units or principal amount for each investment, as well as the value of
each investment at the close of the period, and the percentage value of
each investment when compared to the net assets of the fund.\96\ Funds
would also report the currency in which the investment was denominated,
and, if not denominated in U.S. dollars, the exchange rate used to
calculate value.
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    \95\ See Form N-PORT, Item C.2. See rule 12-12 of Regulation S-
X.
    \96\ See Form N-PORT, Item C.2.a to C.2.d. For derivatives, as
appropriate, funds would provide the number of contracts.
---------------------------------------------------------------------------

    Our proposal would also require funds to report the payoff profile
of the investment, indicating whether the investment is held long,
short, or N/A, which would serve the same purpose as the current
requirement in Regulation S-X to disclose investments sold short.\97\
Funds would respond N/A for derivatives and would respond to relevant
questions that indicated the payoff profile of each derivative in the
derivatives portion of the form. These disclosures would identify short
positions in investments held by funds.
---------------------------------------------------------------------------

    \97\ See Form N-PORT, Item C.3. See rule 12-12A of Regulation S-
X.
---------------------------------------------------------------------------

    Funds would also report the asset type for the investment: Short-
term investment vehicle (e.g., money market fund, liquidity pool, or
other cash management vehicle), repurchase agreement, equity-common,
equity-preferred, debt, derivative-commodity, derivative-credit,
derivative-equity, derivative-foreign exchange, derivative-interest
rate, structured note, loan, ABS-mortgage backed security, ABS-asset
backed commercial paper, ABS-collateralized bond/debt obligation, ABS-
other, commodity, real estate, other) and issuer type (corporate, U.S.
Treasury, U.S. government agency, U.S. government sponsored entity,
municipal, non-U.S. sovereign, private fund, registered fund,
other).\98\ We have based these categories in part on staff review of
how funds currently categorize investments on their schedule of
investments, and in part on the categories of investments required by
private funds under Form PF.\99\ These disclosures would allow the
Commission, investors, and other potential users to assess the
composition of fund portfolios in terms of asset and issuer types and
also

facilitate comparisons among similar types of investments.
---------------------------------------------------------------------------

    \98\ See Form N-PORT, Item C.4.a and C.4.b.
    \99\ See, e.g., Form PF, Item 26 (requiring filers to report
exposures by asset type); Form N-Q, Item 1 (requiring filers to
report the schedules of investments required by sections 210.12-12
to 12-14 of Regulation S-X); Form N-CSR, Item 1 (requiring filers to
attach a copy of the report transmitted to shareholders, which would
include schedules of investments required by sections 210.12-12 to
12-14 of Regulation S-X).
---------------------------------------------------------------------------

    Our proposal would also require funds to report, for each
investment, whether the investment is a restricted security and whether
the investment is an illiquid asset.\100\ These disclosures would
provide investors and the Commission staff with more information about
liquidity risks associated with the fund's investments.
---------------------------------------------------------------------------

    \100\ See Form N-PORT, Items C.6 and C.7. ``Restricted
security'' would have the definition provided in rule 144(a)(3)
under the Securities Act [17 CFR 230.144(a)(3)]. See Form N-PORT,
General Instruction E. See also proposed rule 12-13, nn.6 and 8 of
Regulation S-X, which would require similar disclosures in funds'
schedules of investments to identify securities that are restricted
or illiquid.
    Form N-PORT would define ``illiquid asset'' as ``an asset that
cannot be sold or disposed of by the Fund in the ordinary course of
business within seven calendar days, at approximately the value
ascribed to it by the Fund.'' See Form N-PORT, General Instruction
E. This definition is the same definition used in the liquidity
guidance issued by the Commission for open-end funds. See Revisions
of Guidelines to Form N-1A, Investment Company Act Release No. 18612
(Mar. 12, 1992) [57 FR 9829 (Mar. 20, 1992)] (``1992 Release''). As
recently stated by Chair Mary Jo White, the Division of Investment
Management is considering a recommendation that the Commission
update liquidity standards for open-end funds and ETFs, which may
result in updated guidance on this issue. See Speech by Securities
and Exchange Commission Chair Mary Jo White (Dec. 11, 2014),
available at http://www.sec.gov/News/Speech/Detail/Speech/1370543677722.
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    Each fund would also report whether the investment is categorized
by the fund as a Level 1, Level 2, or Level 3 fair value measurement in
the fair value hierarchy under U.S. Generally Accepted Accounting
Principles (``U.S. GAAP'').\101\ Commission staff could use this
information to identify and monitor investments that may be more
susceptible to increased valuation risk and identify potential outliers
that warrant additional monitoring or inquiry.\102\ In addition,
Commission staff would be better able to identify anomalies in reported
data by aggregating all fund investments industry-wide into the various
level categories. Currently, funds are required to evaluate the fair
value level measurement of each investment as part of the fair value
level hierarchy disclosure in their financial statements.\103\ We
believe that based on this requirement, funds should have pricing
information available to determine the categorization of their
portfolio investments as Level 1, Level 2, or Level 3 within the fair
value hierarchy.
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    \101\ See ASC 820. An investment is categorized in the same
level of the fair value hierarchy as the lowest level input that is
significant to its fair value measurement. Level 1 inputs include
quoted prices (unadjusted) for identical investments in an active
market (e.g., active exchange-traded equity securities). Level 2
inputs include other observable inputs, such as: (i) Quoted prices
for similar securities in active markets; (ii) quoted prices for
identical or similar securities in non-active markets; and (iii)
pricing models whose inputs are observable or derived principally
from or corroborated by observable market data through correlation
or other means for substantially the full term of the security.
Level 3 inputs are unobservable inputs. We are proposing amendments
to Regulation S-X to require that funds identify level 3 securities
in their schedules of investments. See infra Part II.C.3.
    \102\ For a discussion of some of the challenges regulators may
face with respect to Level 3 accounting, see, e.g., Konstantin
Milbradt, Level 3 Assets: Booking Profits and Concealing Losses, in
25 Rev. Fin. Stud. 55-95 (2011).
    \103\ ASC 820-10-50-2 requires for each class of assets and
liabilities measured at fair value, the level of the fair value
hierarchy within which the fair value measurements are categorized
in their entirety (Level 1, 2, or 3).
---------------------------------------------------------------------------

    Form N-PORT would also require funds to report the country that
corresponds to the country of investment or issuer based on the
concentrations of the risk and economic exposure of the investment.
Additionally, funds would be required to report the country in which
the issuer is organized if that is different from the country of risk
and economic exposure.\104\
---------------------------------------------------------------------------

    \104\ See Form N-PORT, Item C.5. Currently, funds are required
to report the related industry, country, or geographic region of the
investment in their schedules of investments. As discussed below, we
are proposing to amend Regulation S-X to require funds to report the
industry and the country or geographic region of the investment. See
infra Part II.C.3.
---------------------------------------------------------------------------

    These disclosures would provide the Commission staff and investors
with more information about country-specific exposures associated with
the fund's investments. Specifically, the Commission believes that
providing both the country based on concentrations of risk and economic
exposure and also the country in which the issuer is organized would
assist the Commission, investors, and other potential users in
understanding the country-specific risks associated with such
investments. For example, knowing the country of risk and economic
exposure is important for understanding the effect of such investments
in a portfolio when that country might be going through times of
economic or political stress, regardless of whether the investment is
issued in a different country. Knowing the country in which the issuer
is organized would be important information for analyzing the effect of
any events that could affect the country in which the issuer is
organized, such as sanctions or monetary controls, as this could affect
the ability of the fund to liquidate the investment.
    We request comment on our proposed disclosure requirements.
     Our proposal would require funds to report certain
identifiers for their investments. Should the Commission include
additional specific identifiers in Form N-PORT, such as the Financial
Instrumental Global Identifier (``FIGI'') or other similar identifier,
if available? \105\ If so, which identifier or identifiers would be
expected to be reported? Are there any special considerations relating
to the use of any identifiers (e.g., licensing fees associated with
certain identifiers, the prevalence of a particular identifier as
adopted by the marketplace, etc.) that could be addressed through these
reporting requirements? If so, how should the requirements be
restructured to address those considerations while still providing the
Commission and investors the necessary identifying information?
---------------------------------------------------------------------------

    \105\ Information about the FIGI is available on the Object
Management Group's Web site, a not-for-profit technology standards
consortium. See generally Object Management Group, Documents
Associated With Financial Industry Global Identifier (FIGI) Version
1.0--Beta 1, available at http://www.omg.org/spec/FIGI/1.0/Beta1/.
---------------------------------------------------------------------------

     We request comment on our proposal to require funds to
provide other unique identifiers for investments that do not have ISIN
or ticker identifiers. Should the Commission require, in certain
circumstances, specific identifiers to be reported as other unique
identifiers? For example, in the case of security-based swaps, should
the Commission require funds to report unique product identifiers?
\106\ If so, why?
---------------------------------------------------------------------------

    \106\ See infra note 139 and accompanying and following text.
---------------------------------------------------------------------------

     How, if at all, should we modify our proposed disclosures
for the amount of each investment at the end of the reporting period
(as well as the currency in which it is denominated)? Likewise, should
we modify our proposed disclosures for the payoff profile of each
investment and the restricted/illiquid nature of securities? If so,
why?
     Would our proposed asset and issuer categories allow funds
to readily categorize the investments typically held in fund
portfolios? Should we include additional or alternative categories, and
if so why? For example, are there any specific asset subcategories with
sufficiently unique features as to warrant their own asset category? To
the extent that funds currently are not categorizing their investments
as proposed in Form N-PORT, what costs would be associated with
providing such information?
     Should any of these disclosures be aggregated and reported
on a portfolio

basis, rather than at an individual investment level? Alternately,
should any of the proposed portfolio level information be reported on
an individual investment level?
     We request comment on the incremental burden of reporting
this information for each investment held by the fund, relative to the
current burden of reporting the total value of each class of
investments categorized in each level of the fair value hierarchy, as
currently required by U.S. GAAP. Are there other ways in which a fund
could identify and disclose investments that do not have readily
available market quotations or observable inputs as an alternative to
disclosing each investment's categorization as a Level 1, Level 2, or
Level 3 measurement?
     Are there additional items that should be included on Form
N-PORT in order to improve the transparency regarding the liquidity and
valuation of investments? For example, should the Commission require
additional disclosure regarding the fund's valuation of its
investments, such as the primary pricing source used (e.g., exchange,
broker quote, third-party pricing service, internal fair value), the
name of any third-party pricing source, or whether an independent
consultant or appraiser assisted with development of internal fair
value? If so, should such information be disclosed on an individual
security basis? Would such information increase the transparency of the
pricing of thinly traded securities? Would investors benefit from such
information and, if so, how? What costs and burdens would be associated
with providing such information?
     Should the Commission require funds to report both the
country in which the issuer is organized and also the country with the
greatest concentrations of risk and economic exposure of the
investments? What is the burden of reporting both elements, if
different? Should the Commission provide specific guidance or
instructions for determining the country with the greatest
concentration of risks and economic exposure? Should funds have the
option of reporting more than one country of economic risk, or a
geographic region of economic risk?
     Should funds not be required to report country codes for
U.S. investments? Would such an exclusion result in reduced burdens for
funds that held only domestic securities? On the other hand, would such
an exclusion result in investor confusion or complicate data validation
efforts, by, for example, rendering it unclear whether an investment
with N/A reported for its country code was a U.S. investment or was
instead a foreign investment for which a country code had not been
properly reported?
ii. Debt Securities
    In addition to the information required above, Form N-PORT would
require additional information about each debt security held by the
fund in order to gain transparency into the payment flows and
convertibility into equity of such investments, as such information can
be used to better understand the payoff profile and credit risk of
these investments. First, funds would report the maturity date and
coupon (reporting annualized rate and indicating whether fixed,
floating, variable, or none).\107\ Funds would also indicate whether
the security is currently in default, whether interest payments for the
security are in arrears or whether any coupon payments have been
legally deferred by the issuer, as well as whether any portion of the
interest is paid in kind.\108\
---------------------------------------------------------------------------

    \107\ See Form N-PORT, Items C.9.a and C.9.b.
    \108\ See Form N-PORT, Items C.9.c to C.9.e.
---------------------------------------------------------------------------

    Finally, we are proposing to require additional information for
convertible securities, to indicate whether the conversion is mandatory
or contingent.\109\ We are also proposing to require funds to disclose
for each convertible security the conversion ratio, information about
the asset into which the debt is convertible, and the delta, which is
the ratio of the change in the value of the option to the change in the
value of the asset into which the debt is convertible. This reflects
the sensitivity of the debt's value to changes in the price of the
asset into which the debt is convertible. The proposed requirement to
provide the delta would also be required for options, as discussed
further below, because convertible securities have optionality.\110\
For similar reasons discussed below regarding options, the Commission
believes that providing the delta for convertible securities is
important to understand the extent of both the credit exposure of the
debt portion of the convertible bond as well as the market price
exposure relative to the underlying security into which it can be
converted or exchanged.
---------------------------------------------------------------------------

    \109\ See Form N-PORT, Item C.9.f.
    \110\ See text accompanying and following note 127 (discussing
information required for options, including delta).
---------------------------------------------------------------------------

    We request comment on our proposed disclosure requirements for debt
securities.
     Are there additional or alternative characteristics of
debt securities that we should require to be disclosed to assist the
Commission, investors, or other potential users in understanding the
nature and risks of a fund's debt security investments? For example,
would disclosure of which debt securities are guaranteed, the nature of
such guarantee (e.g., guarantee insurance or letter of credit), and the
identity of the guarantor, be useful to investors? Alternately, or in
addition, should the Commission require disclosure regarding the
frequency of coupon payments, principal payback schedule, priority in
security structure (e.g., senior, subordinated, etc.), embedded options
(if any), insurance wrapper (if any), and whether the debt is secured?
     We request comment on our proposed disclosure requirements
for convertible securities. With regard to the delta, to what extent
would the inputs and assumptions underlying the methodology by which
funds calculate price changes affect the values reported? Are there
liability or other concerns associated with the reporting of such
measures with such inputs and assumptions? How would the comparability
of information reported between funds be affected if funds used
different inputs and assumptions in calculating delta, such as
different assumptions regarding the values of the funds' portfolios?
Are there ways the Commission could improve the standardization of the
calculation of delta? If so, how? What would the associated costs and
other burdens be for funds to calculate and report these measures
according to a different methodology than that typically used by the
fund?
iii. Repurchase and Reverse Repurchase Agreements
    In addition to the information required above for all investments,
Form N-PORT would require each fund to report additional information
for each repurchase and reverse repurchase agreement held by the fund.
The fund would report the category that reflects the transaction from
the perspective of the fund (repurchase, reverse repurchase), whether
the transaction is cleared by a central counterparty--and if so the
name of the central counterparty--or if not the name and LEI (if any)
of the over-the-counter counterparty, repurchase rate, whether the
repurchase agreement is tri-party (to distinguish from bilateral
transactions), and the maturity date.\111\ Funds would also report the
principal amount and value of collateral, as well as the

category of investments that most closely represents the
collateral.\112\
---------------------------------------------------------------------------

    \111\ See Form N-PORT, Items C.10.a to C.10.e.
    \112\ See Form N-PORT, Item C.10.f. Funds would report the
category of investments that most closely represents the collateral,
selected from among the following (asset-backed securities; agency
collateralized mortgage obligations; agency debentures and agency
strips; agency mortgage-backed securities; private label
collateralized mortgage obligations; corporate debt securities;
equities; money market; U.S. Treasuries (including strips); other
instrument). If ``other instrument,'' funds would also include a
brief description, including, if applicable, whether it is a
collateralized debt obligation, municipal debt, whole loan, or
international debt.
---------------------------------------------------------------------------

    These disclosures would enhance the information currently reported
regarding funds' use of repurchase agreements and reverse repurchase
agreements. Information regarding repurchase agreements would be
comparable to similar disclosures currently required to be made by
money market funds on Form N-MFP. The categories used for reporting
collateral would track the categories currently used to report tri-
party repurchase agreement information to the Federal Reserve Bank of
New York. We believe that conforming the categories that would be used
in Form N-PORT to categories used in other reporting contexts would
ease reporting burdens and enhance comparability.\113\
---------------------------------------------------------------------------

    \113\ See Money Market Fund Reform 2014 Release, supra note 13,
at nn.1515-1518 and accompanying text (discussing comment letter
stating that the categories used to report collateral for tri-party
repurchase agreements to the Federal Reserve Bank of New York would
allow for regular and efficient comparison of current and historical
risk factors regarding repurchase agreements on a standardized
basis).
---------------------------------------------------------------------------

    We request comment on our proposed disclosure requirements above.
     As discussed above, the reporting requirements contained
in Form N-PORT would be comparable to similar disclosures currently
required to be made by money market funds on Form N-MFP concerning
repurchase agreements. Should we collect different or additional
information? For example, should the proposed reporting requirements be
revised to encompass characteristics of bilateral repurchase and
reverse repurchase agreements, which are not typically held by money
market funds but we understand are more commonly held by funds that
would be reporting on Form N-PORT? If so, how? Should the categories
used for reporting collateral, which as proposed would track the
categories currently used to report tri-party repurchase agreement
information to the Federal Reserve Bank of New York, be revised? If so,
how and why?
     We believe that funds already track the characteristics of
their repurchase and reverse repurchase agreements that we would
require to be reported on Form N-PORT. To the extent this is true, what
would be the incremental cost and burden of reporting such information
to the Commission?
     Are there additional or alternative disclosures that we
should require to be reported to assist investors in understanding
counterparty and other risks associated with the fund's repurchase and
reverse repurchase agreements?
iv. Derivatives
    As discussed above, the current reporting regime for derivatives
has led to inconsistent approaches to reporting derivatives information
and, in some cases, insufficient information concerning the terms and
underlying reference assets of derivatives to allow the Commission or
investors to understand the investment. Additionally, as discussed
further below, for options, the Commission believes that it would be
important to have a measurement of ``delta,'' a measure not reported in
the financial statements or schedule of investments, to better
understand the exposure to the underlying reference asset that the
options produce in the portfolio. Currently, the Commission and
investors are sometimes unable to accurately assess funds' derivatives
investments and the exposures they create, which can be important to
understanding funds' investment strategies, use of leverage, and risk
of loss. Our proposal is intended to increase transparency into funds'
derivatives investments by requiring funds to disclose certain
characteristics and terms of derivative contracts that are important to
understand the payoff profile of a fund's investment in such contracts,
as well as the exposures they create or hedge in the fund. This would
include, for example, exposures to currency fluctuations, interest rate
shifts, prices of the underlying reference asset, and counterparty
credit risk. As discussed further below, we are also amending
Regulation S-X to make similar changes to the reporting regime for
derivatives disclosures in fund financial statements.
    Consequently, in addition to the information required above for all
investments, Form N-PORT would require additional information about
each derivative contract in the fund's portfolio. Funds would report
the category of derivative that most closely represents the investment
(e.g., forward, future, option, etc.).\114\ Funds would also report the
name and LEI (if any) of the counterparty (including a central
counterparty).\115\ This identifying information should assist the
Commission, investors, and other potential users in better identifying
and monitoring the categories of derivatives held by funds and the
associated counterparty risks.\116\
---------------------------------------------------------------------------

    \114\ See Form N-PORT, Item C.11.a. Funds would report the
category of derivative that most closely represents the investment,
selected from among the following (forward, future, option,
swaption, swap, warrant, other). If ``other,'' funds would provide a
brief description.
    \115\ See Form N-PORT, Item C.11.b.
    \116\ Commenters to the FSOC Notice indicated that counterparty
data for derivative disclosures is not often available and discussed
the need to have more transparency in this regard. See, e.g.,
Comment Letter of Americans for Financial Reform (Mar. 27, 2015)
(``Americans For Financial Reform FSOC Notice Comment Letter'')
(asserting that counterparty data in derivative disclosures is not
often available); Comment Letter of the Systemic Risk Council (Mar.
25, 2015) (``Systemic Risk Council FSOC Notice Comment Letter'')
(discussing the need to have information about investment vehicles
that hold bank liabilities).
---------------------------------------------------------------------------

    Form N-PORT would also require funds to report terms and conditions
of each derivative investment that are important to understanding the
payoff profile of the derivative.\117\ For options and warrants,
including options on a derivative (e.g., swaptions), funds would report
the type (e.g., put), payoff profile (e.g., written), number of shares
or principal amount of underlying reference instrument per contract,
exercise price or rate, expiration date, and the unrealized
appreciation or depreciation of the option or warrant.\118\

Form N-PORT would require funds to provide a description of the
reference instrument, including name of issuer, title of issue, and
relevant securities identifier.\119\
---------------------------------------------------------------------------

    \117\ We are proposing to require similar information on a
fund's schedule of investments. See Part II.C.2. Commenters to the
FSOC Notice were supportive of enhanced derivatives disclosures.
See, e.g., Systemic Risk Council FSOC Notice Comment Letter, supra
note 116 (``While most managed funds do not employ leverage to the
same degree that banks do, we encourage regulators to consider
carefully whether there are potential improvements to the current
data collection regime (e.g., for registered investment advisers)
that would allow regulators to track the presence and concentration
of leverage in the asset management industry, particularly as it
arises from use of derivatives. . . .''); Americans for Financial
Reform FSOC Notice Comment Letter, supra note 116 (stating that
regulatory oversight should include ensuring appropriate
transparency of fund positions to both investors and regulators,
asserting that current derivatives disclosure requirements for
registered investment companies ``appear very poor,'' noting the
deficiency of just current accounting values and expressing the need
for risk and exposure metrics that show the potential losses or
gains to the fund if market prices change, and suggesting that new
disclosures should require derivatives data to be sufficiently
granular such that regulators and market participants could perform
their own independent calculations of risk exposure, rather than
relying on aggregated metrics of total risk); Vanguard FSOC Notice
Comment Letter, supra note 71 (asserting that regulators would
benefit by better understanding how and why mutual funds use
derivatives).
    \118\ See Form N-PORT, Item C.11.c. The type of warrant or
option would be selected from among the following (put or call). The
payoff profile of the warrant or option would be selected from among
the following (written or purchased). Funds would respond N/A for
warrants for both type and payoff profile. As discussed above, funds
would report the number of option contracts in Item C.2.a of Form N-
PORT. See supra note 96 and accompanying text.
    \119\ See Form N-PORT, Items C.11.c.iii.2 and C.11.c.iii.3. For
the securities identifier, funds would report, if available, CUSIP
of the reference asset, ISIN (if CUSIP is not available), ticker (if
CUSIP and ISIN is not available), or other unique identifier (if
CUSIP, ISIN, and ticker are not available). See also supra note 92
and accompanying and following text.
---------------------------------------------------------------------------

    We recognize that some derivatives have underlying assets that are
indices of securities or other assets or a ``custom basket'' of assets,
the components of which are not publicly available. We are proposing
requirements to ensure that the Commission, investors, and other
potential users are aware of the components of such indices or custom
baskets. If the reference instrument is an index for which the
components are publicly available on a Web site and are updated on that
Web site no less frequently than quarterly, funds would identify the
index and provide the index identifier, if any.\120\ We are proposing
to require at least quarterly public disclosure for the components of
the index because it matches the frequency with which funds are
currently required and, as proposed in this release, would continue to
be required, to disclose their portfolio holdings.\121\ If the index's
components are not publicly available as provided above, and the
notional amount of the derivative represents 1% or less of the NAV of
the fund, the fund would provide a narrative description of the
index.\122\ If the index's components are not publicly available in
that manner, and the notional amount of the derivative represents more
than 1% of the NAV of the fund, the fund would provide the name,
identifier, number of shares or notional amount or contract value as of
the trade date (all of which would be reported as negative for short
positions), value, and unrealized appreciation or depreciation of every
component in the index.\123\
---------------------------------------------------------------------------

    \120\ See Form N-PORT, Item C.11.c.iii.2.
    \121\ See infra Part II.A.4 (discussing proposed rules
concerning the public disclosure of reports on Form N-PORT).
    \122\ See supra note 120.
    \123\ See id. Short positions in the index, if any, would be
reported as negative numbers. The identifier for each index
component would include CUSIP, ISIN (if CUSIP is not available),
ticker (if CUSIP and ISIN are not available), or other identifier
(if CUSIP, ISIN, and ticker are not available. If other identifier
is provided, the fund would indicate the type of identifier used.
---------------------------------------------------------------------------

    We are proposing this requirement because we believe that it is
important for the Commission, investors, and other potential users to
have transparency into all exposures to assets that the fund has,
regardless of whether the fund directly holds investments in those
assets or chooses to create those exposures through a derivatives
contract.\124\ We are proposing the 1% notional amount threshold based
on our experience with the summary schedule of investments, which
requires funds to disclose investments for which the value exceeds 1%
of the fund's NAV in that schedule.\125\ We believe that, similar to
this threshold in the summary schedule of investments, providing a 1%
de minimis for disclosing the components of a derivative with nonpublic
reference assets considers the need for the Commission, investors, and
other potential users to have transparency into the exposures that
derivative contracts create while not requiring extensive disclosure of
multiple components in a non-public index for instruments that
represent a small amount of the fund's overall value.
---------------------------------------------------------------------------

    \124\ We are also proposing to modify Regulation S-X to require
similar disclosures. See infra Part II.C.2.a (discussing proposed
rule 12-13, n.3 of Regulation S-X).
    \125\ See rule 12-12C, n.3 of Regulation S-X.
---------------------------------------------------------------------------

    If the reference instrument is a derivative, funds would indicate
the category of derivative (e.g., swap) and would provide all
information required to be reported on Form N-PORT for that type of
derivative.\126\
---------------------------------------------------------------------------

    \126\ See Form N-PORT, Item C.11.c.iii.1. Funds would report the
category of derivative that most closely represents the investment,
selected from among the following (forward, future, option,
swaption, swap, warrant, other). If ``other,'' funds would provide a
brief description.
---------------------------------------------------------------------------

    We are also proposing to require funds to report the delta of the
option, which is the ratio of the change in the value of the option to
the change in the value of the reference instrument.\127\ This measure
reflects the sensitivity of the option's value to changes in the price
of the reference instrument. Disclosure of delta for options and
warrants would provide the Commission, investors, and other potential
users a more accurate measure of a fund's full exposure to the
reference instrument than the option's notional amount, which we would
otherwise not be able to determine. Accordingly, having the measurement
of delta for options is important for the Commission, as well as
investors and other potential users, to measure the impact, on a fund
or group of funds that holds options on an asset, of a change in such
asset's price. Also, as the Commission has previously observed, funds
can use options as a form of obtaining a leveraged position in an
underlying reference asset.\128\ Having a measurement of exposures
created through this type of leverage can help the Commission,
investors, and other potential users better understand the risks that
the fund faces as asset prices change, since the use of this type of
leverage can magnify losses or gains in assets.
---------------------------------------------------------------------------

    \127\ See Form N-PORT, Item C.11.c.vii.
    \128\ See Derivatives Concept Release, supra note 7.
---------------------------------------------------------------------------

    For futures and forwards (other than foreign exchange forwards,
which share similarities with foreign exchange swaps and should be
reported accordingly as discussed below), Form N-PORT would require
funds to report a description of the reference instrument, the payoff
profile (i.e., long or short), expiration date, aggregate notional
amount or contract value as of the trade date, and unrealized
appreciation or depreciation.\129\ The description of the reference
instrument would conform to the same requirements as the description of
reference instruments for warrants and options.\130\
---------------------------------------------------------------------------

    \129\ See Form N-PORT, Item C.11.d.
    \130\ See Form N-PORT, Item C.11.d.ii. See also supra notes 119-
126 and accompanying text.
---------------------------------------------------------------------------

    For foreign exchange forwards and swaps, funds would report the
amount and description of currency sold, amount and description of
currency purchased, settlement date, and unrealized appreciation or
depreciation.\131\
---------------------------------------------------------------------------

    \131\ See Form N-PORT, Item C.11.e.
---------------------------------------------------------------------------

    For swaps (other than foreign exchange swaps), funds would report
the description and terms of payments necessary for a user of financial
information to understand the nature and terms of payments to be paid
and received, including, as applicable: a description of the reference
instrument, obligation, or index; financing rate to be paid or
received; floating or fixed rates to be paid and received; and payment
frequency.\132\ The description of the reference instrument would
conform to the same requirements as the description of reference
instruments for forwards and futures.\133\ Funds would also report
upfront payments or receipts, unrealized appreciation or

depreciation, termination or maturity date, and notional amount.\134\
---------------------------------------------------------------------------

    \132\ See Form N-PORT, Item C.11.f.i. Funds would separately
report the description and terms of payments to be paid and
received. The description of the reference instrument, obligation,
or index would include the information required to be reported for
the descriptions of reference instruments for warrants, options,
futures, or forwards.
    \133\ See id. See also supra note 130 and accompanying text.
    \134\ See Form N-PORT, Items C.11.f.ii to C.11.f.v.
---------------------------------------------------------------------------

    Finally, for derivatives that do not fall into the categories
enumerated in Form N-PORT, funds would provide a description of
information sufficient for a user of financial information to
understand the nature and terms of the investment. This description
would include, as applicable, currency, payment terms, payment rates,
call or put features, exercise price, and a description of the
reference instrument, among other things.\135\ The description of the
reference instrument would conform to the same requirements as the
description of reference instruments for swaps.\136\ Funds would also
report termination or maturity (if any), notional amount(s), unrealized
appreciation or depreciation, and the delta (if applicable).\137\ We
recognize that new derivative products will continue to evolve, and
thus the disclosures for this category are intended to be flexible
enough to encompass the changing needs and products that may emerge.
---------------------------------------------------------------------------

    \135\ See Form N-PORT, Item C.11.g.1.
    \136\ See Form N-PORT, Item C.11.f.i. See also supra note 133
and accompanying text.
    \137\ See Form N-PORT, Items C.11.g.ii to C.11.g.v.
---------------------------------------------------------------------------

    We request comment on our proposed disclosure requirements for
derivatives.
     Is there additional or alternative information about
derivative contracts that we should be requiring? Should we modify the
information we are proposing to require for any derivatives contracts?
Should other terms and conditions, categories of derivatives, payoff
profiles, or identifiers be included in Form N-PORT so that all
material elements of derivatives contracts can be reported?
     For options, should funds be required to identify the
option exercise type (e.g., American, European, Bermudan, Asian, other)
or report any additional information for more exotic option exercise
types (e.g., rainbow, barrier, lookback, etc.)?
     We recently adopted Regulation SBSR, which will require
one of the parties to security-based swap transactions to report
certain information to registered security-based swaps data
repositories or the Commission.\138\ The reporting party will report
certain identifying information, including unique product identifiers
to identify each security-based swap, as well as certain primary and
secondary trade information, including the terms of any standardized
fixed or floating rate payments, the frequency of any such payments,
and any additional data elements included in the agreement between the
counterparties that are necessary for a person to determine the market
value of the transaction.\139\ The Commodities Futures Trading
Commission has engaged in similar efforts with regards to unique
product identifiers that would be reported with regards to swaps.\140\
Are there methods the Commission should consider to harmonize the SBSR
reporting requirements with the proposed reporting requirements on Form
N-PORT? For example, should we consider ways to allow a fund to import
the data reported to swap and security-based swap data repositories
automatically into the fund's reports on Form N-PORT? How would this
affect investors' ability to analyze this data for swaps and security-
based swaps held by funds? Should we require funds to report the
product identifiers or any other data we are not currently proposing to
require on Form N-PORT that will be required to be reported for swaps
or security-based swaps? If so, why?
---------------------------------------------------------------------------

    \138\ See Regulation SBSR Adopting Release, supra note 40
(requiring the reporting of certain information for each registered
security-based swap transaction to registered security-based swap
data repositories or to the Commission, including unique product
identifiers and transaction identifiers).
    \139\ See rule 901 of Regulation SBSR [17 CFR 242.901].
    \140\ See generally Q&A--Swap Data Recordkeeping and Reporting
Requirements, CFTC, available at<EMAIL_ADDRESS>---------------------------------------------------------------------------

     Proposed Form N-PORT would require funds to list all
underlying reference assets unless the underlying reference asset is an
index whose components are publicly available on a Web site and are
updated on that Web site no less frequently than quarterly, in which
case funds would identify the index and publisher of the index, or
unless the notional amount of the derivative represents 1% or less of
the NAV of the fund, in which case funds would provide a narrative
description of the index.\141\ To the extent such indices are
proprietary or subject to licensing agreements, what would be the
effect of this requirement? For example, would funds incur costs for
amending licensing agreements? Would index providers be willing to
amend existing licensing agreements? If not, how would this impact
funds that make such investments and the marketplace of fund options
available to investors generally? Are there other concerns about
disclosing the components of proprietary indices? Should we alter this
requirement, and if so how? For example, should we not require funds to
report underlying index components for derivatives unless the
derivative's notional amount represents at least 5%, or some other
percentage, of the NAV of the fund? Alternatively, should we limit the
required disclosure of index components to the top 50 components and/or
components that represent more than 1% of the index? If the reference
asset is a modified version of an index whose components are publicly
available on a Web site, for example a version that is customized to
exclude certain issuers that the fund is restricted from owning, would
requiring a narrative of those modifications be preferable to funds and
investors rather than requiring each holding of the modified index to
be listed? If so, should such narrative disclosure be reported in the
``explanatory notes'' section of Form N-PORT? \142\
---------------------------------------------------------------------------

    \141\ See, e.g., supra notes 120-123.
    \142\ See infra note 155 and accompanying and following text.
---------------------------------------------------------------------------

     How, if at all, should we modify the proposed requirement
to report delta? To what extent would the inputs and assumptions
underlying the methodology by which funds calculate this measure affect
the value reported? Are there potential liability or other concerns
associated with the reporting of such measures according to such inputs
and assumptions? For example, how would the comparability of
information reported between funds be affected if funds used different
inputs and assumptions in their methodologies?
     Are there additional or alternative metrics that we should
consider requiring to be reported? Would the disclosure of risk metrics
such as vega--which measures the amount that an option contract's price
changes in relation to a 1% change in the volatility of the underlying
asset--or gamma--which measures the sensitivity of delta in response to
price changes in the underlying instrument--enhance the utility of the
derivatives information reported in Form N-PORT? What would be the
costs and burdens to funds and benefits to investors and other
potential users of requiring funds to report such additional or
alternative metrics? How would the comparability of information
reported by different funds be affected if funds used different inputs
and assumptions in their methodologies, such as different assumptions
regarding the values of the funds' portfolios?
     We believe that funds already track the characteristics of
their derivatives that we would require to be reported on Form N-PORT.
To the extent this is correct, what would be the incremental

cost and burden of reporting such information to the Commission?
v. Securities on Loan and Cash Collateral Reinvestment
    As discussed above, our proposal would require funds to report on
Form N-PORT, for each of their securities lending counterparties as of
the reporting date, the full name and LEI of the counterparty (if any),
as well as the aggregate value of all securities on loan to the
counterparty.\143\ We are also proposing that funds report on Form N-
PORT, on an investment-by-investment level, information about
securities on loan and the reinvestment of cash collateral that secures
the loans. For each investment held by the fund, a fund would report:
(1) Whether any portion of the investment was on loan by the fund, and,
if so, the value of the securities on loan; \144\ (2) whether any
amount of the investment represented reinvestment of the cash
collateral and, if so, the dollar amount of such reinvestment; \145\
and (3) whether any portion of the investment represented non-cash
collateral received to secure loaned securities and, if so, the value
of the securities representing such non-cash collateral.\146\
---------------------------------------------------------------------------

    \143\ See supra note 75 and preceding, accompanying, and
following text.
    \144\ See Form N-PORT, Item C.12.c.
    \145\ See Form N-PORT, Item C.12.a.
    \146\ See Form N-PORT, Item C.12.b.
---------------------------------------------------------------------------

    These disclosures would provide information about how funds
reinvest the cash collateral received from securities lending activity
and should allow for more accurate determination of the value of
collateral securing such loans. This could improve the ability of
Commission staff, as well as investors, brokers, dealers, and other
market participants to assess collateral reinvestment risks and
associated potential liquidity and loss risks, as well as better
understand leverage creation through the reinvestment of
collateral.\147\ These disclosures could also help identify those
investments that one or more funds might have to sell or redeem in the
event of widespread termination or default by borrowers. More
generally, this information could help to address concerns expressed by
industry participants about the lack of transparency in funds'
securities lending transactions.\148\
---------------------------------------------------------------------------

    \147\ As discussed above, commenters to the FSOC Notice
suggested that enhanced securities lending disclosures could be
beneficial to investors and counterparties. See supra note 71.
    \148\ See, e.g., Transcript of Securities and Exchange
Commission Securities Lending and Short Sale Roundtable (Sept. 29,
2009), available at http://www.sec.gov/news/openmeetings/2009/roundtable-transcript-092909.pdf (discussing, among other things,
the lack of publicly available information to market participants
about securities lending transactions).
---------------------------------------------------------------------------

    We request comment on our proposed disclosure requirements for
securities loans and cash collateral reinvestment.
     Should the Commission require funds to report information
about securities on loan or reinvestment of cash collateral at the
portfolio level, rather than at the individual security level? If so,
what categories should be used to report such reinvestment? For
example, would it be appropriate to use the same collateral categories
for securities lending that we are proposing to be used for repurchase
and reverse repurchase agreements?
     As discussed, Form N-PORT would require funds to indicate,
for each investment, whether any portion of the investment represented
non-cash collateral received to secure loaned securities. To what
extent would this information be helpful to brokers, dealers, and
investors? To what extent do funds receive collateral other than cash?
     Is there additional or alternative information regarding
securities lending transactions that the Commission should require to
be disclosed in reports on Form N-PORT?
     We believe that funds already track the characteristics of
their securities lending and cash collateral reinvestment transactions
that we would require to be reported on Form N-PORT. Is this belief
correct? What would be the burden of reporting such information to the
Commission?
h. Miscellaneous Securities
    In Part D of Form N-PORT, as currently permitted by Regulation S-X,
funds would have the option of identifying and reporting certain
investments as ``miscellaneous securities.'' \149\ Funds electing to
separately report miscellaneous securities would use the same Item
numbers and report the same information that would be reported for each
investment if it were not a miscellaneous security.\150\ Consistent
with the disclosure regime established by Regulation S-X, all such
responses regarding miscellaneous securities would be nonpublic and
would be used for Commission use only, notwithstanding the fact that
all other information reported for the third month of each fund's
fiscal quarter on Form N-PORT would otherwise be publicly
available.\151\ Keeping information related to these investments
nonpublic may serve to guard against the premature release of those
securities positions and thus deter front-running and other predatory
trading practices, while still allowing the Commission to have a
complete record of the portfolio for monitoring, analysis, and checking
for compliance with Regulation S-X.\152\ The only information publicly
reported for miscellaneous securities would be their aggregate value,
which would be consistent with current practice as permitted by
Regulation S-X.\153\
---------------------------------------------------------------------------

    \149\ See generally supra note 49 and accompanying text.
    \150\ See Form N-PORT, Part D.
    \151\ See rule 12-12 of Regulation S-X.
    \152\ See, e.g., Quarterly Portfolio Holdings Adopting Release,
supra note 19, at n.64 and accompanying text.
    \153\ See supra notes 48-49 and accompanying text.
---------------------------------------------------------------------------

     Should funds continue to be allowed to use the category of
miscellaneous securities, either on Form N-PORT or in publicly
disclosed schedules of investments pursuant to instruction 1 to rule
12-12 and instruction 5 to rule 12-12C of Regulation S-X? To what
extent do funds currently use ``miscellaneous securities'' as a line
item in their schedule of investments, as opposed to disclosing all
investments in securities of unaffiliated issuers? For what purposes?
Should we continue to allow funds to exclude the full disclosures of
such securities from funds' schedules of investments? Alternatively,
should we consider lowering the threshold, such as to two percent or
one percent of the total value of securities of unaffiliated issuers?
i. Explanatory Notes
    In Part E of Form N-PORT, funds would have the option of providing
explanatory notes relating to the filing, if any.\154\ Any notes
provided in public reports on Form N-PORT (i.e., reports on Form N-PORT
for the third month of the fund's fiscal quarter) would be publicly
available, whereas notes provided in nonpublic filings of Form N-PORT
would remain nonpublic.\155\ Funds would also report, as applicable,
the Item number(s) to which the notes are related.\156\
---------------------------------------------------------------------------

    \154\ See Form N-PORT, Part E. Cf. Form PF, Item 4 (providing
advisers to private funds the option of explaining any assumptions
that they made in responding to any questions in the form).
    \155\ See infra Part II.A.4 of this release.
    \156\ See Form N-PORT, Part E.
---------------------------------------------------------------------------

    These notes, which would be optional, could be used to explain
assumptions that funds made in responding to specific items in Form N-
PORT. Funds could also provide context for anomalous responses or
discuss issues that could not be adequately addressed elsewhere given
the constraints of the form. Similar

information in other contexts has assisted Commission staff in better
understanding the information provided by funds, and we expect that
explanatory notes provided on Form N-PORT would do the same.\157\
---------------------------------------------------------------------------

    \157\ See, e.g., Form N-MFP, Item 43 (``Explanatory notes.
Disclose any other information that may be material to other
disclosures related to the portfolio security.'').
---------------------------------------------------------------------------

    We request comment on our proposed disclosure requirements.
     Would the format outlined above for the explanatory notes
allow funds to adequately discuss their responses on Form N-PORT? If
not, how should the format be modified?
     Should explanatory notes in publicly available filings of
Form N-PORT be nonpublic? If so, why?
j. Exhibits
    In Part F of Form N-PORT, for reports filed for the end of the
first and third quarters of the fund's fiscal year, a fund would also
attach the fund's complete portfolio holdings as of the close of the
period covered by the report. These portfolio holdings would be
presented in accordance with the schedules set forth in Sec. Sec.
210.12-12 to 12-14 of Regulation S-X.
    As discussed further below in Part B, we are proposing to rescind
Form N-Q because reports on Form N-PORT for the first and third fiscal
quarters would make similar reports on Form N-Q unnecessarily
duplicative. While we recognize that the quarterly, publicly disclosed
reports on Form N-PORT will provide structured data to investors and
other potential users, we recognize that the amount and structured
format of the data contained in those reports are not primarily
designed for individual investors. We believe that such investors might
prefer that portfolio holdings schedules for the first and third
quarters continue to be presented using the form and content specified
by Regulation S-X, which investors are accustomed to viewing in reports
on Form N-Q and in shareholder reports. Therefore, we are proposing to
require that, for reports on Form N-PORT for the first and third
quarters of a fund's fiscal year, the fund would attach its complete
portfolio holdings for that fiscal quarter, presented in accordance
with the schedules set forth in Sec. Sec.  210.12-12 to 12-14 of
Regulation S-X.
    Requiring funds to attach these portfolio holdings schedules to
reports on Form N-PORT would provide the Commission, investors, and
other potential users with access to funds' current and historical
portfolio holdings for those funds' first and third fiscal quarters.
Our proposal would also consolidate these disclosures in a central
location, together with other fund portfolio holdings disclosures in
shareholder reports and reports on Form N-CSR for funds' second and
fourth fiscal quarters.
    Under our proposal, and consistent with current practice, funds
would have until 60 days after the end of their second and fourth
fiscal quarters to transmit reports to shareholders containing
portfolio holdings schedules prepared in accordance with Regulation S-X
for that reporting period.\158\ In contrast, under our proposal, funds
would have 30 days after the end of their first and third fiscal
quarters to file reports on Form N-PORT that would include portfolio
holdings schedules prepared in accordance with Regulation S-X, although
such reports would not be required to be made public until 60 days
after the close of the reporting period. Although our proposal would
require funds to prepare Regulation S-X compliant portfolio holdings
schedules for their first and third fiscal quarters 30 days more
rapidly than they do currently, we believe that this would be
reasonable given the significant overlap with information that would be
required to be reported on Form N-PORT, and the fact that funds would
be required to file reports on Form N-PORT within 30 days after the end
of each month. In addition, the portfolio schedules attached to Form N-
PORT would be neither audited nor certified, which we believe would
significantly reduce the time required for preparation and validation.
We request comment below on the timing of preparing this attachment.
---------------------------------------------------------------------------

    \158\ See supra note 27 (discussing current requirements to
transmit reports to shareholders); infra Part II.C (discussing our
proposed amendments to Regulation S-X).
---------------------------------------------------------------------------

    As discussed below, we are proposing to allow funds to transmit
reports to shareholders by posting online those reports, together with
the funds' complete portfolio holdings for the first and third fiscal
quarters presented in accordance with the schedules set forth in
Sec. Sec.  210.12-12 to 12-14 of Regulation S-X disclosures.\159\ We
recognize that there would be duplication between the portfolio
schedules posted online for funds relying upon proposed rule 30e-3 and
the portfolio schedules for funds attached on reports on Form N-PORT.
However, we believe that requiring the Regulation S-X schedules to be
filed as exhibits to Form N-PORT reports would serve the purpose of
making the schedules permanently available on the Commission's
Electronic Data Gathering, Analysis, and Retrieval System (``EDGAR'')
(even when such schedules are no longer required to be maintained
online pursuant to proposed rule 30e-3).
---------------------------------------------------------------------------

    \159\ See supra Part II.D.3.
---------------------------------------------------------------------------

    We request comment on our proposed exhibits.
     Should funds be required to attach portfolio holdings
schedules to reports on Form N-PORT? Is there an alternative that would
be better for funds and investors in terms of informing investors'
investment decisions with regards to current and historical portfolio
holdings?
     As discussed above, the attached portfolio holdings
schedules are intended for investors, but would not be required to be
made publicly available to investors until 60 days after the close of
the reporting period; however, as proposed, funds would be required to
prepare and file this attachment within 30 days of the end of the
reporting period. Should funds be allowed to file reports on Form N-
PORT for the first and third fiscal quarters without Regulation S-X
compliant schedules, but then be required to amend those reports on
Form N-PORT to attach Regulation S-X compliant schedules no later than
60 days after the end of the reporting period?
     Should the portfolio schedules attached to Form N-PORT,
which are similar to reports funds are providing currently on Form N-Q,
be certified, as is currently required by Form N-Q?
k. General Request for Comments Regarding the Information on Form N-
PORT
    In addition to the requests for comment above, we request general
comment on feasible alternatives to the information we would be
requiring funds to report on Form N-PORT that would minimize the
reporting burdens on funds while maintaining the anticipated benefits
of the reporting and disclosure.\160\ We also request comment on the
utility of the information proposed to be included in reports to the
Commission, investors, and the public in relation to the costs to funds
of providing the reports.\161\
---------------------------------------------------------------------------

    \160\ See section 30(c)(2)(A) of the Investment Company Act [15
U.S.C. 80a-29(c)(2)(A)] (requiring Commission to consider and seek
public comment on feasible alternatives to the required filing of
information that minimize reporting burdens on funds).
    \161\ See section 30(c)(2)(B) of the Investment Company Act
(requiring Commission to consider and seek public comment on the
utility of information, documents and reports to the Commission in
relation to the associated costs).

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

     Would Form N-PORT, as proposed, appropriately consider the
usefulness of the information to the Commission, investors, and other
potential users of the required information and the costs that would be
associated with reporting this information? If not, which data points
or items should be enhanced or scaled back? Are there any proposed
items in Form N-PORT that should be revised to avoid duplication of
reporting requirements in different Commission rules or forms? If so,
please explain. On the other hand, are there any elements in Form N-
PORT that the Commission should carry over to other Commission forms or
rules?
     Are there specific items that the proposed form would
require that are unnecessary or otherwise should not be required in the
manner that we propose? Alternately, is there different or additional
information that we have not identified that could be useful to us or
investors in monitoring funds? For example, to the extent there are
fund-specific, sector-specific, or industry-wide risks that would not
be addressed by the information we are proposing to collect today,
should we require additional or alternative information that would be
relevant to an evaluation of the risk characteristics of the fund and
its portfolio investments? Likewise, is there any investment- or
entity-specific information that should be included in Form N-PORT to
facilitate analysis of the information that would be reported? Should
the manner in which information would be reported in Form N-PORT be
revised to improve the clarity of disclosures or reduce reporting
burdens?
     We believe that the information we are proposing to
require would be readily available to funds as a matter of general
business practice. Do commenters agree with this assumption? For
example, do fund accounting or financial reporting systems, or those of
a fund's custodian, generally contain the investment information that
we are requesting in our proposal? What is the feasibility and burden
of requiring funds to report information that is not contained in such
systems? To the extent that any items that we have requested are not
contained in fund accounting or financial reporting systems, are there
other types of readily available data that would provide us with
similar information?
3. Reporting of Information on Form N-PORT
    As discussed above, the Commission proposes that funds would report
information on Form N-PORT in XML, so that Commission staff, investors,
and other potential users could create databases of fund portfolio
information to be used for data analysis. Forms N-CSR and N-Q are not
currently filed in a structured format, which results in reports that
are comprehensible to a human reader, but are not suitable for
automated processing, and generally require filers to reformat the
required information from the way it is stored for normal business
uses.\162\ By contrast, requiring that reports on Form N-PORT be
structured would allow the Commission and other potential users to
combine information from more than one report in an automated way to,
for example, construct a data base of fund portfolio investments
without additional formatting. Based upon our experiences with Forms N-
MFP and PF, both of which require filers to report information in an
XML format, we believe that requiring funds to report information on
Form N-PORT in an XML format would provide the information that we seek
in the most timely and cost-effective manner.\163\ As discussed further
below in the economic analysis, the XML format may also improve the
quality of the information disclosed by imposing constraints on how the
information would be provided, by providing a built-in validation
framework of the data in the reports.\164\
---------------------------------------------------------------------------

    \162\ Forms N-CSR and N-Q are required to be filed in HTMA or
ASCII/SGML. See rule 301 of Regulation S-T; EDGAR Filer Manual
(Volume II) version 27 (June 2014) at 5-1.
    \163\ We anticipate that the XML interactive data file would be
compatible with a wide range of open source and proprietary
information management software applications. Continued advances in
interactive data software, search engines, and other web-based tools
may further enhance the accessibility and usability of the data.
See, e.g., Money Market Fund Reform 2010 Release, supra note 13, at
n.341.
    \164\ See infra Part IV.B.b.
---------------------------------------------------------------------------

     What would be the costs to funds of providing data
conforming to a Form N-PORT XML Schema? How would costs be affected, if
at all, by the size of the funds and fund complexes reporting this
data? How would this affect smaller fund companies?
     Should the Commission allow or require the form to be
provided in an XML Schema derived from existing XML based languages,
such as Financial products Markup Language (``FpML'') or XBRL? FpML is
an industry standard created by ISDA for exchanging and reporting the
terms and conditions of derivatives contracts. XBRL is another industry
standard used by the Commission for many reporting forms.
     Is there another structured format that would allow
investors and analysts to easily download and analyze the data?
    The Commission is considering whether reports on Form N-PORT should
be submitted through EDGAR or another electronic filing system, either
maintained by the Commission or by a third-party contractor. If reports
on Form N-PORT were required to be submitted through EDGAR, the
electronic filing requirements of Regulation S-T would apply.\165\
---------------------------------------------------------------------------

    \165\ See generally 17 CFR 232 (governing the electronic
submission of documents filed with the Commission).
---------------------------------------------------------------------------

    We request comment on this aspect of our proposal.
     Are there specific other capabilities that the Commission
should consider in developing or selecting an electronic filing system?
For example, should the system have the capability to cross-check
information reported to other electronic filing systems, such as the
Investment Adviser Registration Depository (where registration forms
for investment advisers are filed)? If so, which platforms and why?
     Is EDGAR the optimal vehicle for filing reports on Form N-
PORT with the Commission? If not, what vehicle would be optimal for
filing reports and why? Should the Commission allow the filing of
documents in electronic media other than on EDGAR? If so, please make
specific recommendations.
     Are there any particular concerns with filing such reports
on EDGAR as opposed to a third party system or vice versa? If so, what
are those concerns and what are potential remedies for such concerns?
For example, as discussed further below, as proposed, reports on Form
N-PORT for the first and second month of each fiscal quarter would not
be made public. Accordingly, any filing would need to have
confidentiality protections to keep the information on such Forms non-
public. How should EDGAR or an alternative filing platform best address
the confidentiality of this information?
     How important to investors and other interested parties is
the fact that EDGAR currently serves as the filing system for fund
filings with the Commission, and thus serves as a single repository
where investors may examine historical filings by a given fund on
related forms and generally compare reports made by other funds? To
what extent, if at all, could investors become confused by the use of a
new filing system for Form N-PORT and the use of EDGAR for other fund
filings? How should any such investor confusion be mitigated by funds
and the Commission?

    Our proposal would require funds to report information on Form N-
PORT no later than 30 days after the close of each month.\166\ We
request comment on this aspect of our proposal.
---------------------------------------------------------------------------

    \166\ In contrast, one commenter to the FSOC Notice suggested
that funds should report information to the Commission on a real-
time basis. See Comment Letter of Occupy the SEC to the FSOC Notice
(Mar. 25, 2015) (suggesting that asset managers should be required
to provide real-time data, and that the Commission have the
capability to monitor all funds' transactions on a real-time basis).
---------------------------------------------------------------------------

     Would 30 days be sufficient for funds to gather and report
this information to the Commission? If not, what amount of time would
be required and why? Conversely, could funds easily and reliably gather
and report this information in less than 30 days, which would provide
the Commission staff with more timely data? \167\ If so, what amount of
time would be appropriate? To what extent, if at all, should this
determination be affected by the fact that funds would have 60 days to
report their schedule of investments in their financial statements
prepared pursuant to Regulation S-X?
---------------------------------------------------------------------------

    \167\ See, e.g., Money Market Fund Reform 2014 Release, supra
note 13 (requiring money market funds to report their holdings and
other information to the Commission within five days after the end
of each month).
---------------------------------------------------------------------------

    As an alternative to monthly reports filed on Form N-PORT, should
the Commission require quarterly reports that include portfolio
information for each month of that quarter? How would the viability of
this alternative be affected, if at all, by the technological
challenges and inadvertent disclosure risks associated with combining
in a single form nonpublic portfolio information relating to the first
two months of each quarter with public portfolio information relating
to the third month of that quarter? We note that this alternative would
eliminate many of the benefits of monthly reporting, such as the
ability of monthly data to address the staleness of quarterly data and
to assist in monitoring funds by decreasing the delay between reports.
However, this alternative would still provide twelve data points per
year, which should improve the Commission staff's ability to perform
analyses of portfolios, and would discourage various forms of portfolio
manipulation, as discussed above. What, if any, other factors should
the Commission consider in evaluating this alternative?
4. Public Disclosure of Information Reported on Form N-PORT
    We are proposing that funds report information on Form N-PORT on a
monthly basis, no later than 30 days after the close of each
month.\168\ For reasons discussed below, and consistent with current
disclosure practices, only information reported for the third month of
each fund's fiscal quarter would be publicly available, and such
information would not be made public until 60 days after the end of the
third month of the fund's fiscal quarter.\169\
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    \168\ Commission staff understands that certain funds currently
report their investments to shareholders as of the last business day
of the reporting period, while other funds report their investments
as of the last calendar day of the reporting period. In recognition
of this fact, and in an effort to avoid disruptions to current fund
operations, the information reported on Form N-PORT may reflect the
fund's investments as of the last business day, or last calendar
day, of the month for which the report is filed.
    \169\ As discussed above, portfolio schedules are currently
available to the public in reports that are mailed to shareholders
or filed with the Commission either 60 or 70 days following the end
of each reporting period. See supra note 27 and accompanying text.
---------------------------------------------------------------------------

    The quarterly portfolio reports that the Commission currently
receives on Forms N-Q and N-CSR can quickly become stale due to the
turnover of portfolio securities and fluctuations in the values of
portfolio investments. Monthly portfolio reporting would decrease the
delay between reports, which should prove useful to the Commission for
fund monitoring, particularly in times of market stress. This would
also triple the number of data points reported to the Commission in a
given year, as well as ensure that the Commission has current
information, which should in turn enhance the ability of Commission
staff to perform analyses of funds in the course of monitoring for
industry trends, or identifying issues for examination or inquiry.
    As discussed above, the Commission generally believes that public
availability of information, including the types of information that
would be collected on Form N-PORT that may not currently be reported or
disclosed by funds, can benefit investors by assisting them in making
more informed investment decisions. Although Form N-PORT is not
primarily designed for disclosing information to individual investors,
we believe that many investors, particularly institutional investors,
as well as academic researchers, financial analysts, and economic
research firms, could use the information reported on Form N-PORT to
evaluate fund portfolios and assess the potential for returns and risks
of a particular fund. Accordingly, whether directly or through third
parties, we believe that the periodic public disclosure of the
information on proposed Form N-PORT could benefit all fund investors.
    The Commission, however, recognizes that more frequent portfolio
disclosure could potentially harm fund shareholders by expanding the
opportunities for professional traders to exploit this information by
engaging in predatory trading practices, such as trading ahead of
funds, often called ``front-running.'' \170\ Similarly, the Commission
is sensitive to concerns that more frequent portfolio disclosure may
facilitate the ability of outside investors to ``free ride'' on a
mutual fund's investment research, by allowing those investors to
reverse engineer and ``copycat'' the fund's investment strategies and
obtain for free the benefits of fund research and investment strategies
that are paid for by fund shareholders.\171\ Both front-running and
copycatting can reduce the returns of shareholders who invest in
actively managed funds.\172\
---------------------------------------------------------------------------

    \170\ See, e.g., Quarterly Portfolio Holdings Adopting Release,
supra note 19, at n.128 and accompanying text.
    \171\ See, e.g., id. at n.129 and accompanying text.
    \172\ See The Potential Effects of More Frequent Portfolio
Disclosure on Mutual Fund Performance, 7 Investment Company
Institute Perspective No. 3 (June 2001), available at http://www.ici.org/pdf/per07-03.pdf (``Potential Effects of More Frequent
Disclosure'').
---------------------------------------------------------------------------

    We discussed these concerns when we first proposed and adopted Form
N-MFP, and made the determination to make each monthly report on Form
N-MFP public, with a 60 day delay.\173\ In that release, however, we
noted that, due to the short-term and restricted nature of money market
fund securities, and because shares of money market funds are
ordinarily purchased and redeemed at a stable share price, we believed
opportunities for such activities were curtailed.\174\ By contrast,
funds other than money market funds can pursue a variety of investment
strategies and invest in a variety of securities and other investments.
Accordingly, we do not believe that the factors that mitigated our
concerns about the potential for front running or free-riding in money
market funds are as equally applicable to mutual funds.
---------------------------------------------------------------------------

    \173\ See Money Market Fund Reform 2010 Release, supra note 13
(adopting Form N-MFP with a 60 day delay for public disclosure). In
2014, the Commission eliminated the 60 day delay in the public
disclosure of Form N-MFP. See Money Market Fund Reform 2014 Release,
supra note 13.
    \174\ See Money Market Fund Reform 2010 Release, supra note 13,
at text following n.573.
---------------------------------------------------------------------------

    Empirical studies indicate that the portfolio holdings information
that investment companies disclose to the Commission and to
shareholders contains information that can be used by other investors
to front-run and

copycat the positions of reporting funds.\175\ Based on these studies,
as well as experience and discussions with fund groups and market
participants, the Commission is sensitive to the possibility that
increasing the frequency of public portfolio disclosures to a monthly
basis could further enable others to discern trading strategies of the
funds, potentially subjecting registered investment companies to such
predatory trading practices, resulting in competitive harms to the fund
and its investors.
---------------------------------------------------------------------------

    \175\ See infra notes 663-667 and accompanying and following
text.
---------------------------------------------------------------------------

    We recognize that some free-riding and front running activity can
occur even with quarterly disclosure, with the potential for investor
harm. Conversely, however, investors previously petitioned for
quarterly disclosures, noting numerous benefits that quarterly
disclosure of portfolio schedules could provide, including allowing
investors to better monitor the extent to which their funds' portfolios
overlap, and hence enabling investors to make more informed asset
allocation decisions, and providing investors with greater information
about how a fund is complying with its stated investment
objective.\176\ The Commission cited many of these benefits when it
adopted Form N-Q, and based on staff experience and outreach, believes
that the current practice of quarterly portfolio disclosures provides
benefits to investors, notwithstanding the opportunities for front-
running and reverse engineering it might create.
---------------------------------------------------------------------------

    \176\ See Quarterly Portfolio Holdings Adopting Release, supra
note 19, at n.32 and accompanying text (discussing prior investor
petitions for rulemaking). Investors that petitioned for quarterly
disclosure also argued that increasing the frequency of portfolio
disclosure would expose ``style drift'' (when the actual portfolio
holdings of a fund deviate from its stated investment objective) and
shed light on and prevent several potential forms of portfolio
manipulation, such as ``window dressing'' (buying or selling
portfolio securities shortly before the date as of which a fund's
holdings are publicly disclosed, in order to convey an impression
that the manager has been investing in companies that have had
exceptional performance during the reporting period) and ``portfolio
pumping'' (buying shares of stock the fund already owns on the last
day of the reporting period, in order to drive up the price of the
stocks and inflate the fund's performance results).
---------------------------------------------------------------------------

    Our proposal is intended to appropriately consider the benefits to
the Commission, investors, and other potential users of public
portfolio disclosures, including the reporting of such disclosures in a
structured format and additional portfolio information that would be
required on proposed Form N-PORT and the potential costs associated
with making that information available to the public, which could be
ultimately borne by investors. Accordingly, in an attempt to minimize
these potential costs and harms, we propose to require public
disclosure of fund reports on Form N-PORT once each quarter, rather
than monthly, thereby maintaining the status quo regarding the
frequency of public portfolio disclosure. As discussed above, funds are
currently required to disclose their portfolio investments quarterly,
via public filings with the Commission and semi-annual reports
distributed to shareholders. Consequently, the Commission is not
currently proposing to make public the information reported for the
first and second months of each fund's fiscal quarter on Form N-PORT.
Only information reported for the third month of each fund's fiscal
quarter on Form N-PORT would be made publicly available, and such
information would not be made public until 60 days after the end of the
third month of the fund's fiscal quarter. We believe that maintaining
the status quo with regard to the frequency and the time lag of
portfolio reporting would allow the Commission, the fund industry, and
the marketplace to assess the impact of the structured and more
detailed data reported on Form N-PORT on the mix of information
available to the public, and the extent to which these changes might
affect the potential for predatory trading, before determining whether
more frequent or more timely public disclosure would be, beneficial to
investors in funds.
    We are proposing to maintain the status quo of public disclosure of
quarterly information based upon each fund's fiscal quarters, rather
than calendar quarters, to ensure that public disclosure of information
filed on Form N-PORT would be the same as the portfolio disclosures
reported on a semi-annual fiscal year basis on Form N-CSR. We believe
that such overlap would minimize the risks of predatory trading,
because otherwise funds with fiscal year-ends that fall other than on a
calendar quarter- or year-end would have their portfolios publicly
available more frequently than funds with fiscal year-ends that fall on
a calendar quarter- or year-end, thus increasing the risks to those
funds discussed above related to potential front-running or reverse
engineering.
    We request comment on the proposed frequency and delay of public
disclosure of information reported on Form N-PORT.
     Should we require information on Form N-PORT reported for
the first and second month of each fund's fiscal quarter be made
public? Are the concerns about front-running or other possible harms
discussed above warranted given the 60-day delay? Would a different
combination of public disclosure frequency and delay better protect
funds and their investors from the risks of predatory trading, while
still providing timely and regular information to investors? To what
extent would investors benefit from receiving monthly data as opposed
to quarterly data?
     Are there alternatives we should consider to provide
investors and other potential users with the information reported on
Form N-PORT for the first and second months of each quarter? For
example, would the potential harms discussed above be mitigated if
reports on Form N-PORT for the first and second months were made public
60 days (or a shorter or longer time period) after the end of each
quarter, or 60 days (or a shorter or longer time period) after the end
of each fund's fiscal year, thereby increasing the time lag of such
information? If monthly information were to be provided quarterly or
annually, how would that affect the benefits of such information to
investors and other potential users?
     Would Form N-PORT contain the type of information that, if
disclosed on a monthly basis, could reveal information that a fund
would consider proprietary or confidential or that could place the fund
at a competitive disadvantage? If so, please explain and provide
examples, as applicable.
     Would restricting public disclosure of the information
reported on Form N-PORT to information reported for the third month of
each fund's fiscal quarter alleviate concerns about front-running or
other possible harms that might be caused by making the monthly
information reported on Form N-PORT public? Should we instead provide
that all or a portion of the requested information on Form N-PORT be
submitted in nonpublic reports to the Commission? If so, please
identify the specific items that should remain nonpublic and explain
why.
     Do commenters believe that our proposed 60-day delay in
making the information public would be helpful in protecting against
possible front running or free riding? Would a shorter delay (e.g., 45
or 30 days) or a longer delay (e.g., 70 days) be more appropriate? If
so, why? For example, should we provide for a longer delay to prevent
investors other than shareholders from trading along with the fund, to
the possible detriment of the fund and its shareholders? Alternately,
would a shorter delay, for example 30 days, better serve the needs of
shareholders

and potential fund investors while still appropriately protecting the
interests of funds?
     Should information be reported on Form N-PORT as of the
third month of each fund's fiscal year, as proposed, or should we
instead require a uniform public reporting schedule for all funds to
facilitate comparison of information reported on Form N-PORT (e.g.,
March 31, June 30, September 30, and December 31)? To what extent would
a uniform public disclosure schedule increase burdens to funds, given
that one of the purposes for selecting fiscal year-ends that vary from
calendar year-ends is to spread out filing burdens throughout the year
for fund complexes?

B. Rescission of Form N-Q and Amendments to Certification Requirements
of Form N-CSR

1. Rescission of Form N-Q
    Along with our proposal to adopt new Form N-PORT, we are proposing
to rescind Form N-Q. Management companies other than SBICs are
currently required to report their complete portfolio holdings as of
the end of their first and third fiscal quarters on Form N-Q. Because
the data reported on proposed Form N-PORT would include the portfolio
holdings information contained in reports on Form N-Q, we believe that
Form N-PORT, if adopted, would render reports on Form N-Q unnecessarily
duplicative. Therefore, we believe it is appropriate to rescind Form N-
Q rather than require funds to report similar information to the
Commission on two separate forms.
    However, as noted earlier, we believe that individual investors and
other potential users might prefer that portfolio holdings schedules
for the first and third quarters continue to be presented using the
form and content specified by Regulation S-X, which investors are
accustomed to viewing in reports on Form N-Q and in shareholder
reports. Therefore, we are proposing to require that, for reports on
Form N-PORT for the first and third quarters of a fund's fiscal year,
the fund would attach its complete portfolio holdings for that fiscal
quarter, presented in accordance with the schedules set forth in
Sec. Sec.  210.12-12 to 12-14 of Regulation S-X [17 CFR 210.12-12--12-
14]. Also, as discussed below, proposed new rule 30e-3 would allow
funds to satisfy requirements to transmit reports to shareholders by
posting on a Web site those shareholder reports and these same
portfolio schedules for the funds' first and third quarters.\177\
---------------------------------------------------------------------------

    \177\ See infra Part II.D.
---------------------------------------------------------------------------

2. Amendments to Certification Requirements of Form N-CSR
    In connection with the Commission's implementation of the Sarbanes-
Oxley Act of 2002, Form N-Q and Form N-CSR require the principal
executive and financial officers of the fund to make quarterly
certifications relating to (1) the accuracy of information reported to
the Commission, and (2) disclosure controls and procedures and internal
control over financial reporting.\178\ Rescission of Form N-Q would
eliminate certifications as to the accuracy of the portfolio schedules
reported for the first and third fiscal quarters.
---------------------------------------------------------------------------

    \178\ See Item 3 of Form N-Q (certification requirement); Form
N-Q Adopting Release, supra note 152; Item 12 of Form N-CSR
(certification requirement); Certification of Management Investment
Company Shareholder Reports and Designation of Certified Shareholder
Reports as Exchange Act Periodic Reporting Forms; Disclosure
Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002,
Investment Company Act Release No. 24914 (Jan. 27, 2003) [68 FR 5348
(Feb. 3, 2003)] (adopting release for Form N-CSR).
---------------------------------------------------------------------------

    Under today's proposal, the certifications as to the accuracy of
the portfolio schedules reported for the second and fourth fiscal
quarters on Form N-CSR would remain. However, we are proposing to amend
the form of certification in Form N-CSR to require each certifying
officer to state that he or she has disclosed in the report any change
in the registrant's internal control over financial reporting that
occurred during the most recent fiscal half-year, rather than the
registrant's most recent fiscal quarter as currently required by the
form.\179\ Lengthening the look-back of this certification to six
months, so that the certifications on Form N-CSR for the semi-annual
and annual reports would cover the first and second fiscal quarters and
third and fourth fiscal quarters, respectively, would fill the gap in
certification coverage that would otherwise occur once Form N-Q is
rescinded. To the extent that certifications improve the accuracy of
the data reported, removing such certifications could have negative
effects on the quality of the data reported. Likewise, if the reduced
frequency of the certifications affects the process by which controls
and procedures are assessed, requiring such certifications semi-
annually rather than quarterly could reduce the effectiveness of the
fund's disclosure controls and procedures and internal control over
financial reporting are assessed. However, we expect such effects, if
any, to be minimal because certifying officers would continue to
certify portfolio holdings for the fund's second and fourth fiscal
quarters and would further provide semi-annual certifications
concerning disclosure controls and procedures and internal control over
financial reporting that would cover the entire year.
---------------------------------------------------------------------------

    \179\ Proposed Item 11(b) of Form N-CSR; proposed paragraph 5(b)
of certification exhibit of Item 11(a)(2) of Form N-CSR.
---------------------------------------------------------------------------

3. Request for Comment
    We request comments on the proposed rescission of Form N-Q and
related rule and form amendments.
     Should we rescind Form N-Q, as we have proposed? Should we
instead retain Form N-Q, and not require Regulation S-X compliant
schedules to be attached to reports for the first and third fiscal
quarters on Form N-PORT? Why or why not?
     Would the proposed amendments to the certification
requirements in Form N-CSR be an appropriate substitute for the
certification requirements in Form N-Q? Would the change from quarterly
to semiannual certifications have an effect on the quality of funds'
internal controls or on other costs associated with certifications? If
so, are those changes appropriate?

C. Amendments to Regulation S-X

1. Overview
    As part of our larger effort to modernize the manner in which funds
report holdings information to investors, today we are proposing
amendments to Regulation S-X, which prescribes the form and content of
financial statements required in registration statements and
shareholder reports.\180\ As discussed above, many of the proposed
amendments to Regulation S-X, particularly the amendments to the
disclosures concerning derivative contracts, are similar to the
proposed requirements concerning disclosures of derivatives that would
be required on reports on proposed Form N-PORT. The proposed amendments
to Regulation S-X would, among other things, require similar
disclosures in a fund's financial

statements in its shareholder reports and, as applicable, Web site
disclosures in order to provide investors, particularly individual
investors, with clear and consistent disclosures across funds
concerning fund investments in derivatives in a human-readable format,
as opposed to the structured format of proposed Form N-PORT.
---------------------------------------------------------------------------

    \180\ See rule 1-01, et seq of Regulation S-X [17 CFR 210.1-01,
et seq]. While ``funds'' are defined in the preamble as registered
investment companies other than face amount certificate companies
and any separate series thereof--i.e., management companies and
UITs--we note that our proposed amendments to Regulation S-X apply
to both registered investment companies and BDCs. See infra notes
264 and 265. Therefore, throughout this section, when discussing
fund reporting requirements in the context of our proposed
amendments to Regulation S-X, we are also including changes to the
reporting requirements for BDCs.
---------------------------------------------------------------------------

    As outlined below, we are proposing amendments to Articles 6 and 12
of Regulation S-X that would: (1) Require new, standardized disclosures
regarding fund holdings in open futures contracts, open forward foreign
currency contracts, and open swap contracts,\181\ and additional
disclosures regarding fund holdings of written and purchased option
contracts; (2) update the disclosures for other investments, as well as
reorganize the order in which some investments are presented; and (3)
amend the rules regarding the general form and content of fund
financial statements. Our amendments would also require prominent
placement of disclosures regarding investments in derivatives in a
fund's financial statements, rather than allowing such schedules to be
placed in the notes to the financial statements. Finally, our
amendments would require a new disclosure in the notes to the financial
statements relating to a fund's securities lending activities.
---------------------------------------------------------------------------

    \181\ We recognize that under the federal securities laws,
certain derivatives fall under the definition of securities
notwithstanding, for purposes of our proposals to Regulation S-X, we
expect funds to adhere to the requirements of the disclosure
schedules for the relevant derivative investment, regardless of how
it would be defined under the federal securities laws. See, e.g.,
proposed rule 12-13C of Regulation S-X (Open swap contracts).
---------------------------------------------------------------------------

    As discussed above, the proposed rules will renumber the current
schedules in Article 12 of Regulation S-X and break out the disclosure
of derivatives currently reported on Schedule 12-13 into separate
schedules. These changes are summarized in Figure 1, below.

            Proposed Changes to Article 12 of Regulation S-X
------------------------------------------------------------------------
             Current rules                        Proposed rules
------------------------------------------------------------------------
12-12 (Investments in securities of      12-12 (Investments in
 unaffiliated issuers).                   securities of unaffiliated
                                          issuers).
12-12A (Investments--securities sold     12-12A (Investments--securities
 short).                                  sold short).
12-12B (Open option contracts written).  12-13 (Open option contracts
                                          written).*
12-12C (Summary schedule of investments  12-12B (Summary schedule of
 in securities of unaffiliated issuers).  investments in securities of
                                          unaffiliated issuers).*
12-13 (Investments other than            12-13A (Open futures
 securities).                             contracts).*
                                         12-13B (Open forward foreign
                                          currency contracts).*
                                         12-13C (Open swap contracts).*
                                         12-13D (Investments other than
                                          those presented in Sec.  Sec.
                                           210.12-12, 12-12A, 12-12B, 12-
                                          13, 12-13A, 12-13B, and 12-
                                          13C)*
12-14 (Investments in and advances to    12-14 (Investments in and
 affiliates).                             advances to affiliates).
------------------------------------------------------------------------
* Denotes new or renumbered schedules.

Figure 1
    We believe the proposed amendments will assist comparability among
funds, and increase transparency for investors regarding a fund's use
of derivatives and the liquidity of certain investments. We have
endeavored to mitigate burdens on the industry by proposing to require
similar disclosures both on Form N-PORT and in a fund's financial
statements.\182\ As a further consideration, we believe that the
amendments we are proposing today are generally consistent with how
many funds are currently reporting investments (including derivatives),
and other information according to current industry practices.
---------------------------------------------------------------------------

    \182\ See discussion supra Part II.A.2.g.iv.
---------------------------------------------------------------------------

2. Enhanced Derivatives Disclosures
    In 2011, as part of a wider effort to review the use of derivatives
by management investment companies, we issued a concept release and
request for comment on a range of issues.\183\ We received comment
letters from a variety of stakeholders, including investors, fund
groups, and third-party users of the information, who commented on a
number of issues. Several commenters noted that holdings of derivative
investments are not currently reported by funds in a consistent
manner.\184\ Commenters also suggested that more disclosure on
underlying risks was necessary, including more information on
counterparty exposure and reporting relating to the notional amount of
certain derivatives.\185\ Another commenter specifically requested that
we revise Regulation S-X in order to keep ``financial reporting current
with developments in the financial markets.'' \186\
---------------------------------------------------------------------------

    \183\ Derivatives Concept Release, supra note 7.
    \184\ Comments submitted in response to the Derivatives Concept
Release are available at http://www.sec.gov/comments/s7-33-11/s73311.shtml. See Morningstar Derivatives Concept Release Comment
Letter, supra note 58 (``This is because fund companies are not
reporting derivative holdings in a consistent manner and are not
reporting derivative holdings in a manner that identifies the
underlying risk exposure.''); Comment Letter of Rydex[bond]SGI (Nov.
7, 2011) (``Rydex[bond]SGI Derivatives Concept Release Comment
Letter'') (``However, the quality and extent of such derivatives
disclosure still varies greatly from registrant to registrant.'').
Commenters to the FSOC Notice made similar observations. See, e.g.,
Americans for Financial Reform FSOC Notice Comment Letter, supra
note 116 (``While full position-level data on securities portfolios
is available periodically for registered funds, current derivatives
disclosure requirements appear very poor.''); Systematic Risk
Council FSOC Notice Comment Letter, supra note 116 (``While most
managed funds do not employ leverage to the same degree that banks
do, we encourage regulators to consider carefully whether there are
potential improvements to the current data collection regime [ ]
that would allow regulators to track the presence and concentrations
of leverage in the asset management industry, particularly as it
arises from the use of derivatives . . . .'').
    \185\ See Morningstar Derivatives Concept Release Comment
Letter, supra note 58 (``Notional exposure . . . is a better measure
of risk''); Comment Letter of Oppenheimer Funds to Derivatives
Concept Release (Nov. 7, 2011) (``Instead, counterparty risks
incurred through the investments in derivatives . . . should be
considered in a new SEC rulemaking that is primarily disclosure
based.''); Rydex[bond]SGI Derivatives Concept Release Comment
Letter, supra note 184 (recommending that funds that invest in
derivatives should disclose notional exposure for non-exchanged
traded derivatives and a fund's exposure to counterparties).
Commenters to the FSOC Notice made similar observations relating to
counterparty disclosures. See, e.g., Americans for Financial Reform
FSOC Notice Comment Letter, supra note 116 (``Counterparty data is
also often not available.''); Systematic Risk Council Comment
Letter, supra note 116 (discussing the need to have information
about investment vehicles that hold bank liabilities).
    \186\ Comment Letter of Stephen A. Keen to Derivatives Concept
Release (Nov. 8, 2011).
---------------------------------------------------------------------------

    While the rules under Regulation S-X establish general requirements
for portfolio holdings disclosures in fund financial statements, they
do not prescribe standardized information to be included for derivative
instruments

other than options. Currently, rule 12-13 of Regulation S-X
(Investments other than securities) requires limited information on the
fund's investments other than securities--that is, the investments not
disclosed under rules 12-12, 12-12A, 12-12B, and 12-14.\187\ Thus,
under Regulation S-X, a fund's disclosures of open futures contracts,
open forward foreign currency contracts, and open swap contracts are
generally reported in accordance with rule 12-13.
---------------------------------------------------------------------------

    \187\ The schedule to rule 12-13 requires disclosure of: (1)
Description; (2) balance held at close of period--quantity; and (3)
value of each item at close of period. See rule 12-13 of Regulation
S-X.
---------------------------------------------------------------------------

    To address issues of inconsistent disclosures and lack of
transparency as to derivative instruments, we are proposing to amend
Regulation S-X by proposing new schedules for open futures contracts,
open forward foreign currency contracts, and open swap contracts. We
are also proposing to modify the current disclosure requirements for
purchased and written option contracts. Finally, we are proposing to
include certain instructions regarding the presentation of derivatives
contracts that are generally consistent with instructions that are
currently included, or that we are proposing to add, in either rule 12-
12 (Investments in securities of unaffiliated issuers) or rule 12-13
(Investments other than securities).\188\
---------------------------------------------------------------------------

    \188\ See, e.g., proposed rule 12-12, n.2 of Regulation S-X
(instructions for categorizing investments); n.10 (disclosure of
illiquid securities); n.12 (disclosure of costs basis for Federal
income tax purposes); see also rule 12-13, n.7 of Regulation S-X
(current requirement for disclosure of costs basis for Federal
income tax purposes).
---------------------------------------------------------------------------

a. Open Option Contracts Written--Rule 12-13 (Current Rule 12-12B) and
Options Purchased
    Our proposed rule would modify the current disclosure of written
option contracts.\189\ First, we are adding new columns to the schedule
for written option contracts that would require a description of the
contract (replacing the current column for name of the issuer), the
counterparty to the transaction,\190\ and the contract's notional
amount.\191\ Thus, under the new rule 12-13, for each open written
options contract, funds would be required to disclose: (1) Description;
(2) counterparty; (3) number of contracts; (4) notional amount; (5)
exercise price; (6) expiration date; and (7) value.\192\ Second, we are
proposing to add an instruction to current rule 12-12, which is the
schedule on which purchased options are required to be disclosed, that
would require funds to provide all information required by proposed
rule 12-13 for written option contracts.\193\
---------------------------------------------------------------------------

    \189\ Under current rule 12-12B, funds are required to report,
for open option contracts, the name of the issuer, number of
contracts, exercise price, expiration date, and value. See rule 12-
12B of Regulation S-X [17 CFR 210.12-12B].
    \190\ See supra note 116. This information should assist
investors in identifying and monitoring the counterparty risks
associated with a fund's investments in over-the-counter
derivatives.
    \191\ While rule 12-13 is specific to open option contracts
written, the same disclosures also apply for purchased options as
required by proposed instruction 3 to rule 12-12. See also proposed
rule 12-12B, n.5 of Regulation S-X.
    \192\ See proposed rule 12-13 of Regulation S-X.
    \193\ See proposed rule 12-12, n.3 of Regulation S-X.
---------------------------------------------------------------------------

    We are also proposing for options where the underlying investment
would otherwise be presented in accordance with another provision of
rule 12-12 or proposed rules 12-13 through 12-13D that the presentation
of that investment must include a description, as required by those
provisions.\194\ Thus, if another investment contains some sort of
optionality (e.g., put or call features), the investment's disclosure
must include both a description of the optionality (as required by
proposed rule 12-13), and a description of the underlying investments,
as required by the applicable provisions of proposed rules 12-12, 12-
12A, and 12-13 through 12-13D. For example, reporting for a swaption
would include the disclosures required under both the swaps rule
(proposed rule 12-13C) and the options rule (proposed rule 12-13).
---------------------------------------------------------------------------

    \194\ See proposed rules 12-12, n.3; 12-12B, n.5; and 12-13, n.3
of Regulation S-X.
---------------------------------------------------------------------------

    As required in proposed Form N-PORT,\195\ in the case of an option
contract with an underlying investment that is an index or basket of
investments whose components are publicly available on a Web site as of
the fund's balance sheet date,\196\ or if the notional amount of the
holding does not exceed one percent of the fund's NAV as of the close
of the period, we are proposing that the fund provide information
sufficient to identify the underlying investment, such as a
description.\197\ If the underlying investment is an index whose
components are not publicly available on a Web site as of the fund's
balance sheet date, or is based upon a custom basket of investments,
and the notional amount of the option contract exceeds one percent of
the fund's NAV as of the close of the period, the fund would list
separately each of the investments comprising the index or basket of
investments.\198\ We believe that disclosure of the underlying
investments of an option contract is an important element to assist
investors in understanding and evaluating the full risks of the
investment. We are also proposing to include a similar instruction for
swap contracts.\199\ The disclosures in proposed instruction 3 would
provide investors with more transparency into both the terms of the
underlying investment and the terms of the option.
---------------------------------------------------------------------------

    \195\ See Item C.11.c.iii of proposed Form N-PORT.
    \196\ Under the proposal, the components would be required to be
publicly available on a Web site as of the fund's balance sheet date
at the time of transmission to stockholders for any report required
to be transmitted to stockholders under rule 30e-1. The components
would be required to remain publicly available on a Web site as of
the fund's balance sheet date until 70 days after the fund's next
fiscal year-end. For example, components of an index underlying an
option contract for a fund's 12/31/14 annual report must be made
publicly available on a Web site as of 12/31/14 by the time that the
12/31/14 annual report is transmitted to stockholders. The
components must remain publicly available until 3/10/16.
    \197\ See proposed rule 12-13, n.3 of Regulation S-X. See supra
note 120 and accompanying text (discussing the rationale for similar
proposed requirements in Form N-PORT).
    \198\ See id.
    \199\ See proposed rule 12-13C, n.3 of Regulation S-X.
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    We are also proposing several instructions to rule 12-13 and the
other rules we are proposing concerning derivatives holdings (e.g.,
open futures contracts, open swap contracts) in order to maintain
consistency with the disclosures required by current rule 12-13.
Current rule 12-13 contains an instruction requiring identification of
``each investment not readily marketable.'' \200\ We are proposing to
modify this requirement in proposed rule 12-13 and the other rules
concerning derivatives holdings in order to increase transparency into
the marketability of, and observability of valuation inputs for, a
fund's investments by requiring separate identification of investments
that are restricted securities, as well as those investments that were
fair valued using significant unobservable inputs. Thus, we are
proposing to require funds to indicate if an investment cannot be sold
because of restrictions or conditions applicable to the
investment.\201\ We are also proposing to require funds to indicate if
a security's fair value was

determined using significant unobservable inputs.\202\
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    \200\ See rule 12-13, n.4 of Regulation S-X (``The term
`investment not readily marketable' shall include investments for
which there is no independent publicly quoted market and investments
which cannot be sold because of restrictions or conditions
applicable to the investment or the company.'').
    \201\ See proposed rule 12-13, n.6 of Regulation S-X; see also
proposed rules 12-13A, n.4; 12-13B, n.2; 12-13C, n.5; and 12-13D,
n.6 of Regulation S-X.
    \202\ See proposed rule 12-13, n.7 of Regulation S-X; see also
proposed rules 12-13A, n.5; 12-13B, n.3; 12-13C, n.6; and 12-13D,
n.7 of Regulation S-X. These instructions would require funds to
identify each investment categorized in Level 3 of the fair value
hierarchy in accordance with ASC Topic 820. See ASC 820-10-20
(defining ``level 3 inputs'' as ``unobservable inputs for the asset
or liability''); see also ASC 820-10-35-37A (``In some cases, the
inputs used to measure the fair value of an asset or a liability
might be categorized within different levels of the fair value
hierarchy. In those cases, the fair value measurement is categorized
in its entirety in the same level of the fair value hierarchy as the
lowest level input that is significant to the entire measurement.'')
(emphasis added); see also discussion supra note 101.
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    Current rule 12-13 likewise contains an instruction to include tax
basis disclosures for investments other than securities.\203\ We are
extending this requirement to proposed rule 12-13, as well as the other
rules concerning derivatives holdings.\204\ We believe that this type
of tax basis information is important to investors in investment
companies, which are generally pass-through entities pursuant to
Subchapter M of the Internal Revenue Code.\205\
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    \203\ See rule 12-13, n.7 of Regulation S-X.
    \204\ See proposed rule 12-13, n.10 of Regulation S-X; see also
proposed rules 12-13A, n.8; 12-13B, n.6; 12-13C, n.9; and 12-13D,
n.11 of Regulation S-X.
    \205\ See 26 U.S.C. 851, et seq.
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    In order to provide greater transparency to investors into which
investments are deemed illiquid, we are also proposing to require funds
to identify illiquid investments.\206\ Liquidity is an important
consideration for a fund's investors in understanding the risk exposure
of a fund. For example, in times of market stress, illiquid investments
may not be readily sold at their approximate value. Indicating which
investments are illiquid would allow an investor to understand which
holdings in a fund are likely to be sold at a discount if a portion of
the fund's investments must be sold to meet cash needs, such as
redemptions or distributions.
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    \206\ See proposed rule 12-13, n.8 of Regulation S-X; see also
proposed rules 12-13A, n.6; 12-13B, n.4; 12-13C, n.7; and 12-13D,
n.8 of Regulation S-X. See generally 1992 Release, supra note 100.
As previously stated, the staff is reviewing possible
recommendations to the Commission for rulemaking to update liquidity
standards for mutual funds and ETFs, which may result in changes to
the Commission's current guidance on this issue. See supra note 100.
---------------------------------------------------------------------------

    Proposed rule 12-13 would also include other new instructions.\207\
---------------------------------------------------------------------------

    \207\ Instruction 2 would add ``description'' and
``counterparty'' to the organizational categories of options
contracts that must be listed separately. See proposed rule 12-13,
n.2 of Regulation S-X. Instruction 4 would clarify that the fund
need not include counterparty information for exchange-traded
options. See proposed rule 12-13, n.4 of Regulation S-X.
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b. Open Futures Contracts--New Rule 12-13A
    We are proposing new rule 12-13A, which would require standardized
reporting of open futures contracts.\208\ For open futures contracts,
funds are currently required to report under rule 12-13 a description
of the futures contract (including its expiration date), the number of
contracts held (under the balance held--quantity column), and any
unrealized appreciation and depreciation (under the value column).\209\
In order to allow investors to better understand the economics of a
fund's investment in futures contracts, our proposal would also require
funds to report notional amount and value.\210\ Therefore, under the
proposal, funds with open futures contracts would report: (1)
Description; (2) number of contracts; (3) expiration date; (4) notional
amount; (5) value; and (6) unrealized appreciation and
depreciation.\211\ In addition, instruction 7 would include the new
requirement that funds should reconcile the total of Column F
(unrealized appreciation/depreciation) to the total variation margin
receivable or payable on the related balance sheet.\212\ We believe
that proposed instruction 7 would improve transparency by linking the
information in the schedule of open futures contracts with the related
balance sheet.
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    \208\ See proposed rule 12-13A of Regulation S-X.
    \209\ See rule 12-13 of Regulation S-X.
    \210\ See proposed rule 12-13A, columns D and E of Regulation S-
X.
    \211\ See proposed rule 12-13A of Regulation S-X.
    \212\ See proposed rule 12-13A, n.7 of Regulation S-X.
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    As discussed above, our proposal also contains certain new
instructions for rule 12-13A that are generally the same across all of
the schedules for derivatives contracts.\213\ Based on staff review of
disclosures of open futures contracts of funds, we believe that these
proposed disclosures are generally consistent with current industry
practice.\214\
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    \213\ Instruction 1 would require funds to organize long
purchases of futures contracts and futures contracts sold short
separately. See proposed rule 12-13A, n.1 of Regulation S-X.
Instruction 2 would require funds to list separately futures
contracts where the descriptions or expiration dates differ. See
proposed rule 12-13A, n.2 of Regulation S-X. Instruction 3 would
clarify that the description should include the name of the
reference asset or index. See proposed rule 12-13A, n.3 of
Regulation S-X. Instruction 4 would require the fund to indicate
each investment which cannot be sold because of restrictions or
conditions applicable to the investment. See proposed rule 12-13A,
n.4 of Regulation S-X. Instruction 5 would require the fund to
indicate each investment whose fair value was determined using
significant unobservable inputs. See proposed rule 12-13A, n.5 of
Regulation S-X. Instruction 6 would require the fund to identify
each illiquid investment. See proposed rule 12-13A, n.6 of
Regulation S-X. Instruction 8 would extend current rule 12-13's tax
basis disclosure to disclosures of open futures contracts. See
proposed rule 12-13A, n.8 of Regulation S-X.
    \214\ We understand that many funds disclose either value or
notional amount for open futures contracts, but may not disclose
both. Our proposal would require disclosure of both value and
notional amount.
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c. Open Forward Foreign Currency Contracts--New Rule 12-13B
    We are also proposing new rule 12-13B, which would require
standardized disclosures for open forward foreign currency
contracts.\215\ Currently, under rule 12-13, funds are required to
report a description of the contract (including a description of what
is to be purchased and sold under the contract and the settlement
date), the amount to be purchased and sold on settlement date (under
the balance held--quantity column), and any unrealized appreciation or
depreciation (under the value column).\216\ In order to allow investors
to better understand counterparty risk for forward foreign currency
contracts, our proposal would additionally require funds to disclose
the counterparty to each transaction.\217\ As proposed, funds holding
open forward foreign currency contracts would therefore report the: (1)
Amount and description of currency to be purchased; (2) amount and
description of currency to be sold; (3) counterparty; (4) settlement
date; and (5) unrealized appreciation/depreciation.\218\ Based on staff
review of disclosures of open forward foreign currency contracts of
funds, we believe that these proposed disclosures are generally
consistent with current industry practice. Our proposal would also
include certain new instructions to the schedule that are similar to
the other derivatives disclosure requirements we are proposing
today.\219\
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    \215\ See proposed rule 12-13B of Regulation S-X.
    \216\ See rule 12-13 of Regulation S-X.
    \217\ See proposed rule 12-13B, column C of Regulation S-X.
    \218\ See proposed rule 12-13B of Regulation S-X.
    \219\ Instruction 1 would require the fund to separately
organize forward foreign currency contracts where the description of
currency purchased, currency sold, counterparties, or settlement
dates differ. See proposed rule 12-13B, n.1 of Regulation S-X.
Instruction 2 would require the fund to indicate each investment
which cannot be sold because of restrictions or conditions
applicable to the investment. See proposed rule 12-13B, n.2 of
Regulation S-X. Instruction 3 would require the fund to indicate
each investment whose fair value was determined using significant
unobservable inputs. See proposed rule 12-13B, n.3 of Regulation S-
X. Instruction 4 would require the fund to identify each illiquid
investment. See proposed rule 12-13B, n.4 of Regulation S-X.
Instruction 5 would clarify that Column E (unrealized appreciation/
depreciation) should be totaled and agree with the total of
correlative amounts shown on the related balance sheet. See proposed
rule 12-13B, n.5 of Regulation S-X. Instruction 6 would extend
current rule 12-13's tax basis disclosure to disclosures of open
forward foreign currency contracts. See proposed rule 12-13B, n.6 of
Regulation S-X.

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d. Open Swap Contracts--New Rule 12-13C
    We are also proposing new rule 12-13C, which would require
standardized reporting of fund positions in open swap contracts.\220\
Under rule 12-13, funds currently report description (including a
description of what is to be paid and received by the fund and the
contract's maturity date), notional amount (under balance held--
quantity column), and any unrealized appreciation or depreciation
(under the value column).\221\ Our proposal would additionally require
funds to report the counterparty to each transaction (except for
exchange-traded swaps), the contract's value, and any upfront payments
or receipts.\222\ This additional information would allow investors to
both better understand the economics of the transaction, as well as its
associated risks.\223\ Thus, as proposed, funds would report for each
swap the: (1) Description and terms of payments to be received from
another party; (2) description and terms of payments to be paid to
another party; (3) counterparty; (4) maturity date; (5) notional
amount; (6) value; (7) upfront payments/receipts; and (8) unrealized
appreciation/depreciation.\224\ We are proposing these categories of
information in an effort to increase transparency of swap contracts,
while maintaining enough flexibility for the variety of swap products
that currently exist and future products that might come to
market.\225\
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    \220\ See proposed rule 12-13C of Regulation S-X.
    \221\ See rule 12-13 of Regulation S-X.
    \222\ See proposed rule 12-13C, columns C, F, and G of
Regulation S-X.
    \223\ For example, upfront payments disclose whether cash was
paid or received when entering into a swap contract, allowing
investors to better understand the initial cost of the investment,
if any.
    \224\ See proposed rule 12-13C of Regulation S-X. The
description and terms of payments to be paid and received (and other
information) to and from another party should reflect the investment
owned by the fund and allow an investor to understand the full
nature of the transaction.