result in an aggregate average annual hour burden of 634,669 hours and
aggregate time costs of $70,900,317.\757\ In addition to the internal
costs described above, we also estimate that each fund would incur a
one-time average external cost of $800.
---------------------------------------------------------------------------

    \757\ These estimates are based on the following calculations:
((3 x 421,410 hours) (years 1, 2 and 3) + 61,296 (year 1) + 3,831
(year 1) + (3 x 191,550 hours) (years 1, 2 and 3)) / 3 = 634,669
hours; ((3 x $44,171,430) + ($38,593,494 (year 1)) + ($218,367 (year
1)) + (3 x $13,791,600) (years 1, 2, and 3)) / 3 = $70,900,317.
---------------------------------------------------------------------------

3. Asset Segregation: Financial Commitment Transactions
    Proposed rule 18f-4 would require a fund that enters into financial
commitment transactions in reliance on the rule to similarly maintain
qualifying coverage assets designed to enable the fund to meet its
obligations arising from such transactions. A fund would be required to
identify on the books and records of the fund, at least once each
business day, qualifying coverage assets with a value equal to at least
the fund's aggregate financial commitment obligations.\758\ Financial
commitment

obligations would mean the amount of cash or other assets that the fund
is conditionally or unconditionally obligated to pay or deliver under a
financial commitment transaction (as defined in the proposed
rule).\759\ A fund that enters solely into financial commitment
transactions would, as described above for a fund that enters into
derivatives transactions, be required to have policies and procedures
approved by its board of directors (and maintained by the fund in an
easily accessible place) that are reasonably designed to provide for
the fund's maintenance of qualifying coverage assets.\760\
---------------------------------------------------------------------------

    \758\ Proposed rule 18f-4(b)(1).
    \759\ Proposed rule 18f-4(c)(5) (noting, that where the fund is
conditionally or unconditionally obligated to deliver a particular
asset, the financial commitment obligation shall be the value of the
asset, determined at least once each business day).
    \760\ Proposed rule 18f-4(b)(2)(3).
---------------------------------------------------------------------------

    As discussed above in section IV.D.5, DERA staff analysis shows
that approximately 3% of all sampled funds enter into at least some
financial commitment transactions, but do not use derivatives
transactions. Staff estimates, therefore, that 3% of funds (359 funds)
would comply with the asset segregation requirements in proposed rule
18f-4 applicable to financial commitment transactions and would not
also be complying with the asset segregation and other requirements
applicable to derivatives transactions. In addition, staff estimates
that 537 money market funds and 88 BDCs may engage in certain types of
financial commitment transactions. In sum, staff estimates that 984
funds would comply with the asset segregation requirements applicable
to financial commitment transactions and incur the same costs we
estimate above (with regard to funds that engage in derivatives
transactions). These funds would be subject to the collections of
information described below.
Identification of Qualifying Coverage Assets
    Similar to the requirement applicable to a fund that enters into
derivatives transactions (discussed above), a fund that enters solely
into financial commitment transactions would, under the proposed rule,
incur operational costs to establish and implement systems in order to
comply with the proposed asset segregation requirements, including the
proposed requirement that a fund maintain qualifying coverage assets,
identified on the books and records of the fund, at least once each
business day. We believe that the activities related to these
requirements are largely the same, whether applicable to a fund that
enters into derivatives transactions, or financial commitment
transactions. Accordingly, we estimate the same costs to a fund that
enters solely into financial commitment transactions as the asset
segregation costs we estimate above for funds that enter into
derivatives transactions.
    We estimate that each fund would incur an average annual burden of
110 hours (and no initial one-time burdens) associated with the
identification of qualifying coverage assets. We therefore estimate
that the total annual burden for the identification of qualifying
coverage assets would be 108,240 hours.\761\ We also estimate that each
fund would incur an ongoing annual time cost of approximately $11,530
to identify qualifying coverage assets, for a total ongoing annual time
cost for all funds of approximately $11,345,520.\762\ We estimate that
there are no external costs associated with this collection of
information.
---------------------------------------------------------------------------

    \761\ This estimate is based on the following calculation: 110
hours x 984 funds = 108,240 hours.
    \762\ This estimate is based on the following calculations: 100
hours x $87 (hourly rate for a senior computer operator) = $8,700;
10 hours x $283 (hourly rate for compliance manager) = $2,830.
$8,700 + $2,830 = $11,530; $11,530 x 984 funds = $11,345,520.
---------------------------------------------------------------------------

Board-Approved Policies & Procedures
    A fund that enters solely into financial commitment transactions,
like a fund that enters into derivatives transactions, would be
required under the proposed rule to have board-approved policies and
procedures regarding the maintenance of qualifying coverage assets.
Accordingly, we estimate that a fund would incur a one-time average
burden of 15 hours associated with documenting its policies and
procedures. The proposed rule would also require that the fund's board
approve such policies and procedures and we estimate a one-time burden
of 1 hour per fund associated with fund boards' review and approval of
its policies and procedures. Amortized over a three-year period, this
would be an annual burden per fund of approximately 5.3 hours. We
estimate that the total one-time burden for the initial documentation,
and board approval of, written policies and procedures to provide for a
fund's maintenance of qualifying coverage assets would be 15,744
hours.\763\ We also estimate that each fund would incur a time cost of
approximately $6,291, and a total initial time cost for all funds of
approximately $9,912,816.\764\ We estimate that there are no annual
time costs associated with this collection of information. In addition
to the internal costs described above, we also estimate that each fund
would incur a one-time average external cost of $800 associated with a
fund board consulting its outside legal counsel with regard to the
required board approvals.\765\
---------------------------------------------------------------------------

    \763\ This estimate is based on the following calculation: 16
hours x 984 funds = 15,744 hours.
    \764\ This estimate is based on the following calculations: 7.5
hours x $301 (hourly rate for a senior portfolio manager) = $2,258;
7.5 hours x $455.5 (blended hourly rate for assistant general
counsel ($426) and chief compliance officer ($485)) = $3,416; 1 hour
x $4,400 (hourly rate for a board of 8 directors) = $4,400. $2,258 +
$3,416 + $4,400 = $10,074; $10,074 x 984 funds = $9,912,816.
    \765\ This estimate is based on the following calculation: 2
hours x $400 (hourly rate for outside legal services) = $800.
---------------------------------------------------------------------------

Recordkeeping
    A fund that enters solely into financial commitment transactions
would also be required under the proposed rule to retain a written copy
of the fund's board-approved policies and procedures regarding the
maintenance of qualifying coverage assets. This requirement also
applies to funds that enter into derivatives transactions. Accordingly,
as discussed above for the recordkeeping burdens associated with asset
segregation for derivatives transactions, we estimate a one-time burden
(and no annual burden) of 1 hour per fund associated with maintaining a
written copy of the fund's board-approved policies and procedures or,
amortized over a three-year period, a burden of approximately 0.3 hours
annually per fund. We therefore estimate that the total one-time burden
for maintaining this record would be 984 hours.\766\ We also estimate
that each fund would incur a time cost of approximately $57, and a
total initial time cost for all funds of approximately $56,088.\767\ We
estimate that there are no external costs associated with this
collection of information.
---------------------------------------------------------------------------

    \766\ This estimate is based on the following calculation: 1
hour x 984 funds = 984 hours.
    \767\ This estimate is based on the following calculation: 1
hour x $57 (hourly rate for a general clerk) = $57. $57 x 984 funds
= $56,088.
---------------------------------------------------------------------------

    In addition, a fund that relies on the proposed rule also would be
subject to an ongoing requirement to maintain a written record
reflecting the amount of each financial commitment obligation
associated with each financial commitment transaction entered into by
the fund and identifying the associated qualifying coverage assets, as
determined by the fund at least once each business day, for a period of
not less than five years (the first two years in an easily accessible
place).\768\ We

estimate that each fund would incur an average annual burden of 50
hours to retain these records.\769\ We therefore estimate that the
total annual hour burden for maintaining these records would be 49,200
hours.\770\ We also estimate that each fund would incur an annual time
cost of approximately $3,600, and a total annual time cost for all
funds of approximately $3,542,400.\771\ We estimate that there are no
external costs associated with this collection of information.
---------------------------------------------------------------------------

    \768\ Proposed rule 18f-4(b)(3)(ii).
    \769\ We assume for purposes of this estimate that funds would
implement automated processes for creating a written record of their
compliance with the qualifying coverage asset requirements and that
a fund would enter into at least one financial commitment
transaction per trading day. Based on 250 trading days per year, and
assuming 0.1 hours per trading day spent by a general clerk and 0.1
hours per trading day spent by a senior computer operator, we
estimate the annual time cost to be (0.1 x 250) = 25 hours per year
per fund for each general clerk and senior computer operator.
    \770\ This estimate is based on the following calculations: 50
hours x 984 funds = 49,200 hours.
    \771\ This estimate is based on the following calculation: 25
hours x $57 (hourly rate for a general clerk) = $1,425; 25 hours x
$87 (hourly rate for a senior computer operator) = $2,175. $1,425 +
$2,175 = $3,600; $3,600 x 984 funds = $3,542,400.
---------------------------------------------------------------------------

Estimated Total Burden
    Amortized over a three-year time period, the hour burdens and time
costs for collections of information associated with the asset
segregation requirement for financial commitment transactions under
proposed rule 18f-4, including the burdens associated with (a)
identifying qualifying coverage assets; (b) documenting board-approved
policies and procedures; and (c) maintaining required records, are
estimated to result in an aggregate average annual hour burden of
163,016 hours and aggregate time costs of $18,210,888.\772\ In addition
to the internal costs described above, we also estimate that each fund
would incur a one-time average external cost of $800.
---------------------------------------------------------------------------

    \772\ These estimates are based on the following calculations:
((3 x 108,240 hours) (years 1, 2 and 3) + 15,744 (year 1) + 984
(year 1) + (3 x 49,200) (years 1, 2 and 3)) / 3 = 163,016 hours; ((3
x $11,345,520) (years 1, 2 and 3) + ($9,912,816 (year 1)) + ($56,088
(year 1)) + (3 x $3,542,400) (years 1, 2 and 3)) / 3 = $18,210,888.
---------------------------------------------------------------------------

4. Derivatives Risk Management Program
    Proposed rule 18f-4 would require that a fund that engages in more
than a limited amount of derivatives transactions, or that uses complex
derivatives transactions (as defined in the proposed rule), to adopt
and implement a derivatives risk management program.\773\ This risk
management program would require a fund to adopt and implement policies
and procedures reasonably designed to assess and manage the risks of
the fund's derivatives transactions, reasonably segregate the functions
associated with the program from the portfolio management function of
the fund, and periodically review and update the program at least
annually.\774\ The proposed rule would also require a fund to designate
a derivatives risk manager responsible for administering the program
and require that the risk manager, no less frequently than quarterly,
prepare a written report that describes the adequacy and effectiveness
of the fund's risk management program.\775\ A fund's board of directors
must also (1) approve the fund's derivatives risk management program,
including any material changes to the program; (2) approve the fund's
designation of the fund's derivatives risk manager (who cannot be a
portfolio manager of the fund); and (3) review, no less frequently than
quarterly, the written report prepared by the fund's derivatives risk
manager that describes the adequacy and effectiveness of the fund's
risk management program.\776\ Finally, proposed rule 18f-4 would impose
certain recordkeeping requirements related to the derivatives risk
management program (as described below).
---------------------------------------------------------------------------

    \773\ A derivatives risk management program would not be
required if the fund complies with a portfolio limitation under
which, immediately after entering into any derivatives transaction,
the fund's aggregate exposure associated with the fund's derivatives
transactions does not exceed 50% of the value of the fund's net
assets, and the fund does not use ``complex derivatives'' (as
defined in proposed rule 18f-4(c)(1)).
    \774\ See proposed rule 18f-4(a)(3)(i)(A) through (D).
    \775\ See proposed rule 18f-4(a)(3)(ii)(B) and (C).
    \776\ Proposed rule 18f-4(a)(3)(ii).
---------------------------------------------------------------------------

    As discussed above in section IV.D.4, DERA staff analysis shows
that approximately 10% of all sampled funds had aggregate exposure from
derivatives transactions high enough (i.e., aggregate exposure of 50%
of net assets or greater) to require that they establish a derivatives
risk management program under the proposed rule. The DERA staff
analysis also shows an additional approximately 4% of funds had
aggregate exposure of between 25-50% of net assets. Commission staff
estimates, therefore, that approximately 14% of funds (1,676 funds
\777\) and no BDCs would be required to establish a derivatives risk
management program. These funds would be subject to the collections of
information described below with respect to the derivatives risk
management program provision.
---------------------------------------------------------------------------

    \777\ This estimate is based on the following calculation:
11,973 funds x 14% = 1,676 funds. See supra note 578.
---------------------------------------------------------------------------

Establishing a Derivatives Risk Management Program
    As discussed above in section IV.D.4, we estimated that each fund
would incur one-time costs to establish and implement a derivatives
risk management program in compliance with proposed rule 18f-4, as well
as ongoing program-related costs. For purposes of the PRA analysis, we
estimate that each fund would incur an average initial burden of 30
hours associated with establishing a derivatives risk management
program, including (1) adopting and implementing (including
documenting) policies and procedures reasonably designed to assess and
manage the risks of the fund's derivatives transactions and designating
a derivatives risk manager (24 hours); and (2) obtaining initial board
approval of the derivatives risk management program and the designation
of the fund's derivatives risk manager (6 hours). Amortized over a
three-year period, this would be an annual burden per fund of 10 hours.
Accordingly, we estimate that the total average annual initial burden
for establishing a derivatives risk management program would be 50,280
hours.\778\ We also estimate that each fund would incur an initial time
cost of $27,346 in relation to this hour burden, for a total initial
time cost for all funds of approximately $45,831,896.\779\ In addition
to the internal costs described above, we also estimate that each fund
would incur a one-time average external cost of $1,600 associated with
a fund board consulting its outside legal counsel with regard to the
required board approval.\780\
---------------------------------------------------------------------------

    \778\ This estimate is based on the following calculation: 30
hours x 1,676 funds = 50,280 hours.
    \779\ This estimate is based on the following calculations: 12
hours x $301 (hourly rate for a senior portfolio manager) = $3,612;
12 hours x $455.5 (blended hourly rate for assistant general counsel
($426) and chief compliance officer ($485) = $5,466; 4 hours x
$4,400 (hourly rate for a board of 8 directors) = $17,600; 2 hours
(for a fund attorney's time to prepare materials for the board's
determinations) x $334 (hourly rate for a compliance attorney) =
$668. $3,612 + $5,466 + $17,600 + $668 = $27,346; $27,346 x 1,676
funds = $45,831,896.
    \780\ This estimate is based on the following calculation: 4
hours x $400 (hourly rate for outside legal services) = $1,600.
---------------------------------------------------------------------------

    In addition to the initial burden, we estimate that each fund would
incur an average annual burden of 38 hours associated with its
derivatives risk management program, including that: (1) The fund
review and update its risk management program at least annually (8
hours); (2) the derivatives risk

manager prepare, on a quarterly basis, a written report that describes
the adequacy and effectiveness of the fund's risk management program
(24 hours \781\); and (3) the fund's board review, on a quarterly
basis, the written report prepared by the fund's derivatives risk
manager that describes the adequacy and effectiveness of the fund's
risk management program, and approve any material changes to the
derivatives risk management program (6 hours). Accordingly, we estimate
that the total average annual burden for establishing a derivatives
risk management program would be 63,688 hours.\782\ We also estimate
that each fund would incur an annual time cost of $41,066, for a total
annual time cost for all funds of approximately $68,826,616.\783\ In
addition to the internal costs described above, we also estimate that
each fund would incur average annual external costs of $3,200
associated with a fund board's consulting its outside legal counsel
with regard to quarterly reviews of the reports prepared by the fund's
derivatives risk manager.\784\
---------------------------------------------------------------------------

    \781\ The estimate is based on the following calculation: 4
quarterly reports x 6 hours to prepare each written report = 24
hours.
    \782\ This estimate is based on the following calculation: 38
hours x 1,676 funds = 63,688 hours.
    \783\ This estimate is based on the following calculations:
Reviewing/updating the risk management program (8 hours): 4 hours x
$301 (hourly rate for a senior portfolio manager) = $1,204; 4 hours
x $455.5 (blended hourly rate for assistant general counsel ($426)
and chief compliance officer ($485) = $1,822; Preparing quarterly
reports by the derivatives risk manager (6 hours x 4 reports = 24
hours): 24 hours x $485 (hourly rate for chief compliance officer
functioning as proposed derivatives risk manager) = $11,640;
Reviewing quarterly reports by the fund's board (1.5 hours x 4
reports = 6 hours): 6 hours x $4,400 (hourly rate for a board of 8
directors) = $26,400. $1,204 + $1,822 + $11,640 + $26,400 = 41,066;
$41,066 x 1,676 funds = $68,826,616.
    \784\ This estimate is based on the following calculation: 8
hours (2 hours x 4 quarterly reviews) x $400 (hourly rate for
outside legal services) = $3,200.
---------------------------------------------------------------------------

Recordkeeping
    Proposed rule 18f-4 would require a fund that adopts and implements
a derivatives risk management program to maintain: (1) A written copy
of the policies and procedures adopted by the fund (as required in
proposed rule 18f-4(a)(3)) that are in effect, or any time within the
past five years were in effect, in an easily accessible place; (2)
copies of any materials provided to the board of directors in
connection with its approval of the derivatives risk management
program, including any material changes to the program, and any written
reports provided to the board relating to the derivatives risk
management program, for at least five years after the end of the fiscal
year in which the documents were provided (the first two years in an
easily accessible place); and (3) records documenting the periodic
reviews and updates required under proposed rule 18f-4(a)(3)(i)(D), for
a period of not less than five years (the first two years in an easily
accessible place) following each review or update.
    We estimate that each fund would incur an annual average burden of
4 hours to retain these records.\785\ We therefore estimate that the
total annual burden for maintaining these records would be 6,704
hours.\786\ We also estimate that each fund would incur an annual time
cost of approximately $288, and a total annual time cost for all funds
of approximately $482,688 with respect to this hourly burden.\787\ We
estimate that there are no external costs associated with this
collection of information.
---------------------------------------------------------------------------

    \785\ We estimate 2 hours spent by a general clerk and 2 hours
spent by a senior computer operator.
    \786\ This estimate is based on the following calculation: 4
hours x 1,676 funds = 6,704 hours.
    \787\ This estimate is based on the following calculation: 2
hours x $57 (hourly rate for a general clerk) = $114; 2 hours x $87
(hourly rate for a senior computer operator) = $174. $114 + $174 =
$288; $288 x 1,676 funds = $482,688.
---------------------------------------------------------------------------

Estimated Total Burden
    Amortized over a three-year time period, the hour burdens and time
costs for collections of information associated with the derivatives
risk management program under proposed rule 18f-4, including the
burdens associated with (a) establishing a derivatives risk management
program; and (b) maintaining required records, are estimated to result
in an aggregate average annual hour burden of 65,923 hours and
aggregate time costs of $61,644,397.\788\ In addition to the internal
costs described above, we also estimate that each fund would incur a
one-time average external cost of $1,600 and average annual external
costs of $3,200.
---------------------------------------------------------------------------

    \788\ These estimates are based on the following calculations:
(50,280 hours (year 1) + (2 x 63,688 hours) (years 2 and 3) + (3 x
6,704 hours) (years 1, 2 and 3)) / 3 = 65,923 hours; ($45,831,896
(year 1) + (2 x $68,826,616) (years 2 and 3) + (3 x $482,688) (years
1, 2 and 3)) / 3 = $61,644,397.
---------------------------------------------------------------------------

Estimated Total Burden for Rule 18f-4
    Amortized over a three-year time period, the hour burdens and time
costs for collections of information associated with proposed rule 18f-
4, including the burdens associated with (a) portfolio limitations for
derivatives transactions; (b) asset segregation for derivatives
transactions; (c) asset segregation for financial commitment
transactions; and (d) derivatives risk management program, are
estimated to result in an aggregate average annual hour burden of
1,059,755 hours and aggregate time costs of $171,141,630.\789\ In
addition to the internal costs described above, we also estimate that
each fund would incur an aggregate average one-time external cost of
$4,000 and aggregate average annual external costs of $3,200.\790\
---------------------------------------------------------------------------

    \789\ These estimates are based on the following calculations:
(196,147 hours: portfolio limitations + 634,669 hours: asset
segregation (derivatives) + 163,016 hours: asset segregation
(financial commitment transactions) + 65,923 hours (risk management
program) = 1,059,755 hours; ($20,386,028: portfolio limitations +
$70,900,317: asset segregation (derivatives) + $18,210,888: asset
segregation (financial commitment transactions) + $61,644,397 (risk
management program) = $171,141,630.
    \790\ These estimates are based on the following calculations:
One-time costs: ($800: portfolio limitations + $800: asset
segregation (derivatives) + $800: asset segregation (financial
commitment transactions) + $1,600 (risk management program) =
$4,000; Annual costs: ($3,200: risk management program).
---------------------------------------------------------------------------

5. Amendments to Form N-PORT
    On May 20, 2015, the Commission proposed Form N-PORT, which would
require funds to report information within thirty days after the end of
each month about their monthly portfolio holdings to the Commission in
a structured data format. Preparing a report on Form N-PORT is
mandatory and a collection of information under the PRA, and the
information required by Form N-PORT would be data-tagged in XML format.
Responses to the reporting requirements would be kept confidential for
reports filed with respect to the first two months of each quarter; the
third month of the quarter would not be kept confidential, but made
public sixty days after the quarter end.
Prior Burden Estimate for Proposed Form N-PORT
    In the Investment Company Reporting Modernization Release, we
estimated that, for the 35% of funds that would file reports on
proposed Form N-PORT in house, the per fund aggregate average annual
hour burden was estimated to be 178 hours per fund, and the average
cost to license a third-party software solution would be $4,805 per
fund per year.\791\ For the remaining 65% of funds that would retain
the services of a third party to prepare and file reports on proposed
Form N-PORT on the fund's behalf, we estimated the aggregate average
annual hour burden to be 125 hours per fund, and each fund would

pay an average fee of $11,440 per fund per year for the services of
third-party service provider. In sum, we estimated that filing reports
on proposed Form N-PORT would impose an average total annual hour
burden of 1,537,572 hours on applicable funds, and all applicable funds
would incur on average, in the aggregate, external annual costs of
$97,674,221.\792\
---------------------------------------------------------------------------

    \791\ See Investment Company Reporting Modernization Release,
supra note 138, at nn.736-741, 749 and accompanying text.
    \792\ See id., at nn.748 and 751 and accompanying text.
---------------------------------------------------------------------------

Recordkeeping and Reporting
    We are proposing amendments to Form N-PORT that would require each
fund that is required to implement a derivatives risk management
program as required by proposed rule 18f-4(a)(3) to report for options
and warrants, including options on a derivative, such as
swaptions.\793\ We believe that the enhanced reporting proposed in
these amendments would help our staff better monitor price and
volatility trends, as well as various funds' risk profiles.
---------------------------------------------------------------------------

    \793\ See Item C.11.c.viii of proposed Form N-PORT.
---------------------------------------------------------------------------

Estimated Total Burden
    We estimate that 14% of funds (1,676 funds) \794\ would be required
to file, on a monthly basis, additional information on Form N-PORT as a
result of the proposed amendments. We estimate that each fund that
files reports on Form N-PORT in house (35%, or 587 funds) would require
an average of approximately 2 burden hours to compile (including review
of the information), tag, and electronically file the additional
information in light of the proposed amendments for the first monthly
filing and an average of approximately 1 burden hour for each
subsequent monthly filing. Therefore, we estimate the per fund average
annual hour burden associated with the incremental changes to Form N-
PORT as a result of the proposed amendments for these funds would be an
additional 13 hours for the first year \795\ and an additional 12 hours
for each subsequent year.\796\ We further estimate an upper bound on
the initial annual costs to funds choosing this option of $3,352 per
fund \797\ with annual ongoing costs of $2,991 per fund.\798\ Amortized
over three years, the average annual hour burden would be an additional
12 hours per fund \799\ and the aggregate average annual cost would be
an additional $3,111 per fund.\800\
---------------------------------------------------------------------------

    \794\ Commission staff estimates, therefore, that approximately
14% of funds (1,676 funds) would be required to establish a
derivatives risk management program. See supra note 612 and
accompanying text.
    \795\ The estimate is based on the following calculation: (1
filing x 2 hours) + (11 filings x 1 hour) = 13 burden hours in the
first year.
    \796\ This estimate is based on the following calculation: (12
filings x 1 hour) = 12 burden hours in each subsequent year.
    \797\ This estimate is based upon the following calculations:
$3,352 in internal costs = ($3,196 = 1 hour x $303/hour for a senior
programmer) + (2.5 hours x $312/hour for a senior database
administrator) + (2 hours x $266/hour for a financial reporting
manager) + (2 hours x $198/hour for a senior accountant) + (2 hours
x $157/hour for an intermediate accountant) + (2 hours x $301/hour
for a senior portfolio manager) + (1.5 hours x $283/hour for a
compliance manager)). See Investment Company Reporting Modernization
Release, supra note 138, at n.658 and accompanying text.
    \798\ This estimate is based upon the following calculations:
$2,991 in internal costs = (2.14 hours x $266/hour for a financial
reporting manager) + (2.14 hours x $198/hour for a senior
accountant) + (2.14 hours x $157/hour for an intermediate
accountant) + (2.14 hours x $301/hour for a senior portfolio
manager) + (1.71 hours x $283/hour for a compliance manager) + (1.71
hours x $312/hour for a senior database administrator)). See
Investment Company Reporting Modernization Release, supra note 138,
at n. 659 and accompanying text.
    \799\ The estimate is based on the following calculation: (13 +
(12 x 2)) / 3 = 12.33.
    \800\ The estimate is based on the following calculation:
($3,352 + ($2,991 x 2)) / 3 = $3,111.
---------------------------------------------------------------------------

    We estimate that 65% of funds (1,075 funds) would retain the
services of a third party to provide data aggregation, validation and/
or filing services as part of the preparation and filing of reports on
proposed Form N-PORT on the fund's behalf. For these funds, we estimate
that each fund would require an average of approximately 3 hours to
compile and review the information with the service provider prior to
electronically filing the monthly report for the first time and an
average of .5 burden hours for each subsequent monthly filing.
Therefore, we estimate the per fund average annual hour burden
associated with the incremental changes to proposed Form N-PORT as a
result of the proposed amendments for these funds would be an
additional 8.5 hours for the first year \801\ and an additional 6 hours
for each subsequent year.\802\ We further estimate an upper bound on
the initial costs to funds choosing this option of $2,319 per fund
\803\ with annual ongoing costs of $1,517 per fund.\804\ Amortized over
three years, the aggregate average annual hour burden would be an
additional 7 hours per fund,\805\ with average annual ongoing costs of
$1,784 per fund.\806\
---------------------------------------------------------------------------

    \801\ The estimate is based on the following calculation: (1
filing x 3 hours) + (11 filings x 0.5 hour) = 8.5 burden hours in
the first year.
    \802\ This estimate is based on the following calculation: 12
filings x 0.5 hour = 6 burden hours in each subsequent year.
    \803\ This estimate is based upon the following calculations:
$2,319 in internal costs = (1.5 hours x $303/hour for a senior
programmer) + (2.5 hours x $312/hour for a senior database
administrator) + (.9 hours x $266/hour for a financial reporting
manager) + (.9 hours x $198/hour for a senior accountant) + (.9
hours x $157/hour for an intermediate accountant) + (.9 hours x
$301/hour for a senior portfolio manager) + (.9 hours x $283/hour
for a compliance manager)). See Investment Company Reporting
Modernization Release, supra note 138, at n.660 and accompanying
text.
    \804\ This estimate is based upon the following calculations:
$1,517 in internal costs = (1 hours x $266/hour for a financial
reporting manager) + (1 hours x $198/hour for a senior accountant) +
(1 hours x $157/hour for an intermediate accountant) + (1 hours x
$301/hour for a senior portfolio manager) + (1 hours x $283/hour for
a compliance manager) + (1 hours x $312/hour for a senior database
administrator)). See Investment Company Reporting Modernization
Release, at n. 661 and accompanying text.
    \805\ The estimate is based on the following calculation: (8.5 +
(6 x 2)) / 3 = 6.83.
    \806\ The estimate is based on the following calculation:
($2,319 + ($1,517 x 2)) / 3 = $1,784.
---------------------------------------------------------------------------

    In sum, we estimate that the proposed amendments to Form N-PORT
would impose an average total annual hour burden of an additional
14,667 hours on applicable funds,\807\ and an average additional total
cost of $3,768,933 on applicable funds.\808\ We do not anticipate any
change to the total external annual costs of $97,674,221.\809\
---------------------------------------------------------------------------

    \807\ The estimate is based on the following calculation: (587
funds x 12 hours) + (1,089 funds x 7 hours) = 14,667 hours.
    \808\ The estimate is based on the following calculation: (587
funds x $3,111) + (1,089 funds x $1,784) = $3,768,933.
    \809\ See Investment Company Reporting Modernization Release,
supra note 138, at n.751 and accompanying text.
---------------------------------------------------------------------------

6. Amendments to Form N-CEN
    On May 20, 2015, we proposed to amend rule 30a-1 to require all
funds to file reports with certain census-type information on proposed
Form N-CEN with the Commission on an annual basis. Proposed Form N-CEN
would be a collection of information under the PRA, and is designed to
facilitate the Commission's oversight of funds and its ability to
monitor trends and risks. The collection of information under Form N-
CEN would be mandatory for all funds, and responses would not be kept
confidential.
Prior Burden Estimate for Proposed Form N-CEN
    In the Investment Company Reporting Modernization Release, the
staff estimated that the Commission would receive an average of 3,146
reports per year, based on the number of existing Form N-SAR filers,
including responses from 2,419 management companies.\810\ We estimated
that management investment companies would require 33.35 annual burden
hours in the first

year \811\ and 13.35 annual burden hours in each subsequent year for
preparing and filing reports on proposed Form N-CEN. We further
estimated that all Form N-CEN filers would have an aggregate annual
paperwork related expenses of $12,395,064 for reports on Form N-
CEN.\812\ We also estimated that all applicable funds would incur, in
the aggregate, external annual costs of $1,748,637, which would include
the costs of registering and maintaining LEIs for funds.
---------------------------------------------------------------------------

    \810\ This estimate is based on 2,419 management companies and
727 UITs filing reports on Form N-SAR as of Dec. 31, 2014. UITs
would not be required to complete Item 31 of proposed Form N-CEN.
See General Instruction A of proposed Form N-CEN.
    \811\ This estimate is based on the following calculation: 13.35
hours for filings + 20 additional hours for the first filing = 33.35
hours.
    \812\ This estimate is based on annual ongoing burden hour
estimate of 32,294 burden hours for management companies (2,419
management companies x 13.35 hours per filing) plus 6,623 burden
hours for UITs (727 UITs x 9.11 burden hours per filing), for a
total estimate of 38,917 burden ongoing hours. This was then
multiplied by a blended hourly wage of $318.50 per hour, $303 per
hour for Senior Programmers and $334 per hour for compliance
attorneys, as we believe these employees would commonly be
responsible for completing reports on proposed Form N-CEN ($318.50 x
38,917 = $12,395,064.50). See Investment Company Reporting
Modernization Release, supra note 138, at n.723 and accompanying
text.
---------------------------------------------------------------------------

Recordkeeping and Reporting
    We are proposing amendments to Form N-CEN to identify whether the
fund relied upon proposed rule 18f-4. Specifically, the proposed
amendments to Form N-CEN would require a fund to identify the portfolio
limitation(s) on which the fund relied during the reporting period.
Estimated Total Burden
    As discussed above, as part of the Investment Company Modernization
Release proposal, funds would be required to identify if they relied
upon ten different rules under the Act during the reporting
period.\813\ In addition to the paperwork costs associated with
collecting and documenting the requirements under proposed rule 18f-
4,\814\ we believe that there are additional paperwork cost relating to
identifying the portfolio limitation(s) on which a fund relied on
proposed Form N-CEN. We therefore estimate that 2,419 funds would incur
an average annual hour burden of .25 hours for the first year to
compile (including review of the information), tag, and electronically
file the additional information in light of the proposed amendments,
and an average annual hour burden of approximately .1 hours for each
subsequent year's filing. We further estimate an upper bound on the
initial costs to funds choosing this option of $80 per fund \815\ with
annual ongoing costs of $32 per fund.\816\ Amortized over three years,
the aggregate average annual hour burden would be an additional .15
hours per fund,\817\ with average annual ongoing costs of $48 per
fund.\818\
---------------------------------------------------------------------------

    \813\ See supra section IV.D.7.d; see also Item 31 of Proposed
Form N-CEN.
    \814\ See supra section V.B.1.
    \815\ This estimate is based on multiplying .25 hours by a
blended hourly wage of $318.50 per hour, $303 per hour for Senior
Programmers and $334 per hour for compliance attorneys, as we
believe these employees would commonly be responsible for completing
reports on proposed Form N-CEN ($318.50 x .25 = $80). See Investment
Company Reporting Modernization Release, supra note 138, at n.723
and accompanying text.
    \816\ This estimate is based on multiplying .1 hours by a
blended hourly wage of $318.50 per hour, $303 per hour for Senior
Programmers and $334 per hour for compliance attorneys, as we
believe these employees would commonly be responsible for completing
reports on proposed Form N-CEN ($318.50 x .1 = $32). See Investment
Company Reporting Modernization Release, supra note 138, at n.723
and accompanying text.
    \817\ The estimate is based on the following calculation: (.25 +
(.1 x 2)) / 3 = .15 hours.
    \818\ The estimate is based on the following calculation: ($80 +
($32 x 2)) / 3 = $48.
---------------------------------------------------------------------------

    In sum, we estimate that the proposed amendments to Form N-CEN
would impose an average total annual hour burden of an additional 363
hours on applicable funds,\819\ and an average additional total cost of
$115,616 on applicable funds.\820\ We do not anticipate any change to
the total external annual costs of $1,748,637.\821\
---------------------------------------------------------------------------

    \819\ The estimate is based on the following calculation: (2,419
funds x .15 hours) = 363 hours.
    \820\ This estimate is based on annual ongoing burden estimate
of 363 burden hours for management companies (2,419 management
companies x .15 hours per filing). This was then multiplied by a
blended hourly wage of $318.50 per hour, $303 per hour for Senior
Programmers and $334 per hour for compliance attorneys, as we
believe these employees would commonly be responsible for completing
reports on proposed Form N-CEN ($318.50 x 363 = $115,616). See
Investment Company Reporting Modernization Release, supra note 138,
at n.723 and accompanying text.
    \821\ See Investment Company Reporting Modernization Release,
supra note 138, at n.769 and accompanying text.
---------------------------------------------------------------------------

C. Request for Comments

    We request comment on whether our estimates for burden hours and
any external costs as described above are reasonable. Pursuant to 44
U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (1)
Evaluate whether the proposed collections of information are necessary
for the proper performance of the functions of the Commission,
including whether the information will have practical utility; (2)
evaluate the accuracy of the Commission's estimate of the burden of the
proposed collections of information; (3) determine whether there are
ways to enhance the quality, utility, and clarity of the information to
be collected; and (4) determine whether there are ways to minimize the
burden of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
    The agency has submitted the proposed collection of information to
OMB for approval. Persons wishing to submit comments on the collection
of information requirements of the proposed amendments should direct
them to the Office of Management and Budget, Attention Desk Officer for
the Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Washington, DC 20503, and should send a copy to
Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549-1090, with reference to File No. S7-
24-15. OMB is required to make a decision concerning the collections of
information between 30 and 60 days after publication of this Release;
therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days after publication of this Release.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7-24-15, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE., Washington, DC
20549-2736.

VI. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Analysis has been prepared in
accordance with section 3 of the Regulatory Flexibility Act
(``RFA'').\822\ It relates to proposed rule 18f-4 and proposed
amendments to Form N-PORT and Form N-CEN.
---------------------------------------------------------------------------

    \822\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for and Objectives of the Proposed Actions

    The use of derivatives by funds implicates certain requirements
under the Investment Company Act, including section 18 of that
Act.\823\ In particular, section 18 limits a fund's ability to obtain
leverage or incur obligations to persons other than the fund's common
shareholders through the issuance of senior securities, as defined in
that section.\824\ As discussed above, funds and their counsel, in
light of the guidance we provided in Release 10666 and provided by our
staff, have applied the segregated account approach to, or otherwise
sought to cover, many types

of transactions other than those specifically addressed in Release
10666, including various derivatives and other transactions that
implicate section 18.\825\ We have determined to propose a new approach
to funds' use of derivatives in order to address the investor
protection purposes and concerns underlying section 18 of the Act and
to provide an updated and more comprehensive approach to the regulation
of funds' use of derivatives transactions in light of the dramatic
growth in the volume and complexity of the derivatives markets over the
past two decades and the increased use of derivatives by certain funds.
---------------------------------------------------------------------------

    \823\ See supra section I.
    \824\ See supra section I.
    \825\ See supra section II.B.3.
---------------------------------------------------------------------------

    The Commission is proposing a new exemptive rule and amendments to
Form N-PORT and Form N-CEN that are designed to provide an updated and
more comprehensive approach to the regulation of funds' use of
derivatives, as well as certain other transactions that implicate
section 18 of the Act, and to more effectively address the purposes and
concerns underlying section 18.\826\ Specifically, proposed rule 18f-4
is designed both to impose a limit on the leverage a fund relying on
the rule may obtain through derivatives transactions and financial
commitment transactions, and to require the fund to have qualifying
coverage assets to meet its obligations under those transactions, in
order to address the undue speculation concern expressed in section
1(b)(7) and the asset sufficiency concern expressed in section
1(b)(8).\827\ In addition, the derivatives risk management program
requirement is designed to complement the proposed rule's portfolio
limitations and asset segregation requirements by requiring funds
subject to the requirement to adopt and implement a derivatives risk
management program that addresses the program elements specified in the
rule, including the assessment and management of the risks associated
with the fund's derivatives transactions.\828\ The program would be
administered by a derivatives risk manager designated by the fund and
approved by the fund's board of directors.\829\ The amendments to Form
N-PORT require the reporting of certain risk metrics (vega and gamma)
but only by those funds that engage in more than a limited amount of
derivatives transactions, by virtue of meeting the threshold requiring
them to implement a derivatives risk management program as required by
proposed rule 18f-4(a)(3). Last, the amendments to Form N-CEN would
require a fund to identify the portfolio limitation(s) on which the
fund relied during the reporting period.
---------------------------------------------------------------------------

    \826\ See supra section III.
    \827\ See supra section III.A.
    \828\ See supra section III.A.
    \829\ See supra section III.A.
---------------------------------------------------------------------------

B. Legal Basis

    The Commission is proposing new rule 18f-4 under the authority set
forth in sections 6(c), 12(a), 31(a), and 38(a) of the Investment
Company Act of 1940 [15 U.S.C. 80a-6(c), 80a-12(a), 80a-31(a), and 80a-
38(a)]. The Commission is proposing amendments to proposed Form N-PORT
and Form N-CEN under the authority set forth in sections 8, 30, and 38
of the Investment Company Act of 1940 [15 U.S.C. 80a-8, 80a-30, 80a-
38].

C. Small Entities Subject to Proposed Rule 18f-4 and Amendments to Form
N-PORT and Form N-CEN

    An investment company is a small entity if, together with other
investment companies in the same group of related investment companies,
it has net assets of $50 million or less as of the end of its most
recent fiscal year.\830\ Commission staff estimates that, as of June
2015, approximately 110 open and closed-end funds are small entities.
We discuss below the percentage of small funds that the staff estimates
may seek to rely on the proposed rule, and the percentage of small
funds that may be required to comply with the various aspects of the
proposed rule.
---------------------------------------------------------------------------

    \830\ See rule 0-10(a) under the Investment Company Act.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

1. Portfolio Limitations for Derivatives Transactions
    Proposed rule 18f-4 would require a fund that engages in
derivatives transactions in reliance on the rule, including any small
entities that rely on the rule, to comply with one of two alternative
portfolio limitations.\831\ A fund that relies on the exposure-based
portfolio limit would be required to operate so that its aggregate
exposure under senior securities transactions, measured immediately
after entering into any such transaction, does not exceed 150% of the
fund's net assets.\832\ Under the risk-based portfolio limit, a fund
generally would be required to demonstrate, using a VaR calculation,
that its derivatives transactions, in the aggregate, result in an
investment portfolio that is subject to less market risk than if the
fund did not use such derivatives.\833\ A fund that elects the risk-
based portfolio limitation under the proposed rule would be permitted
to obtain exposure under its derivatives transactions and other senior
securities of up to 300% of the fund's net assets.\834\
---------------------------------------------------------------------------

    \831\ Proposed rule 18f-4(a)(1).
    \832\ Proposed rule 18f-4(a)(1)(i).
    \833\ Proposed rule 18f-4(a)(1)(ii).
    \834\ Proposed rule 18f-4(a)(1)(ii).
---------------------------------------------------------------------------

    The proposed rule would require that for a fund relying on the
rule, a fund's board of directors, including a majority of the
directors who are not interested persons of the fund, approve which of
the two alternative portfolio limitations will apply to the fund.\835\
In addition, the proposed rule would require a fund to maintain a
record of each determination made by the fund's board that the fund
will comply with one of the portfolio limitations under the proposed
rule, which would include the fund's initial determination as well as a
record of any determination made by the fund's board to change the
portfolio limitation.\836\ The fund also would be required to maintain
a written record demonstrating that immediately after the fund entered
into any senior securities transaction, the fund complied with the
portfolio limitation applicable to the fund immediately after entering
into the senior securities transaction, reflecting the fund's aggregate
exposure, the value of the fund's net assets and, if applicable, the
fund's full portfolio VaR and its securities VaR.\837\
---------------------------------------------------------------------------

    \835\ Proposed rule 18f-4(a)(5)(i).
    \836\ See proposed rule 18f-4(a)(6)(i). The fund would be
required to maintain this record for a period of not less than five
years (the first two years in an easily accessible place) following
each determination.
    \837\ See proposed rule 18f-4(a)(6)(iv). The fund would be
required to maintain this record for a period of not less than five
years (the first two years in an easily accessible place) following
each senior securities transaction entered into by the fund.
---------------------------------------------------------------------------

    As discussed above in section IV, our staff estimates that the one-
time operational costs necessary to establish and implement an
exposure-based portfolio limitation would range from $20,000 to
$150,000 per fund, depending on the particular facts and circumstances
and current derivatives risk management practices of the fund.\838\
Staff also estimates that each fund would incur ongoing costs related
to implementing a 150% exposure-based portfolio limitation under
proposed rule 18f-4. Staff estimates that such costs would range from
20% to 30% of the one-time costs discussed above. Thus, staff estimates
that a fund would incur ongoing annual costs associated with the 150%
exposure-based portfolio limit that would range from $4,000 to $45,000.
---------------------------------------------------------------------------

    \838\ See section IV.

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

    As discussed above in section IV.D.1, in the DERA staff analysis,
68% of all of the sampled funds did not have any exposure to
derivatives transactions. These funds thus do not appear to use
derivatives transactions or, if they do use them, do not appear to do
so to a material extent. We estimate that approximately 32% of funds--
the percentage of funds that did have derivatives exposure in the DERA
sample--are more likely to enter into derivatives transactions and
therefore are more likely to incur costs associated with either the
exposure-based portfolio limit or the risk-based portfolio limit.
Excluding approximately 4% of all funds (corresponding to the
percentage of sampled funds that had aggregate exposure of 150% or more
of net assets and for which we have estimated costs for the risk-based
limit), we estimate that 28% of funds would incur the costs associated
with the exposure-based portfolio limit. Staff also estimates that 28%
of small funds (approximately 31 small funds) enter into at least some
derivatives transactions, and would therefore incur the costs
associated with the exposure-based portfolio limit.
    As with the costs discussed above regarding the exposure-based
portfolio limit, we expect that funds would incur one-time and ongoing
operational costs to establish and implement a risk-based exposure
limit, including the VaR test. We expect that a fund that seeks to
comply with the 300% aggregate exposure limit would incur the same
costs as those that we estimated above in order to establish and
implement the 150% exposure-based portfolio limit. Accordingly, we
estimate below the costs we believe a fund would incur to comply with
the VaR test. Our staff estimates that the one-time operational costs
necessary to establish and implement a VaR test would range from
$60,000 to $180,000 per fund, depending on the particular facts and
circumstances and current derivatives risk management practices of the
fund. Staff also estimates that each fund would incur ongoing costs
related to implementing a VaR test under proposed rule 18f-4. Staff
estimates that such costs would range from 20% to 30% of the one-time
costs discussed above. Thus, staff estimates that a fund would incur
ongoing annual costs associated with the VaR test aspect of the risk-
based exposure limit that would range from $12,000 to $54,000. DERA
staff estimates that approximately 4% of all funds sampled had
aggregate exposure of 150% (or greater) of net assets. We estimate
therefore, that 4% of funds would rely on the proposed rule, and comply
with the risk-based portfolio limit. Staff also estimates that 4% of
small funds (approximately 4 small funds) would rely on the proposed
rule, and comply with the risk-based portfolio limit.
2. Asset Segregation
    Under proposed rule 18f-4, a fund, including a fund that is a small
entity, that enters into derivatives transactions in reliance on the
rule would be required to manage the risks associated with its
derivatives transactions by maintaining an amount of qualifying
coverage assets designed to enable the fund to meet its obligations
arising from such transactions.\839\ A fund's board, including a
majority of the fund's independent directors, would be required to
approve the fund's policies and procedures reasonably designed to
provide for the fund's maintenance of qualifying coverage assets.\840\
A fund that would be required to maintain an amount of qualifying
coverage assets under the proposed rule also would be subject to
certain recordkeeping requirements. The proposed rule would require
that qualifying coverage assets for derivatives transactions be
identified on the books and records of the fund at least once each
business day.\841\ In addition, the fund would be required to maintain
a written copy of the policies and procedures approved by the board
regarding the fund's maintenance of qualifying coverage assets, as
required under the proposed rule.\842\
---------------------------------------------------------------------------

    \839\ See proposed rule 18f-4(a)(2).
    \840\ See proposed rule 18f-4(a)(5)(ii).
    \841\ See proposed rules 18f-4(a)(2) and 18f-4(a)(6)(v).
    \842\ See proposed rule 18f-4(a)(6)(ii).
---------------------------------------------------------------------------

    Our staff estimates that the one-time operational costs necessary
to establish and implement the proposed asset segregation requirements
would range from $25,000 to $75,000 per fund, depending on the
particular facts and circumstances and current derivatives risk
management practices of the funds comprising the fund. Staff also
estimates that each fund would incur ongoing costs related to
implementing the asset segregation requirements under proposed rule
18f-4. Staff estimates that such costs would range from 65% to 75% of
the one-time costs discussed above. Thus, staff estimates that a fund
would incur ongoing annual costs associated with the asset segregation
requirements that would range from $16,250 to $56,250. As discussed
above in section IV.D.1, in the DERA staff analysis, 68% of all of the
sampled funds did not have any exposure to derivatives transactions.
These funds thus do not appear to use derivatives transactions or, if
they do use them, do not appear to do so to a material extent. Staff
estimates that the remaining 32% of funds will seek to rely on the
proposed rule 18f-4, as noted above, and therefore comply with the
asset segregation requirements. Staff also estimates that 32% of small
funds (approximately 35 small funds) will seek to rely on proposed rule
18f&4, and therefore comply with the asset segregation requirements.
3. Derivatives Risk Management Program
    We are proposing measures under rule 18f-4 that will help enhance
derivatives risk management by requiring that any fund, including a
small entity, that engages in more than a limited amount of derivatives
transactions pursuant to the proposed rule, or that uses complex
derivatives transactions, adopt and implement a derivatives risk
management program.\843\ This risk management program would require a
fund have policies and procedures reasonably designed to assess and
manage the risks of the fund's derivatives transactions.\844\ The
program is designed to be tailored by each fund and its adviser to the
particular types of derivatives used by the fund and the manner in
which those derivatives relate to the fund's investment portfolio and
strategy. Funds that make only limited use of derivatives would not be
subject to the proposed condition requiring the adoption of a
formalized derivatives risk management program. A fund that makes only
limited use of derivatives, however, would need to monitor its
investments in derivatives to confirm that its aggregate exposure to
derivatives transactions is not more than 50% of its NAV and that it
does not use complex derivatives.
---------------------------------------------------------------------------

    \843\ See proposed rule 18f-4(a)(3).
    \844\ See proposed rule 18f-4(a)(3).
---------------------------------------------------------------------------

    Under the proposed rule, a fund's board of directors (including a
majority of the directors who are not interested persons of the fund)
must approve the fund's derivatives risk management program, including
any material changes to the program, if applicable.\845\ A fund that
has a risk management program would be required to designate a person
as a derivatives risk manager responsible for administering the program
and such derivatives risk manager would be required to provide a
written report to the fund's board of directors, no less frequently
than quarterly, that reviews the adequacy and

effectiveness of its implementation.\846\ We note that some funds, and
in particular smaller funds for example, may not have appropriate
existing personnel capable of fulfilling the responsibilities of the
proposed derivatives risk manager, or may choose to hire a derivatives
risk manager rather than assigning that responsibility to a current
employee or officer of the fund or the fund's investment adviser who is
not a portfolio manager. We would expect that a fund that is required
to hire a new derivatives risk manager would likely incur costs on the
higher end of our estimated range of costs provided below.
---------------------------------------------------------------------------

    \845\ See proposed rule 18f-4(a)(3)(ii)(A).
    \846\ See proposed rule 18f-4(a)(3)(ii)(B) and (C).
---------------------------------------------------------------------------

    A fund that is required to have a derivatives risk management
program under the proposed rule would be required to maintain a written
copy of the fund's risk management program and any associated policies
and procedures that are in effect, or at any time within the past five
years, were in effect in an easily accessible place.\847\ In addition,
a fund would be required to maintain copies of any materials provided
to the board of directors in connection with its approval of the
derivatives risk management program, including any material changes to
the program, and any written reports provided to the board of directors
relating to the program.\848\
---------------------------------------------------------------------------

    \847\ See proposed rule 18f-4(a)(6)(iii)(A).
    \848\ See proposed rule 18f-4(a)(6)(iii)(B). The fund would be
required to maintain this record for a period of not less than five
years after the end of the fiscal year in which the documents were
provided (the first two years in an easily accessible place).
---------------------------------------------------------------------------

    As discussed in the Economic Analysis section, our staff estimates
that the one-time costs necessary to establish and implement a
derivatives risk management program would range from $65,000 to
$500,000 per fund, depending on the particular facts and circumstances
and current derivatives risk management practices of the fund. Staff
estimates that each fund would incur ongoing program-related costs, as
a result of proposed rule 18f-4, that range from 65% to 75% of the one-
time costs necessary to establish and implement a derivatives risk
management program. Thus, staff estimates that a fund would incur
ongoing annual costs associated with proposed rule 18f-4 that would
range from $42,250 to $375,000. Under the proposed rule, a fund that
has no greater than 50% aggregate exposure associated with its
derivatives transactions would not be required to establish a
derivatives risk management program. DERA staff analysis shows that
approximately 10% of all sampled funds had aggregate exposure from
derivatives transactions high enough (i.e., aggregate exposure of 50%
of net assets or greater) to require that they establish a derivatives
risk management program under the proposed rule. The DERA staff
analysis also shows that approximately 4% of additional funds had
aggregate exposure of between 25 and 50% of net assets. In light of
this, Commission staff estimates that approximately 14% of funds would
establish a derivatives risk management program. Staff also estimates
that approximately 14% of small funds (approximately 15 small funds)
would establish a derivatives risk management program.
4. Financial Commitment Transactions
    Under our proposed rule, a fund may also enter into financial
commitment transactions, notwithstanding the requirements of section
18(a)(1), section 18(f)(1) and section 61 of the Investment Company Act
provided that the fund maintains qualifying coverage assets, identified
on the books and records of the fund and determined at least once each
business day, with a value equal to at least the fund's aggregate
financial commitment obligations.\849\ In addition, the fund's board of
directors (including a majority of the directors who are not interested
persons of the fund) would be required to approve policies and
procedures reasonably designed to provide for the fund's maintenance of
qualifying coverage assets.\850\ The fund would also be required to
maintain a written copy of the policies and procedures approved by the
board of directors that are in effect, or at any time within the past
five years were in effect, in an easily accessible place.\851\ In
addition, the fund would be required to maintain a written record
reflecting the amount of each financial commitment obligation
associated with each financial commitment transaction entered into by
the fund and identifying the qualifying coverage assets maintained by
the fund with respect to each financial commitment obligation, as
determined by the fund at least once each business day, for a period of
not less than five years (the first two years in an easily accessible
place).\852\
---------------------------------------------------------------------------

    \849\ Proposed rule 18f-4(b)(1). See also proposed rule 18f-
4(c)(5) (definition of financial commitment obligation).
    \850\ Proposed rule 18f-4(b)(2).
    \851\ Proposed rule 18f-4(b)(3)(i).
    \852\ Proposed rule 18f-4(b)(3)(ii).
---------------------------------------------------------------------------

    Our staff estimates that the one-time operational costs necessary
to establish and implement the proposed asset segregation requirements
would range from $25,000 to $75,000 per fund. Staff also estimates that
each fund would incur ongoing costs related to implementing the asset
segregation requirements under proposed rule 18f-4. Staff estimates
that such costs would range from 65% to 75% of the one-time costs
discussed above. Thus, staff estimates that a fund would incur ongoing
annual costs associated with the asset segregation requirements that
would range from $16,250 to $56,250. DERA staff analysis shows that
approximately 3% of all sampled funds enter into at least some
financial commitment transactions, but do not use derivatives
transactions (or other senior securities transactions). Staff
estimates, therefore, that 3% of funds would comply with the asset
segregation requirements in proposed rule 18f-4 applicable to financial
commitment transactions.\853\ Staff also estimates that 3% of small
funds (approximately 3 small funds) would comply with the asset
segregation requirements in proposed rule 18f-4 applicable to financial
commitment transactions.
---------------------------------------------------------------------------

    \853\ The estimate of affected funds does not include money
market funds or BDCs. We understand, however, that both money market
funds and BDCs may engage in certain types of financial commitment
transactions. We estimate that 537 money market funds and 88 BDCs
would also comply with the asset segregation requirements in
proposed rule 18f-4 (applicable to financial commitment
transactions). Based on information in filings submitted to the
Commission, we believe that there are no money market funds that are
small entities. The Commission staff further estimates that, as of
June 2015, approximately 29 BDCs are small entities.
---------------------------------------------------------------------------

5. Amendments to Proposed Form N-PORT
    We are proposing amendments to proposed Form N-PORT to require the
reporting of certain risk metrics (vega and gamma) but only by those
funds that engage in more than a limited amount of derivatives
transactions, by virtue of meeting the threshold requiring them to
implement a derivatives risk management program as required by proposed
rule 18f-4(a)(3).\854\ As discussed above, we propose to limit the
reporting of vega and gamma because: (1) We understand that there are
added burdens to reporting risk-metrics and we are therefore proposing
to limit the reporting of these risk metrics to only those funds who
are engaged in more than a limited amount of derivatives transactions
or that use certain complex derivatives transactions, as opposed to
funds that engage in a more limited use of derivatives; and (2) we
believe many of the funds that would be required to

implement a derivatives risk management program and that invest in
derivatives as part of their investment strategy currently calculate
risk metrics for their own internal risk management programs, albeit,
for internal reporting purposes.\855\ We anticipate that the enhanced
reporting proposed in these amendments would help our staff better
monitor price and volatility trends and various funds' risk profiles.
Risk metrics data reported on Form N-PORT that is made publicly
available also would inform investors and assist users in assessing
funds' relative price and volatility risks and the overall price and
volatility risks of the fund industry--particularly for those funds
that use investments in derivatives as an important part of their
trading strategy.
---------------------------------------------------------------------------

    \854\ See supra section III.G. See also proposed rule 18f-
4(a)(3).
    \855\ Part C of proposed Form N-PORT would require a fund and
its consolidated subsidiaries to disclose its schedule of
investments and certain information about the fund's portfolio of
investments. We propose to add Item C.11.c.viii to Part C of
proposed Form N-PORT that would require funds that are required to
implement a risk management program under proposed rule 18f-4(a)(3)
provide the gamma and vega for options and warrants, including
options on a derivative, such as swaptions. See Item C.11.c.viii of
proposed Form N-PORT.
---------------------------------------------------------------------------

    All funds that would be required to implement a derivatives risk
management program as required by proposed rule 18f-4(a)(3) would be
subject to the proposed amendments to Form N-PORT, including funds that
are small entities. For smaller funds and fund groups \856\ we proposed
an extra 12 months (or 30 months after the effective date) to comply
with the proposed Form N-PORT reporting requirements. We estimate that
10% of small funds (approximately 11 small funds) would be required to
comply with the proposed amendments to Form N-PORT.
---------------------------------------------------------------------------

    \856\ For purposes of the extended compliance date only, we
proposed that funds that together with other investment companies in
the same ``group of related investment companies'' have net assets
of less than $1 billion as of the end of the most recent fiscal year
be subject to an extra 12 months to comply with proposed Form N-
PORT.
---------------------------------------------------------------------------

    We estimate that 1,676 funds would be required to file, on a
monthly basis, additional information on Form N-PORT as a result of the
proposed amendments.\857\ Assuming that 35% of funds (587 funds) would
choose to license a software solution to file reports on Form N-PORT in
house, we estimate an upper bound on the initial annual costs to file
the additional information associated with the proposed amendments for
funds choosing this option of $3,352 per fund with annual ongoing costs
of $2,991 per fund.\858\ We further assume that 65% of funds (1,089
funds) would choose to retain a third-party service provider to provide
data aggregation and validation services as part of the preparation and
filing of reports on Form N-PORT, and we estimate an upper bound on the
initial costs to file the additional information associated with the
proposed amendments for funds choosing this option of $2,319 per fund
with annual ongoing costs of $1,517 per fund.\859\ As noted above, we
estimate that 10% of small funds (approximately 11 small funds) would
be required to comply with the proposed amendments to Form N-PORT.
Staff estimates that 35% of small funds (approximately 4 small funds)
would choose to license a software solution to file reports on Form N-
PORT in house, and 65% of small funds (approximately 7 small funds)
would choose to retain a third-party service provider.
---------------------------------------------------------------------------

    \857\ See supra note 794.
    \858\ See supra notes 797 and 798, and accompanying text.
    \859\ See supra notes 803 and 804, and accompanying text.
---------------------------------------------------------------------------

6. Amendments to Form N-CEN
    We are proposing amendments to Form N-CEN to require a fund to
identify whether the fund relied upon proposed rule 18f-4.
Specifically, the proposed amendments to Form N-CEN would require a
fund to identify the portfolio limitation(s) under which the fund
relied during the reporting period. As we discussed above, while the
costs associated with collecting and documenting the requirements under
proposed rule 18f-4 are discussed above,\860\ we believe that there are
additional costs relating to identifying the portfolio limitation(s) on
which a fund relied on proposed Form N-CEN.
---------------------------------------------------------------------------

    \860\ See supra sections IV.D.1. and IV.D.2.
---------------------------------------------------------------------------

    We estimate that 2,419 funds would incur initial costs of $80 per
fund,\861\ with annual ongoing costs of $32 per fund,\862\ to compile
(including review of the information), tag, and electronically file the
additional information in light of the proposed amendments. We do not
anticipate any change to the total external annual costs of
$1,748,637.\863\
---------------------------------------------------------------------------

    \861\ See supra note 815.
    \862\ See supra note 816.
    \863\ See supra note 821.
---------------------------------------------------------------------------

    As noted above, we estimate that approximately 110 open and closed-
end funds are small entities that would be required to identify the
portfolio limitation(s) on which they relied on reports on Form N-CEN
during the reporting period.\864\
---------------------------------------------------------------------------

    \864\ See supra section VI.C.
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    Commission staff has not identified any federal rules that
duplicate, overlap, or conflict with proposed rule 18f-4 or the
proposed amendments to Form N-PORT and Form N-CEN.

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives
that would accomplish our stated objectives, while minimizing any
significant economic impact on small entities. We considered the
following alternatives for small entities in relation to our proposal:
(1) Exempting funds that are small entities from proposed rule 18f-4,
or any part thereof, and/or establishing different requirements under
proposed rule 18f-4 to account for resources available to small
entities; (2) exempting funds that are small entities from the proposed
amendments to Form N-PORT, or establishing different disclosure and
reporting requirements, or different reporting frequency, to account
for resources available to small entities; (3) the clarification,
consolidation, or simplification of compliance requirements under
proposed rule 18f-4 for small entities; and (4) the use of performance
rather than design standards.
1. Proposed Rule 18f-4
    We do not believe that exempting any subset of funds, including
funds that are small entities, from the provisions in proposed rule
18f-4 would permit us to achieve our stated objectives. We also do not
believe that it would be desirable to establish different requirements
applicable to funds of different sizes under proposed rule 18f-4 to
account for resources available to small entities \865\ or to use
performance standards rather than design standards for small entities
where applicable. We note, however, that proposed rule 18f-4 is an
exemptive rule, which would require funds to comply with new
requirements only if they wish to enter into derivatives transactions
and financial commitment transactions. Therefore, if a small entity
does not invest in derivatives or financial commitment transactions as
part of its investment strategy, then the small entity would not be
required to comply with the provisions of proposed rule 18f-4. In the
DERA staff analysis, 68%

of all funds sampled did not have any exposure to derivatives
transactions, which would indicate that many funds, including many
small funds, will be unaffected by the proposed rule. However, for
small funds that would be affected by our proposed rule, providing an
exemption or consolidating or simplifying the proposed rule for small
entities could subject investors of small funds that invest in
derivatives to a higher degree of risk than investors to large funds
that would be required to comply with the proposed elements of the
rule.
---------------------------------------------------------------------------

    \865\ We believe, however, that the Commission has accounted for
the resources available to small entities by providing some
flexibility in the proposed requirement that each fund that is
required to adopt and implement a program must reasonably segregate
the functions associated with the portfolio management of the fund.
---------------------------------------------------------------------------

    The undue speculation concern expressed in section 1(b)(7) of the
Act and the asset sufficiency concern reflected in section 1(b)(8) of
the Act that the proposed rule is designed to address applies to both
small as well as large funds. As discussed throughout this Release, we
believe that the proposed rule would result in multiple investor
protection benefits, and these benefits should apply to investors in
smaller funds as well as investors in larger funds. We therefore do not
believe it would be appropriate to exempt funds that are small entities
from the portfolio limitation provisions or the asset segregation
provisions of proposed rule 18f-4 or establish different requirements
applicable to funds of different sizes under these provisions to
account for resources available to small entities. Further, we believe
that all of the proposed elements of rule 18f-4 should work together to
produce the anticipated investor protection benefits, and therefore do
not believe it is appropriate to except or modify the requirements for
smaller funds because we believe this would limit the benefits to
investors in such funds.
    We also do not believe it would be appropriate to exempt funds that
are small entities from the derivatives risk management requirements of
proposed rule 18f-4 or establish different requirements applicable to
funds of different sizes. We believe that all of the proposed program
elements would be necessary for a fund to effectively assess and manage
its derivatives risk, and we anticipate that all of the proposed
program elements would work together to produce the anticipated
investor protection benefits. We do note that the costs associated with
proposed rule 18f-4 would vary depending on the fund's particular
circumstances, and thus the proposed rule could result in different
burdens on funds' resources. In particular, we expect that a fund that
pursues an investment strategy that involves greater derivatives risk
may have greater costs associated with its derivatives risk management
program. However, we believe that it is appropriate to correlate the
costs associated with the proposed rule with the level of derivatives
risk facing a fund, and not necessarily with the fund's size. Thus, to
the extent a fund that is a small entity faces relatively little
derivatives risk, it would incur relatively low costs to comply with
proposed rule 18f-4. And, to the extent that a fund that is a small
entity that engages in a limited amount of derivatives transactions
pursuant to the proposed rule, and does not use complex derivatives
transactions, such small entity would not be required to adopt and
implement a derivatives risk management program.
2. Form N-PORT and Form N-CEN
    Similarly, we do not believe that the interests of investors would
be served by exempting funds that are small entities from the proposed
disclosure and reporting requirements, or subjecting these funds to
different disclosure and reporting requirements than larger funds. We
believe that all fund investors, including investors in funds that are
small entities, would benefit from disclosure and reporting
requirements that would permit them to make investment choices that
better match their risk tolerances. We also believe that all fund
investors would benefit from enhanced Commission monitoring and
oversight of the fund industry, which we anticipate would result from
the proposed disclosure and reporting requirements.

G. General Request for Comment

    The Commission requests comments regarding this analysis. We
request comment on the number of small entities that would be subject
to our proposal and whether our proposal would have any effects that
have not been discussed. We request that commenters describe the nature
of any effects on small entities subject to our proposal and provide
empirical data to support the nature and extent of such effects. We
also request comment on the estimated compliance burdens of our
proposal and how they would affect small entities.

VII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''), the Commission must advise OMB whether a
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule
is considered ``major'' where, if adopted, it results in or is likely
to result in:
     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment, or
innovation.
    We request comment on whether our proposal would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
     The potential effect on the U.S. economy on an annual
basis;
     Any potential increase in costs or prices for consumers or
individual industries; and
     Any potential effect on competition, investment, or
innovation.
    Commenters are requested to provide empirical data and other
factual support for their views to the extent possible.

VII. Statutory Authority

    The Commission is proposing new rule 18f-4 under the authority set
forth in sections 6(c), 12(a), 31(a), and 38(a) of the Investment
Company Act of 1940 [15 U.S.C. 80a-6(c), 80a-31(a), 80a-12(a), and 80a-
38(a)]. The Commission is proposing amendments to proposed Form N-PORT
and Form N-CEN under the authority set forth in sections 8, 30, and 38
of the Investment Company Act of 1940 [15 U.S.C. 80a-8, 80a-30, 80a-
38].

Text of Rules and Forms

List of Subjects in 17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements,
Securities.

    For the reasons set out in the preamble, title 17, chapter II of
the Code of Federal Regulations is proposed to be amended as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
1. The authority citation for part 270 continues to read, in part, as
follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless
otherwise noted.
* * * * *
0
2. Section Sec.  270.18f-4 is added to read as follows:

Sec.  270.18f-4  Exemption from the requirements of section 18 and
section 61 for certain senior securities transactions.

    (a) A registered open-end or closed-end company or business
development company (each, including any separate series thereof, a
``fund'') may enter into derivatives transactions, notwithstanding the
requirements of

section 18(a)(1) (15 U.S.C. 80a-18(a)(1)), section 18(c) (15 U.S.C.
80a-18(c)), section 18(f)(1) (15 U.S.C. 80a-18(f)(1)) and section 61
(15 U.S.C. 80a-61) of the Investment Company Act; provided that:
    (1) The fund complies with one of the following portfolio
limitations such that, immediately after entering into any senior
securities transaction:
    (i) The aggregate exposure of the fund does not exceed 150% of the
value of the fund's net assets; or
    (ii) The fund's full portfolio VaR is less than the fund's
securities VaR and the aggregate exposure of the fund does not exceed
300% of the value of the fund's net assets.
    (2) The fund manages the risks associated with its derivatives
transactions by maintaining qualifying coverage assets, identified on
the books and records of the fund as specified in paragraph (a)(6)(v)
of this section and determined at least once each business day, with a
value equal to at least the sum of the fund's aggregate mark-to-market
coverage amounts and risk-based coverage amounts.
    (3) Except as provided in paragraph (a)(4) of this section, the
fund adopts and implements a written derivatives risk management
program (``program'') that is reasonably designed to assess and manage
the risks associated with the fund's derivatives transactions.
    (i) Required program elements. Each fund required to adopt and
implement a program must adopt and implement written policies and
procedures reasonably designed to:
    (A) Assess the risks associated with the fund's derivatives
transactions, including an evaluation of potential leverage, market,
counterparty, liquidity, and operational risks, as applicable, and any
other risks considered relevant;
    (B) Manage the risks associated with the fund's derivatives
transactions (including the risks identified in paragraph (a)(3)(i)(A)
of this section, as applicable), including by:
    (1) Monitoring whether the fund's use of derivatives transactions
is consistent with any investment guidelines established by the fund or
the fund's investment adviser, the relevant portfolio limitation
applicable to the fund under this section, and relevant disclosure to
investors; and
    (2) Informing persons responsible for portfolio management of the
fund or the fund's board of directors, as appropriate, regarding
material risks arising from the fund's derivatives transactions;
    (C) Reasonably segregate the functions associated with the program
from the portfolio management of the fund; and
    (D) Periodically review and update the program at least annually,
including any models (including any VaR calculation models used by the
fund during the period covered by the review), measurement tools, or
policies and procedures that are part of, or used in, the program to
evaluate their effectiveness and reflect changes in risks over time.
    (ii) Board approval and oversight of the program. (A) The fund
shall obtain initial approval of the program, as well as any material
change to the program, from the fund's board of directors, including a
majority of directors who are not interested persons of the fund;
    (B) The fund's board of directors, including a majority of
directors who are not interested persons of the fund, shall review, no
less frequently than quarterly, a written report prepared by the person
designated under paragraph (a)(3)(ii)(C) of this section that describes
the adequacy of the fund's program and the effectiveness of its
implementation; and
    (C) The fund shall designate an employee or officer of the fund or
the fund's investment adviser (who may not be a portfolio manager of
the fund) responsible for administering the policies and procedures
incorporating the elements of paragraphs (a)(3)(i)(A) through (D) of
this section, whose designation must be approved by the fund's board of
directors, including a majority of the directors who are not interested
persons of the fund.
    (4) A derivatives risk management program shall not be required if
the fund complies, and monitors its compliance, with a portfolio
limitation under which:
    (i) Immediately after entering into any derivatives transaction the
aggregate exposure associated with the fund's derivatives transactions
does not exceed 50% of the value of the fund's net assets; and
    (ii) The fund does not enter into complex derivatives transactions.
    (5) The fund's board of directors (including a majority of the
directors who are not interested persons of the fund) has:
    (i) Approved the particular portfolio limitation under which the
fund will operate pursuant to paragraph (a)(1) of this section and, if
applicable, paragraph (a)(4) of this section;
    (ii) Approved policies and procedures reasonably designed to
provide for the fund's maintenance of qualifying coverage assets, as
required under paragraph (a)(2) of this section; and
    (iii) If the fund is required to adopt and implement a derivatives
risk management program, taken the actions specified in paragraph
(a)(3)(ii) of this section.
    (6) The fund maintains:
    (i) A written record of each determination made by the fund's board
of directors under paragraph (a)(5)(i) of this section with respect to
the portfolio limitation applicable to the fund for a period of not
less than five years (the first two years in an easily accessible
place) following each determination;
    (ii) A written copy of the policies and procedures approved by the
board of directors under paragraph (a)(5)(ii) of this section that are
in effect, or at any time within the past five years were in effect, in
an easily accessible place; and
    (iii) If the fund is required to adopt and implement a derivatives
risk management program:
    (A) A written copy of the policies and procedures adopted by the
fund under paragraph (a)(3) of this section that are in effect, or at
any time within the past five years were in effect, in an easily
accessible place;
    (B) Copies of any materials provided to the board of directors in
connection with its approval of the derivatives risk management
program, including any material changes to the program, and any written
reports provided to the board of directors relating to the program, for
at least five years after the end of the fiscal year in which the
documents were provided, the first two years in an easily accessible
place; and
    (C) Records documenting the periodic reviews and updates conducted
in accordance with paragraph (a)(3)(i)(D) of this section (including
any updates to any VaR calculation models used by the fund and the
basis for any material changes thereto), for a period of not less than
five years (the first two years in an easily accessible place)
following each review or update.
    (iv) A written record demonstrating that immediately after the fund
entered into any senior securities transaction, the fund complied with
the portfolio limitation applicable to the fund immediately after
entering into the senior securities transaction, reflecting the fund's
aggregate exposure, the value of the fund's net assets and, if
applicable, the fund's full portfolio VaR and its securities VaR, for a
period of not less than five years (the first two years in an easily
accessible place) following each senior securities transaction entered
into by the fund.
    (v) A written record reflecting the mark-to-market coverage amount
and the risk-based coverage amount for each derivatives transaction
entered into by the fund and identifying the qualifying coverage assets
maintained by the fund with respect to the fund's aggregate

mark-to-market and risk-based coverage amounts, as determined by the
fund at least once each business day, for a period of not less than
five years (the first two years in an easily accessible place).
    (b) A fund may enter into financial commitment transactions,
notwithstanding the requirements of section 18(a)(1) (15 U.S.C. 80a-
18(a)(1)), section 18(c) (15 U.S.C. 80a-18(c)), section 18(f)(1) (15
U.S.C. 80a-18(f)(1)) and section 61 (15 U.S.C. 80a-61) of the
Investment Company Act; provided that:
    (1) The fund maintains qualifying coverage assets, identified on
the books and records of the fund as specified in paragraph (b)(3)(ii)
of this section and determined at least once each business day, with a
value equal to at least the fund's aggregate financial commitment
obligations.
    (2) The fund's board of directors (including a majority of the
directors who are not interested persons of the fund) has approved
policies and procedures reasonably designed to provide for the fund's
maintenance of qualifying coverage assets, as required under paragraph
(b)(1) of this section.
    (3) The fund maintains:
    (i) A written copy of the policies and procedures approved by the
board of directors under paragraph (b)(2) of this section that are in
effect, or at any time within the past five years were in effect, in an
easily accessible place; and
    (ii) A written record reflecting the amount of each financial
commitment obligation associated with each financial commitment
transaction entered into by the fund and identifying the qualifying
coverage assets maintained by the fund with respect to each financial
commitment obligation, as determined by the fund at least once each
business day, for a period of not less than five years (the first two
years in an easily accessible place).
    (c) Definitions. (1) Complex derivatives transaction means any
derivatives transaction for which the amount payable by either party
upon settlement date, maturity or exercise:
    (i) Is dependent on the value of the underlying reference asset at
multiple points in time during the term of the transaction; or
    (ii) Is a non-linear function of the value of the underlying
reference asset, other than due to optionality arising from a single
strike price.
    (2) Derivatives transaction means any swap, security-based swap,
futures contract, forward contract, option, any combination of the
foregoing, or any similar instrument (``derivatives instrument'') under
which the fund is or may be required to make any payment or delivery of
cash or other assets during the life of the instrument or at maturity
or early termination, whether as a margin or settlement payment or
otherwise.
    (3) Exposure means the sum of the following amounts, determined
immediately after the fund enters into any senior securities
transaction:
    (i) The aggregate notional amounts of the fund's derivatives
transactions, provided that a fund may net any directly offsetting
derivatives transactions that are the same type of instrument and have
the same underlying reference asset, maturity and other material terms;
    (ii) The aggregate financial commitment obligations of the fund;
and
    (iii) The aggregate indebtedness (and with respect to any closed-
end fund or business development company, involuntary liquidation
preference) with respect to any senior securities transaction entered
into by the fund pursuant to section 18 (15 U.S.C. 80a-18) or 61 (15
U.S.C. 80a-61) of the Investment Company Act without regard to the
exemption provided by this section.
    (4) Financial commitment transaction means any reverse repurchase
agreement, short sale borrowing, or any firm or standby commitment
agreement or similar agreement (such as an agreement under which a fund
has obligated itself, conditionally or unconditionally, to make a loan
to a company or to invest equity in a company, including by making a
capital commitment to a private fund that can be drawn at the
discretion of the fund's general partner).
    (5) Financial commitment obligation means the amount of cash or
other assets that the fund is conditionally or unconditionally
obligated to pay or deliver under a financial commitment transaction.
Where the fund is conditionally or unconditionally obligated to deliver
a particular asset, the financial commitment obligation shall be the
value of the asset, determined at least once each business day.
    (6) Mark-to-market coverage amount means, for each derivatives
transaction, at any time of determination under this section, the
amount that would be payable by the fund if the fund were to exit the
derivatives transaction at such time; provided that:
    (i) If the fund has entered into a netting agreement that allows
the fund to net its payment obligations with respect to multiple
derivatives transactions, the mark-to-market coverage amount for those
derivatives transactions may be calculated as the net amount that would
be payable by the fund, if any, with respect to all derivatives
transactions covered by the netting agreement; and
    (ii) The fund's mark-to-market coverage amount for a derivatives
transaction may be reduced by the value of assets that represent
variation margin or collateral for the amounts payable referred to in
paragraph (c)(6) of this section with respect to the derivatives
transaction.
    (7) Notional amount means, with respect to any derivatives
transaction:
    (i) The market value of an equivalent position in the underlying
reference asset for the derivatives transaction (expressed as a
positive amount for both long and short positions); or
    (ii) The principal amount on which payment obligations under the
derivatives transaction are calculated; and
    (iii) Notwithstanding paragraphs (c)(7)(i) and (ii) of this
section:
    (A) For any derivatives transaction that provides a return based on
the leveraged performance of a reference asset, the notional amount
shall be multiplied by the leverage factor;
    (B) For any derivatives transaction for which the reference asset
is a managed account or entity formed or operated primarily for the
purpose of investing in or trading derivatives transactions, or an
index that reflects the performance of such a managed account or
entity, the notional amount shall be determined by reference to the
fund's pro rata share of the notional amounts of the derivatives
transactions of such account or entity; and
    (C) For any complex derivatives transaction, the notional amount
shall be an amount equal to the aggregate notional amount of
derivatives instruments, excluding other complex derivatives
transactions, reasonably estimated to offset substantially all of the
market risk of the complex derivatives transaction.
    (8) Qualifying coverage assets means assets of the fund described
in paragraphs (c)(8)(i) through (iii) of this section, provided that
the total amount of a fund's qualifying coverage assets shall not
exceed the fund's net assets, and that assets of the fund maintained as
qualifying coverage assets shall not be used to cover both a
derivatives transaction and a financial commitment transaction:
    (i) Cash and cash equivalents;
    (ii) With respect to any derivatives transaction or financial
commitment transaction under which the fund may satisfy its obligations
under the

transaction by delivering a particular asset, that particular asset;
and
    (iii) With respect to any financial commitment obligation, assets
that are convertible to cash or that will generate cash, equal in
amount to the financial commitment obligation, prior to the date on
which the fund can be expected to be required to pay such obligation or
that have been pledged with respect to the financial commitment
obligation and can be expected to satisfy such obligation, determined
in accordance with policies and procedures approved by the fund's board
of directors as provided in paragraph (b)(2) of this section.
    (9) Risk-based coverage amount means, for each derivatives
transaction, an amount, in addition to the derivative transaction's
mark-to-market coverage amount, that represents, at any time of
determination under this section, a reasonable estimate of the
potential amount payable by the fund if the fund were to exit the
derivatives transaction under stressed conditions, determined in
accordance with policies and procedures (which must take into account,
as relevant, the structure, terms and characteristics of the
derivatives transaction and the underlying reference asset) approved by
the fund's board of directors as provided in paragraph (a)(5) of this
section; provided that:
    (i) The risk-based coverage amount may be determined on a net basis
for derivatives transactions that are covered by a netting agreement
that allows the fund to net its payment obligations with respect to
multiple derivatives transactions, in accordance with the terms of the
netting agreement; and
    (ii) The fund's risk-based coverage amount for a derivatives
transaction may be reduced by the value of assets that represent
initial margin or collateral for the potential amounts payable referred
to in paragraph (c)(9) of this section with respect to the derivatives
transaction.
    (10) Senior securities transaction means any derivatives
transaction, financial commitment transaction, or any transaction
involving a senior security entered into by the fund pursuant to
section 18 (15 U.S.C. 80a-18) or 61 (15 U.S.C. 80a-61) of the Act
without regard to the exemption provided by this section.
    (11) Value-at-risk or VaR means an estimate of potential losses on
an instrument or portfolio, expressed as a positive amount in U.S.
dollars, over a specified time horizon and at a given confidence
interval, provided that:
    (i) For purposes of the portfolio limitation described in
(a)(1)(ii) of this section:
    (A) A fund's ``securities VaR'' means the VaR of the fund's
portfolio of securities and other investments, but excluding any
derivatives transactions;
    (B) A fund's ``full portfolio VaR'' means the VaR of the fund's
entire portfolio, including securities, other investments and
derivatives transactions; and
    (C) A fund must apply its VaR model consistently when calculating
the fund's securities VaR and the fund's full portfolio VaR.
    (ii) Any VaR model used by a fund for purposes of determining the
fund's securities VaR and full portfolio VaR must:
    (A) Take into account and incorporate all significant, identifiable
market risk factors associated with a fund's investments, including, as
applicable:
    (1) Equity price risk, interest rate risk, credit spread risk,
foreign currency risk and commodity price risk;
    (2) Material risks arising from the nonlinear price characteristics
of a fund's investments, including options and positions with embedded
optionality; and
    (3) The sensitivity of the market value of the fund's investments
to changes in volatility;
    (B) Use a 99% confidence level and a time horizon of not less than
10 and not more than 20 trading days; and
    (C) If using historical simulation, include at least three years of
historical market data.

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
3. The authority citation for part 274 continues to read, in part, as
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203,
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
4. Further amend Form N-CEN (referenced in 274.101) as proposed at 80
FR 33699, June 12, 2015, and further amended at 80 FR 62387, October
15, 2015, by, in Part C, adding paragraphs k and l to Item 31 to read
as follows:

Sec.  274.101  Form N-CEN, annual report of registered investment
companies.

* * * * *

Part C. Additional Questions for Management Investment Companies

* * * * *
    Item 31. * * *
* * * * *
    k. Rule 18f-4(a)(1)(i) (17 CFR 270.18f-4(a)(1)(i)): __
    l. Rule 18f-4(a)(1)(ii) (17 CFR 270. 18f-4(a)(1)(ii)): __
* * * * *
0
5. Amend Form N-PORT (referenced in 274.150), as proposed at 80 FR
33712, June 12, 2015, and further amended at 80 FR 62387, October 15,
2015, by:
0
a. In Part C, revising Item C. 11.c.viii; and
0
b. In Part C, adding Item C.11.c.ix.
    The revision and addition read as follows:

Sec.  274.150  Form N-PORT, Monthly portfolio holdings report.

* * * * *

Part C: Schedule of Portfolio Investments

* * * * *
Item C.11. * * *
    c. * * *
    viii. For funds that are required to implement a risk management
program under rule 18f-4(a)(3) under the Investment Company Act,
provide:
    1. Gamma.
    2. Vega.
* * * * *
    ix. Unrealized appreciation or depreciation.
* * * * *

    By the Commission.

    Dated: December 11, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-31704 Filed 12-24-15; 8:45 am]
BILLING CODE 8011-01-P