[Federal Register Volume 83, Number 53 (Monday, March 19, 2018)]
[Proposed Rules]
[Pages 11905-11921]
[FR Doc No: 2018-05511]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 274

[Release No. IC-33046; File No. S7-04-18]
RIN 3235-AM30

Investment Company Liquidity Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

SUMMARY: The Securities and Exchange Commission is proposing amendments
to its forms designed to improve the reporting and disclosure of
liquidity information by registered open-end investment companies. The
Commission is proposing a new requirement that

funds disclose information about the operation and effectiveness of
their liquidity risk management program in their annual reports to
shareholders. The Commission in turn is proposing to rescind the
current requirement in Form N-PORT under the Investment Company Act of
1940 that funds publicly disclose aggregate liquidity classification
information about their portfolios, in light of concerns about the
usefulness of that information for investors. In addition, the
Commission is proposing amendments to Form N-PORT that would allow
funds classifying the liquidity of their investments pursuant to their
liquidity risk management programs required by rule 22e-4 under the
Investment Company Act of 1940 to report on Form N-PORT multiple
liquidity classification categories for a single position under certain
specified circumstances. Finally, the Commission is proposing to add to
Form N-PORT a new requirement that funds and other registrants report
their holdings of cash and cash equivalents.

DATES: Comments should be received on or before May 18, 2018.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to [email protected]. Please include
File Number S7-04-18 on the subject line; or

Paper Comments

     Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-04-18. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
internet website (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549, on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

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

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

Contents

I. Background
II. Discussion
    A. Proposed Amendments to Liquidity Public Reporting and
Disclosure Requirements
    B. Proposed Amendments to Liquidity Reporting Requirements
    C. Compliance Dates
III. Economic Analysis
    A. Introduction
    B. Economic Baseline
    C. Economic Impacts
    D. Reasonable Alternatives
    E. Request for Comment
IV. Paperwork Reduction Act
    A. Introduction
    B. Form N-PORT
    C. Form N-1A
    D. Request for Comments
V. Initial Regulatory Flexibility Analysis
    A. Reasons for and Objectives of the Proposed Actions
    B. Legal Basis
    C. Small Entities Subject to the Proposed Liquidity Regulations
    D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rule
    F. Significant Alternatives
    G. General Request for Comment
VI. Consideration of Impact on the Economy
VII. Statutory Authority
Text of Rules and Forms

I. Background

    On October 13, 2016, the Commission adopted new rules and forms as
well as amendments to its rules and forms to modernize the reporting
and disclosure of information by registered investment companies
(``funds''),\1\ including information about the liquidity of funds'
portfolios.\2\ In particular, the Commission adopted new Form N-PORT,
which requires mutual funds and exchange traded funds (``ETFs'') to
electronically file with the Commission monthly portfolio investment
information on Form N-PORT, a structured data reporting form.\3\ On the
same day, the Commission also adopted rule 22e-4, a new form, and
related rule and form amendments to enhance the regulatory framework
for liquidity risk management of funds.\4\ Among other things, rule
22e-4 requires a fund to classify each portfolio investment into one of
four defined liquidity categories, sometimes referred to as
``buckets.'' \5\
---------------------------------------------------------------------------

    \1\ The term ``funds'' used in this release includes open-end
management companies, including exchange-traded funds (``ETFs'') and
excludes money market funds.
    \2\ Investment Company Reporting Modernization, Investment
Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18,
2016)] (``Reporting Modernization Adopting Release''). See also
Investment Company Liquidity Risk Management Programs, Investment
Company Act Release No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18,
2016)] (``Liquidity Adopting Release'').
    \3\ Registered money market funds and small business investment
companies are exempt from Form N-PORT reporting requirements.
    \4\ Specifically, we adopted rules 22e-4 and 30b1-10, new Form
N-LIQUID, as well as amendments to Forms N-1A, N-PORT and N-CEN. See
Liquidity Adopting Release, supra footnote 2.
    \5\ Rule 22e-4 requires each fund to adopt and implement a
written liquidity risk management program reasonably designed to
assess and manage the fund's liquidity risk. A fund's liquidity risk
management program must incorporate certain specified elements,
including, among others, the requirement that funds classify the
liquidity of each of the fund's portfolio investments into one of
four defined liquidity categories: Highly liquid investments,
moderately liquid investments, less liquid investments, and illiquid
investments (``classification''). This classification is based on
the number of days in which a fund reasonably expects an investment
would be convertible to cash (or, in the case of the less-liquid and
illiquid categories, sold or disposed of) without the conversion
significantly changing the market value of the investment. Rule 22e-
4 also requires funds to establish a highly liquid investment
minimum, and includes requirements related to policies and
procedures on redemptions in kind and evaluation of the liquidity of
new unit investment trusts. Rule 22e-4 also includes other required
elements, such as limits on purchases of illiquid investments,
reporting to the board, and recordkeeping.
---------------------------------------------------------------------------

    In connection with the liquidity classification requirement of rule
22e-4, a fund is also required to report confidentially to the
Commission the liquidity classification assigned to each of the fund's
portfolio investments on

Form N-PORT.\6\ Each portfolio holding must be assigned to a single
classification bucket. A fund must also publicly report on Form N-PORT
the aggregate percentage of its portfolio investments that falls into
each of the four liquidity classification categories noted above.\7\
This aggregate information would be disclosed to the public only for
the third month of each fiscal quarter with a 60-day delay. Form N-PORT
does not currently require funds to report the cash they hold.\8\
---------------------------------------------------------------------------

    \6\ Item C.7 of Form N-PORT.
    \7\ Item B.8.a of Form N-PORT. Form N-PORT also requires public
reporting of the percentage of a fund's highly liquid investments
that it has segregated to cover, or pledged to satisfy margin
requirements in connection with, derivatives transactions that are
classified as moderately liquid, less liquid, or illiquid
investments. Item B.8.b of Form N-PORT.
    \8\ Although the requirements of rule 22e-4 and Form N-PORT
discussed above are in effect, the compliance date has not yet
occurred. Accordingly, no funds are yet reporting this liquidity-
related information on Form N-PORT. In another release issued
earlier, among other things, we extended the current compliance date
for certain classification-related provisions of rule 22e-4 and
their associated Form N-PORT reporting requirements by six months.
See Investment Company Liquidity Risk Management Programs;
Commission Guidance for In-Kind ETFs, Investment Company Act Release
No IC-33010; (Feb. 22, 2018) [83 FR 8342 Feb. 27, 2018)]
(``Liquidity Extension Release'').
---------------------------------------------------------------------------

    We designed rule 22e-4 and the related rules and forms to promote
effective liquidity risk management throughout the fund industry and to
enhance disclosure regarding fund liquidity and redemption
practices.\9\ As discussed in detail below, since we adopted these
requirements, Commission staff has engaged in extensive outreach with
funds and other interested parties as they have sought to design the
new systems and processes necessary to implement the new rules. As a
complement to that engagement process, we have received letters \10\
raising concerns that the public disclosure of a fund's aggregate
liquidity classification information on Form N-PORT may not achieve our
intended purpose and may confuse and mislead investors.\11\ These
letters detail the methodologies that fund groups are designing and
implementing to conduct the liquidity classification, the disparate
assumptions that underlie them, and the variability in classification
that can occur as a result.\12\ As we discuss further in section II.A
below, these letters have caused us to question whether the current
approach of disclosing aggregate liquidity fund profiles through Form
N-PORT is the most accessible or useful way to facilitate public
understanding of fund liquidity.\13\ Specifically, when the new rules
take effect, the Commission will receive more granular position-level
liquidity classification information and can request the fund's
methodologies and assumptions underlying their classification, while
investors would have access only to the aggregate information on Form
N-PORT without the necessary context. However, the Commission continues
to believe, as it articulated when it adopted the final rule, that it
is important for investors to receive information about a fund's
liquidity, which can help investors better understand the risks they
may be assuming through an investment in the fund.
---------------------------------------------------------------------------

    \9\ See Liquidity Adopting Release, supra footnote 2, at n.112
and accompanying text.
    \10\ These letters (File No. S7-04-18) are available at https://www.sec.gov/comments/s7-04-18/s70418.htm.
    \11\ See, e.g., Letter from SIFMA AMG to Chairman Jay Clayton,
Commissioner Stein, and Commissioner Piwowar (Sept. 12, 2017)
(``SIFMA AMG Letter''); Letter from Nuveen, LLC on Investment
Company Liquidity Risk Management Programs (Nov. 20, 2017) (``Nuveen
letter'') (urging the SEC not to publicly disclose the liquidity
classification information submitted via new Form N-PORT); Letter
from TCW to Chairman Jay Clayton, Commissioner Stein, and
Commissioner Piwowar (Sept. 15, 2017) (``TCW Letter'').
    \12\ See, e.g., Letter from the Investment Company Institute to
The Honorable Jay Clayton (July 20, 2017) (``ICI Letter I'');
Supplemental Comments on Investment Company Liquidity Risk
Management Programs from the Investment Company Institute (Nov. 3,
2017) (``ICI Letter II''); Letter from Invesco Advisers, Inc. on
Investment Company Liquidity Risk Management Programs (Nov. 8,
2017); Letter from Vanguard on Investment Company Liquidity Risk
Management Programs (Nov. 8, 2017); Letter from John Hancock on
Investment Company Liquidity Risk Management Programs (Nov. 10,
2017): Letter from T. Rowe Price Associates, Inc. on Investment
Company Liquidity Risk Management Programs (Nov. 10, 2017); Letter
from Federated Investors, Inc. on Liquidity Risk Management Rule
22e-4 (Feb. 6, 2018) (``Federated Letter'').
    \13\ See infra text following footnote 18. Funds may also choose
to provide additional context non-publicly to the Commission in the
explanatory notes section (Part E of Form N-PORT).
---------------------------------------------------------------------------

    In light of the comments we have received, we preliminarily believe
that providing different information to investors via a different form
would more effectively achieve the Commission's policy goal of
promoting investor understanding of the liquidity risks of the funds in
which they have invested, while minimizing risks of investor confusion.
Accordingly, we are proposing to replace the requirement for a fund to
publicly report to the Commission on Form N-PORT the aggregate
liquidity portfolio classification information on a quarterly basis
with new disclosure in the fund's annual shareholder report that
provides a narrative discussion of the operation and effectiveness of
the fund's liquidity risk management program over the reporting
period.\14\
---------------------------------------------------------------------------

    \14\ As discussed below, we also are proposing a related change
to make non-public (but not eliminate) the disclosure required under
Item B.8 of Form N-PORT about the percentage of a fund's highly
liquid investments segregated to cover or pledged to satisfy margin
requirements in connection with certain derivatives transactions,
given that this information is only relevant when viewed together
with full liquidity classification information.
---------------------------------------------------------------------------

    Second, we are proposing additional amendments to Form N-PORT that
would allow a fund to report a single portfolio holding in multiple
classification buckets under certain defined circumstances. Currently,
a fund is required to choose only one classification bucket, even in
circumstances where splitting that holding up into multiple
classification buckets may better reflect the actual liquidity
characteristics of that position. We believe that permitting funds to
split a single portfolio holding into multiple buckets under
circumstances where we believe that such reporting would be more or
equally accurate, and in some cases less burdensome, would provide us
with equal or better information at lower cost to funds (and thus, to
fund shareholders).
    Third, we are proposing to require funds and other registrants \15\
to report holdings of cash and cash equivalents on Form N-PORT so that
we may monitor trends in the use of cash and cash equivalents and, in
the case of funds, more accurately assess the composition of a fund's
highly liquid investment minimum (``HLIM'').
---------------------------------------------------------------------------

    \15\ The term ``registrants'' refers to entities required to
file Form N-PORT, including all registered management investment
companies, other than money market funds and small business
investment companies, and all ETFs (regardless of whether they
operate as UITs or management investment companies). See rule 30b1-
9.
---------------------------------------------------------------------------

II. Discussion

A. Proposed Amendments to Liquidity Public Reporting and Disclosure
Requirements

    Today we are proposing to replace the requirement in Form N-PORT
that a fund publicly disclose on an aggregate basis the percentage of
its investments that it has allocated to each liquidity classification
category with a new narrative discussion in the fund's annual report
regarding its liquidity risk management program. The narrative
discussion would include disclosure about the operation and
effectiveness of the fund's implementation of its required liquidity
risk management program during the most recently

completed fiscal year.\16\ A fund already is required to disclose a
summary of the principal risks of investing in the fund, including
liquidity risk if applicable, in its prospectus.\17\ Therefore, in
combination, these disclosures will provide new and existing investors
with information about the expected liquidity risk of the fund and
ongoing disclosure to existing shareholders (and to new investors to
the extent that they have access to annual reports) regarding how the
fund continues to manage that risk, along with other factors affecting
the fund's performance. This revised approach is designed to provide
accessible and useful disclosure about liquidity risk management to
investors, with appropriate context, so that investors may understand
its nature and relevance to their investments.
---------------------------------------------------------------------------

    \16\ See proposed amendments to Item B.8 of Form N-PORT and
proposed Item 27(b)(7)(iii) of Form N-1A.
    \17\ See Item 4(b) of Form N-1A. In addition, Item 9(c) of Form
N-1A requires a fund to disclose all principal risks of investing in
the fund, including the risks to which the fund's particular
portfolio as a whole is expected to be subject and the circumstances
reasonably likely to affect adversely the fund's net asset value,
yield, or total return.
---------------------------------------------------------------------------

1. Concerns With Public Aggregate Liquidity Profile
    As noted above, since the Commission adopted rule 22e-4 and the
related rule and form amendments, Commission staff has engaged
extensively with interested parties regarding progress toward
implementation. As a complement to that engagement process, we have
received letters from industry participants discussing the complexities
of the classification process.\18\ These commenters raised three
general types of concerns that informed this proposal's revised
approach to public fund liquidity-related disclosure. First, commenters
described how variations in methodologies and assumptions used to
conduct liquidity classification can significantly affect the
classification information reported on Form N-PORT in ways that
investors may not understand (``subjectivity''). Second, the commenters
suggested that Form N-PORT may not be the most accessible and useful
way to communicate information about liquidity risk and may not provide
the necessary context for investors to understand how the fund's
classification results relate to its liquidity risk and risk management
(``lack of context''). Third, the commenters argued that because this
reporting item on Form N-PORT singles out liquidity risk, and does not
place it in a broader context of the risks and factors affecting a
fund's risk, returns, and performance, it may inappropriately focus
investors on one investing risk over others (``liquidity risk in
isolation''). Below we discuss these considerations--and why we
preliminarily believe the proposed revisions to disclosure requirements
on Form N-1A address these concerns while satisfying our public
disclosure goals, including the need to provide shareholders and other
users with improved information about funds' liquidity risk
profile.\19\
---------------------------------------------------------------------------

    \18\ See supra footnotes 10-12.
    \19\ See Liquidity Adopting Release, supra footnote 2, at text
following n.626.
---------------------------------------------------------------------------

Subjectivity
    Commenters emphasized that classification is a subjective
process.\20\ It is based on underlying data, assumptions, measurement
periods, and complex statistical algorithms that can vary
significantly. Accordingly, different managers classifying the same
investment may vary in the way they weigh these factors and come to
different classification conclusions, which would be consistent with
our intent in adopting the rule.\21\
---------------------------------------------------------------------------

    \20\ See, e.g., TCW Letter (stating that many different managers
weighing different factors and using disparate data can result in
different liquidity classification results across managers for the
same security). See also SIFMA AMG Letter.
    \21\ See Liquidity Adopting Release, supra footnote 2, at n. 596
and accompanying text. (``We recognize that liquidity
classifications, similar to valuation- and pricing-related matters,
inherently involve judgment and estimations by funds. We also
understand that the liquidity classification of an asset class or
investments may vary across funds depending on the facts and
circumstances relating to the funds and their trading practices.'').
---------------------------------------------------------------------------

    Commenters stated, however, that presenting liquidity
classification information in a standard format--as the final rule
requires--inaccurately implies to investors that the classifications
for all funds were formed through a uniform process and that the
resulting classifications would be comparable across funds.\22\
Commenters suggested that, because of the lack of such uniformity of
classification, using a fund's liquidity profile to make comparisons
between funds may mislead investors and could lead to investors basing
investment decisions on inappropriate grounds.\23\
---------------------------------------------------------------------------

    \22\ See, e.g., SIFMA AMG Letter. We note that in the Liquidity
Adopting Release, we considered certain proposed uniform approaches
to liquidity classification that would have less subjective inputs,
and discussed why we believed that the approach we adopted most
effectively achieves our goals. This is in part because such
approaches that do not include subjective inputs may not have
resulted in liquidity classification data that is informed by fund
advisers' actual trading experience. See, e.g., Liquidity Adopting
Release, supra footnote 2, at section III.C.
    \23\ See SIFMA AMG Letter and Nuveen Letter. See also Kristin
Grind, Tom McGinty, and Sarah Krouse, The Morningstar Mirage, The
Wall Street Journal, (Oct. 25, 2017), available at https://www.wsj.com/articles/the-morningstar-mirage-1508946687 (discussing
issues with investors basing investing decisions on evaluations of
funds without necessarily understanding the bases of those
evaluations or their limitations).
---------------------------------------------------------------------------

    Commenters suggested that this subjectivity and seeming appearance
of uniformity in content may have a variety of other pernicious
effects. For example, commenters suggested investors may, in choosing
between two funds that are have similar investment objectives, pick the
fund that appears to have more highly liquid investments (and
potentially, thereby, a lower liquidity risk) without understanding the
subjectivity that underlies the classification process.\24\ As a
result, the public disclosure of liquidity profiles may provide funds
an incentive to classify their securities as more liquid in order to
make their funds appear more attractive to investors, further
increasing the risk of investor confusion.\25\ Such incentive to
classify assets as more liquid, if widespread, could undermine the
Commission's objectives for the fund's proper management of its
liquidity risks through its liquidity risk management program and its
monitoring efforts. One commenter also suggested that the size of the
fund may have disproportionate effects on its liquidity classification
results, and thus the fund's overall aggregate liquidity profile.\26\
As a result, they argued that investors may be confused by, or unaware
of the causes of, the differences in results between large and small
portfolios' liquidity profiles, and may inappropriately believe that
smaller portfolios have less liquidity risk.\27\
---------------------------------------------------------------------------

    \24\ See TCW Letter (``Investors could flock to more apparently
liquid funds, only to discover too late that classifications did not
actually provide comparable liquidity data''); see also Nuveen
Letter (``[T]he classification information that will be reported via
Form N-PORT may lead the public to draw inappropriate conclusions
about a fund's liquidity. . . . [I]nvestors, intermediaries, and
financial advisers may be misled as to the value of such
information, and use it as the basis for investment decisions
despite this lack of understanding.'').
    \25\ See SIFMA AMG Letter. We acknowledged in the Liquidity
Adopting Release that the classification status of a security
``inherently involve[s] judgment and estimations by funds'' and that
``the liquidity classification of an asset class or investments may
vary across funds depending on the facts and circumstances relating
to the funds and their trading practices.'' See Liquidity Adopting
Release, supra footnote 2, at text accompanying n.596.
    \26\ See ICI Letter II, at Appendix C.
    \27\ ICI Letter II (providing a liquidity analysis of a variety
of investments, which found that smaller portfolios nearly always
appeared to have a highly liquid aggregate profile, while larger
portfolios holding the same positions appeared to have a less liquid
profile).

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

Lack of Context
    Commenters suggested that the format of the Form N-PORT disclosure
does not give funds the opportunity to explain to the public the
underlying assumptions for their classification, nor can they tailor
the disclosure to their specific risks. One commenter asserted that,
because the aggregate liquidity profile is to be reported on Form N-
PORT, the information will only be understandable by sophisticated
users or intermediaries.\28\ They argued that for investors to have a
sufficient understanding of the role classification plays in a fund's
liquidity risks, investors need contextual information regarding the
underlying subjective assumptions and methodologies used by the fund in
its classification process.\29\ They noted that Form N-PORT does not
provide context or additional information that would help investors
understand the assumptions and methodologies used for liquidity-related
information.\30\
---------------------------------------------------------------------------

    \28\ SIFMA AMG Letter (asserting that Form N-PORT aggregate
classification disclosure puts less sophisticated investors at a
disadvantage because ``[u]nlike securities traded in the secondary
markets, in which all market participants can be expected to benefit
from publicly available information through the efficient market
pricing mechanism, mutual fund shares are purchased and sold
directly with the fund at net asset value per share. Thus, there is
no automatic market mechanism for sophisticated investors' superior
understanding of the liquidity information and its limitations to be
transmitted to less sophisticated investors.'').
    \29\ See generally SIFMA AMG Letter (arguing that the
classification process ``relies heavily on judgments from portfolio
managers and others, based on predictions and extrapolation of data,
which are then combined with other judgments from other sources
based on similar assumptions .* .* *. For the investing public,
which will see only quarterly percentages 60-151 days after the fact
[on Form N-PORT], without context or explanation, this information
will be at best meaningless and more likely misleading.''); see also
Nuveen Letter (similarly arguing that classification information
that will be reported via Form N-PORT may lead the public to draw
inappropriate conclusions about a fund's liquidity and that this
information ``will also be inherently subjective, as the
classification process relies heavily on judgments from portfolio
managers and other sources based on a series of assumptions that may
vary among firms and even within firms.'').
    \30\ SIFMA AMG Letter. This commenter also noted that because
the aggregate liquidity profile would be a backward looking review
of a fund's liquidity presented only quarterly, with a 60 day delay,
it may be inappropriate and misleading if investors were to base
investing decisions on this information without being provided
context about its potential staleness.
---------------------------------------------------------------------------

Liquidity Risk in Isolation
    One commenter also suggested that the information publicly
disclosed on Form N-PORT singles out liquidity risk, and that focusing
on liquidity risk in isolation, presented through an unexplained
aggregate liquidity profile of a fund, may encourage investors to focus
overly on liquidity risk, compared to other risks that may be far more
important to their long-term investment goals.\31\ An investor choosing
between two funds with comparable investment objectives and performance
may choose a fund that appears to have more highly liquid investments,
without adequately considering other risks of their investment and how
they relate to liquidity risk. For example, an isolated focus on
liquidity risk may result in investors not evaluating whether such a
fund is achieving comparable performance despite maintaining low-
yielding assets through use of derivatives or other leverage, and
whether the investor is comfortable with the trade-off of liquidity
versus leverage risks.
---------------------------------------------------------------------------

    \31\ SIFMA AMG Letter (concerned that the focus on liquidity
risk in isolation would encourage investors to exaggerate the
importance of liquidity risk relative to other risks that may be far
more important to their long-term investment goals.).
---------------------------------------------------------------------------

2. New Approach to Liquidity Risk Disclosure
    We continue to believe it is im{ant for investors to understand the
liquidity risks of the funds they hold and how those risks are managed.
However, we appreciate commenters' concerns that public dissemination
of the aggregate classification information, without an accompanying
explanation to investors of the underlying subjectivity, methodological
decisions, and assumptions that shape this information, and other
relevant context, may be potentially misleading to investors.\32\ As
discussed above, in light of the variability of the classification
process under rule 22e-4, we do not believe it is appropriate to adapt
Form N-PORT to provide the level of detail and narrative context
necessary for investors to effectively appreciate the fund's liquidity
risk profile.\33\ We also believe that it may take significant detailed
disclosure and nuanced explanation to effectively inform investors
about the subjectivity and limitations of aggregate liquidity
classification information so as to allow them to properly make use of
the information. Such lengthy disclosure may not be the most accessible
and useful way to accomplish the Commission's goals. To the extent that
such disclosure would need to be granular and detailed to effectively
explain the process, it may also not be consistent with the careful
balancing of investor interests that the Commission performed in
determining to require disclosure of sensitive granular information,
including position-level data, only on a non-public basis.\34\
---------------------------------------------------------------------------

    \32\ The Commission has access to the more granular position-
level liquidity classification information as well as funds'
methodologies and assumptions, and thus does not face these same
challenges in interpreting the classification data.
    \33\ We believe that due to the variability and subjective
inputs required to engage in liquidity classification under rule
22e-4, providing effective information about liquidity
classifications under that rule to investors poses difficult and
different challenges than the other data that is publicly disclosed
on Form N-PORT, which is more objective and less likely to vary
between funds based on their particular facts and circumstances.
    \34\ As discussed in the Liquidity Adopting Release, we
determined that liquidity classification data on individual
securities was necessary for our monitoring efforts, but not
appropriate or in the public interest to be disclosed to investors
or other market participants in light of the inherent variability of
the classification process and the potential for predatory trading
using such granular information.'' See Liquidity Adopting Release,
supra footnote 2, at text accompanying nn.613-615.
---------------------------------------------------------------------------

    We also appreciate how the public dissemination of the aggregate
classification information could create perverse incentives to classify
investments as more liquid, and may inappropriately single out
liquidity risk compared to other risks of the fund. Additionally, we
are concerned that disclosing funds' aggregate liquidity profile may
potentially create risks of coordinated investment behavior, if, for
example, funds were to create more correlated portfolios by purchasing
investments that they believed third parties, such as investors or
regulators, may view as ``more liquid.'' \35\ Such risks may both
increase the possibility of correlated market movements in times of
stress, and may potentially reduce the utility of the classification
data reported to us. We now preliminarily believe that effective
disclosure of liquidity risks may be better achieved through another
disclosure vehicle, rather than Form N-PORT, which would not present
the potential drawbacks discussed above.
---------------------------------------------------------------------------

    \35\ See ICI Letter I.
---------------------------------------------------------------------------

    Accordingly, as discussed previously, we are proposing to replace
the requirement for funds to disclose their aggregate liquidity profile
on a quarterly basis on Form N-PORT with a new requirement for funds to
discuss briefly the operation and effectiveness of a fund's liquidity
risk management program in the fund's annual report to shareholders, as
part of its management discussion of fund performance (``MDFP'').\36\
This disclosure would complement existing liquidity risk disclosure
that funds provide in their prospectus (if it is a principal investment
risk of the fund).
---------------------------------------------------------------------------

    \36\ Proposed Item 27(b)(7)(iii) of Form N-1A.

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

    The proposed amendments to Form N-1A would require funds to
``briefly discuss the operation and effectiveness of the Fund's
liquidity risk management program during the most recently completed
fiscal year.'' \37\ To satisfy this requirement, a fund generally
should provide information about the operation and effectiveness of the
program, and insight into how the program functioned over the past
year.\38\ This discussion should provide investors with enough detail
to appreciate the manner in which a fund manages its liquidity risk,
and could, but would not be required to, include discussion of the role
of the classification process, the 15% illiquid investment limit, and
the HLIM in the fund's liquidity risk management process.\39\
---------------------------------------------------------------------------

    \37\ Proposed Item 27(b)(7)(iii) of Form N-1A.
    \38\ We considered whether to require funds to disclose specific
elements of their liquidity risk management program, but we believe
that such a requirement would unnecessarily limit the fund's ability
to provide the appropriate level of context it believes necessary
for investors to understand the fund's liquidity risks. We believe
that a principles-based approach to this disclosure requirement
would better achieve our goal of promoting investor understanding of
fund liquidity risks, without risking investor confusion.
Furthermore, we believe that a principles-based approach, rather
than a prescriptive one, will give a fund the flexibility to
disclose its approach to liquidity risk management in a manner most
appropriate for the fund as part of its broader discussion of the
fund's risks without placing undue emphasis on liquidity risks. We
also believe that the approach we are proposing today is less likely
to result in standardized boilerplate disclosure because it will
allow funds to tailor disclosure to their particular liquidity risks
and how they manage them.
    \39\ We note that rule 22e-4(b)(2)(iii) requires a fund board to
review, no less frequently than annually, a report prepared by the
program administrator that addresses the operation of the program
over the last year and its adequacy and effectiveness. Because funds
will already need to prepare a report on the program for these
purposes, we expect that the disclosure requirement we are proposing
today would be unlikely to create significant additional burdens as
the conclusions in this report may be largely consistent with the
overall conclusions disclosed to investors in the annual report.
---------------------------------------------------------------------------

    For example, as part of this new disclosure, a fund might opt to
discuss the particular liquidity risks that it faced over the past
year, such as significant redemptions, changes in the overall market
liquidity of the investments the fund holds, or other liquidity risks,
and explain how those risks were managed and addressed, and whether
those risks affected fund performance. If the fund faced any
significant liquidity challenges in the past year, it could opt to
discuss how those challenges affected the fund and how they were
addressed. Funds may also wish to provide context and other
supplemental information about how liquidity risk is managed in
relation to other investing risks of the fund. We note that this new
disclosure would not require a fund to disclose any specific
classification information, either security specific or in the
aggregate, although a fund could do so if it wished. Also, consistent
with the current rule, it would not require a fund to disclose publicly
the level of its HLIM, any shortfalls or changes to it, or any breaches
of the 15% illiquid investment limit.\40\ We expect that this
disclosure should allow funds to provide context and an accessible and
useful explanation of the fund's liquidity risk in relation to its
management practices and other investment risks as appropriate.
---------------------------------------------------------------------------

    \40\ Under rule 22e-4 and related rules and forms, funds are not
required to publicly disclose any shortfalls or changes to their
HLIM or breaches of the 15% illiquid investment limit.
---------------------------------------------------------------------------

    Because the proposal would eliminate public disclosure of a fund's
aggregate liquidity classification information, we would also re-
designate reporting about the percentage of a fund's highly liquid
investments that are segregated to cover, or pledged to satisfy margin
requirements in connection with, derivatives transactions that are
classified as Moderately Liquid Investments, Less Liquid Investments
and Illiquid Investments to the non-public portion of the Form.\41\ We
believe public disclosure of this percentage of a fund's highly liquid
investments would be of limited to no utility to investors without
broader context and, therefore, may be confusing. However, we believe
that funds should report this item to us on a non-public basis because
we would otherwise be unable to determine the percentage of a fund's
highly liquid investments that is actually unavailable to meet
redemptions.\42\
---------------------------------------------------------------------------

    \41\ We are proposing to do this by renumbering current Item
B.8.b of Form N-PORT as Item B.8 and making this item non-public.
This item requires public reporting of the percentage of a fund's
highly liquid investments that it has segregated to cover, or
pledged to satisfy margin requirements in connection with,
derivatives transactions that are classified as moderately liquid,
less liquid, or illiquid investments. Item B.8.b of Form N-PORT. We
originally required this disclosure in order to avoid misleading
investors about the actual availability of investments that are
highly liquid investments to meet redemptions. See Liquidity
Adopting Release, supra footnote 2, at n.623 and accompanying text.
    \42\ For these reasons, we find that it is neither necessary nor
appropriate in the public interest or for the protection of
investors to make this reporting about the percentage of a fund's
highly liquid investments that is segregated to cover less liquid
derivatives transactions publicly available.
---------------------------------------------------------------------------

    We believe that these proposed amendments will provide effective
disclosure that better informs investors of how the fund's liquidity
risk and liquidity risk management practices affect their investment
than the current Form N-PORT public liquidity risk profile.\43\ The
annual report disclosure provides a fund the opportunity to tailor its
disclosure to the fund's specific risks. This would provide funds the
opportunity to explain the level of subjectivity involved in liquidity
assessment, and give a narrative description of these risks and how
they are managed within the context of the fund's own investment
strategy. This annual report disclosure should provide funds the
ability to give sufficient context on these risks, in a way that the
current Form N-PORT liquidity disclosure does not.
---------------------------------------------------------------------------

    \43\ As an alternative to this new proposed narrative disclosure
requirement, we considered moving the aggregate liquidity profile
from Form N-PORT to the fund's annual report, which might allow
funds to provide additional context and explanation of their
methodology. However, we believe that such an approach might not
address the concerns discussed above, as investors may still use the
liquidity profile to compare funds despite its inherent subjectivity
and variability.
---------------------------------------------------------------------------

    In addition, because funds deliver annual reports to their
shareholders each year, the annual report may be a better vehicle for
certain existing investors to gain access to liquidity risk information
if they prefer to base their decisions partially on information
delivered to them, versus information that they would need to seek out
on Form N-PORT, whether directly from the Commission or via a third
party service.\44\ Moreover, third party services, in repackaging this
information, may potentially use additional assumptions about the value
or proper presentation of liquidity profiles, thereby introducing
further subjectivity and variability about which investors may not be
aware.\45\ The proposed annual report disclosure also

would allow a fund to discuss liquidity risk as one among several
risks, and does not require funds to provide any security or portfolio
specific classification information. As a result, liquidity risk should
not be inappropriately singled out among the other risks of the fund.
Finally, because many funds deliver annual reports in conjunction with
an annual delivery of the summary prospectus, investors may be able to
evaluate the summary of the principal risks of investing in the fund
contained in the summary prospectus, including liquidity risk if
applicable, in conjunction with the liquidity risk management program
disclosure we are proposing to include in the annual report. This may
facilitate a more comprehensive understanding of the fund's liquidity
risks and its management of these risks for investors.
---------------------------------------------------------------------------

    \44\ Although investors would be provided liquidity information
only annually under our proposal (rather being able to access it
quarterly through Form N-PORT), as discussed above we believe that
investors may be more likely to access and appreciate liquidity
information provided in the context of the annual report, rather
than seeking out liquidity information on Form N-PORT or through
third parties. Accordingly, we believe that the annual report is a
more appropriate venue for providing liquidity information, even
though it is updated less frequently than Form N-PORT.
    \45\ We recognize that third party service providers who provide
tools that assist funds engaging in the classification process may
have some insight into the methodologies and assumptions used by the
funds they service which, if they were to repackage and distribute
fund liquidity profile data, may allow them to provide context about
such information. However, these service providers also may provide
public information about funds they do not service, even if their
insight into classification methodologies and assumptions may be
inapplicable to these funds. Further, even when a third party
service provider does assist a fund, that fund may not share all of
the assumptions and methods that it ultimately uses in
classification with its service provider, further limiting the
utility of any such insight in providing context about the
variability and lack of comparability of fund liquidity profiles.
---------------------------------------------------------------------------

    To further assist in providing investors with information about
fund liquidity, the staff anticipates that publishing aggregated and
anonymized information about the fund industry's liquidity may be
beneficial. We note that, since October 2015, Commission staff has
published a periodic report that contains highly-aggregated and
anonymized private fund industry statistics derived from Form PF data.
This staff report is designed to enhance public understanding of the
private fund industry and facilitate Commission staff participation in
meetings and discussions with industry professionals, investors, and
other regulators.\46\ Publishing a similar staff report on the
aggregated liquidity of funds may provide similar benefits as the Form
PF report. We expect that the staff would publish the report
periodically and that the report would discuss aggregated and
anonymized liquidity data of all funds or funds in certain categories,
but would not identify the specific liquidity profile of any individual
fund. Staff from the Division of Investment Management as well as staff
from the Division of Economic and Risk Analysis have also published ad
hoc papers on data drawn from Form PF to help inform the public as to
the staff's analyses of that data. We would anticipate a similar
approach to the fund liquidity data.\47\
---------------------------------------------------------------------------

    \46\ See Annual Staff Report Related to the Use of Form PF Data,
available at https://www.sec.gov/files/im-private-fund-annual-report-101617.pdf.
    \47\ See Liquidity Adopting Release, supra footnote 2, at n.617
and accompanying text; see also Investment Company Reporting
Modernization, Investment Company Act Release No. 32936 (Dec. 8,
2017) [82 FR 58731 (Dec. 14, 2017)] at text accompanying nn.13-15.
---------------------------------------------------------------------------

    In addition to interim public reporting of aggregate, anonymized
liquidity information, staff from the Divisions of Investment
Management and Economic and Risk Analysis will conduct a review of the
granular fund-specific liquidity classification data that the
Commission will begin receiving on a confidential basis in June
2019.\48\ The staff will provide an analysis of the data to the
Commission and present to the Commission by June 2020 a recommendation
addressing whether and, if so, how there should be public dissemination
of fund-specific liquidity classification information.
---------------------------------------------------------------------------

    \48\ See Liquidity Extension Release supra footnote 8.
---------------------------------------------------------------------------

    Finally, in its 2017 Asset Management and Insurance Report, the
Department of Treasury highlighted the importance of robust liquidity
risk management programs, but recommended that the Commission embrace a
``principles-based approach to liquidity risk management rulemaking and
any associated bucketing requirements.''\49\ Today, we are proposing to
modify certain aspects of our liquidity framework. We note that market
participants will continue to gather insights as liquidity risk
management programs are implemented, and can provide comments to the
Commission as they do so. The staff will monitor the information
received and report to the Commission what steps, if any, the staff
recommends in light of commenter experiences.
---------------------------------------------------------------------------

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

3. Comment Request
    We request comment on the proposed elimination of the aggregate
liquidity profile public disclosure requirement of Form N-PORT and our
proposed replacement with a requirement that funds discuss the
operation and effectiveness of their liquidity risk management program
as part of their annual reports to shareholders.
     Should we eliminate this public disclosure of funds'
aggregate liquidity profiles? Why or why not?
     To what extent would investors have relied on a fund's
aggregate liquidity profile in making investment decisions? Is it
likely that this disclosure would have been informative rather than
confusing to investors in making these decisions?
     If, as proposed, we were to eliminate the requirement that
funds publicly disclose their aggregate liquidity profile, would
investors have sufficient information about a fund's liquidity risk to
make an informed investment decision?
     Should we retain the public disclosure of a fund's
aggregate liquidity profile and otherwise seek to address the concerns
discussed above? For example, would making the disclosure more frequent
(i.e., monthly), reducing the lag on public disclosure, providing funds
the opportunity to publicly provide additional context and explanation
on the Form or elsewhere, or other changes address the concerns
discussed above? Should we permit funds to choose to make any
explanatory notes related to liquidity disclosures in Part E of Form N-
PORT publicly available?
     Instead of eliminating the public disclosure of a fund's
aggregate liquidity profile as proposed, should we instead make the
profile non-public for some additional period of time (e.g., 2 to 3
years) to allow us to evaluate the quality of the information provided
and its potential impact on investors?
     Should we make current Item B.8.b of Form N-PORT (highly
liquid investments segregated to cover less liquid derivatives) non-
public as proposed? If it was retained as public, would investors
understand it without accompanying classification information?
Alternatively, should we rescind the requirement entirely?
     Should we require a fund to provide a discussion of the
operation and effectiveness of its liquidity risk management program,
as we are proposing? Why or why not? Should we instead require
disclosure about the extent to which and the manner in which the fund
took liquidity risk and managed liquidity risk during the period in
question and how those risks and management affected fund performance?
     As part of this proposed disclosure, should we require a
fund to discuss specific elements of the fund's liquidity risk program
such as the 15% illiquid investment limit, HLIM, classification process
or specific liquidity risk observations? Why or why not?
     Should we require a fund to include a discussion of any
relevant changes made to its liquidity risk management over the course
of the reporting period?
     What additional information would be relevant to investors
regarding liquidity risks that we should require funds to disclose?
     Should we require this liquidity risk disclosure to be
included in the annual report? Should it instead be included in another
disclosure document such as the fund's statutory prospectus, summary
prospectus, or statement of additional information? If

so, under what item should it be included?
     Are there alternative approaches to providing relevant
liquidity information to investors? If so, what are they, and why
should we use them?
     Are there advantages to the approach that Treasury
recommends? If so, what additional steps, if any, should we consider to
shift toward a principles-based approach? To what extent have funds
already implemented the existing liquidity classification requirement?

B. Proposed Amendments to Liquidity Reporting Requirements

    We are also proposing to make certain changes to Form N-PORT
related to the liquidity data reported on Form N-PORT. As discussed
below, we believe these changes enhance the liquidity data reported to
us. In addition, for some funds, these proposed changes may also reduce
cost burdens as they comply with the rule.
1. Multiple Classification Categories
    We are proposing amendments to Form N-PORT to allow funds the
option of splitting a fund's holding into more than one classification
category in three specified circumstances.\50\ Today, Form N-PORT
requires a fund to classify each holding into a single liquidity
bucket. The staff has engaged in discussions with funds regarding
questions that have arisen in implementing the liquidity rule and
related requirements. These discussions have led us to propose these
changes today.
---------------------------------------------------------------------------

    \50\ See proposed Item C.7.b of Form N-PORT and Instructions.
---------------------------------------------------------------------------

    First, some funds have explained that the requirement to classify
each entire position into one classification category poses
difficulties for certain holdings and may not accurately reflect the
liquidity of that holding. In these cases, even though the holding may
nominally be a single security, different liquidity-affecting features
may justify the fund treating the holding as two or more separate
investments for liquidity classification purposes (``differences in
liquidity characteristics''). For example, a fund might hold an asset
that includes a put option on a percentage (but not all) of the fund's
holding of the asset.\51\ Such a feature may significantly affect the
liquidity characteristics of the portion of the asset subject to the
feature, such that the fund believes that the two portions of the asset
should be classified into different buckets.\52\
---------------------------------------------------------------------------

    \51\ For example, if 30% of a holding is subject to a liquidity
feature such as a put, and the other 70% is not, pursuant to the
proposed Instructions to Item C.7 of Form N-PORT, a fund may split
the position, evaluate the sizes it reasonably anticipates trading
for each portion of the holding that is subject to the different
liquidity characteristics, and classify each separate portion
differently, as appropriate. The fund in such a case would use the
classification process laid out in the final rule, but would apply
it separately to each portion of the holding that exhibits different
liquidity characteristics.
    \52\ As another example, a fund might have purchased a portion
of an equity position through a private placement that makes those
shares restricted (and therefore illiquid) while also purchasing
additional shares of the same security on the open market. In that
case, certain shares of the same holding may have very different
liquidity characteristics depending on the specific shares being
evaluated.
---------------------------------------------------------------------------

    Second, some funds suggested that in cases of sub-advisers managing
different portions or ``sleeves'' of a fund's portfolio, differences
may arise between sub-advisers as to their views of the liquidity
classification of a single holding that may be held in multiple
sleeves. They noted it would avoid the need for costly reconciliation--
and may provide useful information to the Commission on each sub-
adviser's determination about the asset's liquidity--to be able to
report each sub-adviser's classification of the proportional holding it
manages instead of putting the entire holding into a single
category.\53\
---------------------------------------------------------------------------

    \53\ Similar to the ``differences in liquidity characteristics''
examples discussed above, under the proposed amendments to the
liquidity classification reporting on Form N-PORT the fund
effectively would be treating the portions of the holding managed by
different sub-advisers as if they were two separate and distinct
securities, and bucketing them accordingly. See Instructions to Item
C.7 of Form N-PORT.
---------------------------------------------------------------------------

    Finally, some funds indicated that for internal risk management
purposes they currently classify their holdings proportionally across
buckets, based on an assumed sale of the entire position
(``proportionality'').\54\ In such cases, they argued that allowing a
fund to have the option of proportionally reporting the position on
Form N-PORT would be more efficient and less costly.\55\ We believe
that in such cases, this form of reporting would not impair the
Commission's monitoring and oversight efforts as compared to our
approach of classifying based on ``sizes that the fund would reasonably
anticipate trading.'' \56\ Further, we believe the approach we are
proposing today, which allows, but does not require, funds to use the
proportionality approach in specified circumstances, would maintain the
quality of the information reported to us and be potentially less
costly than either our previously proposed or adopted approaches.\57\
---------------------------------------------------------------------------

    \54\ We initially proposed to require that funds classify each
portfolio position based on the amount of time it would take to
convert the entire position, or portions thereof, to cash
(``proportionality approach''). See Open-End Fund Liquidity Risk
Management Programs; Swing Pricing; Re-Opening of Comment Period for
Investment Company Reporting Modernization Release, Investment
Company Act Release No. 31835 (Sept. 22, 2015) [80 FR 62274 (Oct.
15, 2015)], at n.172 and accompanying text. Multiple commenters
expressed concern about the proposed requirement, arguing, among
other things, that a fund generally would not need to liquidate an
entire large position unexpectedly. Rule 22e-4 as adopted, requires
a fund, when classifying an investment, to instead determine whether
trading varying portions of a position in a particular portfolio
investment, in sizes that the fund would reasonably anticipate
trading, is reasonably expected to significantly affect the
liquidity characteristics of that investment (i.e., market-depth).
These market-depth considerations were adopted as a substitute for
the proposed proportionality approach. See Liquidity Adopting
Release, supra footnote 2, at n.439 and accompanying text.
    \55\ Effectively, these funds requested the option to use the
position size bucketing approach that was originally proposed
(analyzing the entirety of a fund's position and splitting it among
buckets), rather than bucketing the entire holding into a single
category based on the sizes they reasonably anticipate trading, as
required under the final rule.
    \56\ Under the proposed Instructions to Item C.7 of Form N-PORT,
a fund taking the proportionality approach would use a method
similar to that described in the proposal, and split the entire
holding among the four classification categories. For example, a
fund holding $100 million in Asset A could determine that it would
be able to convert to cash $30 million of it in 1-3 days, but could
only convert the remaining $70 million to cash in 3-7 days. This
fund could choose to split the liquidity classification of the
holding on Form N-PORT and report an allocation of 30% of Asset A in
the Highly Liquid category and 70% of Asset A in the Moderately
Liquid category. Such a fund would not use sizes that it reasonably
anticipates trading when engaging in this analysis, but instead
would assume liquidation of the whole position.
    \57\ As discussed in the economic analysis below, allowing
classification in multiple categories may be less costly if it
better aligns with current fund systems or allows funds to avoid
incurring costs related to the need to develop systems and processes
to allocate each holding to exactly one classification bucket.
---------------------------------------------------------------------------

    We agree that we should permit funds to report liquidity
classifications in these ways as they may equally, or more accurately,
reflect their liquidity and in some cases may be less burdensome. In
addition, we believe that allowing funds to proportionally report the
liquidity classification of securities under the three circumstances we
discussed here will enhance our monitoring efforts, as it will allow
for a more precise view of the liquidity of these securities. Because
funds that choose to classify across multiple categories under this
approach would be required to indicate which of the three circumstances
led to the split classification, we will be able to monitor more
effectively the liquidity of a fund's portfolio and determine the
circumstances leading to the classification. Therefore, we are
proposing to amend Item C.7 of Form N-PORT to provide funds the option
of splitting the classification categories reported for their
investments on a percentage basis, if done for one of these

three reasons.\58\ We are also proposing new Instructions to Item C.7
that explain the specified circumstances where a fund may split
classification categories. In addition, we are proposing new Item
C.7.b, which would require funds taking advantage of the option to
attribute multiple classifications to a holding to note which of the
three circumstances led the fund to split the classifications of the
holdings.\59\
---------------------------------------------------------------------------

    \58\ Proposed revisions to Item C.7 and its Instructions of Form
N-PORT. Funds that choose not to take advantage of this proportional
splitting approach may continue to use the approach laid out in the
final rule of bucketing an entire position based on the liquidity of
the sizes the fund would reasonably anticipate trading.
    \59\ Proposed Item C.7.b of Form N-PORT. A fund may also choose
to provide (but is not required to) additional context on its
process for classifying portions of the same holding differently in
the explanatory notes section of Form N-PORT. See Part E of Form N-
PORT.
---------------------------------------------------------------------------

    We seek comment on our proposal to allow, but not require, funds to
classify a single holding in multiple categories on Form N-PORT.
     Should we allow funds to split holdings among different
liquidity categories in three specified circumstances as we are
proposing today? \60\ Why or why not?
---------------------------------------------------------------------------

    \60\ Proposed Instructions to Item C.7 to Form N-PORT.
---------------------------------------------------------------------------

     Should we require funds to use a consistent approach to
classification for all of their investments for purposes of Form N-PORT
reporting? For example, should we require a fund that attributes
multiple classifications for a holding because it uses a full
liquidation analysis on one position to do so consistently for all of
its positions?
     Are there circumstances other than the ones discussed in
the proposed Form N-PORT Instructions to Item C.7 when funds may wish
to classify the same security into multiple categories? If so, what are
they and why should we permit classification splitting in those cases?
     Instead of requiring funds to note the circumstance that
led them to split classification of a position on new Item C.7.b as
proposed, should we instead require them to note the circumstance in
the explanatory notes section of the Form? Should we not require them
to note the circumstance leading to the splitting at all? Why or why
not?
     Should we allow a fund using the proportionality approach
to not classify the liquidity of a holding based on an assumed
liquidation of the whole position, but instead classify it by
evaluating different portions of the sizes it reasonably anticipates
trading and bucketing the entire position accordingly? \61\ Would this
result in misleading or incorrect liquidity classifications?
---------------------------------------------------------------------------

    \61\ For example, under this alternate approach, a fund with a
$100 million position in a security with a reasonably anticipated
trading size of $10 million might determine that it could convert $4
million to cash in 1-3 days and $6 million in 4-7 days. The fund
might then bucket $40 million as highly liquid and $60 million as
moderately liquid, even though the fund has previously determined
that it could only convert $4 million into cash in 1-3 days. We
believe this approach would potentially result in inaccurate
classifications that may not fully reflect the liquidity of a fund's
investments, but has been suggested to our staff as a potential
method of splitting classifications in some circumstances.
---------------------------------------------------------------------------

2. Proposed Disclosure of Cash and Cash Equivalents
    We are also proposing to add to Form N-PORT an additional
disclosure relating to a registrant's holdings of cash and cash
equivalents not reported in Parts C and D of the Form.\62\ This
disclosure would be made publicly available each quarter.\63\ Form N-
PORT currently does not require registrants to specifically report the
amount of cash and cash equivalents held by the registrant. For
example, as we noted in the Reporting Modernization Adopting Release,
we designed Part C of Form N-PORT to require registrants to report
certain information on an investment-by-investment basis about each
investment held by the registrant.\64\ However, cash and certain cash
equivalents are not considered an investment on Form N-PORT, and
therefore registrants are not required to report them in Part C of the
Form as an investment. Similarly, Part B.1 of Form N-PORT (assets and
liabilities) will require information about a registrant's assets and
liabilities, but does not require specific disclosure of a registrant's
holdings of cash and cash equivalents.\65\
---------------------------------------------------------------------------

    \62\ See supra footnote 15 (noting that the term ``registrant''
refers to entities required to file Form N-PORT, including all
registered management investment companies, other than money market
funds and small business investment companies, and all ETFs
(regardless of whether they operate as UITs or management investment
companies).
    \63\ See proposed Item B.2.f. of Form N-PORT.
    \64\ See Reporting Modernization Adopting Release, supra
footnote 2.
    \65\ We understand that, in addition to cash, a registrant's
disclosure of total assets on Part B.1.a. could also include certain
non-cash assets that are not investments of the registrant, such as
receivables for portfolio investments sold, interest receivable on
portfolio investments, and receivables for shares of the registrant.
---------------------------------------------------------------------------

    Cash held by a fund is a highly liquid investment under rule 22e-4
and would have been included in the aggregate liquidity profile that we
are proposing to eliminate. Without the aggregate liquidity profile, we
may not be able to effectively monitor whether a fund is compliant with
its HLIM unless we know the amount of cash held by the fund. The
additional disclosure of cash and certain cash equivalents by funds
will also provide more complete information that will be useful in
analyzing a fund's HLIM, as well as trends regarding the amount of cash
being held, which also correlates to other activities the fund is
experiencing, including net inflows and outflows.
    As a result, we are proposing to amend Item B.2. of Form N-PORT
(certain assets and liabilities) to include a new Item B.2.f. which
would require registrants to report ``cash and cash equivalents not
reported in Parts C and D.'' Current U.S. Generally Accepted Accounting
Principles (``GAAP'') define cash equivalents as ``short-term, highly
liquid investments that . . . are . . . [r]eadily convertible to known
amounts of cash . . . [and that are] [s]o near their maturity that they
present insignificant risk of changes in value because of changes in
interest rates.'' \66\ However, we understand that certain categories
of investments currently reported on Part C of Form N-PORT (schedule of
portfolio investments) could be reasonably considered by some
registrants as cash equivalents. For example, Item C.4. of Form N-PORT
will require registrants to identify asset type, including ``short-term
investment vehicle (e.g., money market fund, liquidity pool, or other
cash management vehicle),'' which could reasonably be categorized by
some registrants as a cash equivalent. Therefore, in order to ensure
the amount reported under proposed Item B.2.f is accurate and does not
double count items that are more appropriately reported in Parts C
(Schedule of portfolio investments) and D (Miscellaneous securities) of
Form N-PORT, we are proposing to require registrants to only include
the cash and cash equivalents not reported in those sections.\67\
---------------------------------------------------------------------------

    \66\ See FASB Accounting Standards Codification Master Glossary.
    \67\ We also are proposing other amendments to Form N-PORT. In
particular, we are proposing to amend General Instruction F (Public
Availability) to remove the phrase ``of this form'' from
parenthetical references to Item B.7 and Part D for consistency with
other parenthetical cross references in the Form. We also are
proposing to amend Part F (Exhibits) to fix a typographical error in
the citation to Regulation S-X. In addition, for consistency with
the amendments we are proposing today and we are proposing to add
Item B.8 (Derivative Transactions) to General Instruction F.
---------------------------------------------------------------------------

    We seek comment on our proposal to require registrants to report
cash and cash equivalents on Form N-PORT.
     Should we require registrants to report cash and cash
equivalents?

Should we require a different formulation for cash? For example, should
we require registrants to report separately pledged or segregated cash?
     Should we require registrants to provide more detailed
information on cash, rather than reporting cash and cash equivalents
together? For example, should we require registrants to report cash
separately from cash equivalents in Part C of Form N-PORT? If so,
should we require cash to be reported separately for different
currencies?

C. Compliance Dates

    If the amendments we propose to Forms N-PORT and N-1A related to
liquidity risk disclosure are adopted, we would expect to provide for a
tiered set of compliance dates based on asset size.\68\ Specifically,
we are proposing to align the compliance date for our proposed
amendments to Forms N-PORT and N-1A with the revised compliance date we
previously adopted for Form N-PORT.\69\ We believe that aligning the
compliance date for all liquidity-related reporting requirements will
allow funds to holistically implement all liquidity reporting and
disclosure requirements at the same time and may make the requirements
less burdensome.
---------------------------------------------------------------------------

    \68\ ``Larger entities'' are defined as funds that, together
with other investment companies in the same ``group of related
investment companies,'' have net assets of $1 billion or more as of
the end of the most recent fiscal year of the fund. ``Smaller
entities'' are defined as funds that, together with other investment
companies in the same group of related investment companies, have
net assets of less than $1 billion as of the end of its most recent
fiscal year. See Liquidity Adopting Release, supra footnote 2, at
n.997. We adopted this tiered set of compliance dates based on asset
size because we anticipated that smaller groups would benefit from
this extra time to comply and from the lessons learned by larger
investment companies, and we believe the same rationale applies to
the changes we are proposing today. See Liquidity Adopting Release,
supra footnote 2, at nn.999 and 1008 and accompanying text.
    \69\ See Investment Company Reporting Modernization, Investment
Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14,
2017)]. These compliance dates would apply to all Form N-PORT
filings after the relevant date and to funds subject to these
proposed requirements that file initial registration statements on
Form N-1A, or that file post-effective amendments that are annual
updates to effective registration statements on Form N-1A, after
these proposed compliance dates.
---------------------------------------------------------------------------

    We request comment on the compliance dates discussed above.
     Should we align the compliance dates for the amendments
with the general compliance date for Form N-PORT? Alternatively, should
we align the compliance date for the proposed amendments with the
compliance date for the other liquidity-related requirements of rule
22e-4 and Form N-PORT?
     Should we provide a longer compliance period for these
proposed changes? For example, should we provide an additional six
months or one year beyond the compliance dates for the liquidity-
related requirements of rule 22e-4 and Form N-PORT? Should we provide a
different compliance period for the Form N-PORT changes and the Form N-
1A changes? If so, why and how long?

III. Economic Analysis

A. Introduction

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

B. Economic Baseline

    The costs and benefits of the proposed amendments as well as any
impact on efficiency, competition, and capital formation are considered
relative to an economic baseline. For the purposes of this economic
analysis, the baseline is the regulatory framework and liquidity risk
management practices currently in effect, and any expected changes to
liquidity risk management practices, including any systems and
processes that funds have already implemented in order to comply with
the liquidity rule and related requirements as adopted. The baseline
also includes the economic effects anticipated in the Liquidity
Adopting Release and the Liquidity Extension Release.\70\
---------------------------------------------------------------------------

    \70\ See supra footnotes 2 and 8.
---------------------------------------------------------------------------

    The economic baseline's regulatory framework consists of the
liquidity rule's requirements adopted by the Commission on October 13,
2016. Under the baseline, larger entities must comply with some of the
liquidity rule's requirements, such as the establishment of a liquidity
risk management program, by December 1, 2018 and must comply with other
requirements, such as the classification of portfolio holdings, by June
1, 2019.\71\ Similarly, smaller entities must comply with some of the
liquidity rule's requirements by June 1, 2019 and other requirements by
December 1, 2019.
---------------------------------------------------------------------------

    \71\ See supra footnote 68 for a detailed description of large
and small entities. The compliance date for some of the requirements
related to portfolio holding classification is being delayed. See
the Liquidity Extension Release, supra footnote 8, for a more
detailed discussion of the requirements that are being delayed.
---------------------------------------------------------------------------

    The primary SEC-regulated entities affected by these proposed
amendments would be mutual funds and ETFs. As of the end of 2016, there
were 9,090 mutual funds managing assets of approximately $16
trillion,\72\ and there were 1,716 ETFs managing assets of
approximately $2.5 trillion.\73\ Other potentially affected parties
include investors, investment advisers that advise funds, issuers of
the securities in which these funds invest, and other market
participants that could be affected by fund and investor behavior.
---------------------------------------------------------------------------

    \72\ See 2017 ICI Fact Book, available at https://www.ici.org/pdf/2017_factbook.pdf, at 22, 170, 174. The number of mutual funds
includes funds that primarily invest in other mutual funds but
excludes 421 money-market funds.
    \73\ See 2017 ICI Fact Book, available at https://www.ici.org/pdf/2017_factbook.pdf, at 180, 181.
---------------------------------------------------------------------------

C. Economic Impacts

    We are mindful of the costs and benefits of the proposed amendments
to Form N-PORT and Form N-1A. The Commission, where possible, has
sought to quantify the benefits and costs, and effects on efficiency,
competition and capital formation expected to result from these
amendments. However, as discussed below, the Commission is unable to
quantify certain of the economic effects because it lacks information
necessary to provide reasonable estimates. The economic effects of the
amendments fall into two categories: (1) Effects stemming from changes
to public disclosure on Form N-PORT and Form N-1A; (2) effects stemming
from changes to non-public disclosure on Form N-PORT.
Changes to Public Disclosure
    The proposed amendments to Form N-PORT and Form N-1A alter the
public disclosure of information about fund liquidity in three ways.
First, the proposed amendments rescind the requirement that funds
publicly disclose their aggregate liquidity profile on a quarterly
basis with a 60-day delay in structured format on Form N-PORT.\74\
Second, the proposed amendments require a fund to provide a narrative
description of the fund's liquidity risk management program's operation
and effectiveness in unstructured format on Form N-1A. Finally, the
proposed amendments require funds and other

registrants to report to the Commission on a non-public basis the
amount of cash and cash equivalents in their portfolio on Form N-PORT
on a monthly basis and to publicly disclose this amount on a quarterly
basis with a 60-day delay through EDGAR.\75\
---------------------------------------------------------------------------

    \74\ See supra footnote 1 for a definition of ``funds.'' The
requirement to publicly disclose aggregate liquidity profiles does
not apply to funds that are In-Kind ETFs under the baseline, so it
is only being proposed to be rescinded for funds that are not In-
Kind ETFs. In-Kind ETFs are included as funds that would provide a
narrative description of their liquidity risk management program on
Form N-1A under this proposal.
    \75\ The Commission will continue to receive non-public position
level liquidity information on Form N-PORT. See supra footnote 32.
---------------------------------------------------------------------------

    Funds and other registrants would experience benefits and costs
associated with proposed changes to public disclosures on Form N-PORT.
Funds \76\ would no longer incur the one-time and ongoing costs
associated with preparing the portion of Form N-PORT associated with
the aggregate liquidity profile, which would likely constitute a small
portion of the aggregate one-time costs of $158 million and the ongoing
costs of $3.9 million for Form N-PORT that we estimated in the
Liquidity Adopting Release.\77\ At the same time, funds and other
registrants would also incur additional costs, relative to the
baseline, associated with the requirement that they report their
holdings of cash and cash equivalents on Form N-PORT.\78\ Because funds
and other registrants are already preparing Form N-PORT, and already
need to keep track of their cash and cash equivalents for valuation
purposes, we expect that these additional costs will not be
significant. In aggregate, we expect any additional costs associated
with the requirement that funds and other registrants disclose their
holdings of cash and cash equivalents to be offset by the savings
associated with funds no longer having to report an aggregate liquidity
profile. Therefore, we expect that funds and other registrants will not
experience a significant net economic effect associated with the direct
costs of filing Form N-PORT.\79\ Additionally, to the extent that any
risk of herding or correlated trading would exist if funds executed
trades in order to make their aggregate liquidity profiles appear more
liquid to investors, rescinding the requirement that funds publicly
disclose an aggregate liquidity profile would mitigate such risk.\80\
---------------------------------------------------------------------------

    \76\ See supra footnote 73.
    \77\ See Liquidity Adopting Release, supra footnote 2, at
nn.1188-1191. We estimated the total one-time costs associated with
the rule's disclosure and reporting requirements on Form N-PORT as
being approximately $55 million for funds that will file reports on
Form N-PORT in house and approximately $103 million for funds that
will use a third-party service provider. Similarly, we estimated the
total ongoing annual costs as being approximately $1.6 million for
funds filing reports in house and $2.3 million for funds that will
use a third-party service provider.
    \78\ See supra footnote 15.
    \79\ See text following infra footnote 98.
    \80\ See supra footnote 35 and surrounding discussion.
---------------------------------------------------------------------------

    Relative to the baseline, funds would incur costs associated with
preparing an annual narrative discussion of their liquidity risk
management programs on Form N-1A. We estimate that funds would incur
aggregate one-time costs of approximately $18 million and aggregate
ongoing costs of approximately $8.9 million in association with
preparing this narrative discussion.\81\
---------------------------------------------------------------------------

    \81\ See infra footnotes 102 and 105. We estimate funds will
incur an additional aggregate one-time of burden of 53,990 hours and
an additional aggregate annual burden of 26,995 hours. Assuming a
blended hourly rate of $329 for a compliance attorney ($345) and a
senior officer ($313), that translate to an additional aggregate
one-time burden of $17,7627,710 = 53,990 x $329 and an additional
aggregate annual burden of $8,881,355 = 26,995 x $329.
---------------------------------------------------------------------------

    Investors also would experience costs and benefits as a result of
the proposed amendments to the public disclosure requirements on Form
N-PORT and Form N-1A. To the extent that aggregate liquidity profiles
on Form N-PORT would help certain investors make more informed
investment choices that match their liquidity risk preferences,
rescinding the aggregate liquidity profile requirement will reduce an
investor's ability to make more informed investment choices. However,
to the extent that aggregate liquidity profiles are not comparable
across funds because portfolio holding classifications incorporate
subjective factors that may be interpreted differently by different
funds, rescinding the aggregate liquidity profile requirement may not
reduce these investors' ability to make informed investment choices.
Rather, the amendments may reduce the likelihood that investors make
investment choices based on any confusion about how the fund's
liquidity risk profile should be interpreted.\82\ Additionally, the
annual narrative discussion in Form N-1A may mitigate any reduction in
their ability to make more informed investment choices, though this
disclosure would be less frequent than the quarterly public disclosure
of aggregate liquidity profiles as adopted and would provide
information about a fund's liquidity risk management rather than the
fund's aggregate liquidity profile of investments.
---------------------------------------------------------------------------

    \82\ Even if aggregate liquidity profiles are not comparable
across funds, they may be comparable across time for a given fund,
which might provide useful information to investors. This would be
the case if a fund maintains a consistent position classification
process over time.
---------------------------------------------------------------------------

    If certain investors prefer to base their investment decisions on
information that is delivered to them directly, those investors would
be more likely to use the narrative discussion of a fund's liquidity
risk management program on Form N-1A than to have used the aggregate
liquidity profile on Form N-PORT to inform their investment decisions.
However, if certain other investors could more easily access, reuse,
and compare the information about a fund's liquidity risk if included
within a structured format on Form N-PORT, those investors would have a
reduced ability to make as timely and accurate an analysis when that
information is provided to them in the unstructured format of an annual
report. To the extent that certain investors rely on third parties to
provide them with information for analysis, there may be an increased
burden on these third-party providers to search, aggregate and analyze
the unstructured information in funds' annual reports. Finally, the
proposed amendment to Form N-PORT that requires funds and other
registrants to publicly disclose their holdings of cash and cash
equivalents on a quarterly basis with a 60-day delay gives investors
some potentially useful information about the most liquid assets that a
fund previously had available to, for example, meet its redemption
obligations.
Changes to Non-Public Disclosure
    In addition to the proposed amendments to public disclosures of
liquidity information discussed above, the proposed amendments to Form
N-PORT give funds the option to split a given holding into portions
that may have different liquidity classifications on their non-public
reports on Form N-PORT. Funds may benefit from the proposed amendment
because it gives them the option to either include an entire holding
within a classification bucket or to allocate portions of the holding
across classification buckets. This could benefit a fund if a more
granular approach to classification that assigns portions of a
portfolio holding to separate classification buckets is more consistent
with the fund's preferred approach to liquidity risk management, and
reduces the need for funds to develop systems and processes to allocate
each holding to exactly one classification bucket.\83\ In addition, to

the extent that providing the option to choose the position
classification method most suitable to a given fund results in
disclosures on Form N-PORT that more accurately reflect the fund's
liquidity profile, the proposed amendments may improve the Commission's
ability to monitor liquidity risks in markets and protect investors
from liquidity-related developments. However, we acknowledge that
providing funds with this option does add an additional subjective
decision to the portfolio holding classification process. Thus the
proposed amendments could result in classification profiles that are
less comparable across funds relative to the baseline.\84\
---------------------------------------------------------------------------

    \83\ For example, funds that use multiple sub-advisers to manage
different sleeves of a portfolio might have to establish more
complex systems and processes for combining the classifications of
individual sub-advisers into a single classification for the
portfolio's aggregate holding of a given security under the rule as
adopted. The ability to split a portfolio holding across multiple
classification buckets provides funds with a straightforward way of
combining the classifications of different sub-advisers.
    \84\ Portfolio classifications on Form N-PORT will include
CUSIPs or other identifiers that allow Commission staff to identify
when different funds classify the same investment using different
classification methods. However, comparing such classifications will
require some method of adjustment between classifications based on,
for example, reasonably anticipated trade size and those based
splitting a position into proportions that are assigned to different
classification buckets.
---------------------------------------------------------------------------

Efficiency, Competition, and Capital Formation
    The proposed amendments have several potential impacts on
efficiency, competition, and capital formation. First, if publicly
disclosed aggregate liquidity profiles created an incentive for a fund
to classify its holdings in a manner that led to a relatively more
liquid aggregate liquidity profile in order to attract investors, the
proposed amendments remove any such incentive and potentially reduce
the likelihood that funds compete based on their aggregate liquidity
profiles. To the extent that a fund or other registrant's cash and cash
equivalent holdings are interpreted by investors as being associated
with lower liquidity risk, funds and other registrants may still have
some incentive to compete based on their holdings of cash and cash
equivalents under the proposed amendments.\85\ We do not expect the
proposed amendments to Form N-1A to have a significant competitive
effect.
---------------------------------------------------------------------------

    \85\ However, because cash and cash equivalent holdings do not
generate significant returns relative to other holdings, funds and
other registrants may have an incentive to shift to non-cash or cash
equivalent holdings that generate higher returns.
---------------------------------------------------------------------------

    Second, to the extent that publicly disclosed aggregate liquidity
profiles would have helped investors more accurately evaluate fund
liquidity risk and make more informed investment decisions, the
proposed amendments could reduce allocative efficiency. However, to the
extent that aggregate liquidity profiles on Form N-PORT would have
increased the likelihood of investors making investment choices based
on any confusion about a fund's liquidity risk profile, which would
have harmed the efficient allocation of capital, the proposed
amendments could increase allocative efficiency. The proposed annual
discussion of a fund's liquidity risk management program on Form N-1A
and the proposed requirement that funds and other registrants publicly
disclose their holdings of cash and cash equivalents on Form N-PORT
potentially mitigate this reduction in allocative efficiency, but only
to the extent that these proposed requirements provide information that
helps investors evaluate fund liquidity risk.
    Finally, to the extent that the information provided by aggregate
liquidity profiles would have promoted increased investment in certain
funds, and the assets those funds invest in, rescinding the aggregate
liquidity profile requirement could reduce capital formation. At the
same time, we note that the new public disclosure requirements we are
proposing could offset any reduction in capital formation.
    In summary, we note that all of the impacts described above are
conditioned upon the usefulness to investors of information that we
propose to no longer require relative to the usefulness of additional
proposed disclosures. We cannot estimate the aggregate effect on
efficiency, competition, or capital formation that will result from the
new amendments because we do not know the extent to which aggregate
liquidity risk profiles, narrative discussion of a fund's liquidity
risk management program, or the amount of cash and cash equivalents
held by a fund and other registrants are useful to investors in making
more informed investment choices.

D. Reasonable Alternatives

    The Commission considered several alternatives to the proposed
amendments to funds public and non-public disclosure requirements.
First, in order to address any potential issues with the interpretation
of a fund's aggregate liquidity profile by investors, we could have
maintained the public disclosure of this profile on Form N-PORT and
added a requirement that funds publicly disclose on Form N-PORT
additional information providing context and clarification regarding
how their aggregate liquidity profile were generated and should be
interpreted. This alternative would have provided investors with some
of the benefits of the additional context provided by the proposed
narrative discussion on Form N-1A, and, to the extent that it increased
investors' understanding of a fund's aggregate liquidity profile, could
allow them to make more informed investment choices relative to the
baseline. However, to the extent that some investors believe that they
can more easily obtain information in a fund's annual report compared
to information in the fund's N-PORT filings because annual reports are
delivered directly to them, and the investors are not as interested in
being able to access, reuse, and compare the information if included in
a structured format on Form N-PORT, this alternative would require
investors to seek out this additional information on EDGAR instead of
having it delivered directly to them in an annual report. Similarly, we
could have required funds to disclose an aggregate liquidity profile in
their annual report along with additional information providing context
and clarification regarding how its aggregate liquidity profile was
generated and should be interpreted. If such disclosure increased
investors' understanding of a fund's aggregate liquidity profile, this
would allow them to make more informed investment choices relative to
the baseline, though they would receive this information at an annual
rather than quarterly frequency.
    Second, instead of requiring a fund to briefly discuss the
operation and effectiveness of its liquidity risk management program in
the MDFP section of its annual report, we could have required a more
specific discussion of the fund's exposure to liquidity risk over the
preceding year, how the fund managed that risk, and how the fund's
returns were affected over the preceding year. This alternative could
have provided investors with a more in-depth understanding of both a
fund's liquidity risk and the fund's approach to managing that risk,
which might allow them to make more informed investment decisions
compared to the proposed discussion of the fund's liquidity risk
management program. However, we preliminarily believe that this
alternative would be more costly for funds to implement than the
proposed narrative discussion on Form N-1A because it might require
funds to perform a more detailed analysis of their liquidity risk over
the past year.
    Third, we could have amended both Form N-PORT and rule 22e-4 to

prescribe an objective approach to classification in which the
Commission would specify more precise criteria and guidance regarding
how funds should classify different categories of investments. Such an
approach could permit consistent comparisons of different funds'
aggregate liquidity profiles, allowing investors to make more informed
investment decisions without requiring funds to provide additional
contextual discussion of their liquidity risk management programs.
However, as discussed in the Liquidity Adopting Release, the Commission
may not be able to respond as quickly as market participants to dynamic
market conditions that might necessitate changes to such criteria and
guidance, and would be unable to account for determinants of investment
liquidity that rule 22e-4 treats as fund-specific.\86\
---------------------------------------------------------------------------

    \86\ See Liquidity Adopting Release, supra footnote 2, at n.1143
and accompanying text.
---------------------------------------------------------------------------

    Finally, we could have required that if funds chose to split the
classification of any of their portfolio holdings across liquidity
buckets when reporting them on the non-public portion of Form N-PORT,
they do so for all of their portfolio holdings. This would have ensured
that all of the portfolio holdings within a given fund could be
interpreted more consistently for any monitoring purposes by the
Commission. However, to the extent that being able to choose the
classification approach appropriate to each portfolio holding more
accurately reflects a manager's judgment of that portfolio holding's
liquidity, any reduction in the consistency of portfolio
classifications under the proposed amendment could be offset by a more
accurate assessment of fund liquidity risk.

E. Request for Comment

    We request comment on our analysis of the likely economic effects
of the proposed form amendments. We also request comment on the
following:
     To what extent will investors rely on the annual narrative
discussion of a fund's liquidity risk management program's
effectiveness in making investment decisions?
     To what extent will investors rely on the quarterly
disclosure of a fund or other registrant's holdings of cash and cash
equivalents in making investment decisions?
     Will investors find the new proposed public disclosures
more or less informative than an aggregate liquidity profile in making
investment choices? Would investors be better off if both types of
disclosures were required?
     How much would it cost a fund to discuss the extent and
manner in which the fund took liquidity risk, the way that risk was
managed, and the effects of these on the fund's performance over the
past year in the MDFP section of its annual report? Would it be more
costly than the proposed narrative discussion of the fund's liquidity
risk management program in its annual report? If so, how much more
costly would it be? Are there other benefits of this alternative to
funds, investors, and other market participants that we should
consider?
     Do investors have a reason to access, reuse, or compare
the narrative information? If so, would investors' ease of access and
usability of the information improve if the information were provided
in a structured format (e.g., XML, XBRL, Inline XBRL)? If so, which
structured format would be most useful and why?
     To the extent that certain investors prefer to have
information about a fund's liquidity risk management delivered to them
rather than having to seek out that information on EDGAR, would
investors prefer that information on Form N-PORT pertaining to
aggregate liquidity risk profiles be delivered to them as a separate
disclosure in paper or electronic form?
     Are there any other reasonable alternative with
significant economic impacts that we should consider?

IV. Paperwork Reduction Act

A. Introduction

    The proposed amendments to Form N-PORT and Form N-1A contain
``collections of information'' within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\87\
---------------------------------------------------------------------------

    \87\ 44 U.S.C. 3501 through 3521.
---------------------------------------------------------------------------

    The title for the existing collections of information are: ``Rule
30b1-9 and Form N-PORT'' (OMB Control No. 3235-0730); and ``Form N-1A
under the Securities Act of 1933 and under the Investment Company Act
of 1940, Registration Statement of Open-End Management Investment
Companies'' (OMB Control No. 3235-0307). The Commission is submitting
these collections of information to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number. The Commission is proposing to amend
Form N-PORT and Form N-1A. The proposed amendments are designed to
improve the reporting and disclosure of liquidity information by funds.
We discuss below the collection of information burdens associated with
these amendments.

B. Form N-PORT

    As discussed above, on October 13, 2016, the Commission adopted new
Form N-PORT, which requires all registered management investment
companies, other than money market funds and small business investment
companies, and unit investment trusts (``UITs'') that operate as ETFs
to report information about their monthly portfolio holdings to the
Commission in a structured data format.\88\ On the same day, the
Commission adopted amendments to Form N-PORT requiring a fund to
publicly report on Form N-PORT the aggregate percentage of its
portfolio investments that falls into each of the four liquidity
classification categories noted above.\89\ Today, the Commission is
proposing amendments to rescind the requirement that funds publicly
disclose their aggregate liquidity profile on a quarterly basis with a
60-day delay. The Commission also is proposing to require funds and
other registrants to report to the Commission on a non-public basis the
amount of cash and cash equivalents in their portfolio on Form N-PORT
on a monthly basis and to publicly disclose this amount on a quarterly
basis with a 60 day delay.\90\ Finally, the Commission is proposing to
allow funds the option of splitting a fund's holding into more than one
liquidity classification category in certain specified
circumstances.\91\ As of the end of 2016, there were 9,090 mutual funds
managing assets of approximately $16 trillion, and there were 1,716
ETFs managing assets of approximately $2.5 trillion.\92\ Preparing a
report on Form N-PORT is mandatory and is a collection of information
under the PRA, and the information required by Form N-PORT will be
data-tagged in XML format.

Except for certain reporting items specified in the form,\93\ responses
to the reporting requirements will be kept confidential for reports
filed with respect to the first two months of each quarter; the third
month of the quarter will not be kept confidential, but made public
sixty days after the quarter end.
---------------------------------------------------------------------------

    \88\ Reporting Modernization Adopting Release, supra footnote 2.
    \89\ Item B.8.a of Form N-PORT. Form N-PORT also requires public
reporting of the percentage of a fund's highly liquid investments
that it has segregated to cover, or pledged to satisfy margin
requirements in connection with, derivatives transactions that are
classified as moderately liquid, less liquid, or illiquid
investments. Item B.8.b of Form N-PORT.
    \90\ See supra footnote 15 (noting that the term ``registrant''
refers to entities required to file Form N-PORT, including all
registered management investment companies, other than money market
funds and small business investment companies, and all ETFs
(regardless of whether they operate as UITs or management investment
companies).
    \91\ See Proposed Item C.7.b of Form N-PORT and Instructions.
    \92\ See supra footnote 73 and accompanying text.
    \93\ These items include information reported with respect to a
fund's Highly Liquid Investment Minimum (Item B.7), derivatives
transactions (Item B.8), country of risk and economic exposure (Item
C.5.b), delta (Items C.9.f.v, C.11.c.vii, or C.11.g.iv), liquidity
classification for portfolio investments (Item C.7), or
miscellaneous securities (Part D), or explanatory notes related to
any of those topics (Part E) that is identifiable to any particular
fund or adviser. See Proposed General Instruction F of Form N-PORT.
---------------------------------------------------------------------------

    In the Liquidity Adopting Release, we estimate that, for the 35% of
funds that would file reports on Form N-PORT in house, the per fund
average aggregate annual hour burden will be 144 hours per fund, and
the average cost to license a third-party software solution will be
$4,805 per fund per year.\94\ For the remaining 65% of funds that would
retain the services of a third party to prepare and file reports on
Form N-PORT on the fund's behalf, we estimate that the average
aggregate annual hour burden will be 125 hours per fund, and each fund
will pay an average fee of $11,440 per fund per year for the services
of third-party service provider. In sum, we estimate that filing
liquidity-related information on Form N-PORT will impose an average
total annual hour burden of 144 hours on applicable funds, and all
applicable funds will incur on average, in the aggregate, external
annual costs of $103,787,680, or $9,118 per fund.\95\
---------------------------------------------------------------------------

    \94\ See Liquidity Adopting Release, supra footnote 2, at n.1237
and accompanying text.
    \95\ See Liquidity Adopting Release, supra footnote 2, at n.1238
and accompanying text.
---------------------------------------------------------------------------

    Today, we are proposing amendments to Form N-PORT to rescind the
requirement that a fund report the aggregate percentage of the fund's
portfolio representing each of the four liquidity categories. As
discussed above, we are rescinding this requirement because we believe
that Form N-PORT may not be the most accessible and useful way to
convey to the public information about a fund's liquidity risks and the
fund's approach to liquidity risk management. Because there would no
longer be public disclosure of a fund's aggregate liquidity
classification information, we would also re-designate reporting about
the amount of a fund's highly liquid investments that are segregated or
pledged to cover less liquid derivatives transactions to the non-public
portion of the form. We believe that public disclosure of this
information would be of limited to no utility to investors without
broader context and, therefore, may be confusing. However, because we
would otherwise be unable to determine the amount of a fund's highly
liquid investments that is actually unavailable to meet redemptions, we
believe that funds should continue to report this item to us, on a non-
public basis. Finally, we are proposing other amendments to Form N-PORT
to add an additional disclosure requirement relating to the fund's and
other registrant's holdings of cash and cash equivalents not reported
in Parts C and D of the Form \96\ and to allow funds the option of
splitting a fund's holding into more than one classification category
in three specified circumstances.\97\ We believe these additional
amendments enhance, the liquidity data reported to the Commission.\98\
In addition, for some funds, these proposed changes may also reduce
cost burdens as they comply with the rule.
---------------------------------------------------------------------------

    \96\ See proposed Item B.2.f. of Form N-PORT.
    \97\ See proposed Instructions to Form N-PORT Item C.7.
    \98\ See Liquidity Adopting Release, supra footnote 2, at n.293
and accompanying text (discussing the Commission's need for the
information reported on Form N-PORT).
---------------------------------------------------------------------------

    Based on Commission staff experience, we believe that our proposal
to rescind the requirement that funds publicly report the aggregate
classification information on Form N-PORT will reduce the estimated
burden hours and costs associated with Form N-PORT by approximately one
hour. We believe, however, that this reduction in cost will be offset
by the increase in cost associated with the other proposed amendments
to Form N-PORT, which we also estimate to be one hour. Therefore, we
believe that there will be no substantive modification to the existing
collection of information for Form N-PORT. As a result, the Commission
believes that the current PRA burden estimates for the existing
collection of information requirements remain appropriate.

C. Form N-1A

    Form N-1A is the registration form used by open-end investment
companies. The respondents to the amendments to Form N-1A adopted today
are open-end management investment companies registered or registering
with the Commission. Compliance with the disclosure requirements of
Form N-1A is mandatory, and the responses to the disclosure
requirements are not confidential. In our most recent Paperwork
Reduction Act submission for Form N-1A, we estimated for Form N-1A a
total hour burden of 1,602,751 hours, and the total annual external
cost burden is $131,139,208.\99\
---------------------------------------------------------------------------

    \99\ This estimate is based on the last time the rule's
information collection was submitted for PRA renewal in 2018.
---------------------------------------------------------------------------

    The Commission is proposing to amend Form N-1A to require funds to
discuss certain aspects of their liquidity risk management program as
part of their annual reports to shareholders. Specifically we are
proposing to require a fund to discuss briefly the operation and
effectiveness of the fund's liquidity risk management program in the
fund's annual report to shareholders, as part of its MDFP.\100\ We
believe that this proposed amendment will provide effective disclosure
that better informs investors of how the fund's liquidity risk and
liquidity risk management practices affect their investment than the
Form N-PORT public liquidity risk profile.
---------------------------------------------------------------------------

    \100\ Proposed Item 27(b)(7)(iii) of Form N-1A.
---------------------------------------------------------------------------

    Form N-1A generally imposes two types of reporting burdens on
investment companies: (i) The burden of preparing and filing the
initial registration statement; and (ii) the burden of preparing and
filing post-effective amendments to a previously effective registration
statement (including post-effective amendments filed pursuant to rule
485(a) or 485(b) under the Securities Act, as applicable). We estimate
that each fund would incur a one-time burden of an additional five
hours,\101\ to draft and finalize the required disclosure and amend its
registration statement. In aggregate, we estimate that funds would
incur a one-time burden of an additional 53,990 hours,\102\ to comply
with the proposed Form N-1A disclosure requirements. Amortizing the
one-time burden over a three-year period results in an average annual
burden of an additional 17,996.7 hours.\103\
---------------------------------------------------------------------------

    \101\ This estimate is based on the following calculation: 5
hours (3 hours for the compliance attorney to consult with the
liquidity risk management program administrator and other investment
personnel in order to produce an initial draft of the MDFP
disclosure + 2 hours for senior officers to familiarize themselves
with the new disclosure and certify the annual report). These
calculations stem from the Commission's understanding of the time it
takes to draft and review MDFP disclosure and to update a fund's
registration statement.
    \102\ This estimate is based on the following calculations: 5
hours x 10,798 open-end funds (excluding money market funds and ETFs
organized as UITs, and including ETFs that are management investment
companies) = 53,990 hours.
    \103\ This estimate is based on the following calculation:
53,990 hours / 3 = 17,996.7 average annual burden hours.
---------------------------------------------------------------------------

    Based on Commission staff expertise and experience in reviewing
registration

statements, we estimate that each fund would incur an ongoing burden of
an additional 2.5 hours each year to review and update the required
disclosure and amend its registration statement.\104\ In aggregate, we
estimate that funds would incur an annual burden of an additional
26,995 hours,\105\ to comply with the proposed Form N-1A disclosure
requirements.
---------------------------------------------------------------------------

    \104\ This estimate is based on the following calculation: 2.5
hours (2 hours for the compliance attorney to consult with the
liquidity risk management program administrator and other investment
personnel in order to produce an initial draft of the MDFP
disclosure + .5 hours for senior officers to certify the annual
report). These calculations stem from the Commission staff's
understanding of the time it takes to review MDFP disclosure and to
update a fund's registration statement.
    \105\ This estimate is based on the following calculation: 2.5
hours x 10,798 open-end funds (excluding money market funds and ETFs
organized as UITs, and including ETFs that are management investment
companies) = 26,995 hours.
---------------------------------------------------------------------------

    Amortizing these one-time and ongoing hour and cost burdens over
three years results in an average annual increased burden of
approximately 3.3 hours per fund.\106\
---------------------------------------------------------------------------

    \106\ This estimate is based on the following calculation: 5
burden hours (year 1) + 2.5 burden hours (year 2) + 2.5 burden hours
(year 3) / 3 = 3.3.
---------------------------------------------------------------------------

    In total, we estimate that funds would incur an average annual
increased burden of approximately 44,991.7 hours,\107\ to comply with
the proposed Form N-1A disclosure requirements.
---------------------------------------------------------------------------

    \107\ This estimate is based on the following calculation:
17,996.7 hours + 26,995 hours = 44,991.7 hours.
---------------------------------------------------------------------------

D. Request for Comments

    We request comment on whether our estimates for burden hours and
any external costs as described above are reasonable. Pursuant to 44
U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (i)
Evaluate whether the proposed collections of information are necessary
for the proper performance of the functions of the Commission,
including whether the information will have practical utility; (ii)
evaluate the accuracy of the Commission's estimate of the burden of the
proposed collections of information; (iii) determine whether there are
ways to enhance the quality, utility, and clarity of the information to
be collected; and (iv) determine whether there are ways to minimize the
burden of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
    The agency is submitting the proposed collections of information to
OMB for approval. Persons wishing to submit comments on the collection
of information requirements of the proposed amendments should direct
them to the Office of Management and Budget, Attention Desk Officer for
the Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Washington, DC 20503, and should send a copy to
Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549-1090, with reference to File No. S7-04-
18. OMB is required to make a decision concerning the collections of
information between 30 and 60 days after publication of this release;
therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days after publication of this release.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7-04-18, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736.

V. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory
Flexibility Analysis in accordance with section 3(a) of the Regulatory
Flexibility Act (``RFA'').\108\ It relates to proposed amendments to
Form N-PORT and proposed amendments to Form N-1A.
---------------------------------------------------------------------------

    \108\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons for and Objectives of the Proposed Actions

    The Commission adopted rule 22e-4 and related rule and form
amendments to enhance the regulatory framework for liquidity risk
management of funds.\109\ In connection with rule 22e-4, a fund is
required to publicly report on Form N-PORT the aggregate percentage of
its portfolio investments that falls into each of the liquidity
categories enumerated in rule 22e-4. This requirement was designed to
enhance public disclosure regarding fund liquidity and redemption
practices. However, since we adopted these requirements, we have
received letters raising concerns that the public disclosure of a
fund's aggregate liquidity classification information on Form N-PORT
may not achieve our intended purpose and may confuse and mislead
investors. As we discuss further in section II.A above, these letters
have led us to believe that the approach of disclosing liquidity
information to the public through Form N-PORT may not be the most
accessible and useful way to convey fund liquidity information to the
public, given that only the Commission, and not the public, would have
access to the more granular information and can request information
regarding the fund's methodologies and assumptions that would provide
needed context to understand this reporting.\110\
---------------------------------------------------------------------------

    \109\ See supra section I.
    \110\ See supra section II.A.1 at text following footnote 18.
---------------------------------------------------------------------------

B. Legal Basis

    The Commission is proposing amendments to Form N-1A and Form N-PORT
under the authority set forth in the Securities Act, particularly
section 19 thereof [15 U.S.C. 77a et seq.], the Exchange Act,
particularly sections 10, 13, 15, and 23, and 35A thereof [15 U.S.C.
78a et seq.], and the Investment Company Act, particularly, sections 8,
30, and 38 thereof [15 U.S.C. 80a et seq.].

C. Small Entities Subject to the Proposed Liquidity Regulations

    An investment company is a small entity if, together with other
investment companies in the same group of related investment companies,
it has net assets of $50 million or less as of the end of its most
recent fiscal year.\111\ Commission staff estimates that, as of June
31, 2017, there were 64 open-end investment companies (within 60 fund
complexes) that would be considered small entities. This number
includes open-end ETFs.\112\
---------------------------------------------------------------------------

    \111\ See rule 0-10(a) under the Investment Company Act.
    \112\ This estimate is derived from an analysis of data obtained
from Morningstar Direct as well as data reported on Form N-SAR filed
with the Commission for the period ending June 30, 2017.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

    We are proposing amendments to Form N-1A and Form N-PORT to enhance
fund disclosure regarding a fund's liquidity risk management practices.
Specifically, the proposed amendments to Form N-PORT \113\ would
rescind the requirement that funds publicly disclose aggregate
liquidity classification information about their portfolios and
proposed amendments to Form N-1A would require funds to discuss certain
aspects of their liquidity risk management program as part of their
annual reports to shareholders.\114\ In addition, we are proposing
amendments to Form N-PORT to allow funds to report multiple
classification categories for a single

position in certain cases \115\ and require funds and other registrants
to report their holdings of cash and cash equivalents.\116\
---------------------------------------------------------------------------

    \113\ See proposed amendments to Item B.8 of Form N-PORT.
    \114\ See proposed amendments to Item 27(b)(7)(iii) of Form N-
1A.
    \115\ See proposed Item C.7.b of Form N-PORT and Instructions.
    \116\ See proposed Item B.2.f. of Form N-PORT.
---------------------------------------------------------------------------

    All funds would be subject to the proposed disclosure and reporting
requirements, including funds that are small entities. We estimate that
64 funds (comprising 60 fund complexes) are small entities that would
be required to comply with the proposed disclosure and reporting
requirements. As discussed above, we do not believe that our proposed
amendments will change Form N-PORT's estimated burden hours and
costs.\117\ We estimate that each fund would incur a one-time burden of
an additional five hours,\118\ each year to draft and finalize the
required Form N-1A disclosure and amend its registration statement. For
purposes of this analysis, Commission staff estimates, based on
outreach conducted with a variety of funds, that small fund groups will
incur approximately the same initial and ongoing costs as large fund
groups. Therefore, in the aggregate, we estimate that funds that are
small entities would incur a one-time burden of an additional 320
hours,\119\ to comply with the proposed Form N-1A disclosure
requirements. Amortizing the one-time burden over a three-year period
results in an average annual burden of an additional 106.7 hours.\120\
We estimate that each fund would incur an ongoing burden of an
additional 2.5 hours each year to review and update the required Form
N-1A disclosure and amend its registration statement.\121\ Therefore,
we estimate that funds that are small entities will incur an ongoing
burden of an additional 160 hours to comply with the proposed Form N-1A
disclosure requirements.\122\
---------------------------------------------------------------------------

    \117\ See supra text accompanying footnote 79.
    \118\ See supra footnote 101 (noting that this estimate is based
on the Commission staff's understanding of the time it takes to
draft and review MDFP disclosure and to update a fund's registration
statement, including the time it takes for the compliance attorney
to consult with the liquidity risk management program administrator
and other investment personnel in order to produce an initial draft
of the MDFP disclosure as well as the time it takes for senior
officers to familiarize themselves with the new disclosure and
certify the annual report).