competition among swap and security-based swap dealers to offer
favorable fees and financing terms thereby decreasing the fees paid by
funds. Counterparties could also choose not to transact with funds as a
consequence of this disclosure, in which case competition for
counterparties would increase and the fees paid by funds would rise.
---------------------------------------------------------------------------

    \1323\ See Item C.11.f.i. of Form N-PORT.
    \1324\ See, e.g., MFS Comment Letter; Invesco Comment Letter;
and ICI Comment Letter (public benefit of disclosure does not
outweigh potential competitive harm).
---------------------------------------------------------------------------

    Finally, some commenters noted that reporting of distressed debt
issued by private companies could affect the private company's
relationship with the fund. For example, one commenter argued that the
public disclosure of default, arrears, or deferred coupon payments
raises competitive concerns when a debt security is issued by a
borrower that is a private company, as private borrowers may avoid
registered funds in order to limit public disclosure if the company
becomes distressed.\1325\ The commenter noted that public disclosure
that a borrower is or may be financially distressed could increase
prepayment risk and be disruptive to the fund's or adviser's
relationship with the borrower.\1326\ Moreover, this disclosure could
also harm private issuers by disclosing their financial distress to
vendors and key employees and customers.\1327\ While we recognize that
the disclosure of a private issuer in distress could result in costs
for the issuer in the forms discussed above (e.g. a potentially
negative impact on existing outside relationships or a decrease in
prospective future borrowers), we believe that it is important that
Commission staff have access to information relating to fund
investments that are in default or arrears in order to monitor
individual fund and industry risk. Moreover, funds investors will
benefit from the transparency into the financial health of the fund's
investments which will allow them to make more fully informed decisions
regarding their investment. Moreover, default or arrears relating to a
fund's investments in private issuer debt are already publicly
available on a fund's quarterly financial statements, further
mitigating any potential new costs to the fund or its private
counterparties.\1328\
---------------------------------------------------------------------------

    \1325\ See Simpson Thacher Comment Letter.
    \1326\ See id.
    \1327\ See id.
    \1328\ See rule 12-12, n. 5 of Regulation S-X.
---------------------------------------------------------------------------

    As discussed, we expect that institutional investors and other
market participants will directly use the information from Form N-PORT
more so than individual investors as a result of the format and
associated readability.\1329\ To the extent that third-party
information providers obtain and present the information in a format
that individual investors could understand, then individual investors
will also benefit from the information that funds report on Form N-
PORT. We recognize that some commenters were concerned that individual
investors may misinterpret the portfolio investment information that
funds report on Form N-PORT, possibly including portfolio and position
level risk metrics, country of risk and portfolio return information.
As discussed above, we have determined to keep position-level reporting
of delta and of country of risk nonpublic.\1330\ Regarding the other
information, however, while there is some possibility of
misinterpretation, we believe investors could benefit from the
information and, accordingly determined that the disclosure of such
information is appropriate and in the public's interest.
---------------------------------------------------------------------------

    \1329\ As discussed in section I.B.1., while we do not
anticipate that many individual investors will analyze data using
Form N-PORT, we believe that individual investors will benefit
indirectly from the information collected on reports on Form N PORT,
through enhanced Commission monitoring and oversight of the fund
industry and through analyses prepared by third-party service
providers and other parties, such as industry observers and
academics.
    \1330\ See, e.g., IDC Comment Letter (warning of possible
investor confusion from public disclosure of risk metrics); SIFMA
Comment Letter I (same); Invesco Comment Letter (same); Schwab
Comment Letter (same); ICI Comment Letter (same); CRMC Comment
Letter (warning of possible investor confusion from public
disclosure of portfolio return information); SIFMA Comment Letter I
(same).
---------------------------------------------------------------------------

    For funds that invest in debt instruments or derivatives we are
modifying our requirements from the proposing release in several ways
that may affect the costs borne by affected filers. For example, as
discussed in detail above, we are requiring the reporting of fewer key
rates in order to reduce the reporting burden for funds, adding de
minimis for reporting such metrics for certain currencies, and raising
the threshold for fixed income allocation for risk reporting from 20%
to 25% to align the reporting requirement with current disclosures
required in the prospectus, which could reduce the number of funds that
must report such metrics. We are also requiring filers to report DV100
in addition to DV01, which will result in an additional reporting cost
relative to the proposal; however, we believe that the extent of such
reporting costs will be mitigated because DV100 is among the most
common measures of interest rate sensitivity and that it will not be
costly to report. Similarly, we are adding the requirement to report
net realized gain (or losses) and net change in unrealized appreciation
(or depreciation) attributable to derivatives by derivative instrument,
in addition to by asset category as proposed, which will add an
incremental cost relative to the proposal; however, as discussed above,
we understand from commenters that funds already keep this information
by derivative instrument type, which should mitigate the incremental
increase in cost relative to the proposal.\1331\
---------------------------------------------------------------------------

    \1331\ See supra section II.A.2.e.
---------------------------------------------------------------------------

    As discussed above, although Form N-Q would be rescinded, it would
also require funds to file portfolio schedules prepared in accordance
with Sec. Sec.  210.12-12 to 12-14 of Regulation S-X for the fund's
first and third fiscal quarters, by attaching those schedules to its
reports on Form N-PORT for those reporting periods. The schedules
attached to Form N-PORT would be largely identical to the information
currently reported on Form N-Q to ensure that such information
continues to be presented using the form and content which investors
are accustomed to viewing in reports on Form N-Q, and we have modified
this requirement from the Proposing Release to allow funds 60 days from
the end of the reporting period to file this attachment, as opposed to
30 days as proposed. This should lower the burden of preparing such
attachments relative to the proposal, without any change in benefit, as
the attachment is intended for investors and quarter-end Form N-PORT
filings are made public 60 days after the end of the reporting period.
    Rescission of Form N-Q would eliminate certifications of the
accuracy of the portfolio schedules reported for the first and third
fiscal quarters. Rescission would also result in funds certifying their
disclosure controls and procedures and internal control over financial
reporting semi-annually (at the end of the second and fourth quarters)
rather than quarterly. To the extent that such certifications improve
the accuracy of the data reported, removing such certifications could
have negative effects on the quality of the data reported. Likewise, if
the reduced frequency of the certifications affects the process by
which controls and procedures are assessed, requiring such
certifications semi-annually rather than quarterly could reduce the
effectiveness of the fund's disclosure controls and

procedures and internal control over financial reporting. However, we
expect such effects, if any, to be minimal because certifying officers
would continue to certify portfolio holdings for the fund's second and
fourth fiscal quarters and would further provide semi-annual
certifications concerning disclosure controls and procedures and
internal control over financial reporting that would cover the entire
year.
    Lastly, registrants also will be required to file the management's
statement regarding a change in independent public accountant as an
exhibit to reports on Form N-CSR. This exhibit filing requirement
originated in Form N-SAR. Commission staff believes that moving this
reporting requirement from Form N-SAR to Form N-CSR does not have new
economic implications from the proposal. We have, however, attributed
an annual burden of an additional one-tenth of an hour per registrant
\1332\ and approximately an additional $32.40 per registrant \1333\ in
reporting paperwork costs to Form N-CSR as a result of the
modification.
---------------------------------------------------------------------------

    \1332\ See infra footnote1612 and accompanying text.
    \1333\ See infra footnote 1609 and accompanying text.
---------------------------------------------------------------------------

4. Alternatives
    The Commission has explored other ways to modernize and improve the
utility and the quality of the portfolio investment information that
funds provide to the Commission and to investors.\1334\ Commission
staff examined how portfolio investment information reported to the
Commission could be improved to assist the Commission in its
rulemaking, inspection, examination, policymaking, and risk-monitoring
functions, and how technology could be used to facilitate those ends.
Commission staff also examined enhancements that would benefit
investors and other potential users of this information, including
updating the reporting obligations of funds to keep pace with the
changes in the fund industry. We have considered many alternatives to
the individual elements contained in this release, and those
alternatives are discussed above in the sections pertinent to the major
components of this rulemaking.\1335\ Alternatives to the filing of Form
N-PORT and the disclosure of portfolio investment information relate to
the timing and frequency of the reports, the public disclosure of the
information, and the information that Form N-PORT would request.
---------------------------------------------------------------------------

    \1334\ We discuss other alternatives to the adopted changes to
the current regulatory regime in section III.F, below. Other
alternatives include the information that funds will report on Form
N-PORT relative to the information that funds will report on Form N-
CEN, and alternative formats for structuring the data.
    \1335\ See generally supra section II.
---------------------------------------------------------------------------

    Funds will file reports on Form N-PORT no later than 30 days after
the close of each month. The monthly reporting and the 30-day reporting
lag will increase the timeliness of the information and improve the
ability of the Commission to oversee investment companies. Alternatives
include extending the filing period from thirty days, as recommended by
many commenters, or shortening the filing period, which no commenters
specifically recommended,\1336\ and to require the filing of monthly
portfolio investment information at a quarterly frequency, as
recommended by another commenter.\1337\ While a shorter filing period
would provide more timely information to the Commission, it would also
increase the burden on funds that need time to collect, verify, and
report the required information to the Commission. Conversely, a longer
filing period or a decrease in the frequency in which funds provide
monthly information would give funds more time to report the
information and may decrease the potential costs from front-running,
predatory trading, and copycatting/reverse engineering of trading
strategies by other investors,\1338\ but may also decrease the ability
of the Commission to oversee investment companies and to identify risks
a fund is facing, particularly during times of market stress, as the
information is more likely to be stale or outdated. As discussed above
in section II.A.3, we believe that the monthly reporting of Form N-PORT
with a 30-day filing period appropriately balances the staff's need for
timely information against the appropriate amount of time for funds to
collect, verify, and report information to the Commission.
---------------------------------------------------------------------------

    \1336\ See, e.g., State Street Comment Letter (supporting a 30-
day reporting lag, but requesting an additional 15 days for the
first year of reporting); Morningstar Comment Letter (supporting a
30- or 45-day reporting lag); Vanguard Comment Letter (supporting a
45-day reporting lag); CRMC Comment Letter (supporting a 60-day
reporting lag); Dechert Comment Letter (generally supporting a
longer reporting period, or alternatively a longer compliance period
to enable the systems necessary to produce accurate information to
be developed and implemented).
    \1337\ See, e,g., Dodge & Cox Comment Letter (supporting
quarterly filings of monthly data).
    \1338\ See, e.g., Dodge & Cox Comment Letter (advocating for
quarterly filings of monthly data due, in part, to concerns
regarding potential data breaches regarding monthly portfolio data);
Morningstar Comment Letter (supporting public disclosure of
portfolio investment information at the monthly frequency, citing to
the large number of funds already reporting monthly portfolio
investment information without significant delay as evidence of a
lack of industry concern relating to front-running or copycatting).
---------------------------------------------------------------------------

    As discussed above in section II.A.2.a and in response to comments
received, the final amendments now include an instruction that funds
report portfolio information on Form N-PORT on the same basis used in
calculating NAV under rule 2a-4 (generally a T+1 basis). Alternatives
include requiring all funds to file reports on Form N-PORT on a T+0
basis or, providing the reporting fund the explicit option to file
reports on Form N-PORT on either a T+0 basis or a T+1 basis, as
recommended by a commenter.\1339\ Although requiring funds to file
reports on Form N-PORT on a T+0 basis would be consistent with the
current filing requirements for Form N-CSR and Form N-Q and thus would
result in information that is reported on a more consistent basis
across reports, the shorter time to file Form N-PORT relative to Form
N-CSR and Form N-Q could require funds to alter reporting systems and
result in additional filing costs, as pointed out by several
commenters.\1340\ In addition, although providing funds the option to
report on either a T+0 or a T+1 basis would eliminate the potential
costs for all funds to alter systems to report on either a T+0 or a T+1
basis, providing funds the option to report on either a T+0 or a T+1
basis would result in information that is less comparable between
funds.
---------------------------------------------------------------------------

    \1339\ SIFMA Comment Letter II.
    \1340\ See, e.g., Fidelity Comment Letter; Pioneer Comment
Letter; and Invesco Comment Letter.
---------------------------------------------------------------------------

    Funds will have 18 to 30 months after the effective date to comply
with the new reporting requirements for Form N-PORT. The compliance
period varies with fund size, with smaller fund entities having an
additional 12 months to comply with the new reporting requirements. An
alternative would be to not allow for tiered compliance and require all
investment companies to begin filing reports on Form N-PORT within 18
months. Other alternatives would be to extend the compliance period for
all investment companies, as recommended by many commenters.\1341\ As
discussed above, we believe it is appropriate to tier the compliance
period to provide the smaller fund complexes more time to make the
system and internal process changes necessary to prepare reports on
Form N-PORT. We also continue to believe that 18 months would provide
an adequate period of time for larger fund entities,

intermediaries, and other service providers to update systems to
conduct the requisite operational changes to their systems and to
establish internal processes to prepare, validate, and file reports on
Form N-PORT with the Commission. Nonetheless, as discussed above, we
intend to keep the first six months of filings reported on Form N-PORT
after the compliance date nonpublic, to allow funds and the Commission
to refine the technical specifications and data validation
processes.\1342\
---------------------------------------------------------------------------

    \1341\ See, e.g., IDC Comment Letter; Dreyfus Comment Letter;
Fidelity Comment Letter; Oppenheimer Comment Letter; Vanguard
Comment Letter; MFS Comment Letter; Mutual Fund Directors Forum
Comment Letter; ICI Comment Letter; and SIFMA Comment Letter I.
    \1342\ See supra section II.H.1.
---------------------------------------------------------------------------

    Another alternative for tiered compliance would be to set the
threshold at a level different than $1 billion. A higher threshold,
such as $20 billion, as recommended by one commenter,\1343\ would
increase the number of entities that could benefit from the additional
time to update systems to adhere to the additional filing requirements,
but would also decrease the amount of portfolio investment information
that would be available to the Commission, investors, and other
interested parties in a structured data format. A lower threshold, on
the other hand, would have the opposite effects. As discussed above,
the Commission believes that a $1 billion threshold for tiered
compliance will address the need for structured portfolio investment
information while providing smaller entities in most need of additional
time a better opportunity to update systems.
---------------------------------------------------------------------------

    \1343\ Simpson Thacher Comment Letter.
---------------------------------------------------------------------------

    The information that funds report on Form N-PORT for the last month
of each fiscal quarter will be made publicly available (with the
exception of delta, country of risk, and associated explanatory notes)
60 days after month-end (thirty days after the filing deadline).
Additional alternatives include making more of the portfolio and other
information reported on the form either nonpublic or public, including
making all or none of the information reported on Form N-PORT each
month publicly available, as discussed above in section II.A.3.\1344\
---------------------------------------------------------------------------

    \1344\ Commenters had mixed views on the public disclosure of N-
PORT information; those comments are discussed supra section II.A.3.
---------------------------------------------------------------------------

    In response to comments received we have removed delta, country of
risk, and the associated explanatory notes from the public reporting
requirements, but we believe that making more of the portfolio and
other information reported on Form N-PORT nonpublic would reduce the
amount of information investors have access to when making investment
decisions. However, as discussed above, making more of the portfolio
and other information reported on the form public, including making all
of the information reported on Form N-PORT each month publicly
available, could increase the risk of front-running, predatory trading,
and copycatting/reverse engineering of trading strategies by other
investors, as well as the public disclosure of proprietary or sensitive
information.\1345\ We believe that making the vast majority of items
reported on Form N-PORT public, as well as keeping eight of the twelve
months of data collected by the Commission on Form N-PORT nonpublic,
balances the public's need for and the usefulness of the information
without unnecessarily subjecting funds to potentially harmful trading
strategies by other market participants.
---------------------------------------------------------------------------

    \1345\ See infra section III.C.3.
---------------------------------------------------------------------------

    Form N-PORT will require funds to report additional portfolio
investment information relative to what is currently reported in Form
N-CSR and Form N-Q. Alternatives include not requiring some of this
additional information, or requiring information in addition to what
will be required to be reported as currently adopted. Other
alternatives would be to request information that is more granular,
information that is more aggregate, and information that is more
consistent with other current regulatory forms or that substitutes
compliance with other current regulatory regimes.\1346\ Although we
recognize that there are various alternative reporting requirements
imposed in other contexts and by other regulators, the reporting
requirements imposed by Form N-PORT have been designed specifically to
meet the Commission's regulatory needs with regards to monitoring and
oversight of registered funds. As discussed above, the information
reported on Form N-PORT will increase the ability of Commission staff
to better understand the risks of a particular fund, a group of funds,
and the fund industry. Investors, third-party information providers,
and other potential users will also experience benefits from the
introduction of Form N-PORT. For example, to the extent that investors
use the information, Form N-PORT will improve the ability of investors
to differentiate funds based on their investment strategies and other
activities. Although the new information that will be reported on Form
N-PORT could increase the initial and ongoing reporting costs for
investment companies, and could increase the likelihood of front-
running, predatory trading, and copycatting/reverse-engineering by
other investors, the Commission continues to believe that the
information is important to fully describe a fund's investments. The
Commission also believes that the reporting requirements of Form N-PORT
are appropriate given each filer's status as a registered investment
company with the Commission and not as a private fund.\1347\
---------------------------------------------------------------------------

    \1346\ One commenter suggested that the Commission should use
the same interest rate and credit spread risk metrics as is required
in Form PF (BlackRock Comment Letter). Another commenter suggested
that the Commission and the CFTC should agree on and implement a
substituted compliance regime (SIFMA Comment Letter I).
    \1347\ See supra footnote 485 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, the Commission is requiring funds to report
risk metrics at the portfolio and position level on Form N-PORT. In
response to commenters' suggestions, we are now requiring the
disclosure of measures of duration for a smaller number of key interest
rates than we had originally proposed. However, an alternative would be
to request those key rates detailed in the proposing release, or even
additional measures. As discussed above, we believe that the number of
key rates that we are adopting today will provide us with sufficient
information and flexibility while also reducing the reporting burden.
Other alternatives that would increase the reporting of risk-
sensitivity measures include requiring funds to report additional
portfolio level measures that describe the sensitivity of a reporting
fund at additional basis point changes in interest rates and credit
spreads, and a measure (or measures) of convexity, and include
requiring funds to report additional position level measures such as
vega, as requested by one commenter.\1348\ Investment companies could
also report fewer portfolio or position level risk-sensitivity
measures, such as a single or total portfolio level measure of interest
rate and credit spread duration, as recommended by some
commenters,\1349\ or instead report the underlying data to calculate
the measures, as recommended by another commenter.\1350\
---------------------------------------------------------------------------

    \1348\ See State Street Comment Letter (requesting that funds
also be required to report credit spread, delta, duration, yield to
maturity, option adjusted spread, exposure, delta-adjusted exposure,
duration equivalents, foreign exchange sensitivity/risk, and vega).
    \1349\ See Simpson Thacher Comment Letter; Fidelity Comment
Letter; Dreyfus Comment Letter; ICI Comment Letter; and Wells Fargo
Comment Letter.
    \1350\ See Vanguard Comment Letter (suggesting that the
Commission calculate risk metrics from information that funds report
on Form N-PORT).
---------------------------------------------------------------------------

    As discussed above and in response to commenters' suggestions, we
have made

a modification from the proposed requirement to report only DV01 to now
require filers to report both DV01 and DV100 on Form N-PORT. The
Commission believes that DV100 is among the most common measures of
interest rate sensitivity and that it will, in conjunction with DV01,
provide more useful information about non-parallel shifts in the yield
curve than smaller measures, such as DV25 and DV5, while not requiring
filers that do not calculate convexity internally to begin doing so.
However, while potentially useful, requiring all funds to report
further additional portfolio- or position-level risk-sensitivity
measures would increase the burden on all funds and not significantly
improve the ability of Commission staff to monitor the funds in most
market environments, and in particular for funds which do not
extensively use derivatives as part of their investment strategy (while
we are requiring funds to report DV100, we believe the marginal cost of
reporting it is minimal because we understand that many funds likely
already calculate it). Although the burden to investment companies to
report risk metrics would decrease if fewer or no risk-sensitivity
measures were required by the Commission, the staff believes that the
benefits from requiring the measures that we are including in Form N-
PORT today, including the ability of Commission staff to efficiently
identify and size specific investment risks, justify the costs to
investment companies to provide the information. Lastly, we believe
that requiring funds to provide the risk measures would improve the
ability of the Commission, investors, or other potential users to
efficiently analyze the information rather than requiring funds to
provide the inputs that might be necessary for interested parties to
calculate these measures themselves,\1351\ and would enhance the
ability of Commission staff to efficiently identify risk exposures,
especially during times of market stress.
---------------------------------------------------------------------------

    \1351\ See supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    Other alternatives to the reporting of portfolio level risk-
sensitivity measures relate to the allocation thresholds for funds to
report portfolio interest rate risk exposures and currency risk
exposures. Given commenters' recommendations, we are raising the
threshold for fixed income allocation for risk reporting from 20% to
25%, and providing a de minimis threshold for reporting currency risk
of 1%. We could, however, require lower/higher thresholds that would
result in more/fewer funds reporting interest rate or currency risk
exposures, respectively. As discussed above, the Commission believes
that the reporting thresholds for Form N-PORT provide Commission staff
the ability to analyze interest rate and currency exposures while
reducing reporting burdens and the potential that funds inadvertently
trigger the reporting requirement when the exposures are not part of
its principal investment strategy.
    Form N-PORT will also require funds to report terms and conditions
of each derivative investment that are important to understanding the
payoff profile of the derivative, including the reference
instrument.\1352\ As discussed above, for reference instruments that
are indexes or custom baskets of securities that are not publicly
available, Form N-PORT will require funds to report all the components
of the index or custom basket if the investment constitutes more than
5% of the fund's NAV, and the top 50 components of the index or custom
basket and any components that represent more than 1% of the notional
value of the index or custom basket if the investment represents more
than1% but less than 5% of the fund's NAV. Alternatives would be for
funds to report fewer or additional components of the underlying
indexes or custom baskets.
---------------------------------------------------------------------------

    \1352\ We are requiring similar information on a fund's schedule
of investments. See supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    Lastly, funds will no longer be required to file reports on Form N-
Q. An alternative is for funds to continue reporting Form N-Q along
with Form N-PORT at the end of first and third fiscal quarters.
Commission staff believes, however, that the new reporting requirements
for portfolio investment information, including the amendments to the
certification requirements of Form N-CSR, would cause Form N-Q to
become redundant if not outdated, and therefore impose costs on funds
to file reports that would result in little benefit. Although requiring
that certifying officers state that they have disclosed in the report
any change in the registrant's internal control over financial
reporting that occurred during the most recent fiscal half-year will
increase the burden of filing Form N-CSR, these certifications will
fill the gap in certification coverage regarding the registrant's
internal control over financial reporting that would otherwise exist
once Form N-Q is rescinded.

C. Amendments to Regulation S-X

1. Introduction and Economic Baseline
    Regulation S-X prescribes the form and content required in
financial statements. The amendments to Regulation S-X will require new
disclosures regarding fund holdings in open futures contracts, open
forward foreign currency contracts, and open swap contracts, and
additional disclosures regarding fund holdings of written and purchased
option contracts; update the disclosures for other investments with
conforming amendments, as well as reorganize the order in which some
investments are presented; and amend the rules regarding the general
form and content of fund financial statements, including requiring
prominent placement of investments in derivative investments in a
fund's financial statements, rather than allowing such schedules to be
placed in the notes to the financial statements.\1353\
---------------------------------------------------------------------------

    \1353\ See supra section II.C. As discussed above, rule 12-13 of
Regulation S-X requires limited generic information on the fund's
investments other than securities. To address issues of inconsistent
disclosures and lack of transparency, the amendments will have a
consistent presentation of a fund's disclosures of open futures
contacts, foreign currency forward contracts, and swaps. In
addition, while many of the amendments to Regulation S-X are similar
to the proposed disclosures in Form N-PORT (e.g., enhanced
derivatives disclosures), the amendments to Regulation S-X will be
in an unstructured but consistently presented format (as opposed to
Form N-PORT's structured data).
---------------------------------------------------------------------------

    The current set of requirements under Regulation S-X, as well as
the current practice of many funds \1354\ to voluntarily disclose
additional portfolio investment information in fund financial
statements and to follow industry guidance and other industry
practices, is the baseline from which we discuss the economic effects
of amendments to Regulation S-X.\1355\ The parties that could be
affected by the amendments to Regulation S-X include funds that file or
will file reports with the Commission and update or will update
registration statements on file with the Commission, the Commission,
current and future investors of investment companies, and other market
participants that could be affected by the increase in the disclosure
of portfolio investment information. We did not receive any specific
comments on the proposed

economic baseline for the amendments to Regulation S-X.
---------------------------------------------------------------------------

    \1354\ As we discussed supra footnote 524, while ``funds'' are
defined in the preamble as registered investment companies other
than face-amount certificate companies and any separate series
thereof--i.e., management companies and UITs, we note that our
amendments to Regulation S-X apply to both registered investment
companies and BDCs. See supra footnotes 699 and 700. Therefore, when
discussing fund reporting requirements in the context of our
amendments to Regulation S-X, we are also including changes to the
reporting requirements for BDCs.
    \1355\ See discussion supra section II.C.1.
---------------------------------------------------------------------------

    Previously, Regulation S-X did not prescribe specific information
to be disclosed for many investments in derivatives, which could result
in inconsistent reporting between funds and reduced transparency of the
information reported, and in some cases could result in insufficient
information concerning the terms and underlying reference assets of
derivatives to allow investors to understand the investment.
    We expect that many of the economic effects from the amendments to
Regulation S-X will largely result from an increase in investor ability
to make investment decisions dependent on the more transparent
disclosure in financial statements, as noted by commenters.\1356\ As
discussed above, the total economic effects will depend on the extent
to which the portfolios and investment practices of all investment
companies become more transparent, and the ability of investors, and in
particular individual investors, to utilize financial statements to
compare funds and to make investment decisions. The economic effects
will also depend on the extent to which investment companies already
voluntarily provide disclosures that will be required by the
amendments, and the extent to which the amendments to Regulation S-X
standardize financial statements across funds. As a result of these
factors, some of which are difficult to quantify or unquantifiable, the
discussion below is largely qualitative although certain one-time and
ongoing costs associated with the amendments are quantified below.
---------------------------------------------------------------------------

    \1356\ See, e.g., PwC Comment Letter (''We believe that the
Proposed Rule will generally provide investors with greater access
to information relating to their investments and investment
advisors.''); Deloitte Comment Letter.
---------------------------------------------------------------------------

2. Benefits
    The amendments to Regulation S-X will benefit investors by updating
the information funds disclose in the financial statements of
registration statements and shareholder reports. Several commenters
noted that the amendments will benefit investors through increased
transparency and comparability of fund financial statements,
particularly for individual investors that we would not expect to use
the information in Form N-PORT because of its structured data
format.\1357\ In particular, the additional information that Regulation
S-X will require for open option contracts both written and purchased,
open futures contracts, open forward foreign currency contracts, open
swap contracts, and other investments will increase the transparency of
the fund's portfolio investments and risk exposures.\1358\
---------------------------------------------------------------------------

    \1357\ See PwC Comment Letter; EY Comment Letter.
    \1358\ See, e.g., EY Comment Letter and Morningstar Comment
Letter for statements in support of these ideas, and MFS Comment
Letter and ICI Comment Letter for statements against, as well as the
discussion in Section II.C.2.
---------------------------------------------------------------------------

    Other amendments will also improve the transparency into the fund's
investments. For example, we are requiring funds to identify each
investment whose value was determined using significant unobservable
inputs.\1359\ Likewise, we are requiring that funds separately identify
restricted investments.\1360\ In addition, in a modification from the
proposal, we are now including a requirement that should benefit
investors and other users of the information by providing more
transparency to a fund's investments in debt securities, and in
particular variable rate securities. As discussed more fully below and
in section II.C.3, in light of comments we received and in order to
give investors both the ability to understand the investment's current
return (through end-period rate) and to better understand how interest
rate changes could affect the investment's future returns, we are
adopting an instruction that would require a fund, for its investments
in variable rate securities, to both describe the referenced rate and
spread and provide the end of period interest rate for each investment,
or include disclosure of each referenced rate at the end of the
period.\1361\
---------------------------------------------------------------------------

    \1359\ See, e.g., rule 12-13, n. 7 of Regulation S-X; see also
rules 12-13A, n. 5; 12-13B, n. 3; 12-13C, n. 6; and 12-13D, n. 7 of
Regulation S-X.
    \1360\ See rule 12-13, n. 6 of Regulation S-X; see also rules
12-13A, n. 4; 12-13B, n. 2; 12-13C, n. 5; and 12-13D, n. 6 of
Regulation S-X.
    \1361\ See rules 12-12, n. 4 and 12-12B, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    In a change from the proposal and Form N-PORT, we are requiring
funds to separately list the top 50 components and the components that
represent more than 1% of the notional value of the referenced assets
underlying swap and option contracts, rather than separately listing
every component. We believe that this alteration benefits investors by
making it easy for them to understand and evaluate the specific risk
exposures of a fund from certain swap and option contracts, while
simultaneously reducing the reporting burden for funds.
    We believe that the changes to the form and content of financial
statements in Article 6 of Regulation S-X will similarly benefit
investors, particularly individual investors who in general may not
have the tools and resources possessed by institutional investors,
through greater transparency in a fund's financial statements. For
example, we are requiring funds to disclose their investments in
derivatives in the financial statements, as opposed to in the notes to
the financial statements.\1362\ To the extent funds do not do this
already, we believe, and commenters agreed, that more prominent
placement of investments in derivatives in the financial statements
(immediately following the schedules for investments in securities of
unaffiliated investors and securities sold short), will benefit
investors through increased visibility of fund investments in
derivatives and comparability between funds.\1363\ Likewise, we are
eliminating the financial statement disclosure of ``Total investments''
on the balance sheet under ``Assets''.\1364\ As we discuss in more
detail in section II.C.6, recognizing that funds could present
investments in derivatives under both assets and liabilities on the
balance sheet, eliminating this disclosure will benefit investors by
providing a more complete representation of the effect of these
investments on a balance sheet.\1365\ Other parties that will be
affected by the amendments to Regulation S-X include the Commission and
other market participants that would use shareholder reports and
registration statements to obtain fund information. Although the
amendments to Regulation S-X will primarily benefit investors and
particularly individual investors, the Commission and other market
participants could use the information reported in a fund's financial
statements, and would benefit from an increase in transparency into a
fund's financial statements. For example, Commission staff could
utilize the information in a fund's financial statements during
examinations.
---------------------------------------------------------------------------

    \1362\ See rule 6-10(a) of Regulation S-X; see also discussion
supra section II.C.6; see also ICI Comment Letter (supporting the
requirement to present derivatives schedules in the fund's financial
statements).
    \1363\ See State Street Comment Letter; ICI Comment Letter.
    \1364\ See rule 6-04 of Regulation S-X; see also discussion
supra section II.C.6.
    \1365\ See id.
---------------------------------------------------------------------------

    Commission staff believes that a large number of funds currently
adhere to industry practices from which the amendments to Regulation S-
X are derived. The amendments to Regulation S-X, therefore, will
effectively standardize the information that all funds disclose on
financial statements, and make the schedule of investments and
financial statement disclosures consistent and thus more comparable

across funds, as noted by commenters.\1366\ Similar to new Form N-PORT,
the amendments to Regulation S-X, to the extent that they increase the
transparency and consistency of shareholder reports across funds, could
improve the ability of investors, particularly individual investors, to
differentiate investment companies and make investment decisions either
by themselves or by way of third-party information providers. An
increase in the ability of investors to differentiate investment
companies and allocate capital across reporting funds closer to their
risk preferences will increase the competition among funds for investor
capital. In addition, by improving the ability of investors to
understand investment risks and hence their ability to allocate capital
across funds and other investments more efficiently, we also believe
that the introduction of Form N-PORT could also promote capital
formation.
---------------------------------------------------------------------------

    \1366\ See, e.g., EY Comment Letter.
---------------------------------------------------------------------------

3. Costs
    We believe that registrants on average will likely incur minimal
costs from our amendments to Regulation S-X because, as discussed
above, based upon staff experience, we believe that a majority of funds
are already providing the information that will be required by the
amendments to Regulation S-X in their financial statements.\1367\ The
costs to a fund of complying with the new rules will depend upon the
extent to which funds are already making such disclosures
currently.\1368\ As discussed above, the Commission will require
parallel disclosures in Form N-PORT, and funds will incur one set of
costs, both one-time and ongoing, to obtain the information that will
be disclosed in Form N-PORT and in financial statements. In addition,
other costs that relate to the disclosure of portfolio investment
information, including the ability of other investors to front-run,
trade predatorily, and copycat/reverse engineer trading strategies of
funds, will primarily relate to Form N-PORT because of the additional
ability of other interested third-parties and market participants to
efficiently obtain, aggregate, and analyze the information as a result
of its structured data format as compared to the non-structured data
format of portfolio investment information reported in financial
statements.
---------------------------------------------------------------------------

    \1367\ In order to reduce burdens on funds, we also endeavored,
where appropriate, to require consistent derivatives holdings
disclosures between Form N-PORT and Regulation S-X.
    \1368\ Moreover, as we discussed above in section III.C.1, we
expect minimal audit costs as a result of our amendments to
Regulation S-X because many funds are already voluntarily providing
this information in their audited financial statements.
---------------------------------------------------------------------------

    For example, as discussed above in section II.C.2.a, in response to
commenters' concerns relating to the burdens associated with our
proposed requirement that funds list all components underlying a
nonpublic index or custom basket,\1369\ we are instead requiring funds
to separately list the top 50 components and the components that
represent more than 1% of the notional value of the referenced assets
underlying swap \1370\ and option contracts.\1371\ Commenters noted,
and we agree, that the potential volume of all of the components
underlying nonpublic indexes and custom baskets were disclosed would
make the fund's financial statements difficult to understand.\1372\
Thus requiring funds to report only the most significant components
could benefit investors by making it easier for them to understand and
evaluate the specific risk exposures of a fund from certain swap and
option contracts.\1373\ Moreover, limiting the reporting of nonpublic
indexes and custom baskets will reduce fund auditing costs by
eliminating the burdens of requiring an auditor to verify every
component of a nonpublic index, which could potentially include
thousands of investments.
---------------------------------------------------------------------------

    \1369\ See, e.g., PwC Comment Letter; Oppenheimer Comment
Letter; ICI Comment Letter; and AICPA Comment Letter.
    \1370\ See rule 12-13C, n. 3 of Regulation S-X; see also
discussion supra section II.C.2.d.
    \1371\ See rule 12-13, n. 3 of Regulation S-X; see also
discussion supra section II.C.2.a.
    \1372\ See AICPA Comment Letter; and PwC Comment Letter.
    \1373\ Id.
---------------------------------------------------------------------------

    We further believe this change provides the necessary benefit
without being unduly burdensome. We understand that index providers
might assert intellectual property rights to certain indexes, and these
may be subject to licensing agreements between the index provider and
the fund.\1374\ Disclosing the underlying components of an index could
subject the fund to costs associated with negotiating or renegotiating
licensing agreements in order to publicly disclose the components of
the index.\1375\ The Commission does not have information available to
provide a reliable estimate of the increased costs of licensing
agreements because funds currently are not required to disclose the
agreements or the components of the index. In addition, disclosing the
components of a nonpublic index may include costs to both the index
provider, whose indexing strategy could be reverse-engineered, and the
fund, whose rebalancing trades could be front-run.\1376\ Finally, the
possibility exists that index providers will refuse to permit
disclosure and the funds might not be able to use such indexes any
longer. This could potentially drive up competition for index
providers, in turn raising costs for funds. Requiring the disclosure of
only those proprietary components that meet a materiality threshold
could help alleviate some of these costs and concerns. However, the
underlying components would be more accessible in Form N-PORT as a
result of its structured data format as compared to the non-structured
data format of the information in financial statements, so we believe
that the costs of disclosing the information will therefore primarily
relate to Form N-PORT, and reporting of components will be more
comprehensive in Form N-PORT, as discussed in greater detail above.
---------------------------------------------------------------------------

    \1374\ See discussion supra sections II.A.2.g.iv and II.C.2.a.
    \1375\ See id.
    \1376\ See id.
---------------------------------------------------------------------------

    As another example, the amendments include an instruction to
disclose the variable financing rates for swaps that pay or receive
financing payments.\1377\ It is our understanding that variable
financing rates for swap contracts are often commercial terms of a deal
that are negotiated between the fund and the counterparty to the
swap.\1378\ Disclosure of favorable variable financing rates could
result in costs to the fund in the form of less favorable variable
financing rates for future transactions, but may also improve the
ability of other funds to negotiate more favorable terms. Similar to
the introduction of Form N-PORT, the increased transparency could
increase the competition among swap and security-based swap dealers to
offer favorable fees and financing terms thereby decreasing the fees
paid by funds. Counterparties could also, however, choose not to
transact with funds as a consequence of this disclosure, in which case
competition for counterparties would increase and the fees paid by
funds would rise. As with the disclosure of the components of an index,
we believe that the majority of the costs associated with disclosures
of variable financing rates, including the increase in competition for
favorable fees and terms, will instead derive from

the similar requirements in Form N-PORT.\1379\
---------------------------------------------------------------------------

    \1377\ See rule 12-13C, n. 3 of Regulation S-X.
    \1378\ See, e.g., MFS Comment Letter; Invesco Comment Letter;
and ICI Comment Letter (public benefit of disclosure does not
outweigh potential competitive harm).
    \1379\ See Item C.11.f.i of Form N-PORT; see also discussion
supra section II.A.2.g.iv.
---------------------------------------------------------------------------

    In response to commenters concerns, we also made changes from the
proposal to eliminate several disclosures. For example, we are amending
our proposed instruction which would require funds to categorize the
schedule by type of investment, the related industry, and the related
country or geographic region.\1380\ We agreed with commenters that
requiring categorization of both the industry and geographic region (as
opposed to categorizing one) would add considerable length to the
schedule of investments, which could ultimately undermine the
schedule's usefulness to investors.\1381\ In the interest of reducing
burdens for investors and making financial statements easier to review,
we are not adopting this proposed requirement.
---------------------------------------------------------------------------

    \1380\ See supra section II.C.3.
    \1381\ See Oppenheimer Comment Letter; State Street Comment
Letter; Vanguard Comment Letter; MFS Comment Letter; and BlackRock
Comment Letter.
---------------------------------------------------------------------------

    We similarly determined to eliminate an instruction in Regulation
S-X requiring funds to include tax basis disclosures. As discussed
above in section II.C.4, this instruction is contained in current rules
12-12, 12-12C, and 12-13 and we proposed to extend the instruction to
proposed rules 12-12A, 12-13A, 12-13B, 12-13C, and 12-13D. We were,
however, persuaded by commenters that this disclosure of tax basis by
investment type would not provide meaningful disclosure to investors,
while increasing the volume and complexity of financial
statements.\1382\ In the interest of reducing burdens to both investors
and funds, while making financial statements easier for investors to
understand, we are eliminating the tax basis instruction from the
current rules and not adopting it for the other rules.
---------------------------------------------------------------------------

    \1382\ See, e.g. PwC Comment Letter; EY Comment Letter; CRMC
Comment Letter; State Street Comment Letter; and MFS Comment Letter.
---------------------------------------------------------------------------

    We also proposed to require funds to identify illiquid
investments.\1383\ We received several comments noting that, among
other things, this disclosure would be difficult and costly to audit,
as auditors would be required to determine the validity of the fund's
liquidity determinations for each investment.\1384\ We were persuaded
by comments relating to the costs of auditing liquidity disclosures
and, as discussed further in the Liquidity Adopting Release we are
adopting concurrently, also believe that such position-level
information regarding liquidity is better suited for nonpublic
reporting to the Commission in Form N-PORT.
---------------------------------------------------------------------------

    \1383\ See supra section II.C.4.
    \1384\ See, e.g., PwC Comment Letter; ICI Comment Letter; and
AICPA Comment Letter.
---------------------------------------------------------------------------

    Finally, in order to provide more transparency to a fund's
investments in debt securities, we had proposed an instruction
requiring a fund to disclose, for its investment in variable rate
securities, the referenced rate and spread.\1385\ We received several
comments supporting our proposal to provide the reference rate and
spread for variable rate securities, reasoning that the disclosure of
the components of the variable rate would be easier for investors and
other interested parties to determine the investment's current rate at
any given time (as opposed to the rate at the end of the reporting
period).\1386\ However, another commenter suggested that the end-period
interest rate is the most appropriate variable rate security disclosure
for shareholders.\1387\ As discussed more fully in section II.C.3, in
order to give investors both the ability to understand the investment's
current return (through end-period rate) and to better understand how
interest rate changes could affect the investment's future returns, we
have made a change to the proposed instruction so that it now requires
a fund to both describe the reference rate and spread and provide the
end of period interest rate for each investment, or include disclosure
of each reference rate at the end of the period.\1388\ Requiring a fund
to disclose both the period-end rate and reference rate and spread will
necessarily add costs relating to a fund's financial statement and
auditing costs, albeit, we expect that cost to be minimal because these
pieces of information are generally not difficult to obtain and verify
as, based on staff experience, we believe that this information is
currently collected by funds and commonly available in a fund's
accounting system.
---------------------------------------------------------------------------

    \1385\ See proposed rule 12-12, n. 4; see also supra section
II.C.3.
    \1386\ See State Street Comment Letter; see also Morningstar
Comment Letter (Disclosure would allow investors to identify when
cash flows associated with a fund's returns are fixed or variable).
    \1387\ See Wells Fargo Comment Letter.
    \1388\ See rules 12-12, n. 4 and 12-12B, n. 3 of Regulation S-X.
---------------------------------------------------------------------------

    Funds will incur one-time and ongoing costs to comply with the
amendments to Regulation S-X in addition to the costs attributable to
new Form N-PORT. For the amendments to Regulation S-X, funds will incur
one-time and ongoing costs to obtain the additional information that
will be disclosed on shareholder reports and registration statements,
and that will also not be disclosed on Form N-PORT; and funds will also
incur one-time costs to format for presentation all additional
information that will be reported in financial statements. In addition,
we will require funds, to the extent they do not already do so, to
present the schedules associated with rules 12-13 through 12-13D and
12-14 in the financial statements, as opposed to in the notes to the
financial statements.\1389\ Funds that do not currently present their
schedule of investments in this manner will incur a one-time cost of
modifying the presentation of their financial statements to conform to
the amendments.
---------------------------------------------------------------------------

    \1389\ See rule 6-10 of Regulation S-X; see also discussion
supra section II.C.6.
---------------------------------------------------------------------------

    Additionally, we proposed to add a new disclosure requirement that
was designed to increase transparency into a fund's securities lending
and cash collateral management activities.\1390\ Some commenters
expressed concerns relating to the location of the required disclosure
in the fund's financial statements in particular.\1391\ One commenter
in particular noted that additional costs of auditing the disclosure of
these fees ``would most likely outweigh any benefits of reporting this
information.'' \1392\ While we continue to believe that investors and
other interested parties will benefit from disclosures relating to a
fund's securities lending and cash collateral management activities,
after consideration of the issues raised by commenters, including the
added auditing costs that funds would incur, we determined that it is
more appropriate to require these disclosures be made in a fund's
Statement of Additional Information (or, with respect to closed-end
funds, a fund's reports on Form N-CSR) rather than to require their
inclusion in its financial statements.\1393\
---------------------------------------------------------------------------

    \1390\ See proposed rule 6.03(m) of Regulation S-X; see also
supra section II.C.6.
    \1391\ See Deloitte Comment Letter (noting that indirect fees
``are typically a management's estimate that is imprecise''); EY
Comment Letter (stating that ``the proposed disclosures would result
in the presentation of detailed information with varying degrees of
usefulness that could detract from other material information
presented in the financial statements'' and recommending that ``the
Commission use other reporting mechanisms more suited for that
purpose'').
    \1392\ See Deloitte Comment Letter.
    \1393\ See supra section II.F.
---------------------------------------------------------------------------

    To the extent possible, we have attempted to quantify these costs.
As discussed below in section IV.C, we estimate that management
investment companies will incur certain one-time additional paperwork
and other costs

associated with preparing, reviewing, and filing semi-annual reports in
accordance with the amendments to Regulation S-X in the amount of
approximately $1,911 per fund \1394\ and $22,662,549 in the
aggregate.\1395\ We similarly estimate that management investment
companies will incur certain ongoing paperwork and other costs
associated with preparing, reviewing, and filing semi-annual reports in
accordance with our amendments to Regulation S-X in the amount of
approximately $683 per fund \1396\ and $8,099,697 in the
aggregate.\1397\ Likewise, we estimate that UITs will incur certain
one-time additional paperwork and other costs associated with
preparing, reviewing, and filing semi-annual reports in accordance with
the amendments to Regulation S-X in the amount of approximately $1,911
per fund \1398\ and $1,377,831 in the aggregate.\1399\ We similarly
estimate that UITs will incur certain ongoing paperwork and other costs
associated with preparing, reviewing, and filing semi-annual reports in
accordance with the amendments to Regulation S-X in the amount of
approximately $683 per UIT \1400\ and $492,443 in the aggregate.\1401\
---------------------------------------------------------------------------

    \1394\ See infra footnote 1562 and accompanying text. The
estimate is based upon the following calculations: ($1,911 = ($560 =
3.5 hours x $160/hour for an Intermediate Accountant) + ($1,351 =
3.5 hours x $386/hour for an Attorney)). The hourly wage figures in
this and subsequent footnotes are from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead.
    \1395\ See id. These estimates are based upon the following
calculations: $22,662,549 = (11,859 funds x $1,911 per fund).
    \1396\ See id. The estimate is based upon the following
calculations: ($683 = ($200 = 1.25 hours x $160/hour for an
Intermediate Accountant) + ($483 = 1.25 hours x $386/hour for an
Attorney). The hourly wage figures in this and subsequent footnotes
are from SIFMA's Management & Professional Earnings in the
Securities Industry 2013, modified by Commission staff to account
for an 1800-hour work-year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead.
    \1397\ See id. These estimates are based upon the following
calculations: $8,099,697 = (11,859 funds x $683 per fund).
    \1398\ See infra footnote 1577 and accompanying text. The
estimate is based upon the following calculations: ($1,911 = ($560 =
3.5 hours x $160/hour for an Intermediate Accountant) + ($1,351= 3.5
hours x $386/hour for an Attorney)). The hourly wage figures in this
and subsequent footnotes are from SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified by Commission
staff to account for an 1800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
    \1399\ See id. These estimates are based upon the following
calculations: $1,377,831 = (721 UITs x $1,911per UIT).
    \1400\ See id. The estimate is based upon the following
calculations: ($683 = ($200 = 1.25 hours x $160/hour for an
Intermediate Accountant) + ($483 = 1.25 hours x $386/hour for an
Attorney). The hourly wage figures in this and subsequent footnotes
are from SIFMA's Management & Professional Earnings in the
Securities Industry 2013, modified by Commission staff to account
for an 1800-hour work-year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead.
    \1401\ See id. These estimates are based upon the following
calculations: $492,443 = (721 UITs x $683 per UIT).
---------------------------------------------------------------------------

4. Alternatives
    The Commission has also explored other ways to modernize and
improve the utility, quality, and consistency of the information that
funds report to the Commission and to investors in the financial
statements required in shareholder reports and other registration
statements. Commission staff examined how the information funds provide
to the Commission and to investors could be made more informative and
more consistent across funds. Alternatives to the amendments to
Regulation S-X relate to the compliance period to adhere to the new
amendments and to the information that funds report in the financial
statements.
    Funds will have 8 months after the effective date to comply with
the amendments to Regulation S-X. An alternative would be to extend the
compliance period, as suggested by several commenters.\1402\ We
believe, however, that most entities would not need additional time to
modify systems to adhere to the amendments to Regulation S-X because,
with the exception of the disclosure of index components, the proposed
amendments are largely consistent with current fund disclosure
practices. As such, we do not expect that funds, intermediaries, or
service providers will require significant amounts of time to modify
systems or establish internal processes to prepare financial statements
in accordance with our final amendments to Regulation S-X. Another
alternative would be to provide a tiered compliance period to provide
smaller fund complexes more time, as we do for Form N-PORT. However, we
do not believe that smaller entities would relatively benefit from
additional time, since while fixed costs in general are proportionately
higher for smaller entities, the amendments to Regulation S-X do not
add additional fixed costs, but rather the amendments are largely
consistent with current disclosure practices. Extending the compliance
period for all entities or for smaller entities, however, would delay
the benefits to investors (and to the Commission and to other market
participants) from the increased transparency and standardization of
shareholder reports and other financial statements.
---------------------------------------------------------------------------

    \1402\ Fidelity Comment Letter; Oppenheimer Comment Letter;
State Street Comment Letter; MFS Comment Letter; Invesco Comment
Letter; SIFMA Comment Letter I; and Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    The amendments to Regulation S-X will update the information funds
disclose in financial statements. Alternatives to the amendments to
Regulation S-X include the disclosures of different information. For
example, the amendments to Regulation S-X will require funds to report
information describing derivative contracts including, in some
instances, the components of reference indexes that surpass certain
materiality thresholds. As alternatives, we could require funds to only
disclose a brief description of the index, require a different
threshold for identifying the components of the swap or options
contract, or require the reporting of all components. Although the
alternatives that would increase the reporting of the components of
reference indexes would increase the transparency for investors into
the assets underlying a swap or options contract including the
underlying risks of the fund, these alternatives would increase the
costs of funds to report the information. However, although the
alternatives that would decrease the reporting of the components of
reference indexes would decrease the costs to funds to report the
information, these alternatives would decrease the ability of investors
to understand fund portfolio investments. We believe that the
amendments to Regulation S-X adopted today provide investors with
sufficient information to broadly understand funds' investments without
unduly burdening funds.
    Amendments to Regulation S-X will also not require funds to report
information describing their securities lending activities in the
financial statements, as proposed, but will instead require funds to
report the information in the Statement of Additional Information (or,
for closed-end funds, their reports on Form N-CSR). An alternative,
similar to proposed rule 6.03(m), would be for funds to report
information describing their securities lending activities as part of
the financial statements. However, the requirement that securities
lending information would be disclosed as part of financial statements
would increase the costs to audit and report the information.\1403\
Another alternative

would be for funds to not provide the information altogether. However,
we believe that the information is important to investors, the
Commission, and other interested parties to understand the economic
implications of a fund's securities lending activities. To the extent
that investors utilize this information or that it benefits the
Commission, we believe that the Statement of Additional Information
(or, for closed-end funds, reports on Form N-CSR) is an appropriate
place to disclose this information.
---------------------------------------------------------------------------

    \1403\ Deloitte Comment Letter.
---------------------------------------------------------------------------

    Similarly, amendments to Regulation S-X will also not require funds
in their financial statements to identify illiquid securities, as was
initially proposed. An alternative is to adopt the proposed approach
and require funds in their financial statements to identify illiquid
securities. The disclosure of the liquidity of securities on financial
statements, however, could increase the costs to audit financial
statements.\1404\ In addition, some commenters asserted the disclosure
of security liquidity could cause investors, and in particular
individual investors, to misinterpret the information as
objective.\1405\ As discussed in the Liquidity Adopting Release, we are
adopting portfolio-level liquidity reporting on Form N-PORT which we
believe mitigates many of the commenters' concerns and is a more
appropriate method of public reporting.\1406\ Accordingly, we are not
adopting the proposed instructions in Regulation S-X relating to the
liquidity of investments.
---------------------------------------------------------------------------

    \1404\ Deloitte Comment Letter; ICI Comment Letter; and AICPA
Comment Letter.
    \1405\ PwC Comment Letter; Oppenheimer Comment Letter; MFS
Comment Letter; Deloitte Comment Letter; Invesco Comment Letter;
Schwab Comment Letter; ICI Comment Letter; and AICPA Comment Letter.
    \1406\ See discussion in section II.C.4.
---------------------------------------------------------------------------

    Lastly, amendments to Regulation S-X will include instructions to
funds to make a separate disclosure for income from non-cash dividends
and payment-in-kind interest on the statement of operations. Funds will
report income from payment-in-kind interest or non-cash dividends only
if the income exceeds 5 percent of the fund's investment income, as
suggested by commenters who requested a materiality threshold, which is
consistent with the other income disclosures under rule 6-07.1.\1407\
An alternative, similar to the proposal, would be for funds to make a
separate disclosure for all income from payment-in-kind interest or
non-cash dividends regardless of the amount.
---------------------------------------------------------------------------

    \1407\ Several commenters suggested the materiality threshold
including MFS Comment Letter; PwC Comment Letter; State Street
Comment Letter; ICI Comment Letter; and AICPA Comment Letter; see
also section II.C.6.
---------------------------------------------------------------------------

D. Form N-CEN and Rescission of Form N-SAR

1. Introduction and Economic Baseline
    Form N-CEN requires funds to report census information to the
Commission on an annual basis. Although Form N-CEN includes many of the
same data elements as the current census-type reporting form, Form N-
SAR, it replaces items that are outdated or no longer informative with
items of greater importance for the oversight and examination of
investment companies, and eliminates certain items that are also
reported to the Commission in other forms. Investment companies will
file reports on Form N-CEN in a structured, XML format to allow for
easier aggregation and manipulation of the data. Form N-SAR will be
rescinded.
    The current set of requirements for funds to file reports on Form
N-SAR is the baseline from which we discuss the economic effects of
Form N-CEN.\1408\ The parties that could be affected by the
introduction of Form N-CEN and the rescission of Form N-SAR include
funds that currently file reports on Form N-SAR and funds that will
file reports on Form N-CEN; the Commission; and, other current and
future users of fund census information including investors, third-
party information providers, and other interested potential users.
---------------------------------------------------------------------------

    \1408\ Management companies must file reports on Form N-SAR
semi-annually, and UITs must file reports on Form N-SAR annually.
See current rule 30b1-1 for management companies, and see current
rule 30a-1 for UITs.
---------------------------------------------------------------------------

    At the time it was adopted, Form N-SAR was intended to reduce
reporting burdens and better align the information reported with the
characteristics of the fund industry. As the fund industry has
developed, including the development of new products, so has the need
to update the information the Commission requires in order to improve
its ability to monitor the compliance and risks of reporting funds. The
format in which information is reported in Form N-SAR is also outdated,
which reduces the ability of Commission staff to obtain and aggregate
the information. Likewise, the technology in which Form N-SAR is filed
does not allow for certain validation checks, reducing the data quality
of the information (e.g., the Form N-SAR application is unable to check
related fields for arithmetic consistency) and therefore the ability of
Commission staff to compare the information across funds is
constrained.
    The economic effects from the introduction of new Form N-CEN and
the rescission of Form N-SAR will largely result from an update to the
format of the information reported, as well as the update to the census
information that investment companies will report. The economic effects
will therefore depend on the extent to which investment companies
become more transparent, and the ability of Commission staff and
investors to utilize the updated disclosures. Form N-CEN requires
census information about the fund industry reported in a structured
data format. However, while Form N-SAR information is also reported in
a structured data format, Form N-CEN information will be reported in
XML format, a much more modern and useful data format, and one that
allows for more efficient data collection than does the baseline
format, aggregation, manipulation, and rendering. Therefore, although
the introduction of Form N-CEN will increase the transparency of the
fund industry by making the information reported therein more readily
available, more easily shared or retrieved, and more relevant, we
cannot quantify the significance of its economic implications.
2. Benefits
    The Commission is rescinding Form N-SAR and replacing it with new
Form N-CEN to improve the quality and the utility of the information
investment companies report to the Commission. The improvement in the
quality and utility of the information will allow Commission staff to
better understand industry trends, inform policy, and assist with the
Commission's examination program.
    Similar to Form N-PORT, the ability of the Commission to most
effectively use the information is dependent on the ability of staff to
compile and aggregate the information into a single database. The
structuring of the information in an XML format will improve the
ability and efficiency of Commission staff to obtain and analyze the
information. An improved structured data format could also promote
additional efficiency to the extent that the new standardized reporting
requirements encourage more automated report assembly, validation, and
review processes for the disclosure and transmission of
information.\1409\ In

ways similar to those discussed above in relation to Form N-PORT, an
XML format also improves the quality of census information obtained by
the Commission by providing constraints as to how information can be
provided and by allowing for built-in validation.\1410\
---------------------------------------------------------------------------

    \1409\ See, e.g., CFA Comment Letter (noting that requiring
information to be reported through a structured data format will
allow better collection and analysis of information); see also XBRL
US Comment Letter (expressing the belief that a structured data
format will make data computer-readable, consistent and comparable
across different reporting entities).
    \1410\ See, e.g., Morningstar Comment Letter (noting that the
XML format will reduce the amount of defective reporting currently
possible in Form N-SAR); see also XBRL US Comment Letter (while
specifically recommending an XBRL structured format, noting that
checking the validity of data may still be required but, with
structured data, the process can be automated, thereby reducing
costs and at the same time increasing the consistency of the data
produced).
---------------------------------------------------------------------------

    Form N-CEN also modernizes the census information that funds
provide and increases its utility to Commission staff, investors, and
other interested parties by reflecting the changes to the fund industry
in a structured data format. The Commission will use the information in
Form N-CEN to improve its understanding of fund industry trends and
practices, and assist with the Commission's examination program.
Commission staff has identified specific information that could improve
its ability to effectively oversee funds.
    Along with the other information, Form N-CEN adds new requirements
for information specifically relating to the ETF primary markets,
including more detailed information on authorized participants and
creation unit requirements.\1411\ We believe that the additional
information on ETFs will allow the Commission to better understand and
assess the ETF market and also inform the public about certain
characteristics of the ETF primary markets.\1412\ Additionally, Form N-
CEN, like Form N-SAR, has particular sections for closed-end funds,
SBICs, and UITs in order to obtain information about the particular
characteristics of these entities to assist our staff in monitoring the
activities of these funds and preparing for examinations.
---------------------------------------------------------------------------

    \1411\ See discussion supra section II.D.4.e.
    \1412\ Some commenters supported the inclusion of ETF-specific
information in Form N-CEN. See supra footnote 1061 and accompanying
text; but see infra footnote 1429 and accompanying text.
---------------------------------------------------------------------------

    Form N-CEN also adds new requirements for information relating to a
management company's securities lending activities, including
information concerning the management company's securities lending
agents and cash collateral managers.\1413\ We are also requiring the
monthly average value of securities on loan, the net income from
securities lending, and the monthly average net assets in the
fund.\1414\ Together with the requirements on securities lending
activities in Form N-PORT and in fund Statements of Additional
Information,\1415\ this information will benefit the Commission's
oversight abilities and, potentially, future policymaking concerning
securities lending. Moreover, we believe that this information could
inform investors and other interested parties about the use of and
potential risks associated with a management company's securities
lending activities.\1416\
---------------------------------------------------------------------------

    \1413\ See Item C.6 of Form N-CEN.; see also discussion supra
section II.D.4.c.iii.
    \1414\ The monthly average value of securities on loan and the
net income from securities lending are being moved from Form S-X to
Form N-CEN, while the monthly average net assets is a newly reported
value, and while not specifically related to securities lending
activity, it will facilitate the use of the monthly average value of
securities on loan.
    \1415\ See supra section II.A.2.d; section II.A.2.g.v; and
section II.F.
    \1416\ Some commenters expressed general support for reporting
securities lending information on Form N-CEN; some commenters
expressed certain concerns about particular proposed requirements
and we have modified the securities lending requirements in certain
respects after consideration of commenters' views. See supra section
II.D.4.c.iii.
---------------------------------------------------------------------------

    We expect funds will also benefit from replacing Form N-SAR with
Form N-CEN through reduced expenses. First, we estimate that Form N-CEN
has a lower cost per filing than Form N-SAR, as a result of filing in
an XML format, as opposed to the outdated format of Form N-SAR, and the
elimination of certain items on Form N-SAR that funds will not report
on Form N-CEN. Second, funds that are management companies will
experience a decrease in paperwork-related expenses from the decrease
in the reporting frequency of census information from semi-annual to
annual.\1417\ As discussed in detail below, we estimate that paperwork
expenses associated with reporting on Form N-CEN will be, in the
aggregate, about $14.6 million each year.\1418\ By contrast, we
estimate that paperwork expenses associated with reporting on Form N-
SAR are about $25.5 million each year.\1419\ Accordingly, we estimate,
on net, annual paperwork expense savings to funds associated with the
adoption of Form N-CEN and rescission of Form N-SAR will be about $10.9
million.\1420\ We recognize that these ongoing annual expense savings
will be partially offset by one-time expenses in the first year to file
reports on Form N-CEN. We estimate that these expenses would be, in the
aggregate, about $20.2

million.\1421\ As indicated by commenters, the 75-day period to file
Form N-CEN will also benefit funds by staggering the reports that funds
file with the Commission at the end of each fiscal year.\1422\
---------------------------------------------------------------------------

    \1417\ See supra notes 768-769 and accompanying text for a
discussion of commenters' views on the filing frequency. See also
ICI Comment Letter (stating that reporting this data on an annual,
rather than a semi-annual basis, would significantly lessen
reporting burdens for funds).
    \1418\ Below, we estimate that 3,113 funds will file reports on
Form N-CEN each year. See infra footnote 1532. Below, we estimate
that funds will, on average, incur 12.37 burden hours per fund per
year to comply with the reporting requirements of Form N-CEN. See
infra footnote 1532 and accompanying text. Therefore, in the
aggregate, we estimate that such funds would incur about 38,508
burden hours to comply with these requirements. This estimate is
based on the following calculation: 3,113 funds x 12.37 hours per
fund per year = 38,508 hours per year. The Commission estimates the
wage rate associated with these burden hours based on salary
information for the securities industry compiled by the Securities
Industry and Financial Markets Association. The estimated wage
figure is based on published rates for senior programmers and
compliance attorneys, modified to account for an 1,800-hour work
year; multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead; and adjusted to account for the effects of
inflation, yielding effective hourly rates of $308 and $340,
respectively. See Securities Industry and Financial Markets
Association, Report on Management & Professional Earnings in the
Securities Industry 2013. We estimate that senior programmers and
compliance attorneys would divide their time equally, yielding an
estimated hourly wage of $324. ($308 per hour for senior programmers
+ $340 per hour for compliance attorneys) / 2 = $324 per hour. Based
on the Commission's estimate of 38,508 burden hours per year and the
estimated wage rate of $324 per hour, the total annual paperwork
expenses for funds associated with the internal hour burden imposed
by the reporting requirements of Form N-CEN are about $12,476,592.
This estimate is based upon the following calculation: 38,508 hours
per year x $324 per hour = $12,476,592. Below, we also estimate that
funds will incur aggregate annual external costs of $2,088,176 to
comply with the requirements of Form N-CEN. See infra footnote 1538
and accompanying text. Thus the total estimated annual paperwork
expenses associated with the reporting requirements of Form N-CEN
are $14,564,768. This estimate is based upon the following
calculation: $12,476,592 associated with internal burden +
$2,088,176 external cost burden = $14,564,768.
    \1419\ Below, we estimate that, in the aggregate, funds
currently incur about 78,561 burden hours to comply with the
requirements of Form N-SAR. See infra footnote 1541 and accompanying
text. The Commission estimates the wage rate associated with these
burden hours based on salary information for the securities industry
compiled by the Securities Industry and Financial Markets
Association. The estimated wage figure is based on published rates
for senior programmers and compliance attorneys, modified to account
for an 1,800-hour work year; multiplied by 5.35 to account for
bonuses, firm size, employee benefits, and overhead; and adjusted to
account for the effects of inflation, yielding effective hourly
rates of $308 and $340, respectively. See Securities Industry and
Financial Markets Association, Report on Management & Professional
Earnings in the Securities Industry 2013. We estimate that senior
programmers and compliance attorneys would divide their time
equally, yielding an estimated hourly wage of $324. ($308 per hour
for senior programmers + $340 per hour for compliance attorneys) / 2
= $324 per hour. Based on the Commission's estimate of 78,561 burden
hours and the estimated wage rate of $324 per hour, the total annual
paperwork expenses for funds associated with the internal hour
burden imposed by the reporting requirements of Form N-SAR are about
$25,453,764. This estimate is based upon the following calculation:
78,561 hours per year x $324 per hour = $25,453,764.
    \1420\ This estimate is based upon the following calculation:
$25,453,764 in annual paperwork expenses associated with Form N-SAR
- $14,564,768 in annual paperwork expenses associated with Form N-
CEN = $10,888,996 in annual paperwork expenses.
    \1421\ Below, we estimate that 3,113 funds will file reports on
Form N-CEN each year. See infra footnote 1532. Below, we estimate
that funds will, on average, incur 20 additional one-time burden
hours per fund in the first year to comply with the reporting
requirements of Form N-CEN. See infra footnote 1528 and accompanying
text. Therefore, in the aggregate, we estimate that such funds would
incur about 62,160 one-time burden hours to comply with these
requirements. This estimate is based on the following calculation:
3,113 funds x 20 one-time burden hours per fund = 62,260 one-time
hours. The Commission estimates the wage rate associated with these
burden hours based on salary information for the securities industry
compiled by the Securities Industry and Financial Markets
Association. The estimated wage figure is based on published rates
for senior programmers and compliance attorneys, modified to account
for an 1,800-hour work year; multiplied by 5.35 to account for
bonuses, firm size, employee benefits, and overhead; and adjusted to
account for the effects of inflation, yielding effective hourly
rates of $308 and $340, respectively. See Securities Industry and
Financial Markets Association, Report on Management & Professional
Earnings in the Securities Industry 2013. We estimate that senior
programmers and compliance attorneys would divide their time
equally, yielding an estimated hourly wage of $324. ($308 per hour
for senior programmers + $340 per hour for compliance attorneys) / 2
= $324 per hour. Based on the Commission's estimate of 62,260 one-
time burden hours and the estimated wage rate of $324 per hour, the
total one-time paperwork expenses for funds associated with the
internal hour burden imposed by the reporting requirements of Form
N-CEN are about $20,172,240. This estimate is based on the following
calculation: 60,260 one-time hours x $324 per hour = $20,172,240
one-time expenses.
    \1422\ CAI Comment Letter; T. Rowe Price Comment Letter; Invesco
Comment Letter; and ICI Comment Letter.
---------------------------------------------------------------------------

    The rescission of Form N-SAR and the introduction of Form N-CEN, to
the extent relevant, could provide benefits to investors, to third-
party information providers, and to other potential users from an
update to the census information that investment companies report and
from an update to its structured data format. Similar to Form N-PORT,
we expect that institutional investors and other market participants
could use the information from Form N-CEN more so than individual
investors. However, individual investors may indirectly benefit from
the increase in information to the extent that it becomes available
through third-party information providers, as these information
providers will likely have the capabilities to efficiently collect the
data from Form N-CEN and present it for investors in user-friendly
format. For certain investors and other potential users that would
obtain and use the information that funds report in Form N-CEN
directly, the update to the structure of the information should improve
their ability to efficiently aggregate the information across all
investment companies given the difficulty associated with extracting
information from reports on Form N-SAR, due to its idiosyncratic
reporting format.\1423\
---------------------------------------------------------------------------

    \1423\ See, e.g., Morningstar Comment Letter (noting that the
XML format will provide more accessible data to the public).
---------------------------------------------------------------------------

    The changes to the reporting of census information, including the
reporting of the information in a modern structured data format, could
improve the ability of investors to differentiate investment companies
and could therefore lead to an increase in competition among funds for
investor capital. In addition, these changes could enhance the ability
of investors to understand the investment risks and practices (for
example, securities lending activities) of investment companies, and
therefore could improve the ability of investors to efficiently
allocate capital. Consequently, the reporting changes could promote
capital formation.
3. Costs
    As discussed above, we expect the new Form N-CEN will be less
costly to file than Form N-SAR has been, because Form N-CEN will be
filed annually while Form N-SAR is filed semi-annually.\1424\ ETFs and
closed-end funds, however, may have higher expenses in filing reports
on Form N-CEN relative to other investment companies, as they will
generally be required to provide more information than previously
reported.\1425\ There could also be costs as a result of the change in
the frequency of disclosure of census information. For example, the
Commission will receive census information on an annual instead of
semi-annual basis, and therefore to the extent that the information
changes intra-annually the information will be more dated than if the
information was reported to the Commission on a semi-annual
basis.\1426\ As discussed above, we believe that the costs related to
reducing the frequency of the information received on Form N-SAR are
not significant as this information is unlikely to change frequently.
Also, funds' reporting costs may be reduced by the elimination, in Form
N-CEN, of certain items from Form N-SAR that are no longer needed by
Commission staff or are outdated in their current form.\1427\ In
addition, as discussed above, we are moving the change in independent
public accountant attachment proposed on Form N-CEN to Form N-CSR so
that an accountant's letter regarding a change in accountant will
become available to the public semi-annually rather than
annually,\1428\ which we expect will affect reporting and other costs
only minimally. Additionally, we recognize that we are adding some
additional information items from the proposal, such as average net
assets and CRD numbers for directors, which will result in minor
increases in reporting costs relative to the proposal.
---------------------------------------------------------------------------

    \1424\ See, e.g., Dreyfus Comment Letter (noting that the
rescission of Form N-SAR and Form N-Q and replacement with Form N-
CEN would result in a net reduction of 504 filings annually for the
company).
    \1425\ See supra section II.D.4.e for a discussion of the ETF
requirements.
    \1426\ However, as discussed supra footnote 770, this cost is
mitigated, in part, by the fact that certain items from Form N-SAR
that the Commission staff has deemed necessary on a more frequent
basis are included instead in reports on Form N-PORT.
    \1427\ See discussion supra section II.D.5. One commenter did,
however, suggest we reconsider the exclusion of several of these
items. Comment Letter of Morningstar, Inc. (July 20, 2015).
    \1428\ See supra section II.D.4.b.
---------------------------------------------------------------------------

    As discussed above, some commenters objected to the inclusion of
the requirement for each ETF to report the dollar value of the ETF
shares that each authorized participant purchased and redeemed from the
ETF during the reporting period, expressing concerns that reporting
authorized participant activities on Form N-CEN could discourage
authorized participants from participating in the ETF market, leading
to further concentration in the authorized participant community or
authorized participants moving their ETF-related trading activities to
banks or ``clearing'' authorized participants.\1429\ We expect that any
effects of these reporting requirements on authorized participant
participation in the ETF primary market will be minimal. We continue to
believe, moreover, that collection of this additional information may
allow the Commission staff to monitor how ETF purchase and redemption
activity is distributed across authorized participants and, for
example, the extent to which a particular ETF--or ETFs as a group--may
be reliant on one or more particular authorized participants, and we
believe that adopting the new reporting requirements is appropriate in
light of these benefits notwithstanding the possibility that public
availability of the information might affect the ETF primary markets in
the manner those commenters suggest.
---------------------------------------------------------------------------

    \1429\ See supra footnote 1072 and accompanying text.
---------------------------------------------------------------------------

    Form N-CEN could impose costs on investors and other potential
users of the information to obtain the information from a new or
additional source, including the information that

will not be included on Form N-CEN but would be available through other
filings. The information that will not be included on Form N-CEN and
that will not be available elsewhere will impose costs on investors and
other potential users from a loss of information to the extent that the
information is found to be useful.\1430\ One commenter expressed
concern that obtaining this information from various sources would
reduce its availability to investors and other interested parties, but
could be available through third-party information providers.\1431\ We
have attempted to mitigate the potential cost relating to the loss of
information by eliminating only those items which are either available
elsewhere, not frequently used by Commission staff, or provide minimal
benefit relative to the burdens of reporting such information.
---------------------------------------------------------------------------

    \1430\ Some of the information that funds will no longer report
on a census-form, such as loads paid to captive or unaffiliated
brokers, has been found by interested third-parties, including
researchers, to be important in their analysis of the fund industry.
See, e.g., Susan E. K. Christoffersen, Richard Evans & David K.
Musto, What do Consumers' Fund Flows Maximize? Evidence from Their
Brokers' Incentives, 68 J. of Fin. 201 (2013). See discussion supra
section II.D.5.
    \1431\ See, e.g., Morningstar Comment Letter.
---------------------------------------------------------------------------

4. Alternatives
    Similar to Form N-PORT, the Commission has explored other ways to
modernize and improve the utility and the quality of the census
information that funds provide to the Commission and to investors.
Commission staff examined how census information reported to the
Commission could be improved to assist the Commission in its oversight
activities, as well as how the information could benefit investors and
other potential users of the information. Alternatives to the filing of
Form N-CEN and the reporting of census information relate to the timing
and frequency of the reports, the public disclosure of the information,
the information that Form N-PORT would request, and the rescission of
Form N-SAR.
    Unlike Form N-SAR, on which management companies file reports on a
semi-annual basis, management companies will report information on Form
N-CEN on an annual basis. An alternative to the annual reporting of
census information in Form N-CEN is a semi-annual reporting of the
information similar to Form N-SAR. However, as we discussed above, the
census-type nature of the information that we will collect from funds
in Form N-CEN should not change as frequently as, for example,
portfolio holdings information.\1432\ Requiring management companies to
report census information semi-annually would therefore place a burden
on funds without a commensurate increase in the value of the
information received by the Commission.
---------------------------------------------------------------------------

    \1432\ Unlike Form N-SAR, Form N-CEN will not require funds
report information relating to fee and expense information.
Morningstar Comment Letter suggested semi-annual reporting of Form
N-CEN should fee and expense information be required on Form N-CEN.
---------------------------------------------------------------------------

    We also considered alternatives to extend or shorten the filing
period of Form N-CEN from 75 days. While a shorter filing period, such
as 60 days (similar to the proposal) would provide more timely
information to the Commission,\1433\ it would also place a burden on
funds that need time to collect, verify, and report the required
information to the Commission. Several commenters supported extending
the filing period to at least a 75-day period, arguing, among other
things, that a longer time period would help stagger the filing
deadline from other end-of-month filing requirements, ensure that all
accounting-related questions could be addressed more completely, and
allow the appropriate time needed to update systems to report
information in an XML format.\1434\ As discussed above, we have been
persuaded by commenters to adopt a filing period of 75 days after the
fiscal year-end (for management companies) and calendar year-end (for
UITs). We believe that the 75-day filing period for Form N-CEN would
appropriately balance the staff's need for timely information against
the appropriate amount of time for funds to collect, verify, and report
information to the Commission.
---------------------------------------------------------------------------

    \1433\ Several commenters supported the 60-day filing period
(Carol Singer Comment Letter and State Street), other commenters
supported a longer filing period (MFS Comment Letter; CAI Comment
Letter; T. Rowe Price Comment Letter; Invesco Comment Letter; and
ICI Comment Letter). One justification for a longer filing period
provided by commenters is the time needed to update systems to
report information in an XML format (MFS Comment Letter; Invesco
Comment Letter; and ICI Comment Letter).
    \1434\ MFS Comment Letter; CAI Comment Letter; T. Rowe Price
Comment Letter; Invesco Comment Letter; and ICI Comment Letter.
---------------------------------------------------------------------------

    Funds will have 18 months after the effective date to comply with
the new reporting requirements for Form N-CEN. An alternative would be
to tier the compliance period, similar to the compliance period for
Form N-PORT, dependent on entity size. However, as discussed above, we
believe that it is less likely that smaller entities would need
additional time to file Form N-CEN because the requirement to file Form
N-CEN is similar to the current requirement to file Form N-SAR, and we
expect that filers will prefer the updated, more efficient filing
format of Form N-CEN.\1435\ An additional alternative would be to
extend the compliance period. Some commenters suggested that the
compliance period be extended to the later of 30 months after adoption
of Form N-CEN, or 18 months after the effective date of amendments
requiring funds to report liquidity information on Form N-CEN.\1436\
Given that much of the information that will be reported on Form N-CEN
is currently already reported by funds on Form N-SAR, funds should
already have processes and procedures in place to reduce the risk of
inadvertent errors. In addition, filings on Form N-CEN are not expected
to be as technically complex nor present comparable challenges in terms
of reporting and data validation as filings on Form N-PORT. As such, we
expect that eighteen months will provide an adequate period of time for
funds, intermediaries, and other service providers to conduct the
requisite operational changes to their systems and to establish
internal processes to prepare, validate, and file reports on Form N-CEN
with the Commission.
---------------------------------------------------------------------------

    \1435\ No commenters expressed an opinion specifically related
to the filing format of N-CEN versus N-SAR.
    \1436\ See, e.g., Fidelity Comment Letter (suggesting a
compliance date of 30 months after the adoption of Form N-CEN); MFS
Comment Letter (same); CAI Comment Letter (same); IDC Comment Letter
(same); ICI Comment Letter (suggesting the later of 30 months after
the adoption of Form N-CEN or 18 months after the adoption of
amendments requiring funds to report liquidity information on Form
N-CEN).
---------------------------------------------------------------------------

    Funds will be required to report to the Commission information in
Form N-CEN that will provide staff an ability to identify investment
risks and engage in further outreach as necessary. Not requiring the
information would substantially reduce the ability of the Commission to
oversee the fund industry. In addition, the information reported on
Form N-CEN could be important to investors to differentiate investment
companies. An alternative to adopting Form N-CEN would be to revise
Form N-SAR. The Commission believes, however, that the outdated
technology associated with Form N-SAR requires the introduction of a
new form in order to increase the benefits from the changes made to the
reporting of census information. In addition, there were no commenters
who explicitly stated that Form N-SAR should not be replaced by Form N-
CEN.
    The information that funds report on Form N-CEN will be made
publicly available. Additional alternatives include making some or all
of the

census information reported on the form nonpublic. Specific information
that could be made nonpublic includes securities lending
information,\1437\ service provider information,\1438\ and ETF
authorized participant information.\1439\ Making more information
reported on Form N-CEN nonpublic would reduce the amount of information
available to investors and therefore reduce the ability of investors to
differentiate investment companies. For example, one commenter
recommended that details concerning indemnification protection should
be made nonpublic.\1440\ Nonetheless, we continue to believe that
public reporting is a necessary part of improving transparency
regarding a fund's securities lending activities. Specifically, we
believe that the information regarding indemnification provisions is
relevant to investors evaluating the risks associated with securities
lending and comparing those risks across funds.
---------------------------------------------------------------------------

    \1437\ Some commenters suggested that certain securities lending
information be kept non-public, including information describing
third-party lending arrangements (Fidelity Comment Letter).
    \1438\ Some commenters suggested that certain service provider
information be kept non-public, including the identities of the
pricing services used (Interactive Data Comment Letter) and the
compensation and other fee and expense arrangements (IDC Comment
Letter).
    \1439\ Some commenters suggested that disclosure of information
on authorized participants could discourage APs from participating
in the ETF market (Invesco Comment Letter and BlackRock Comment
Letter), while others suggested that disclosure of the creation and
redemption activity of each AP is not helpful and is confusing to
investors (BlackRock Comment Letter). See supra footnote 1429 and
accompanying text.
    \1440\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    One set of alternatives is to require funds to report additional
information on Form N-CEN, including additional new information that is
not currently reported on Form N-SAR.\1441\ Another set of alternatives
is to require funds to report less information on Form N-CEN. For
example, commenters expressed concern about providing new information
related to securities lending, service providers, and ETF authorized
participants, and one alternative is to not require this information to
be provided.\1442\ One commenter, however, expressed concern about the
exclusion from Form N-CEN of particular items on Form N-SAR.\1443\ As
discussed above, the adoption of Form N-CEN and the rescission of Form
N-SAR will improve the quality and utility of the information
investment companies report to the Commission. Although additional
information could further increase the benefits of Form N-CEN to
Commission staff, investors, and other interested parties, the benefits
may not justify the initial and ongoing costs for investment companies
to report the information because the Commission believes that the
information we are requesting strikes an appropriate balance between
the current information needs of Commission staff as well as the
developments in the fund industry and the reduction of reporting
burdens for registrants, particularly where information may be
similarly disclosed or reported elsewhere.\1444\
---------------------------------------------------------------------------

    \1441\ Morningstar Comment Letter expressed concern that some of
the information that would have been eliminated under the proposal
would decrease the availability of the information for investors and
other interested parties.
    \1442\ See, e.g., Fidelity Comment Letter; Interactive Data
Comment Letter; and BlackRock Comment Letter; supra footnote 1429
and accompanying text.
    \1443\ Morningstar Comment Letter expressed concern that the
exclusion of several Form N-SAR items would then require a manual
aggregation of information that would put comprehensive analysis of
the information out of reach for investors and fund boards unless
they were using services from third-party providers that could
aggregate such data.
    \1444\ See, e.g., supra footnotes 941, 968, 989, 1000-1003 and
accompanying text.
---------------------------------------------------------------------------

E. Amendments to Forms Regarding Securities Lending Activities

1. Introduction and Economic Baseline
    We are also adopting amendments to Forms N-1A and N-3 to require
certain disclosures in fund Statements of Additional Information
regarding securities lending activities, as well as amendments to Form
N-CSR to require the same information from closed-end funds.\1445\ We
proposed that similar requirements be included in fund financial
statements as part of the proposed amendments to Regulation S-X in
order to allow investors to better understand the income generated
from, as well as the expenses associated with, a fund's securities
lending activities.\1446\ Some commenters stated that some of the
proposed requirements would yield estimates that may be costly to
audit, and that lengthy disclosure concerning securities lending
activity in a fund's financial statements could detract from other
financial statement disclosures.\1447\ After consideration of these
issues raised by commenters, we are adopting these disclosure
requirements as amendments to the fund registration forms (viz., Forms
N-1A and N-3) or, in the case of closed-end funds, as amendments to
Form N-CSR, rather than as amendments to Regulation S-X.\1448\
---------------------------------------------------------------------------

    \1445\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; Item
12 of Form N-CSR; see also supra section II.F.
    \1446\ The proposed requirements would have included disclosure
in the fund's financial statements of (1) the gross income from
securities lending, including income from cash collateral
reinvestment; (2) the dollar amount of all fees and/or compensation
paid by the fund for securities lending activities and related
services, including borrower rebates and cash collateral management
services; (3) the net income from securities lending activities; (4)
the terms governing the compensation of the securities lending
agent, including any revenue sharing split, with the related
percentage split between the fund and the securities lending agent,
and/or any fee-for-service, and a description of services included;
(5) the details of any other fees paid directly or indirectly,
including any fees paid directly by the fund for cash collateral
management and any management fee deducted from a pooled investment
vehicle in which cash collateral is invested; and (6) the monthly
average of the value of portfolio securities on loan. See proposed
rule 6-03(m) of Regulation S-X; Proposing Release, supra footnote 7,
at 33624.
    \1447\ See Deloitte Comment Letter; EY Comment Letter.
    \1448\ See Item 19(i) of Form N-1A; Item 21(j) of Form N-3; Item
12 of Form N-CSR.
---------------------------------------------------------------------------

    The final rules will require funds to disclose gross and net income
from securities lending activities, fees and compensation in total and
broken out by enumerated types, and a description of the services
provided to the fund by the securities lending agent. The quantitative
disclosure requirements are discussed above in section II.F and also
illustrated in Table 2 below.

[GRAPHIC] [TIFF OMITTED] TR18NO16.013

    Modifications from the proposed rule include, for example,
replacing the proposed requirement that funds disclose the terms
governing the compensation of the securities lending agent--including
any revenue split--with a requirement to report actual fees paid during
the fund's prior fiscal year,\1449\ because commenters persuaded us
that backward-looking dollar-based requirements would yield clearer
disclosure than would the proposed requirements and may also enhance
disclosure comparability across funds for investors and reduce
preparation complexity for funds. Additionally, as discussed above,
while the proposed requirements would have included disclosure of all
fees and/or compensation paid for securities lending and related
services, we have determined that it is appropriate to clarify in the
final rules the specific categories of fees and/or compensation that
are required to be disclosed.\1450\
---------------------------------------------------------------------------

    \1449\ Compare proposed rule 6-03(m)(4) of Regulation S-X with
Item 19(i)(1)(ii) of Form N-1A; Item 21(j)(i)(B) of Form N-3 (same);
Item 12(a)(1) of Form N-CSR.
    \1450\ Compare proposed rule 6-03(m)(2) with Item 19(i)(1)(ii)
of Form N-1A; Item 21(j)(i)(B) of Form N-3; and Item 12(a)(1) of
Form N-CSR.
---------------------------------------------------------------------------

    The current set of fund registration statement and reporting
requirements under Forms N-1A, N-3, and N-CSR (for closed-end funds) is
the baseline from which we discuss the economic effects of today's
amendments. The parties that could be affected by these amendments
include funds that file or will file or update registration statements
with the Commission (and closed-end funds that file or will file
reports on Form N-CSR), the Commission itself, current and future
investors of investment companies, and other market participants that
could be affected by the increase in the disclosure of fund securities
lending activity information.
    We expect that many of the economic effects from the amendments to
Forms N-1A, N-3, and N-CSR will largely result from an increase in
investor ability to make investment decisions dependent on the more
transparent disclosure in fund Statements of Additional Information (or
in Form N-CSR for closed-end funds), and the extent to which this
transparency enhances the ability of the Commission to utilize the
updated disclosures. As discussed above, the economic effects will
depend on the extent to which the securities lending practices of all
investment companies become more transparent, and the ability of
investors--and, in particular, individual investors--to utilize
Statements of Additional Information (and reports on Form N-CSR for
closed-end funds) to compare funds and to make investment decisions. As
a result of these factors, some of which are unquantifiable, the
discussion below is largely qualitative.
2. Benefits
    The amendments to Forms N-1A, and N-3, and N-CSR will benefit
investors by enhancing the information funds disclose in the Statements
of Additional Information (and reports on Form N-CSR for closed-end
funds). We continue to believe that because net earnings from
securities lending can contribute to the investment performance of a
fund, the Commission, investors and others would benefit from the
additional transparency of securities lending fees on the income from
these activities. We further believe that the benefits of this
additional transparency justify the potential unintended consequences,
highlighted by commenters and discussed above, of public disclosure of
certain information.\1451\
---------------------------------------------------------------------------

    \1451\ See supra footnotes 1212-1219 and accompanying text.
---------------------------------------------------------------------------

    We have made modifications from the proposed requirements designed
to, among other things, enhance comparability of the disclosed
information and potentially ameliorate some concerns commenters
expressed about the proposed required public disclosure of the terms
governing compensation of the securities lending agent. A commenter
suggested that we could facilitate comparability by specifying the fees
for particular services that must be disclosed,\1452\ and we agree. We
believe that these clarifications will enhance comparability of the
disclosed fees and compensation across funds, and indirectly benefit
investors to the extent that other entities, including investment
advisers and broker-dealers, utilize the

information to help investors make more informed investment decisions.
---------------------------------------------------------------------------

    \1452\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    The comparability of the disclosed fee and expense information may
also depend on the nature of the services provided to a particular fund
in connection with its securities lending activities. Accordingly, to
further enhance the comparability of the disclosed information and
allow users to better assess fee and expense information, we have
determined to specify that this information should be provided on the
basis of the services actually provided to the fund in its most recent
fiscal year and the discussion above provides some examples of the
types of services that could be enumerated to illustrate such
services.\1453\
---------------------------------------------------------------------------

    \1453\ Item 19(i)(2) of Form N-1A (requiring disclosure of the
services provided to the fund by the securities lending agent (for
example and as applicable, locating borrowers, monitoring daily the
value of the loaned securities and collateral, requiring additional
collateral as necessary, cash collateral management, qualified
dividend management, negotiation of loan terms, selection of
securities to be loaned, recordkeeping and account servicing,
monitoring dividend activity and material proxy votes relating to
loaned securities, and arranging for return of loaned securities to
the fund at loan termination)); Item 21(j)(ii) of Form N-3 (same);
Item 12(b) of Form N-CSR (same).
---------------------------------------------------------------------------

    As mentioned above, we are persuaded that backward-looking dollar-
based requirements would yield clearer disclosure than would the
proposed requirements and may also enhance disclosure comparability
across funds for investors and reduce preparation complexity for funds.
This change from the proposal allows investors and others to derive the
informational benefit from the disclosure without any potentially
sensitive negotiated contractual terms being made public.
3. Costs
    We believe that registrants on average will likely incur minimal
costs from our amendments to Forms N-1A and N-3, including certain
paperwork and other expenses discussed below.\1454\
---------------------------------------------------------------------------

    \1454\ See infra footnotes 1460-1461 and accompanying text. See
also supra section III.B.3 for related cost analysis associated with
amendments to Form N-CSR.
---------------------------------------------------------------------------

    Several commenters expressed concern that the proposed disclosure
requirements could yield information that would suggest, inaptly, that
fees and expenses related to securities lending activities among funds
are readily compared and contrasted.\1455\ While there is the potential
for investor confusion with any disclosure, we believe we have
mitigated these concerns through changes that we are making from the
proposal, such as switching from terms of compensation to backward-
looking dollar based requirements and providing clarification in the
final rules as to the types of fees and/or compensation that must be
enumerated.
---------------------------------------------------------------------------

    \1455\ See MFS Comment Letter; PwC Comment Letter.
---------------------------------------------------------------------------

    Another commenter expressed concerns that the proposed fee and
expense information could be used to evaluate the terms of a fund's
lending arrangements and could, without access to additional
information, result in potentially inappropriate conclusions that a
fund negotiated its arrangements poorly or was otherwise disadvantaged
in its negotiations.\1456\ That commenter noted that the revenue split
can depend on numerous factors, including the range, amount, and
attractiveness of the securities a fund complex as a whole may make
available for loan.\1457\ We believe that the modifications we have
made from the proposal, discussed above in Section II.F.2, help
ameliorate these concerns.
---------------------------------------------------------------------------

    \1456\ PwC Comment Letter (particularly with respect to the
proposed terms of compensation disclosure requirement); see also RMA
Comment Letter (concerning borrower rebates).
    \1457\ PwC Comment Letter.
---------------------------------------------------------------------------

    Commenters also expressed concerns with the proposed requirements
based on the currently nonpublic character of some of the information
that would be required to be disclosed publicly, particularly the
proposed requirement to disclose the terms governing compensation of
the securities lending agent.\1458\ Commenters argued that some funds
currently enjoy privately negotiated competitive advantages with
securities lending services or counterparties that could be jeopardized
should their arrangements with their securities lending agents be made
public.\1459\ First, we note that, as discussed herein, we have
modified the rule from the proposal and are no longer requiring certain
pieces of information be disclosed--specifically, the terms of the
revenue split and the terms governing the compensation of the
securities lending agent more generally. We acknowledge, as these
commenters have asserted, that enhanced transparency into securities
lending arrangements could put funds at a competitive disadvantage by
affecting the relative negotiating posture of funds that procure
securities lending services, or dissuade counterparties from engaging
in securities lending altogether, which could drive up the costs of
lending services for funds. We believe, however, that the modifications
to the proposed requirements that we are making today eliminate the
disclosures from the proposed requirements that some commenters
indicated could be the most sensitive while retaining the required
information that we think will be most useful to investors in
understanding the expenses associated with fund securities lending
activities. This dollar-based requirement would also eliminate the
requirement that potentially sensitive negotiated contractual terms be
disclosed.
---------------------------------------------------------------------------

    \1458\ See AICPA Comment Letter (particularly with respect to
the terms governing the compensation of the securities lending
agent); Fidelity Comment Letter (particularly with respect to the
revenue split); ICI Comment Letter; Invesco Comment Letter; MFS
Comment Letter; SIFMA Comment Letter I; Simpson Thacher Comment
Letter (particularly with respect to the revenue split); Wells Fargo
Comment Letter.
    \1459\ See AICPA Comment Letter; Fidelity Comment Letter; ICI
Comment Letter; Invesco Comment Letter; MFS Comment Letter; SIFMA
Comment Letter I; Simpson Thacher Comment Letter; Wells Fargo
Comment Letter.
---------------------------------------------------------------------------

    As mentioned above, we are persuaded that backward-looking dollar-
based requirements would yield clearer disclosure than would the
proposed requirements, thus mitigating potential costs related to
misinterpretation or a false sense of precision by investors. In
addition, this switch from terms of compensation to backward-looking
dollar-based requirements could yield a cost savings for filers by
possibly reducing preparation complexity relative to the proposal.
    We expect that funds would incur certain paperwork and other
expenses in connection with the new requirements. For funds that file
registration statements on Forms N-1A and N-3, as discussed in detail
below, we estimate that these paperwork expenses would be, in the
aggregate, about $1.3 million each year.\1460\ Funds

would also incur initial one-time costs associated with establishing
systems and procedures for compliance. We estimate that these expenses
would be, in the aggregate, about $3.9 million.\1461\ For closed-end
funds that file annual reports on Form N-CSR, we estimate that the new
requirements will increase the hour burden associated with the
paperwork costs of Form N-CSR for closed-end funds by an additional 2
burden hours with an additional internal cost burden of $648 per fund
in the first year,\1462\ and an additional 0.5 hours with an additional
internal cost burden of $162 per fund for filings in subsequent
years.\1463\
---------------------------------------------------------------------------

    \1460\ Below, we estimate that 9,502 and 16 funds per year could
file registration statements on Forms N-1A and N-3, respectively.
See infra text following footnote 1591. Below, we estimate that
funds will, on average, incur 0.5 burden hours per fund per year to
comply with the new registration statement requirements. See id.
Therefore, in the aggregate, we estimate that such funds would incur
about 5,038 burden hours to comply with these requirements. (9,502
funds + 16 funds) x 0.5 burden hours per fund per year = 4,759
burden hours per year. The Commission estimates the wage rate
associated with these burden hours based on salary information for
the securities industry compiled by the Securities Industry and
Financial Markets Association. The estimated wage figure is based on
published rates for intermediate accountants and attorneys, modified
to account for an 1,800-hour work year; multiplied by 5.35 to