(9).
    \63\ For example, highly liquid funds and In-Kind ETFs are not
required to determine an HLIM. See rule 22e-4(b)(1)(iii).
    \64\ Highly liquid funds and In-Kind ETFs must consider a
variety of factors specific to their operations as part of their
liquidity risk management program, which may be relevant to
investors. For example, both types of funds must analyze issues such
as shareholder or portfolio concentration, holdings of cash and cash
equivalents, and other factors. In-Kind ETFs must consider factors
specific to ETFs, such as the operation of the arbitrage function
and the level of active participation by market participants. See
rule 22e-4(b)(1).
---------------------------------------------------------------------------

    To satisfy this new disclosure requirement, a fund generally may
provide information that was provided to the board about the operation
and effectiveness of the program, and insight into how the program
functioned over the past year.\65\ This discussion should

provide investors with enough detail to appreciate the manner in which
a fund manages its liquidity risk, and could, but is not required to,
include discussion of the role of the classification process, the 15%
illiquid investment limit, and the HLIM in the fund's liquidity risk
management process.
---------------------------------------------------------------------------

    \65\ The disclosure included in new Item 27(d)(7)(b) of Form N-
1A generally should provide a high level summary of the report that
must be provided to the fund's board under rule 22e-4(b)(2)(iii)
addressing the operation of the fund's liquidity risk management
program and the adequacy and effectiveness of its implementation. We
believe that the conclusions in this report may be largely
consistent with the overall conclusions disclosed to investors in
the shareholder report. Therefore, because funds will already need
to prepare a report on the program for purposes of board reporting,
we believe that the disclosure requirement we are adopting today
would be unlikely to create significant additional burdens.
---------------------------------------------------------------------------

    As part of this new disclosure, a fund might opt to discuss the
particular liquidity risks that it faced over the past year, such as
significant redemptions, changes in the overall market liquidity of the
investments the fund holds, or other liquidity risks, and explain how
those risks were managed and addressed. If the fund faced any
significant liquidity challenges in the past year, it would discuss how
those challenges affected the fund and how they were addressed
(recognizing that this discussion may occur in the new sub-section or
the MDFP, as appropriate). In the new sub-section, funds also may wish
to provide context and other supplemental information about how
liquidity risk is managed in relation to other investment risks of the
fund. Additionally, one commenter suggested that funds can provide
investors with useful empirical data metrics that would be informative
of the fund's liquidity profile.\66\ We agree and believe that funds
may include, as part of this new sub-section, a discussion of other
empirical data metrics such as the fund's bid-ask spreads, portfolio
turnover, or shareholder concentration issues (if any) and their effect
on the fund's liquidity risk management.\67\ Overall, we believe that
this disclosure will provide context and an accessible and useful
explanation of the fund's liquidity risk in relation to its management
practices and other investment risks as appropriate.
---------------------------------------------------------------------------

    \66\ See MSCI Comment Letter.
    \67\ Id.
---------------------------------------------------------------------------

    We continue to believe, and commenters generally agreed, that this
new disclosure will better inform investors about the fund's liquidity
risk management practices than aggregate liquidity classification data
on Form N-PORT.\68\ The shareholder report disclosure provides funds
the opportunity to tailor the disclosure to their specific liquidity
risks, explain the level of subjectivity involved in liquidity
assessment, and give a narrative description of these risks and how
they are managed within the context of the fund's investment strategy.
Accordingly, we are adopting these changes substantially as proposed
with the modifications discussed above.
---------------------------------------------------------------------------

    \68\ See e.g., SIFMA AMG Comment Letter; Wellington Comment
Letter; Fidelity Comment Letter; State Street Comment Letter.
---------------------------------------------------------------------------

B. Amendments to Liquidity Reporting Requirements

    We also are adopting certain changes to Form N-PORT related to
liquidity data. As discussed in the Proposing Release, we believe these
changes may enhance the liquidity data reported to us.\69\ In addition,
for some funds, these changes also may reduce cost burdens as they
comply with the rule.
---------------------------------------------------------------------------

    \69\ See Proposing Release, supra footnote 10, at text
accompanying n.50.
---------------------------------------------------------------------------

1. Multiple Classification Categories
    We are adopting as proposed amendments to Form N-PORT to allow
funds the option of splitting a fund's holding into more than one
classification category in certain specified circumstances.\70\ The
requirement to classify each entire position into a single
classification category poses difficulties for certain holdings and may
not accurately reflect the liquidity of that holding, or be reflective
of the liquidity risk management practices of the fund. Commenters
generally supported these proposed amendments to Form N-PORT, noting
that they appreciated the flexibility and better accuracy that may
result.\71\ However, as discussed below, three commenters raised
questions or suggested amendments related to the third circumstance
(``full liquidation'') \72\ and one questioned the utility of the first
two circumstances (``differences in liquidity characteristics'' and
``differences in sub-adviser classifications'').\73\
---------------------------------------------------------------------------

    \70\ See new Item C.7.b of Form N-PORT and Instructions to Item
C.7 of Form N-PORT. As discussed above, Form N-PORT required a fund
to classify each holding into a single liquidity bucket.
    \71\ See IDC Comment Letter; Fidelity Comment Letter; IAA
Comment Letter.
    \72\ SIFMA AMG Comment Letter; ICI Comment Letter; J.P Morgan
Comment Letter.
    \73\ MSCI Comment Letter.
---------------------------------------------------------------------------

    Other commenters suggested that we not allow funds to classify
portions of a portfolio holding separately because it would ``reduce
the utility of the entire bucketing exercise.'' \74\ Similarly, a few
commenters suggested that allowing funds to classify portions of a
portfolio holding for some of their holdings could lead to inconsistent
interpretations of the fund's classifications, and that we should
instead require a fund to apply a uniform approach across all of its
holdings.\75\ We believe that allowing funds to split classification in
these circumstances will actually enhance, rather than reduce the
utility of the process. Because funds will be required to indicate
which circumstance led to their choice to split a classification, we
will be able to identify which positions are split and why. This will
allow us a more fine-grained understanding of funds' views of a
position's liquidity. We also do not believe that we should require a
fund to consistently use a single classification splitting approach for
all its positions, as different positions may have different but
equally valid circumstances justifying a split classification.\76\
---------------------------------------------------------------------------

    \74\ See MSCI Comment Letter.
    \75\ See State Street Comment Letter; MSCI Comment Letter.
    \76\ For example, a fund may have multiple sub-advisers that
differ on position A's classification, and also have a different
position that has differential liquidity characteristics for part of
the position. We believe that requiring a fund to only use one of
the circumstances in such a situation could result in worse, not
better, data reported to us.
---------------------------------------------------------------------------

    In the first circumstance, even though a holding may nominally be a
single security, different liquidity-affecting features may justify
treating the holding as two or more separate investments for liquidity
classification purposes. For example, a fund might hold an asset that
includes a put option on a percentage (but not all) of the fund's
holding of the asset.\77\ Such a feature may significantly affect the
liquidity characteristics of the portion of the asset subject to the
feature, such that the fund believes that the two portions of the asset
should be classified into different buckets.\78\
---------------------------------------------------------------------------

    \77\ For example, if 30% of a holding is subject to a liquidity
feature such as a put, and the other 70% is not, pursuant to the new
Instructions to Item C.7 of Form N-PORT, a fund may split the
position, evaluate the sizes it reasonably anticipates trading for
each portion of the holding that is subject to the different
liquidity characteristics, and classify each separate portion
differently, as appropriate. The fund in such a case would use the
classification process laid out in rule 22e-4, but would apply it
separately to each portion of the holding that exhibits different
liquidity characteristics.
    \78\ As another example, a fund might have purchased a portion
of an equity position through a private placement that makes those
shares restricted (and therefore illiquid) while also purchasing
additional shares of the same security on the open market. In that
case, certain shares of the same holding may have very different
liquidity characteristics.
---------------------------------------------------------------------------

    As discussed above, commenters generally agreed that such an
amendment would allow funds to more accurately reflect their liquidity
profile and report their holdings in a manner more consistent with
internal liquidity risk management programs.\79\ However,

one commenter suggested that this amendment would not be necessary, as
such differences in liquidity characteristics should already result in
the position being labeled as separate positions on Form N-PORT.\80\
Form N-PORT requires positions to be categorized based on CUSIP or
other identifier, and in many circumstances, positions with differences
in liquidity characteristics may have identical identifiers.
Accordingly, we continue to believe that offering this flexibility is
appropriate and providing clarity that a position can be split in such
a circumstance would be useful. Therefore, we are adopting this
amendment as proposed.
---------------------------------------------------------------------------

    \79\ See, e.g., Comment Letter of ICE Data Services (May 18,
2018) (``ICE Comment Letter''); Fidelity Comment Letter; ICI Comment
Letter.
    \80\ MSCI Comment Letter.
---------------------------------------------------------------------------

    Second, it is our understanding that when sub-advisers manage
different portions or ``sleeves'' of a fund's portfolio, sub-advisers
may have different views of the liquidity classification of a single
holding that is held in multiple sleeves.\81\ We believe that allowing
a fund to report each sub-adviser's classification of the proportional
holding it manages, instead of putting the entire holding into a single
category, will avoid the need for costly reconciliation and may provide
useful information to the Commission on each sub-adviser's
determination about the investment's liquidity.\82\
---------------------------------------------------------------------------

    \81\ See Proposing Release, supra footnote 10, at text preceding
n.53.
    \82\ Similar to the ``differences in liquidity characteristics''
examples discussed above, the fund effectively will be treating the
portions of the holding managed by different sub-advisers as if they
were two separate and distinct investments, and bucketing them
accordingly. See new Instructions to Item C.7 of Form N-PORT.
---------------------------------------------------------------------------

    Commenters generally agreed that this flexibility would allow for
these benefits.\83\ However, one commenter suggested that splitting
positions in this circumstance would merely signal an inconsistency
between sub-adviser models and would not provide useful
information.\84\ We disagree, and believe that getting more granular
insight into sub-advisers' views on liquidity positions may be
informative in some circumstances. We also believe it is appropriate to
allow this flexibility to avoid unnecessary costs associated with the
reconciliation process. Therefore, we are adopting this amendment as
proposed.\85\
---------------------------------------------------------------------------

    \83\ See, e.g., J.P. Morgan Comment Letter, ICE Comment Letter.
    \84\ MSCI Comment Letter.
    \85\ These amendments also would have the effect of making
inapplicable staff FAQ 8 on the liquidity rule for funds that choose
to rely on this option. See Liquidity Staff FAQs, available at
https://www.sec.gov/investment/investment-company-liquidity-risk-management-programs-faq. FAQ 8 provides guidance for funds on the
process of reconciling classifications for sub-advisers when
reporting on Form N-PORT. As this is an option, not a requirement,
the FAQ would still be relevant for those funds that choose not to
rely on the optional reporting method. The staff will amend the FAQ
accordingly.
---------------------------------------------------------------------------

    Third, it is our understanding that for internal risk management
purposes some funds may currently classify their holdings
proportionally across buckets, based on an assumed sale of the entire
position.\86\ In such cases, it is our understanding that allowing a
fund to have the option of reporting the position assuming a full
liquidation on Form N-PORT would be more efficient and less costly than
using a single classification category.\87\ We believe that in such
cases, this form of reporting will not impair the Commission's
monitoring and oversight efforts as compared to our approach of
classifying based on ``sizes that the fund would reasonably anticipate
trading.'' \88\ Further, we believe the approach, which allows, but
does not require, funds to use the full liquidation/proportional
approach, will maintain the quality of the information reported to us
and potentially be less costly than the approach we adopted.\89\
Commenters generally agreed that permitting the option to use such a
full liquidation approach would be useful,\90\ though one cautioned
that it would not use such an approach in practice.\91\ This approach
is optional, and therefore, if it could have negative consequences such
as inflating the fund's illiquid investment bucket, a fund could choose
not to use it. We are adopting this third circumstance as proposed.
---------------------------------------------------------------------------

    \86\ See Proposing Release, supra footnote 10, at n.54.
    \87\ See id., at n.55.
    \88\ For example, a fund using the full liquidation approach and
holding $100 million in Asset A could determine that it would be
able to convert to cash $30 million of it in 1-3 days, but could
only convert the remaining $70 million to cash in 3-7 days. This
fund could choose to split the liquidity classification of the
holding on Form N-PORT and report an allocation of 30% of Asset A in
the Highly Liquid category and 70% of Asset A in the Moderately
Liquid category. Such a fund would not use sizes that it reasonably
anticipates trading when engaging in this analysis, but instead
would assume liquidation of the whole position. See Proposing
Release, supra footnote 10, at n.56.
    \89\ As discussed in the economic analysis below, allowing
classification in multiple categories may be less costly if it
better aligns with current fund systems or allows funds to avoid
incurring costs related to the need to develop systems and processes
to allocate each holding to exactly one classification bucket.
    \90\ ICI Comment Letter; State Street Comment Letter; MSCI
Comment Letter.
    \91\ J.P. Morgan Comment Letter (explaining that a full
liquidation approach may result in negative consequences, by for
example, inflating the amount of illiquid assets in a fund based
solely on the calculation method used).
---------------------------------------------------------------------------

    In the proposal, we also requested comment on other circumstances
where classification splitting might be appropriate. Commenters
suggested that we also allow certain methods of classification
splitting when a fund's reasonably anticipated trade size falls across
multiple liquidity buckets.\92\ As discussed in the Liquidity Adopting
Release, the reasonably anticipated trade size method for analyzing
positions replaced the full liquidation approach that we originally
proposed.\93\ Classifying liquidity based on reasonably anticipated
trading sizes allows for a simpler analytic process in some respects
and avoids certain issues where a full liquidation analysis may create
disparate results between funds of different sizes.\94\ However, it
also is an imperfect proxy for the actual liquidity characteristics of
fund investments, potentially skewing classifications to more liquid
``buckets.'' \95\
---------------------------------------------------------------------------

    \92\ SIFMA Comment Letter; ICI Comment Letter. For example, if a
fund had a $100 million position, and a reasonably anticipated trade
size of $10 million, the fund might determine that $4 million of
that trade size would fall in the highly liquid asset bucket, and $6
million would fall in the moderately liquid asset bucket. Commenters
differed on how funds should classify the remainder of the position
($90 million) in this circumstance.
    \93\ Liquidity Adopting Release, supra footnote 2.
    \94\ Id. (discussing commenters' concerns that the full
liquidation method ``could result in large funds' portfolio
liquidity appearing artificially low compared to smaller funds
because large funds are more likely to hold larger positions and
determine that they could not quickly liquidate these positions
entirely without a value impact'').
    \95\ For example, a fund with a $100 million position might
determine that it could sell $10 million in 1-3 days and the rest in
4-7 days using the full liquidation approach. However, using the
reasonably anticipated trade size proxy, it might determine $10
million was a reasonable trade size, and because it could sell that
in 1-3 days, the fund would be permitted to bucket the entire
position in the highly liquid category potentially skewing the
classification to a more liquid bucket.
---------------------------------------------------------------------------

    We believe that allowing funds to split the reasonably anticipated
trade size and use such a split in classifying the rest of a fund's
position could further exacerbate these imperfections, leading to more
distorted liquidity profiles for funds. The staff will continue to
evaluate potential other approaches to liquidity risk management,
including other approaches to classifying fund liquidity. Interested
parties may provide feedback on the use of reasonably anticipated trade
size as part of classification, and whether we should consider any
further modifications.
    Two commenters asked us to clarify that funds may use these
classification-splitting approaches not just for Form N-PORT reporting,
but for all classification purposes under rule 22e-

4.\96\ The requirement to assign a position into a single bucket is
specific to Form N-PORT.\97\ Rule 22e-4(b)(ii) requires funds to
classify their positions among four categories for liquidity risk
management purposes, but does not require positions to be put into a
single category. Accordingly, we clarify that funds following the
classification splitting approaches delineated on Form N-PORT may apply
such splitting more generally in their classification processes under
rule 22e-4.
---------------------------------------------------------------------------

    \96\ SIFMA Comment Letter; ICI Comment Letter.
    \97\ See Item C.7 of Form N-PORT.
---------------------------------------------------------------------------

    While we believe that we should permit funds to report liquidity
classifications in the three ways discussed above, we also continue to
believe it is necessary to limit split reporting to these circumstances
in order to maintain the effectiveness of our monitoring efforts. As we
stated in the Proposing Release, we believe that allowing funds to
engage in such split reporting under these circumstances will allow for
a more precise view of the liquidity of these securities.\98\ Because
funds that choose to classify across multiple categories under this
approach will be required to indicate which of the circumstances led to
the split classification, we will be able to monitor more effectively
the liquidity of a fund's portfolio and determine the circumstances
leading to the classification. Therefore, we are amending Item C.7 of
Form N-PORT to provide funds the option of splitting the classification
categories reported for their investments on a percentage basis in
these specified circumstances.\99\ We are also adopting new
Instructions to Item C.7 that explain the specified circumstances where
a fund may split classification categories.\100\ In addition, we are
adopting new Item C.7.b, which will require funds taking advantage of
the option to attribute multiple classifications to a holding to note
which of the circumstances led the fund to split the classifications of
the holdings.\101\
---------------------------------------------------------------------------

    \98\ See Proposing Release, supra footnote 10, at text
accompanying n.58.
    \99\ Revised Item C.7 of Form N-PORT and new Instructions to
Item C.7 of Form N-PORT. Funds that choose not to take advantage of
these options may continue to use the approach laid out in the final
rule of bucketing an entire position based on the liquidity of the
sizes the fund would reasonably anticipate trading.
    \100\ Revised Item C.7 of Form N-PORT and new Instructions to
Item C.7 of Form N-PORT. These instructions provide an explanation
for how funds that choose to take advantage of split reporting
should implement it.
    \101\ New Item C.7.b of Form N-PORT. A fund may also choose to
provide (but is not required to) additional context on its process
for classifying portions of the same holding differently in the
explanatory notes section of Form N-PORT. See Part E of Form N-PORT.
---------------------------------------------------------------------------

2. Disclosure of Cash and Cash Equivalents
    We also are adopting as proposed amendments to Form N-PORT to
require additional disclosure relating to a registrant's holdings of
cash and cash equivalents not reported in Parts C and D of the
Form.\102\ This disclosure will be made publicly available each
quarter.\103\ Form N-PORT currently does not require registrants to
specifically report the amount of cash and cash equivalents held by the
registrant. As we noted in the Reporting Modernization Adopting
Release, Part C of Form N-PORT was designed to require registrants to
report certain information on an investment-by-investment basis about
each investment held by the registrant.\104\ However, cash and certain
cash equivalents are not considered an investment on Form N-PORT, and
therefore registrants are not required to report them in Part C of the
Form as an investment. Similarly, Part B.1 of Form N-PORT (assets and
liabilities) will require information about a registrant's assets and
liabilities, but does not require specific disclosure of a registrant's
holdings of cash and cash equivalents.\105\
---------------------------------------------------------------------------

    \102\ See supra footnote 21.
    \103\ See new Item B.2.f of Form N-PORT.
    \104\ See Reporting Modernization Adopting Release, supra
footnote 2. Part D of Form N-PORT requires the disclosure of
miscellaneous securities.
    \105\ In addition to cash, a registrant's disclosure of total
assets on Part B.1.a. also could include certain non-cash assets
that are not investments of the registrant, such as receivables for
portfolio investments sold, interest receivable on portfolio
investments, and receivables for shares of the registrant.
---------------------------------------------------------------------------

    Cash held by a fund is a highly liquid investment under rule 22e-4
and would have been included in the aggregate liquidity profile that we
are eliminating. Without the aggregate liquidity profile, we may not be
able to effectively monitor whether a fund is compliant with its HLIM
unless we know the amount of cash held by the fund. The additional
disclosure of cash and certain cash equivalents by funds also will
provide more complete information to be used in analyzing a fund's
HLIM, as well as trends regarding the amount of cash being held, which
also correlates to other activities the fund is experiencing, including
net inflows and outflows.
    Most commenters who discussed this addition supported it. They
agreed that providing this information is necessary for the
Commission's monitoring of a fund's HLIM, and that this information
would help provide a more complete picture of a fund's holdings.\106\
However, two commenters were concerned about potential investor
confusion if they interpreted this item as the totality of a fund's
highly liquid investments.\107\ They were concerned that investors
could mistakenly believe that a fund's ability to meet redemption
requests depended only on these cash holdings.\108\ One such commenter
asked that the Commission make this item non-public to avoid these
concerns,\109\ while another suggested changing the title of the item
to further clarify that a fund may report cash equivalents in response
to other items on the form.\110\
---------------------------------------------------------------------------

    \106\ ICI Comment Letter; State Street Comment Letter; IDC
Comment Letter.
    \107\ See, e.g., Fidelity Comment Letter.
    \108\ SIFMA AMG Comment Letter; Fidelity Comment Letter.
    \109\ SIFMA AMG Comment Letter.
    \110\ Fidelity Comment Letter.
---------------------------------------------------------------------------

    While we appreciate the concerns for investor confusion, we believe
that the title of the item makes clear that it covers only cash and
cash equivalents not reported in other parts of the form, and therefore
investors would be on notice that this item does not necessarily
include all cash or cash equivalents held by the fund. We also note
that funds may provide further public explanations about their cash
holdings as part of the explanatory notes associated with the item.
    We are therefore adopting as proposed amendments to Item B.2 of
Form N-PORT (certain assets and liabilities) to include a new Item
B.2.f, which will require registrants to report ``cash and cash
equivalents not reported in Parts C and D.'' Current U.S. Generally
Accepted Accounting Principles (``GAAP'') define cash equivalents as
``short-term, highly liquid investments that . . . are . . . [r]eadily
convertible to known amounts of cash . . . [and that are] [s]o near
their maturity that they present insignificant risk of changes in value
because of changes in interest rates.'' \111\ However, we understand
that certain categories of investments currently reported on Part C of
Form N-PORT (schedule of portfolio investments) could be reasonably
considered by some registrants as cash equivalents. For example, Item
C.4 of Form N-PORT requires registrants to identify asset type,
including ``short-term investment vehicle (e.g., money market fund,
liquidity pool, or other cash management vehicle),'' which could
reasonably be categorized by some registrants as a cash equivalent. In
order to ensure the amount reported under Item B.2.f is accurate and
does

not double count items that are more appropriately reported in Parts C
(Schedule of portfolio investments) and D (Miscellaneous securities) of
Form N-PORT, we are requiring registrants to only include the cash and
cash equivalents not reported in those sections.\112\
---------------------------------------------------------------------------

    \111\ See FASB Accounting Standards Codification Master
Glossary.
    \112\ We also are adopting other amendments to Form N-PORT as
proposed. In particular, we are amending General Instruction F
(Public Availability) to remove the phrase ``of this form'' from
parenthetical references to Item B.7 and Part D for consistency with
other parenthetical cross references in the Form. We also are
amending Part F (Exhibits) to fix a typographical error in the
citation to Regulation S-X. In addition, for consistency with the
amendments we are adopting, we are adding Item B.8 (Derivative
Transactions) to General Instruction F.
---------------------------------------------------------------------------

C. Treasury Asset Management Report and Evaluation of Other Approaches

    In its 2017 Asset Management and Insurance Report, the Department
of Treasury highlighted the importance of robust liquidity risk
management programs, but recommended that the Commission embrace a
``principles-based approach to liquidity risk management rulemaking and
any associated bucketing requirements.'' \113\ The proposal requested
comment on whether there were advantages to the Treasury report's
suggested approach and, if so, what additional steps should be taken to
shift towards a more principles-based approach.\114\
---------------------------------------------------------------------------

    \113\ See A financial System That Creates Economic
Opportunities; Asset Management and Insurance, U.S. Department of
the Treasury (Oct. 2017) available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-That-Creates-Economic-Opportunities-Asset_Management-Insurance.pdf.
    \114\ See Proposing Release, supra footnote 10, at n.49.
---------------------------------------------------------------------------

    We received many comments that suggested alternative approaches to
liquidity risk management regulation.\115\ Most of these commenters saw
little benefit in the classification provisions of rule 22e-4, and
associated requirements such as the HLIM.\116\ Some stated that if
requirements related to classification were removed or if we allowed
funds to design their own classification systems, the funds could
define what qualifies as a highly liquid asset and an illiquid
asset.\117\ Several of these commenters noted that they already have
liquidity risk management practices in place that differ from the
specific classification requirements of rule 22e-4, and that they
expected to maintain their own processes alongside those required by
the rule.\118\ They stated that this results in duplication of effort
and wasted resources, and suggested that replacing the classification
provisions with a principles-based approach would reduce burdens on
funds and investors while still ensuring effective liquidity risk
management practices by funds.\119\ We note that funds that believe
they would have to maintain dual liquidity classification programs as
part of their liquidity risk management may choose to seek an exemption
from the Commission from the classification requirements of rule 22e-4
if they believe that their existing systems would effectively
accomplish the Commission's stated goals.\120\
---------------------------------------------------------------------------

    \115\ See, e.g., Federated Comment Letter; Fidelity Comment
Letter; Vanguard Comment Letter.
    \116\ See, e.g., Fidelity Comment Letter; Vanguard Comment
Letter.
    \117\ See, e.g., J.P. Morgan Comment Letter; Vanguard Comment
Letter.
    \118\ See, e.g., T. Rowe Comment Letter; Vanguard Comment
Letter.
    \119\ See, e.g., T. Rowe Comment Letter (``We believe that the
bucketing requirement goes beyond what is necessary for a robust
risk management regime, and will ultimately prove to be of limited
additional utility to fund managers, fund boards, and fund
shareholders.'').
    \120\ The Commission would evaluate appropriate terms and
conditions for any exemption under the standard set forth in Section
6(c) of the Investment Company Act.
---------------------------------------------------------------------------

    One commenter acknowledged that moving to a principles based
approach would come at a cost, for example, because it would limit the
Commission's ability to compare fund reporting in an ``apples-to-
apples'' manner.\121\ However, that commenter stated that such a cost
would be worthwhile in light of the benefits and cost savings
associated with allowing funds to continue to manage liquidity in the
way they believed was most appropriate for their funds.\122\ Another
commenter disagreed that moving to a principles-based approach was
appropriate.\123\ One commenter also pointed to additional costs
associated with moving to such a principles based approach in light of
the expense and effort incurred already to comply with the rule.\124\
---------------------------------------------------------------------------

    \121\ See ICI Comment Letter.
    \122\ Id.
    \123\ AFR Comment Letter (``[W]e continue to believe the
Commission should require granular information about the liquidity
classifications of individual assets; provide strong oversight of
fund liquidity classifications; or strengthen and enforce the 15
percent illiquid investments limit.'').
    \124\ See BlackRock Comment Letter (``Any material changes to
the requirements of fund managers under rule 22e-4 at this point in
time would have a cost of its own that would need to be factored in.
We believe the proposed refinements to the disclosure associated
with rule 22e-4 would be sufficient to address the material concerns
raised by the industry, which were reflected in the Treasury report
recommendation, without materially altering the rule at this late
stage (a development that would be counterproductive at this
time.'')). Conversely, one commenter cautioned the Commission from
falling victim to the ``sunk cost fallacy'' arguing that the costs
incurred already in complying with rule 22e-4 should not deter the
Commission from moving to a principles-based approach. See Vanguard
Comment Letter.
---------------------------------------------------------------------------

    Today, we are modifying certain aspects of our liquidity framework,
largely as proposed. However, we recognize that a broad range of
commenters continue to believe that alternative approaches to
classification would better achieve the Commission's goals.
Accordingly, during and following the implementation of the rule and
reporting requirements, the staff will continue its efforts to monitor
and solicit feedback on implementation. As part of this monitoring, the
staff will analyze the extent to which the liquidity classification
process and data are achieving the Commission's goals and any other
feedback provided from interested parties to the Commission.\125\ The
staff will then inform the Commission what steps, if any, the staff
recommends in light of this monitoring.
---------------------------------------------------------------------------

    \125\ See infra footnote 129 and accompanying text.
---------------------------------------------------------------------------

    We expect that this evaluation will include, at a minimum: (i) The
costs and benefits of rule 22e-4 and its associated classification
requirements; (ii) whether there should be public dissemination of
fund-specific liquidity classification information; (iii) whether the
Commission should propose amendments to rule 22e-4 to move to a more
principles-based approach in light of this evaluation; (iv) and whether
the Commission should propose to require certain empirical data metrics
be disclosed.\126\
---------------------------------------------------------------------------

    \126\ See supra section II.A.2.
---------------------------------------------------------------------------

    To properly engage in such an evaluation and to ground it on an
empirical basis, we believe it is important for funds and the
Commission to gain experience with the classification process, to allow
analysis of its benefits and costs based on actual practice.\127\
Accordingly, we expect that this staff evaluation will take into
account at least one full year's worth of liquidity classification data
from large and small entities.\128\
---------------------------------------------------------------------------

    \127\ Retrospective review of regulations is often viewed as a
best practice in federal agency rulemaking. See e.g., Government
Accountability Office, Opportunities remain for OMB to improve the
transparency of rulemaking processes (Mar. 2016), available at
https://www.gao.gov/assets/680/675810.pdf (``We have long advocated
the potential usefulness to Congress, agencies, and the public of
conducting retrospective regulatory analyses.'').
    \128\ One commenter argued that any such review of liquidity
data should take into account a full year's worth of data at a
minimum, and preferably more, to ensure that the data includes
stressed periods and other fund outflows. See ICI Comment Letter.
---------------------------------------------------------------------------

    We welcome public feedback as part of this evaluation, and have set
up an email inbox where funds, investors, or other interested parties
may submit

information, now and during the first year of reporting, to help assist
the staff and the Commission.\129\ In particular, we would appreciate
information about the following subjects.
---------------------------------------------------------------------------

    \129\ Email: [email protected].
---------------------------------------------------------------------------

     To what extent will funds continue to maintain separate
liquidity risk management processes and practices alongside those
required by the classification provisions of rule 22e-4? What costs are
associated with maintaining such dual systems? Are there synergies or
other benefits that would result? Do funds expect to eventually combine
existing systems and rule 22e-4 classification programs over time, or
do they expect to keep them separate?
     Were the implementation and ongoing cost estimates and
assumptions made in adopting rule 22e-4 and rule and form amendments
accurate? In particular, were the assumptions made about vendor usage
and associated costs correct considering the widespread use of vendors
(as opposed to in-house systems) that we understand has taken place?
     What benefits have investors, funds, and the markets
gained from liquidity classification, including matters associated with
classification such as the HLIM and the illiquid investment limit? Is
there a way to retain these benefits while moving to a more principles-
based system? Do certain aspects of the classification process, such as
the classification of illiquid investments and/or the classification of
highly liquid investments, generate greater benefits than others?
     To what extent would investors and others benefit from
public liquidity classification information? Are there other types of
information that may allow investors to better understand the liquidity
of their funds? For example, instead of classification information,
would investors (or the Commission) be better able to evaluate fund
liquidity through public disclosure of empirical data such as bid-ask
spreads of portfolio securities, portfolio turnover, or shareholder
concentration measures?
     If we were to propose amendments to rule 22e-4 to move to
a more principles-based approach, would the benefits of such a new
approach outweigh the costs of implementation? On what principles
should we base such an approach?
    Finally, as we discussed in the proposal, our staff anticipates
publishing a periodic report containing aggregated and anonymized
information about the fund industry's liquidity may be beneficial. One
commenter objected, arguing that even aggregated and anonymized
classification data would still be derived from the same disparate and
subjective inputs, and accordingly may be of limited value to the
Commission or the public.\130\ As part of the staff evaluation noted in
the proposal and discussed above, we expect that our staff will
consider whether publishing such aggregated and anonymized
classification data would be useful, and include a recommendation as
part of that evaluation as to whether the staff should publish such a
periodic report.\131\
---------------------------------------------------------------------------

    \130\ ICI Comment Letter.
    \131\ Staff from the Division of Investment Management as well
as staff from the Division of Economic and Risk Analysis also may
publish ad hoc papers on fund liquidity based on Form N-PORT
liquidity data.
---------------------------------------------------------------------------

D. Compliance Dates

    As proposed, we are providing a tiered set of compliance dates
based on asset size.\132\ However, in a change from the proposal, we
are not aligning the compliance date for the amendments to Form N-1A we
are adopting today with the revised compliance dates we previously
adopted for the liquidity-related portions of Form N-PORT.\133\
Instead, we are providing additional time so that funds have at least a
full year's experience with the liquidity risk management program
before including the new narrative disclosure in their shareholder
report.
---------------------------------------------------------------------------

    \132\ ``Larger entities'' are defined as funds that, together
with other investment companies in the same ``group of related
investment companies,'' have net assets of $1 billion or more as of
the end of the most recent fiscal year of the fund. ``Smaller
entities'' are defined as funds that, together with other investment
companies in the same group of related investment companies, have
net assets of less than $1 billion as of the end of its most recent
fiscal year. See Liquidity Adopting Release, supra footnote 2, at
n.997.
    \133\ See Liquidity Extension Release, supra footnote 8.
---------------------------------------------------------------------------

    A number of commenters argued that the first time a fund includes
the new narrative disclosure on the operation of a fund's liquidity
risk management program, it should have at least a year's experience
operating a liquidity risk management program under the rule.\134\ We
agree. Therefore, we are providing additional time so that funds would
not need to comply with the new shareholder report amendments to Form
N-1A until they have had their liquidity risk management programs in
effect for a full year. We have provided additional time for funds to
comply with certain aspects of the liquidity risk management program
(classification and related elements).\135\ As result, we expect that
only the aspects of the liquidity risk management program operation and
effectiveness that are legally required to be in place need be
discussed during the first reporting cycle.
---------------------------------------------------------------------------

    \134\ See, e.g., ICI Comment Letter.
    \135\ Liquidity Extension Release, supra footnote 8.
---------------------------------------------------------------------------

    However, we are not changing the compliance date for the Form N-
PORT amendments from the proposal. Most commenters did not object to
the proposed Form N-PORT compliance dates, although a few asked that
funds be provided at least one year from adoption to implement the
changes to Form N-PORT.\136\ We believe that we are adopting this
change sufficiently in advance that funds should be able to implement
this change without difficulty, and accordingly are not amending the
proposed compliance dates for Form N-PORT.
---------------------------------------------------------------------------

    \136\ ICI Comment Letter; State Street Comment Letter.
---------------------------------------------------------------------------

    Below is a chart that describes the compliance dates for the Form
N-PORT and Form N-1A amendments that we are adopting today.

------------------------------------------------------------------------
                                                    First N-PORT filing
                                 Compliance Date            date
------------------------------------------------------------------------
Form N-PORT:
    Large Entities............  June 1, 2019.....  July 30, 2019.
    Small Entities............  March 1, 2020....  April 30, 2020.
Form N: \137\
    Large Entities............  Dec. 1, 2019.....
    Small Entities............  June 1, 2020.....
------------------------------------------------------------------------
\137\ Funds that distribute annual or semi-annual shareholder reports
  after the compliance dates discussed above would be subject to the new
  requirement.

III. Economic Analysis

A. Introduction

    The Commission is sensitive to the potential economic effects of
the amendments to Form N-PORT and Form N-1A that we are adopting. These
effects include the benefits and costs to funds, their investors and
investment advisers, issuers of the portfolio securities in which funds
invest, and other market participants potentially affected by fund and
investor behavior as well as any effects on efficiency, competition,
and capital formation.

B. Economic Baseline

    The costs and benefits of the amendments as well as any impact on
efficiency, competition, and capital formation are considered relative
to an economic baseline. For the purposes of this economic analysis,
the baseline is the regulatory framework and liquidity risk management
practices currently in effect, and any expected changes to liquidity
risk management practices, including any systems and processes that
funds have already implemented in order to comply with the liquidity
rule and related requirements as anticipated in the Liquidity Adopting
Release and the Liquidity Extension Release.\138\
---------------------------------------------------------------------------

    \138\ See supra footnotes 2 and 8.
---------------------------------------------------------------------------

    The economic baseline's regulatory framework consists of the rule
requirements adopted by the Commission on October 13, 2016 in the
Liquidity Adopting Release. Under the baseline, larger entities must
comply with some of the liquidity rule's requirements, such as the
establishment of a liquidity risk management program, by December 1,
2018 and must comply with other requirements, such as the
classification of portfolio holdings, by June 1, 2019.\139\ Smaller
entities must comply with some of the liquidity rule's requirements by
June 1, 2019 and other requirements by December 1, 2019.\140\ Because
these compliance dates have not yet occurred, the Commission has not
yet received portfolio classification data and investors have not yet
received aggregate portfolio classification disclosures from funds.
Accordingly, the baseline does not include experience on the part of
the Commission or investors with interpreting or analyzing the
quantitative data that will be reported on Form N-PORT.
---------------------------------------------------------------------------

    \139\ See supra footnote 136 for a detailed description of
larger and smaller entities. The compliance date for some of the
requirements related to portfolio holding classification was
delayed. See the Liquidity Extension Release, supra footnote 8, for
a more detailed discussion of the requirements that were delayed.
    \140\ In a change from the proposal, we are not aligning the
compliance dates for the amendments to Form N-1A with those for Form
N-PORT, as discussed above in section II.D. As a result, funds would
not need to comply with the new Form N-1A amendments until they have
had their liquidity risk management program in effect for a full
year. Moving the compliance date could provide benefits to funds
relative to the proposal as they should be able to implement changes
to shareholder reports with less difficulty.
---------------------------------------------------------------------------

    The primary SEC-regulated entities affected by these amendments are
mutual funds and ETFs. As of the end of 2017, there were 9,154 mutual
funds managing assets of approximately $19 trillion,\141\ and there
were 1,832 ETFs managing assets of approximately $3.4 trillion.\142\
Other potentially affected parties include investors, investment
advisers that advise funds, issuers of the securities in which these
funds invest, and other market participants that could be affected by
fund and investor behavior.
---------------------------------------------------------------------------

    \141\ See ICI, 2018 ICI Fact Book (58th ed., 2018) (``2018 ICI
Fact Book''), available at https://www.ici.org/pdf/2018_factbook.pdf, at nn.52, 208, 212. The number of mutual funds
includes funds that primarily invest in other mutual funds but
excludes 382 money-market funds.
    \142\ See 2018 ICI Fact Book, supra footnote 145, at nn.218,
219.
---------------------------------------------------------------------------

C. Economic Impacts

    We are mindful of the costs and benefits of the amendments to Form
N-PORT and Form N-1A we are adopting. The Commission, where possible,
has sought to quantify the benefits and costs, and effects on
efficiency, competition and capital formation expected to result from
these amendments. However, as discussed below, the Commission is unable
to quantify certain of the economic effects because it lacks
information necessary to provide reasonable estimates. The economic
effects of the amendments fall into two categories: (1) Effects
stemming from changes to public disclosure on Form N-PORT and Form N-
1A; (2) effects stemming from changes to non-public disclosure on Form
N-PORT.
Changes to Public Disclosure
    The amendments to Form N-PORT and Form N-1A we are adopting alter
the public disclosure of information about fund liquidity in three
ways. First, the amendments rescind the requirement that funds publicly
disclose their aggregate liquidity profile on a quarterly basis with a
60-day delay in structured format on Form N-PORT.\143\ Second, the
amendments require funds and other registrants to report to the
Commission, on a non-public basis, the amount of cash and cash
equivalents in their portfolio on Form N-PORT on a monthly basis and to
publicly disclose this amount on a quarterly basis with a 60-day delay
through EDGAR. Finally, the amendments require a fund to provide a
narrative description of the fund's liquidity risk management program's
operation and effectiveness in an unstructured format in the fund's
shareholder report.\144\ Most commenters generally supported rescinding
the requirement for quarterly public disclosure of aggregate liquidity
classification information on Form N-PORT, adopting the requirement for
funds to disclose their cash and cash equivalents on Form N-PORT, and
requiring funds to provide a narrative discussion in the shareholder
report.\145\
---------------------------------------------------------------------------

    \143\ See supra footnote 1 for a definition of ``funds.'' The
requirement to publicly disclose aggregate liquidity profiles does
not apply to funds that are In-Kind ETFs under the baseline, so it
is only rescinded for funds that are not In-Kind ETFs. In-Kind ETFs
are included as funds that provide a narrative description of their
liquidity risk management program pursuant to Form N-1A.
    \144\ The Commission will continue to receive non-public
position level liquidity information on Form N-PORT.
    \145\ See Fidelity Comment Letter; J.P. Morgan Comment Letter;
State Street Comment Letter; ICI Comment Letter; SIFMA Comment
Letter; Vanguard Comment Letter. One commenter recommended a delay
in compliance to any changes to Form N-PORT or the reporting
requirement of cash and cash equivalents. See State Street Comment
Letter. The Commission changed the compliance dates for the Form N-
1A requirements from what it proposed, as discussed above in section
II.D above.
---------------------------------------------------------------------------

    Funds and other registrants will experience benefits and costs
associated with the amendments to public disclosure requirements on
Form N-PORT. Funds will no longer incur the one-time and ongoing costs
associated with preparing the portion of Form N-PORT associated with
the aggregate liquidity profile. These costs likely would have
constituted a small portion of the aggregate one-time costs of $158
million and the ongoing costs of $3.9 million for Form N-PORT that we
estimated in the Liquidity Adopting Release.\146\ At the same time,
funds and other registrants will also incur additional costs, relative
to the baseline, associated with the adoption of the requirement that
they report their holdings of cash and cash equivalents on Form N-PORT.
Because funds and other registrants are already preparing Form N-PORT
and already need to keep track of their cash and cash equivalents

for valuation purposes, we expect that these additional costs will not
be significant.
---------------------------------------------------------------------------

    \146\ See Liquidity Adopting Release, supra footnote 2, at
nn.1188-1191. We estimated the total one-time costs associated with
the rule's disclosure and reporting requirements on Form N-PORT as
being approximately $55 million for funds that will file reports on
Form N-PORT in house and approximately $103 million for funds that
will use a third-party service provider. Similarly, we estimated the
total ongoing annual costs as being approximately $1.6 million for
funds filing reports in house and $2.3 million for funds that will
use a third-party service provider.
---------------------------------------------------------------------------

    In aggregate, we expect any additional costs associated with the
requirement that funds and other registrants disclose their holdings of
cash and cash equivalents to be offset by the savings associated with
funds no longer having to report an aggregate liquidity profile.
Therefore, we expect that funds and other registrants will not
experience a significant net economic effect associated with the direct
costs of filing Form N-PORT.\147\ Additionally, to the extent that any
risk of herding or correlated trading would exist if funds executed
trades in order to make their aggregate liquidity profiles appear more
liquid to investors, rescinding the requirement that funds publicly
disclose an aggregate liquidity profile will mitigate such risk.\148\
---------------------------------------------------------------------------

    \147\ See infra paragraph following footnote 190.
    \148\ See supra footnote 43.
---------------------------------------------------------------------------

    Relative to the baseline, funds will incur costs associated with
preparing an annual narrative discussion of their liquidity risk
management programs in the fund's shareholder report. We estimate that
funds will incur aggregate one-time costs of approximately $18 million
and aggregate ongoing costs of approximately $9 million in preparing
this narrative discussion.\149\ Several commenters suggested excluding
funds that primarily hold highly liquid investments from providing the
narrative discussion,\150\ and that the benefits of the narrative
disclosure to investors that hold these funds would be outweighed by
the costs of including the narrative in the shareholder report.\151\ We
disagree because, even for funds that predominantly hold highly liquid
investments, such discussion can benefit investors to the extent that
such disclosures may enhance their understanding of liquidity risk
management for individual funds and when comparing funds.
---------------------------------------------------------------------------

    \149\ We estimate funds will incur an additional aggregate one-
time burden of 54,890 hours and an additional aggregate annual
burden of 27,445 hours. See infra footnotes 194 and 197. Assuming a
blended hourly rate of $329 for a compliance attorney ($345) and a
senior officer ($313), that translates to an additional aggregate
one-time burden of $18,058,810 = 54,890 x $329 and an additional
aggregate annual burden of $9,029,405 = 27,445 x $329.
    \150\ See ICI Comment Letter; Capital Group Comment Letter.
    \151\ See Capital Group Comment Letter.
---------------------------------------------------------------------------

    As discussed above, and in response to comments, the Commission is
not adopting the requirement that the narrative disclosure be part of
the MDFP and instead is requiring that the narrative disclosure of the
operation and effectiveness of a fund's liquidity management programs
be part of the fund's shareholder report (annual or semi-annual) in the
section following the discussion of board approval of advisory
contracts.\152\ Moving the narrative disclosure from the MDFP to this
section of the shareholder report will allow funds to align the
production of the narrative disclosure with the review of the liquidity
risk management practices by the fund's board of directors, which may
reduce costs to funds relative to the proposal by allowing funds to
avail themselves of any efficiencies from the overlap between these
requirements.\153\
---------------------------------------------------------------------------

    \152\ However, as discussed in section II.A.2 above, funds
should include in the MDFP a discussion of any events relating to a
fund's liquidity that materially affected the fund's performance
during the most recently completed fiscal year. One commenter stated
that although such a disclosure would increase ``administrative and
compliance burden on funds that face material liquidity risks, it
may be eased by relevant disclosure that may already be included in
the management discussion as a material factor that impacts fund
performance. In order to ensure that investors receive proportionate
liquidity risk disclosure relative to the risks within a particular
fund, we believe the modest additional expense would be warranted.''
See Vanguard Comment Letter. Because we understand that funds often
already discuss such events in their MDFP today, we agree with the
commenter that increases in costs would be limited and that the
disclosure would benefit investors in promoting informed decision-
making.
    \153\ See ICI Comment Letter. See also Capital Group Comment
Letter. Further, another commenter suggested that moving the
narrative disclosure from the MDFP would also benefit investors by
reducing confusion for investors. See Blackrock Comment Letter.
---------------------------------------------------------------------------

    Investors will also experience costs and benefits as a result of
the changes to public disclosure requirements on Form N-PORT and Form
N-1A that we are adopting.\154\ To the extent that aggregate liquidity
profiles within the structured format of Form N-PORT could have helped
certain investors make more informed investment choices that match
their liquidity risk preferences, rescinding the aggregate liquidity
profile requirement will reduce those investors' ability to make more
informed investment choices.\155\ However, to the extent that portfolio
holding classifications incorporate subjective factors that may be
interpreted differently by different funds, aggregate liquidity
profiles may not have been comparable across funds. Therefore,
rescinding the aggregate liquidity profile requirement may reduce the
likelihood that investors make investment choices based on any
confusion about how the fund's liquidity risk profile should be
interpreted.\156\ Further, the narrative discussion in shareholder
reports may mitigate any reduction in investors' ability to make more
informed investment choices, though this disclosure will be less
frequent than the quarterly public disclosure of aggregate liquidity
profiles that was previously adopted and will provide information about
a fund's liquidity risk management rather than the aggregate liquidity
profile of the fund's investments.\157\
---------------------------------------------------------------------------

    \154\ See ICE Comment Letter (discussing the benefits to the
``investing public'' by ``injecting additional rigor and discipline
into funds' liquidity assessment procedures.'').
    \155\ See Better Markets Comment Letter (stating that the
aggregated public reports in N-PORT would have benefited investors
by empowering them to make more informed investment decisions
through the analysis provided by third-party analysts). Another
commenter stated that the removal of the aggregate liquidity
profiles will reduce the information offered to the public and
opposed the elimination of the public disclosure of funds' aggregate
liquidity profiles. AFR Comment Letter.
    \156\ Even if aggregate liquidity profiles are not comparable
across funds, they might be comparable across time for a given fund,
which might provide useful information to investors. This would be
the case if a fund maintains a consistent position classification
process over time. Funds, however, may change their classification
processes over time.
    \157\ See Comment Letter of Mutual Fund Directors Forum (May 18,
2018) (``MFDF Comment Letter'') (discussing that the narrative
disclosure will benefit investors by providing ``information on a
fund's management of liquidity risk . . . in a format that will
allow those investors to assess the importance of the
information'').
---------------------------------------------------------------------------

    As discussed above, the compliance date for rule 22e-4 and related
reporting on Form N-PORT has not yet occurred and the Commission has
not yet received portfolio classification data from funds, nor is
aggregated liquidity classification information currently being made
public. As a result, the Commission's assessment of the costs and
benefits of these changes is, necessarily, informed by qualitative
concerns, together with what we know about the subjectivity of inputs,
assumptions, and methods that funds are likely to utilize in
classifying portfolio assets and the nature of the information to be
reported. The liquidity classifications that funds would have used to
construct an aggregate liquidity profile are based on several factors
that are subjective and fund specific. Such factors include a fund's
determination of the reasonably anticipated trade size for a given
holding and its determination of what constitutes significant market
impact.\158\ As a result of these subjective factors, aggregate
liquidity profiles are likely to vary across otherwise similar funds,
diminishing their comparability.\159\ However, without yet receiving
and evaluating liquidity classification data,

we cannot anticipate with any quantitative precision the extent to
which they will vary across otherwise similar funds as a result of the
above factors.\160\ As a result, the adopted approach will enable the
Commission to evaluate and consider how the quantitative data from
funds' N-PORT filings might be fashioned into common quantitative
metrics. This approach will also enable the Commission to assess the
potential costs and benefits of future public dissemination of
quantitative metrics derived from data contained in N-PORT filings and
whether such metrics would be comparable across funds.
---------------------------------------------------------------------------

    \158\ See Liquidity Adopting Release, supra footnote 2, at
section III.C.3.
    \159\ See supra footnotes 41 and 42.
    \160\ A few commenters objected to the proposed changes, arguing
that the Commission should err on the side of providing more
information and that investors would understand and use the
aggregated liquidity information. See supra footnote 33 and
accompanying text.
---------------------------------------------------------------------------

    The overall impact of the amendments on an investor's use of data
for informing investment choices will likely depend on how the investor
accesses and processes information about fund liquidity. If certain
investors prefer to base their investment decisions on information that
is accessible to them in an unstructured document, those investors will
be more likely to use the narrative discussion of a fund's liquidity
risk management program in shareholder reports than they would have
been to use the aggregate liquidity profile within the structured
format of Form N-PORT to inform their investment decisions. However,
certain other investors may prefer to access, reuse, and compare the
information about a fund's liquidity risk if included within a
structured format on Form N-PORT. These investors will have a reduced
ability to make as timely and accurate an analysis within an entity's
filings, perform text analysis of an entity's narrative disclosures,
and potentially combine narrative and numeric information when the
narrative disclosures related to their liquidity risk management
programs are provided to them in the unstructured format of an annual
report. Further, there may be an increased burden on these third-party
providers to search, parse, and assess the quality of the unstructured
information in funds' annual reports. To the extent that certain
investors rely on third parties to provide them with information for
analysis, this increased burden may be partially or fully passed on to
these investors in the form of higher costs.
    One commenter recommended that narrative disclosures, as well as
all financial data, be reported in a consistent, structured format to
promote comparison across filings and filers.\161\ While for some
retail investors, an unstructured narrative disclosure will be useful
and accessible, standardized, structured, machine-readable disclosures
facilitate timely access and accurate identification and parsing of
information for other investors and market participants relative to
unstructured disclosures. As discussed in the Proposing Release, while
we acknowledge that there are costs to our amendments for investors,
filers, and third party platforms that prefer to access and use
financial information in a structured format, we believe there are also
benefits to investors that prefer the narrative discussion of a fund's
liquidity risk management program accessible to them in an unstructured
shareholder report.\162\ We are currently soliciting feedback on the
use of structured data in fund investor disclosure generally.\163\
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    \161\ See XBRL US Comment Letter.
    \162\ See Proposing Release, supra footnote 10, at section
III.C.
    \163\ See supra footnote 52.
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    Finally, the amendment to Form N-PORT that requires funds and other
registrants to publicly disclose their holdings of cash and cash
equivalents that are not reported in Parts C and D of the Form on a
quarterly basis with a 60-day delay will give investors some
potentially useful information about the most liquid assets that a fund
previously had available to, for example, meet its redemption
obligations.\164\
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    \164\ See supra section II.B.2.
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Changes to Non-Public Disclosure
    In addition to the amendments to public disclosures of liquidity
information discussed above, the amendments to Form N-PORT give funds
the option to split a given holding into portions that may have
different liquidity classifications on their non-public reports on Form
N-PORT. Funds may benefit from the amendment because it gives them the
option to either include an entire holding within a classification
bucket or to allocate portions of the holding across classification
buckets. This could benefit a fund and the fund's investors if a more
granular approach to classification that assigns portions of a
portfolio holding to separate classification buckets is more consistent
with the fund's preferred approach to liquidity risk management. This
approach also reduces the need for funds to develop systems and
processes to allocate each holding to exactly one classification bucket
for the purposes of regulatory compliance.\165\ In addition, to the
extent that providing the option to choose the position classification
method most suitable to a given fund results in disclosures on Form N-
PORT that more accurately reflect the fund's liquidity profile, the
amendments may improve the Commission's ability to monitor liquidity
risks in markets and protect investors from liquidity-related
developments. However, we acknowledge that providing funds with this
option does add an additional subjective decision to the portfolio
holding classification process. Thus, the amendments could result in
classifications that are less comparable across funds relative to the
baseline.\166\
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    \165\ For example, funds that use multiple sub-advisers to
manage different sleeves of a portfolio might have had to establish
more complex systems and processes for combining the classifications
of individual sub-advisers into a single classification for the
portfolio's aggregate holding of a given security under the rule as
originally adopted. The ability to split a portfolio holding across
multiple classification buckets provides funds with a
straightforward way of combining the classifications of different
sub-advisers.
    \166\ Portfolio classifications on Form N-PORT will include
CUSIPs or other identifiers that allow Commission staff to identify
when different funds classify the same investment using different
classification methods. However, comparing such classifications will
require some method of adjustment between classifications based on,
for example, reasonably anticipated trade size and those based on
splitting a position into proportions that are assigned to different
classification buckets.
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    Several commenters supported the amendments to Form N-PORT that
will give funds the option to split a given holding into portions that
may have different liquidity classifications on their non-public
reports on Form N-PORT, noting that this option will allow funds
increased flexibility and higher precision when classifying the
liquidity of an investment.\167\ One commenter, however, stated that
this option is unlikely to reduce burdens or costs to funds, and is
likely to be incompatible with the 15% illiquid asset restriction.\168\
We note that this approach is optional, and therefore funds could
choose not to use it if it had negative consequences, such as inflating
the fund's illiquid investment bucket. Several commenters recommended
that the proportionality option be revised to include categories based
on reasonably anticipated trade size, which would allow increased
flexibility and potential increased efficiency for funds that choose to
implement this classification option.\169\ We note that, while in some
circumstances classifying liquidity based on reasonably anticipated
trade size may be a simpler analytic approach

and avoids certain issues related to full liquidation, as discussed
above in section II.B.1, it also is an imperfect proxy for the actual
liquidity characteristics of fund investments, potentially skewing
classifications to more liquid ``buckets.'' \170\
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    \167\ See Fidelity Comment Letter; IAA Comment Letter; State
Street Comment Letter; ICE Comment Letter; and J.P. Morgan Comment
Letter.
    \168\ See J.P. Morgan Comment Letter.
    \169\ See SIFMA Comment Letter and ICI Comment Letter.
    \170\ See supra footnote 95.
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    Other commenters suggested that we should not allow funds to
classify portions of a portfolio holding separately because it would
reduce the value of the information and would ``reduce the utility of
the entire bucketing exercise.'' \171\ However, the Commission does not
consider allowing portfolio splitting to affect its ability to monitor
liquidity risks, an ability that ultimately benefits investors. The
Commission is adopting amendments to Form N-PORT to allow funds the
option of splitting a fund's holding into more than one classification
category in certain specified circumstances as proposed.
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    \171\ See MSCI Comment Letter. Several commenters stated that
allowing funds to classify portions of a portfolio holding for some
of their holdings could lead to inconsistent interpretations of the
funds classifications, and that we should instead require a fund to
apply a uniform approach across all of its holdings. See State
Street Comment Letter and MSCI Comment Letter.
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Efficiency, Competition, and Capital Formation
    The amendments we are adopting have several potential effects on
efficiency, competition, and capital formation. First, if publicly
disclosed aggregate liquidity profiles may have created an incentive
for a fund to classify its holdings in a manner that led to a
relatively more liquid aggregate liquidity profile in order to attract
investors, the amendments remove any such incentive and potentially
reduce the likelihood that funds compete based on their aggregate
liquidity profiles. To the extent that a fund or other registrant's
cash and cash equivalent holdings are interpreted by investors as being
associated with lower liquidity risk, funds and other registrants may
still have some incentive to compete based on their holdings of cash
and cash equivalents as a result of the amendments.\172\ We do not
expect the proposed amendments to require narrative discussions in
shareholder reports to have a significant competitive effect.
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    \172\ However, because cash and cash equivalent holdings do not
generate significant returns relative to other holdings, funds and
other registrants may have an incentive to shift to non-cash or cash
equivalent holdings that generate higher returns.
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    Second, to the extent that those publicly disclosed aggregate
liquidity profiles would have helped investors more accurately evaluate
fund liquidity risk and make more informed investment decisions, the
amendments could reduce allocative efficiency. The annual discussion of
a fund's liquidity risk management program in shareholder reports and
the requirement that funds and other registrants publicly disclose
their holdings of cash and cash equivalents on Form N-PORT could
mitigate this reduction in allocative efficiency if these requirements
provide information that helps investors evaluate fund liquidity risk.
Furthermore, to the extent that aggregate liquidity profiles on Form N-
PORT would have increased the likelihood of investors making investment
choices based on any confusion about a fund's liquidity risk profile,
which would have harmed the efficient allocation of capital, the
amendments could increase allocative efficiency.
    Lastly, to the extent that the information provided by aggregate
liquidity profiles would have promoted increased investment in certain
funds, and the assets those funds invest in, rescinding the aggregate
liquidity profile requirement could reduce capital formation. At the
same time, we note that the new public disclosure requirements we are
adopting could offset any reduction in capital formation.
    In summary, we note that all of the effects described above are
conditioned upon the usefulness to investors of information that we
will no longer require relative to the usefulness of additional
disclosure requirements we are adopting. We cannot estimate the
aggregate effect on efficiency, competition, or capital formation that
will result from the new amendments because we do not know the extent
to which aggregate liquidity risk profiles, narrative discussion of a
fund's liquidity risk management program, or the amount of cash and
cash equivalents held by a fund and other registrants are useful to
investors in making more informed investment choices.\173\
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    \173\ See supra paragraph following footnote 157.
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D. Reasonable Alternatives

    The Commission considered several alternatives to the amendments to
funds public and non-public disclosure requirements that we are
adopting.\174\
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    \174\ Several commenters also addressed potential costs
associated with modifying the bucketing requirements of rule 22e-4.
As discussed above, in section II.C, we are not adopting
modifications to the rule 22e-4 bucketing requirements today.
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    First, in order to address any potential issues with the
interpretation of a fund's aggregate liquidity profile by investors, we
could have maintained the public disclosure of this profile on Form N-
PORT and added a requirement that funds publicly disclose on Form N-
PORT additional information providing context and clarification
regarding how their aggregate liquidity profiles were generated and
should be interpreted. This alternative would have provided investors
with some of the benefits of the additional context provided by the
narrative discussion on Form N-1A that we are adopting, and, to the
extent that it increased investors' understanding of a fund's aggregate
liquidity profile, could have allowed them to make more informed
investment choices relative to the baseline. However, some investors
may believe that they can more easily obtain information in a fund's
annual report compared to information in the fund's Form N-PORT filings
if they are not as interested in being able to access, reuse, and
compare the information if included in a structured format on Form N-
PORT. This alternative would have required these investors to seek out
this additional information on EDGAR.
    Second, instead of requiring a fund to briefly discuss the
operation and effectiveness of its liquidity risk management program in
a shareholder report, we could have required a more specific discussion
of the fund's exposure to liquidity risk over the preceding year, how
the fund managed that risk, and how the fund's returns were affected
over the preceding year. This alternative could have helped investors
understand both a fund's liquidity risk and the fund's approach to
managing that risk, which might lead to more informed investment
decisions than a discussion of the fund's liquidity risk management
program. However, this alternative could have been more costly for some
funds to implement than the proposed narrative discussion in the
shareholder report, and funds still have the flexibility to provide
this information in the course of complying with the final rule if they
think it will benefit their investors.\175\ Further, as discussed
above, a fund should discuss, with specificity, as part of its MDFP,