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

    \724\ See supra section II.I.
    \725\ See supra section III.C.4.
    \726\ See supra section II.I.
---------------------------------------------------------------------------

    The proposed rule also includes a provision that codifies an
approach for funds' participation in unfunded commitment agreements in
light of the concerns underlying section 18.\727\ Proposed rule 18f-4
would permit a fund to enter into unfunded commitment agreements if it
reasonably believes, at the time it enters into such agreement, that it
will have sufficient cash and cash equivalents to meet its obligations
with respect to all of its unfunded commitment agreements, in each case
as they come due. The proposed rule would prescribe factors that a fund
must consider in forming such a reasonable belief. If a fund enters
into unfunded comment agreements in compliance with this requirement,
the proposed rule specifies that unfunded commitment agreements will
not be considered for purposes of computing asset coverage, as defined
in section 18(h) of the Investment Company Act. This proposed approach
for unfunded commitment agreements reflects the staff's experience in
reviewing and commenting on fund registration statements, as discussed
above.\728\ We therefore do not expect that the proposed approach would
result in significant costs to small or large funds because we believe
the proposed approach is generally consistent with the current
practices of funds that enter into unfunded commitment agreements.
---------------------------------------------------------------------------

    \727\ See supra section II.J.
    \728\ See id.
---------------------------------------------------------------------------

e. Recordkeeping
    Proposed rule 18f-4 includes certain recordkeeping provisions that
are designed to provide the Commission's staff, and the fund's board of
directors and compliance personnel, the ability to evaluate the fund's
compliance with the proposed rule's requirements.\729\ The proposed
rule would require a fund to maintain certain records documenting its
derivatives risk management program, including a written record of: (1)
Its policies and procedures designed to manage the fund's derivatives
risks, (2) the results of any stress testing of its portfolio, (3) the
results of any VaR test backtesting it conducts, (4) records
documenting any internal reporting or escalation of material risks
under the program, and (5) records documenting any periodic reviews of
the program.\730\
---------------------------------------------------------------------------

    \729\ See supra section II.K.
    \730\ See proposed rule 18f-4(c)(6)(i)(A).
---------------------------------------------------------------------------

    Second, the proposed rule would also require a fund to maintain a
written record of any materials provided to the fund's board of
directors in connection with approving the designation of the
derivatives risk manager. The proposed rule would also require a fund
to keep records of any written reports provided to the board of
directors relating to the program, and any written reports provided to
the board that the rule would require regarding the fund's non-
compliance with the applicable VaR test.\731\
---------------------------------------------------------------------------

    \731\ See proposed rule 18f-4(c)(6)(i)(B).
---------------------------------------------------------------------------

    Third, a fund that is required to comply with the proposed VaR test
would also have to maintain written records documenting the
determination of: Its portfolio VaR; the VaR of its designated
reference index, as applicable; its VaR ratio (the value of the VaR of
the Fund's portfolio divided by the VaR of the designated reference
index), as applicable; and any updates to the VaR calculation models
used by the fund, as well as the basis for any material changes made to
those models.\732\
---------------------------------------------------------------------------

    \732\ See proposed rule 18f-4(c)(6)(i)(C).
---------------------------------------------------------------------------

    Fourth, the proposed rule would require a fund that is a limited
derivatives user to maintain a written record of its policies and
procedures that are reasonably designed to manage its derivatives
risks.\733\
---------------------------------------------------------------------------

    \733\ See proposed rule 18f-4(c)(6)(i)(D).
---------------------------------------------------------------------------

    Finally, a fund that enters into unfunded commitment agreements
would be required to maintain a records documenting the basis for the
fund's belief regarding the sufficiency of its cash and cash
equivalents to meet its obligations with respect to its unfunded
commitment agreements.\734\ A record must be made each time a fund
enters into such an agreement.\735\
---------------------------------------------------------------------------

    \734\ See proposed rule 18f-4e)(2); see also supra note 429 and
accompanying text.
    \735\ Id.; see also supra note 430 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, we estimate that the average one-time
recordkeeping costs for funds that would not qualify as limited
derivatives users would be $2,047 per fund, depending on the particular
facts and circumstances and current derivatives risk management
practices of the fund.\736\ We also

estimate that such a fund would incur an average ongoing annual
recordkeeping costs of $330.\737\ We further estimate that the one-time
and ongoing annual recordkeeping costs for a limited derivatives user
to be 90% of those for funds that do not qualify as limited derivatives
users.\738\ Thus, for each fund that could rely on the limited
derivatives user exception, we estimate a one-time cost of $1,842 and
an ongoing cost of $297 per year.\739\ To the extent that we estimate
that small funds would be subject to the various provisions of the
proposed rule that would necessitate recordkeeping requirements, as
discussed above, these small funds also would be subject to the
associated proposed recordkeeping requirements. Therefore, we estimate
that: 22% of small funds (approximately 22 small funds) would have to
comply with the program-related recordkeeping requirements and
requirements regarding materials provided to the fund's board; 19% of
small funds (approximately 19 small funds) would have to comply with
requirements to maintain records of compliance with the proposed VaR
test; and 19% of small funds (approximately 19 funds) would have to
comply with the recordkeeping requirements for limited derivatives
users.\740\
---------------------------------------------------------------------------

    \736\ See supra section III.C.8. This section, along with
section IV.B.7, also discusses the professional skills that we
believe compliance with this aspect of the proposal would entail.
    \737\ Id.
    \738\ Id.
    \739\ Id.
    \740\ See supra sections III.C.1, III.C.2, III.C.3, V.D.1.a,
V.D.1.b, and V.D.1.c.
---------------------------------------------------------------------------

    A fund's recordkeeping-related costs will vary, depending on the
provisions of proposed rule 18f-4 that the fund relies on. For example,
funds that are required to adopt derivatives risk management programs,
versus funds that are limited derivatives users under the proposed
rule, would be subject to different recordkeeping requirements.
However, while small funds' recordkeeping burdens would vary based on
the provisions of the proposed rule that a fund relies on, their
recordkeeping burdens would not vary solely because they are small
funds. We do not anticipate that larger funds, or funds that are part
of a large fund complex, would experience any significant economies of
scale related to the proposed recordkeeping requirements.
2. Proposed Amendments to Forms N-PORT, N-LIQUID, and N-CEN
a. Proposed Amendments to Form N-PORT
    The proposed amendments to Form N-PORT would require funds to
report information about their derivatives exposure, and also--as
applicable for funds that are subject to the proposed rule 18f-4 VaR-
based limit on fund leverage risk--to report certain VaR-related
information.\741\ These proposed amendments would provide market-wide
insight into the levels of reporting funds' derivatives exposure to the
Commission, its staff, and market participants at the specific points
in time covered by the reporting. They also would help the Commission
and its staff assess compliance with proposed rule 18f-4.
---------------------------------------------------------------------------

    \741\ See supra section II.H.1; see also proposed Items B.9 and
B.10 of Form N-PORT.
---------------------------------------------------------------------------

    All funds that file Form N-PORT would have to provide information
regarding their derivatives exposure on this form. We estimate that 41%
of small funds that file Form N-PORT (approximately 34 small funds) use
derivatives, and thus only these funds would have substantive
information to report in response to this new exposure-related
disclosure requirement.\742\
---------------------------------------------------------------------------

    \742\ See supra sections V.C, V.D.1.a, and V.D.1.c. Because BDCs
do not file reports on Form N-PORT, we deduct the number of BDCs
from the total number of small funds that we estimate (99 small
funds-16 BDCs that are small entities = 83 small funds that file
reports on Form N-PORT). See supra note 692 and accompanying text.
    We estimate that approximately 22% of funds would be subject to
the proposed rule's derivatives risk management program requirements
and approximately 19% of funds would be subject to either of the
limited derivatives user exceptions, with funds from both groups
subject to reporting requirements on Form N-PORT. See supra notes
706, 720, and accompanying text. Although both of these estimated
percentages include BDCs, we note that the total number of BDCs
relative to the number of registered open- and closed-end funds is
small, and therefore our estimates do not adjust these percentages
to reflect the fact that BDCs do not file Forms N-PORT. See supra
section III.B.1. Therefore, we estimate the total number of small
funds subject to the proposed Form N-PORT requirements as follows:
83 small funds that file reports on Form N-PORT x (22% + 19% = 41%)
= 34 small funds.
---------------------------------------------------------------------------

    In addition, funds that are subject to the proposed limit on fund
leverage risk would have to report: (1) The fund's highest daily VaR
during the reporting period and its corresponding date; and (2) the
fund's median daily VaR for the reporting period. Funds subject to the
relative VaR test during the reporting period also would have to
report: (1) The name of the fund's designated reference index, (2) the
index identifier, (3) the fund's highest daily VaR ratio during the
reporting period and its corresponding date; and (4) the fund's median
daily VaR ratio for the reporting period. A fund would be required to
determine its compliance with its applicable VaR test once each
business day.\743\
---------------------------------------------------------------------------

    \743\ See supra note 364.
---------------------------------------------------------------------------

    All funds that are subject to the proposed limit on fund leverage
risk also would have to report the number of exceptions that the fund
identified as a result of the backtesting of its VaR calculation model.
We estimate that 19% of small funds (approximately 16 small funds)
would be subject to these VaR-related disclosure requirements.\744\
---------------------------------------------------------------------------

    \744\ We estimate 83 small funds that file reports on Form N-
PORT. See supra note 741.
     We estimate that approximately 19% of funds would be subject to
the proposed limit on fund leverage risk. See supra note 712 and
accompanying text. Although this estimated percentage include BDCs,
we note that the total number of BDCs relative to the number of
registered open- and closed-end funds is small, and therefore our
estimate does not adjust this percentage to reflect the fact that
BDCs do not file Forms N-PORT. See supra section III.B.1. Therefore,
we estimate the total number of small funds that would make VaR-
related disclosures on Form N-PORT as follows: 83 small funds that
file reports on Form N-PORT x 19% = approximately 16 small funds.
---------------------------------------------------------------------------

    We estimate that each fund that reports information in response to
the proposed VaR-related disclosure requirements on Form N-PORT would
incur a one-time cost of $2,784 and an ongoing cost of $4,176 per year,
and each fund that is not subject to the VaR-related disclosure
requirement would incur a one-time cost of $1,392 and an ongoing cost
of $2,088 per year.\745\ Notwithstanding the economies of scale
experienced by large versus small funds, we would not expect the costs
of compliance associated with the new Form N-PORT requirements to be
meaningfully different for small versus large funds. The costs of
compliance would vary only based on fund characteristics tied to their
derivatives use. For example, a fund that uses derivatives extensively
would incur more costs to calculate its derivatives exposure than a
fund that does not use derivatives extensively.\746\ And a fund that is
a limited derivatives user, or that otherwise is not subject to the
proposed VaR test, would not incur any costs to comply with the
proposed new VaR-related N-PORT items.\747\
---------------------------------------------------------------------------

    \745\ See supra section III.C.9.a.; see also supra section IV.F
(discussing the professional skills that we believe compliance with
this aspect of the proposal would entail).
    \746\ See supra note 714.
    \747\ See proposed Item B.10 to Form N-PORT.
---------------------------------------------------------------------------

b. Proposed Amendments to Form N-LIQUID
    We are proposing to re-title Form N-LIQUID as Form N-RN, and amend
this form to include new reporting events for funds that are subject to
proposed rule 18f-4's limit on fund leverage risk.\748\ The proposed
amendments would require funds subject to the limit on fund leverage
risk to report information

about VaR test breaches under certain circumstances. These proposed
current reporting requirements are designed to aid the Commission in
assessing funds' compliance with the VaR tests, and to provide staff
the ability to assess how long a fund is precluded from entering into
derivatives transactions as a consequence of its lack of compliance
with its VaR test. We are proposing to require funds to provide this
information in a current report because we believe that the Commission
should be notified promptly when a fund is out of compliance with the
proposed VaR-based limit on fund leverage risk (and also when it has
come back into compliance with its applicable VaR test). We believe
this information could indicate that a fund is experiencing heightened
risks as a result of a fund's use of derivatives transactions, as well
as provide the Commission insight about the duration and severity of
those risks, and whether those heightened risks are fund-specific or
industry-wide.
---------------------------------------------------------------------------

    \748\ See supra section II.H.2.
---------------------------------------------------------------------------

    As discussed above, we estimate that each fund subject to the
proposed new current reporting requirements would incur an average cost
of $10 per year to prepare amended Form N-RN.\749\ We estimate that
approximately 19 registered open- and closed-end funds, and BDCs, are
small entities that would be required to report VaR test related
information on Form N-RN.\750\ Because the proposed amendments to Form
N-RN would require both large and small funds to report VaR test
breaches, the burden to report is not associated with fund size, and
consequently, we would not expect the costs of compliance with the new
Form N-RN requirements to be meaningfully different for small versus
large funds.
---------------------------------------------------------------------------

    \749\ See supra section III.C.9.b; see also supra section IV.G
(discussing the professional skills that we believe compliance with
this aspect of the proposal would entail).
    \750\ This estimate is based on an estimate that 16 small
registered open- and closed-end funds would make VaR-related
disclosures on Form N-PORT (see supra note 743 and accompanying
text), plus 3 BDCs (16 total small BDCs (see supra note 692 and
accompanying text) x 19% (our estimate of the percentage of funds
subject to a VaR-based limit on fund leverage risk, see supra note
712 and accompanying text) = approximately 3 BDCs). Thus, 16 small
registered open- and closed-end funds + 3 BDCs = 19 funds.
---------------------------------------------------------------------------

c. Proposed Amendments to Form N-CEN
    The proposed amendments to Form N-CEN would require a fund to
identify whether it relied on proposed rule 18f-4 during the reporting
period.\751\ The proposed amendments also would require a fund to
identify whether it relied on any of the exemptions from various
requirements under the proposed rule, specifically: (1) Whether the
fund is a limited derivatives user excepted from the proposed rule's
program requirement, under either of the proposed exception's
alternatives (either a funds that limits its derivatives exposure to
10% of its net assets, or a fund that uses derivatives transactions
solely to hedge certain currency risks); or (2) whether it is a
leveraged/inverse fund covered by the proposed sales practices rules
that, under proposed rule 18f-4, would be excepted from the proposed
limit on fund leverage risk. Finally, a fund would have to identify
whether it has entered into reverse repurchase agreements or similar
financing transactions, or unfunded commitment agreements, as provided
under the proposed rule.\752\ The proposed amendments to Form N-CEN are
designed to assist the Commission and staff with our oversight
functions by allowing us to identify which funds were excepted from
certain of the proposed rule's provisions or relied on the rule's
provisions regarding reverse repurchase agreements and unfunded
commitment agreements.
---------------------------------------------------------------------------

    \751\ See supra section II.H.3.
    \752\ See proposed Item C.7.l.iv-v of Form N-CEN; see also supra
section II.I and II.J; proposed rule 18f-4(d); and proposed rule
18f-4(e).
---------------------------------------------------------------------------

    As discussed above, we estimate that each fund subject to the
proposed new Form N-CEN reporting requirements would incur on average
an ongoing annual cost of $6.96 per year.\753\ We estimate that
approximately 34 registered open- and closed-end funds are small
entities that would be subject to the proposed new Form N-CEN reporting
requirements.\754\ Notwithstanding any economies of scale experienced
by large versus small funds, we would not expect the costs of
compliance with the new Form N-CEN requirements to be meaningfully
different for small versus large funds.
---------------------------------------------------------------------------

    \753\ See supra section III.C.9.a; see also supra section IV.H
(discussing the professional skills that we believe compliance with
this aspect of the proposal would entail).
    \754\ Because BDCs do not file reports on Form N-CEN, we deduct
the number of BDCs from the total number of small funds that we
estimate (99 small funds - 16 BDCs that are small entities = 83
small funds that file reports on Form N-CEN). See supra note 692 and
accompanying text.
    The estimate of 34 funds is based on the percentage of funds we
believe would be subject to the proposed derivatives risk management
program requirement (22% of funds, see supra note 498 and
accompanying text) plus the percentage of funds we believe would
qualify as limited derivatives users (19% of funds, see supra note
720 and accompanying text). We estimate that 83 small funds that
file reports on Form N-CEN (99 total small funds less 16 small BDCs)
x 41% (22% + 19%) = 34 small funds subject to the proposed Form N-
CEN reporting requirements. To the extent that there are funds that
either (1) would not adopt a derivatives risk management program or
(2) would not qualify as limited derivatives user, but that would
rely on the rule's provisions with respect to reverse repurchase
agreements or unfunded commitment agreements, this analysis might
underestimate the number of funds that would be subject to the new
Form N-CEN reporting requirements.
---------------------------------------------------------------------------

3. Proposed Sales Practices Rules
    The proposed sales practices rules under the Exchange Act and the
Advisers Act would require a firm to exercise due diligence in
determining whether to approve the account of a retail investor to buy
or sell shares of a leveraged/inverse investment vehicle before
accepting an order from, or placing an order for, the retail investor
to engage in these transactions.\755\ Under the proposed sales
practices rules, no firm may accept an order from or place an order for
a retail investor to buy or sell shares of a leveraged/inverse
investment vehicle, or approve such an investor's account to engage in
those transactions, unless the firm has complied with certain
conditions.
---------------------------------------------------------------------------

    \755\ See supra section II.G.1.
---------------------------------------------------------------------------

    Specifically, the proposed sales practices rules would require the
firm to: (1) Approve the retail investor's account for buying and
selling shares of leveraged/inverse investment vehicles pursuant to a
due diligence requirement; and (2) adopt and implement policies and
procedures reasonably designed to achieve compliance with the proposed
rules.\756\ The proposed sales practices rules' due diligence
requirements provide that a firm must exercise due diligence to
ascertain the essential facts relative to the retail investor, his or
her financial situation, and investment objectives. A firm must seek to
obtain, at a minimum, certain specified information about the retail
investor. The proposed sales practices rules also include recordkeeping
requirements relating to the information that the firm obtained through
its due diligence, the firm's approval or disapproval of the retail
investor's account for buying and selling shares of leveraged/inverse
investment vehicles (account approvals must be in writing), and the
firm's policies and procedures that it adopted pursuant to those
rules.\757\
---------------------------------------------------------------------------

    \756\ See supra section II.G.2.b.
    \757\ See supra section II.G.2.c.
---------------------------------------------------------------------------

    The proposed sales practices rules are designed to establish a
uniform set of enhanced due diligence and account approval requirements
for all leveraged/inverse investment vehicle transactions, including
transactions where no recommendation or investment advice is provided
by a firm. They also are designed in part to help to ensure that

investors in these funds are limited to those who understand their
characteristics--including that these funds would not be subject to all
of the leverage-related requirements applicable to registered
investment companies generally--and the unique risks they present.
    As discussed above, we estimate that each broker-dealer subject to
proposed rule 15l-2, and each investment adviser subject to proposed
rule 211(h)-1, would incur total one-time costs that would range from
$9,115.50 to $15,192.50 to comply with the proposed rules, and total
ongoing costs that would range from $2,270.50 to $3,915 per year to
comply with the proposed rules.\758\ We estimate that approximately 236
broker-dealers and 43 registered investment advisers are small entities
that would be subject to the proposed sales practices rules.\759\
---------------------------------------------------------------------------

    \758\ See supra notes 539 and 543 and accompanying text. This
discussion, along with sections IV.C and IV.D supra, also discusses
the professional skills that we believe compliance with this aspect
of the proposal would entail.
    \759\ We estimate there are currently 942 small broker-dealers.
See supra note 694 and accompanying text. We further estimate that
700 broker-dealers (or 25% of all 2,766 broker-dealers registered
with the Commission) have retail customer accounts that invest in
leveraged/inverse investment vehicles. See supra section III.C.5.
Our estimate of 236 broker-dealers is based on the following
calculation: 942 small broker dealers x 25% = approximately 236
small broker-dealers that have retail customer accounts that invest
in leveraged/inverse investment vehicles.
    We estimate that there are currently 470 SEC-registered
investment advisers that are small entities. See supra note 697 and
accompanying text. Of these, we estimate that 171 provide advice to
individual clients, and could therefore be subject to the proposed
new sales practices rules under the Advisers Act. See supra note 698
and accompanying text. We further estimate that 2,000 investment
advisers (or approximately 25% of the 8,235 investment advisers that
are registered with the Commission and offer some part of their
business to retail investors) have retail client accounts that
invest in leveraged/inverse investment vehicles. See supra sections
III.C.5 and IV.D. Our estimate of 43 investment advisers is based on
the following calculation: 171 small investment advisers that
provide advice to individual clients x 25% = approximately 43 small
investment advisers that have retail client accounts that invest in
leveraged/inverse investment vehicles.
---------------------------------------------------------------------------

    The costs that broker-dealers and investment advisers may incur as
a result of the proposed sales practices rules would vary depending on
the firm and the due diligence requirements that the firm adopts as a
result of the proposed rules' requirements.\760\ We expect that
economies of scale among larger firms could result in cost reductions
for larger firms. Compliance costs could, however, be different across
firms with relatively smaller or larger numbers of retail investors as
customers or clients.\761\
---------------------------------------------------------------------------

    \760\ See supra section III.C.5 (discussing costs and benefits
of proposed sales practices rules).
    \761\ See supra section II.G.2.b (discussing required approval
and due diligence for retail investors' accounts to trade shares of
leveraged/inverse investment vehicles under the proposed sales
practices rules).
---------------------------------------------------------------------------

4. Proposed Amendments to Rule 6c-11
    We are proposing to amend rule 6c-11 to remove the provision
excluding leveraged/inverse ETFs from the scope of that rule and to
newly permit leveraged/inverse ETFs to rely on that rule.\762\ Rule 6c-
11 permits ETFs that satisfy certain conditions to operate without
obtaining an exemptive order from the Commission.\763\ The rule is
designed to create a consistent, transparent, and efficient regulatory
framework for such ETFs and facilitate greater competition and
innovation among ETFs. As a consequence of our proposed amendment to
rule 6c-11, and proposal to rescind the exemptive orders we have
previously issued to leveraged/inverse ETFs, these proposed amendments
would newly permit leveraged/inverse ETFs to come within scope of the
rule's exemptive relief.
---------------------------------------------------------------------------

    \762\ See supra section II.G.4.
    \763\ Id.
---------------------------------------------------------------------------

    Currently, there are 73 leveraged/inverse ETFs.\764\ As a result of
the proposed amendments, we would expect the number of funds relying on
rule 6c-11 to increase, and we estimate that all 73 leveraged/inverse
ETFs would newly seek to use rule 6c-11. We also estimate, for purposes
of this Regulatory Flexibility Act analysis, that approximately 1 of
these leveraged/inverse ETFs would be a small leveraged/inverse ETF
that would seek to rely on rule 6c-11.\765\ We do not estimate our
amendments to rule 6c-11 would change the estimated per-fund cost
burden associated with rule 6c-11, but we do believe the number of
funds using the rule, as a result of our amendment, would now
increase.\766\ The costs associated with complying with rule 6c-11 are
discussed in the ETFs Adopting Release.\767\
---------------------------------------------------------------------------

    \764\ See supra note 467.
    \765\ This estimate is based on the following calculation: 8
small ETFs/1,190 total ETFs = approximately 0.67% of ETFs that are
small ETFs. See supra sections III.B.1 and V.C. 0.67% of 73
leveraged/inverse ETFs = approximately 1 leveraged/inverse ETF.
    \766\ See supra section IV.E.
    \767\ See ETFs Adopting Release, supra note 76, at section IV.
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    Commission staff has not identified any federal rules that
duplicate, overlap, or conflict with proposed Investment Company Act
rule 18f-4, proposed Exchange Act rule 15l-2, proposed Advisers Act
rule 211(h)-1, or the proposed amendments to Form N-PORT, Form N-
LIQUID, and Form N-CEN.
    We recognize that other broker-dealer or investment adviser
obligations require these entities to engage in due diligence with
respect to transactions they recommend to customers or clients. The
proposed sales practices rules, in contrast, would apply regardless of
whether a broker-dealer or investment adviser recommends that a
customer or client buy or sell leveraged/inverse investment vehicles.
We therefore do not believe that the sales practices rules would
conflict with existing broker-dealer or investment adviser obligations,
and believe that any overlap or duplication should be limited because a
broker-dealer or investment adviser could consider the information it
collects in connection with the sales practices rules in connection
with the due diligence the broker-dealer or investment adviser conducts
in connection with other, existing obligations for recommended
transactions.

F. Significant Alternatives

    The Regulatory Flexibility Act 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, broker-dealers, and registered
investment advisers that are small entities from the proposed
reporting, recordkeeping, and other compliance requirements, to account
for resources available to small entities; (2) establishing different
reporting, recordkeeping, and other compliance requirements or
frequency, to account for resources available to small entities; (3)
clarifying, consolidating, or simplifying the compliance requirements
under the proposal for small entities; and (4) using performance rather
than design standards.
1. Proposed Rule 18f-4
    We do not believe that exempting small funds from the provisions in
proposed rule 18f-4 would permit us to achieve our stated objectives.
Because proposed rule 18f-4 is an exemptive rule, it would require
funds to comply with new requirements only if they wish to enter into
derivatives or certain other transactions.\768\ Therefore, if a

small entity does not enter into derivatives or such other transactions
as part of its investment strategy, then the small entity would not be
subject to the provisions of proposed rule 18f-4. In addition, a small
fund whose derivatives use is limited could benefit from the proposed
limited derivatives user exception, because it would not be required to
adopt a derivatives risk management program (including all of the
proposed program elements).
---------------------------------------------------------------------------

    \768\ See supra sections II.D.6 and III.E.
---------------------------------------------------------------------------

    We estimate that 59% of all funds do not have any exposure to
derivatives or such other transactions.\769\ This estimate indicates
that many funds, including many small funds, would be unaffected by the
proposed rule. However, for small funds that would be affected by our
proposed rule, providing an exemption for them could subject investors
in small funds that invest in derivatives or engage in such other
transactions to a higher degree of risk than investors to large funds
that would be required to comply with the proposed elements of the
rule.
---------------------------------------------------------------------------

    \769\ See supra note 458 and accompanying paragraph.
---------------------------------------------------------------------------

    The undue speculation concern expressed in section 1(b)(7) of the
Investment Company Act, and the asset sufficiency concern reflected in
section 1(b)(8) of the Act--both of which the proposed rule is designed
to address--apply to both small as well as large funds. As discussed
throughout this release, we believe that the proposed rule would result
in 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 small funds
from the proposed rule's program requirement or VaR-based limit on fund
leverage risk, or to establish different requirements applicable to
funds of different sizes under these provisions to account for
resources available to small entities. 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 smaller funds because we believe this would
limit the benefits to investors in such funds.
    We also do not believe that it would be appropriate to subject
small funds to different reporting, recordkeeping, and other compliance
requirements or frequency. Similar to the concerns discussed above, if
the proposal included different requirements for small funds, it could
raise investor protection concerns for investors in small funds
including subjecting small fund investors to a higher degree of risk if
the small fund uses derivatives transactions. We also believe that all
fund investors will benefit from enhanced Commission monitoring and
oversight of the fund industry, which we anticipate will result from
the disclosure and reporting requirements.
    We do not believe that clarifying, consolidating, or simplifying
the compliance requirements under the proposal for small funds would
permit us to achieve our stated objectives. Again, this approach would
raise investor protection concerns for investors in small funds using
derivatives transactions. However, as discussed above, the proposed
rule contains an exception for limited derivatives users that we
anticipate would subject funds that qualify for this exception to fewer
compliance burdens. We recognize that the risks and potential impact of
derivatives transactions on a fund's portfolio generally increase as
the fund's level of derivatives usage increases and when funds use
derivatives for speculative purposes. Therefore the proposed rule would
entail a less significant compliance burden for funds--including small
funds--that choose to limit their derivatives usage in the manner that
the proposed exception specifies. The proposal, therefore, does include
provisions designed to consider the requirement burdens based on the
fund's use of derivatives (rather than the size of the fund).
    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. For example, a fund that qualifies
as a limited derivatives user under the proposed rule would be exempt
from the proposed requirements to adopt and implement a derivatives
risk management program, and to adhere to the proposed rule's VaR-based
limit on fund leverage risk. The costs of compliance with the proposed
rule would vary even for limited derivatives users, as these funds
would be required to adopt policies and procedures that are
``reasonably designed'' to manage their derivatives risks. Thus, to the
extent a fund that is a small entity faces relatively little
derivatives risk, we believe it would incur relatively low costs to
comply with the proposed rule. 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 in light of our investor protection objectives.
    Finally, with respect to the use of performance rather than design
standards, the proposed rule generally uses performance standards for
all funds relying on the proposed rule, regardless of size. We believe
that providing funds with the flexibility with respect to investment
strategies and use of derivatives transactions is appropriate, as well
as the derivatives risk management program design. However, the
proposed rule also uses design standards with respect to certain
requirements such as complying with the VaR-based limit on fund
leverage risk and the specified program elements in the derivatives
risk management program. For the reasons discussed above, we believe
that this use of design standards is appropriate to address investor
protection concerns, particularly the concerns expressed in sections
1(b)(7), 1(b)(8), and 18 of the Investment Company Act.
2. Proposed Sales Practices Rules
    Similarly, we do not believe that exempting any subset of broker-
dealers or registered investment advisers, including those firms that
are small entities, from the provisions in the proposed sales practices
rules would permit us to achieve our stated investor protection
objectives. We also do not believe that it would be desirable to
establish different requirements applicable to firms of different sizes
under the proposed sales practices rules to account for resources
available to small entities, to consolidate or simplify the compliance
requirements under the proposal for small entities, or to use
performance standards rather than design standards for small entities.
    We do not believe exempting small broker-dealers and investment
advisers from the proposed sales practices rules would serve the
interest of investors. As we discussed above, leveraged/inverse
investment vehicles present unique considerations, and the proposed
sales practices rules are designed in part to address the investor
protection concerns leveraged/inverse funds present.\770\ The proposed
sales practices rules would permit broker-dealers and investment
advisers to accept or place orders to buy or sell shares of a
``leveraged/inverse investment vehicle'' only for investors that they
have approved for those transactions, based on certain required

criteria.\771\ Exempting smaller broker-dealer and investment adviser
firms would create a regulatory gap, whereby larger funds would be
required to comply with the proposed sales practices rules' due
diligence requirements to determine whether to approve the account of
retail investor to buy or sell shares of a leveraged/inverse investment
vehicle, and small entities would not need to conduct this same
diligence.
---------------------------------------------------------------------------

    \770\ See supra section II.G.
    \771\ See proposed rule 15l-2(b).
---------------------------------------------------------------------------

    As discussed above, we believe that this limitation on leveraged/
inverse investment vehicles' investor base would help provide that
investors in these vehicles understand the characteristics of these
vehicles and the unique risks they present.\772\ Providing different
requirements or simplifying the requirements for small entities would
dilute these investor protection benefits for customers or clients of
small entities. We do not believe that the investor protection benefits
of the proposed sales practices rules should depend on whether an
investor is transacting through a small or a large firm. Furthermore, a
broker-dealer or investment adviser would have to comply with the
applicable proposed rule's requirements only if it transacts with
retail investors in the shares of leveraged/inverse investment
vehicles.\773\
---------------------------------------------------------------------------

    \772\ See supra section II.G.
    \773\ We estimate that approximately 236 broker-dealers and 43
registered investment advisers are small entities that would be
subject to the proposed sales practices rules. See supra note 758
and accompanying text.
     Broker-dealers and investment advisers that would have to
comply with the proposed sales practices rules also might currently
have processes in place that would provide efficiencies in complying
with the proposed rules. See supra note 536 and accompanying text.
---------------------------------------------------------------------------

    Finally, we are not proposing performance standards rather than
design standards for smaller entities. We believe that subjecting
smaller entities to different standards under the proposed rules could
lead to inconsistency in how investors would transact in leveraged/
inverse investment vehicles, depending on whether the investor has a
relationship with a large or small broker-dealer or investment adviser.
This would be inconsistent with the regulatory and investor protections
purposes of the proposed rules and could subject investors who interact
with small firms to a higher degree of risk than investors who interact
with larger firms. It could also circumvent the proposed rules' ability
to establish a uniform set of enhanced due diligence and approval
requirements for all leveraged/inverse investment vehicle transactions,
and to address the investor protection concerns underlying section 18
for leveraged/inverse funds by limiting their investor base.
3. Proposed Amendments to Forms N-PORT, N-LIQUID, and N-CEN
    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. We believe that the form amendments are
necessary to help identify and provide the Commission, staff,
investors, and other market participants timely information about funds
that comply with proposed rule 18f-4, and to realize the anticipated
benefits of the proposed reporting requirements.\774\ Exempting small
funds from coverage under all or any part of the proposed form
amendments could compromise the effectiveness of the required
disclosures, which the Commission believes would not be consistent with
its goals of industry oversight and investor protection. We believe
that all fund investors, including investors in small funds, 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.
---------------------------------------------------------------------------

    \774\ See supra section III.C.9.
---------------------------------------------------------------------------

    For similar reasons, we do not believe that the interests of
investors would be served by establishing different reporting,
recordkeeping, or other compliance requirements for small funds. We
considered providing small funds simplified compliance or disclosure
requirements. However, we believe this too would subject investors in
small funds that invest in derivatives to a higher degree of risk and
information asymmetry than investors to large funds that would be
required to comply with the proposed disclosure requirements. We also
note that registered open- and closed-end management investment
companies, including those that are small entities, have already
updated their systems and have established internal processes to
prepare, validate, and file reports on Forms N-PORT and N-CEN (or will
do so shortly).\775\ For funds that will be required to file reports on
Form N-RN, the vast majority of them are open-end funds, which already
are required to submit the form upon specified events. With respect to
the additional registered closed-end funds and BDCs newly required to
file reports on Form N-RN, we do not believe they would need more time
to comply with the new reporting requirements, given the limited set of
reporting requirements they would be subject to and the relatively low
burden we estimate of filing reports on Form N-RN.
---------------------------------------------------------------------------

    \775\ See supra note 359 (discussing, among other things, Form
N-PORT compliance dates and noting that the funds that would rely on
proposed rule 18f-4 (if adopted) other than BDCs generally are
subject to reporting requirements on Form N-CEN); see also
Investment Report Modernization Adopting Release supra note 178, at
section II.H.
---------------------------------------------------------------------------

    We also do not believe that the interests of investors would be
served by clarifying, consolidating, or simplifying the compliance
requirements under the proposal for small funds. Small funds are as
vulnerable to the same potential risks associated with their
derivatives use as larger funds are, and therefore we believe that
simplifying or consolidating the proposed reporting requirements for
small funds would not allow us to meet our stated objectives. Moreover,
we believe many of the proposed disclosure requirements involve minimal
burden. For example, the Form N-CEN ``checking a box'' reporting
requirement is completed on an annual basis.
    Finally, we did not prescribe performance standards rather than
design standards for small funds because we believe this too could
diminish the ability of the proposed rules to achieve their intended
regulatory purpose by creating inconsistent reporting requirements
between small and large funds, and weakening the benefits of the
proposed reporting requirement for investors in small funds.
4. Rule 6c-11
    Rule 6c-11 is designed to modernize the regulatory framework for
ETFs and to create a consistent, transparent, and efficient regulatory
framework.\776\ The Commission's full Regulatory Flexibility Act
Analysis regarding rule 6c-11, including analysis of significant
alternatives, appears in the 2019 ETFs Adopting Release and the 2018
ETFs Proposing Release.\777\ Our analysis of alternatives for small
leveraged/inverse ETFs here is consistent with the Commission's
analysis of alternatives for small ETFs in those releases.
---------------------------------------------------------------------------

    \776\ See ETFs Adopting Release, supra note 76, at section I.
    \777\ See id. at section VI; see also Exchange-Traded Funds,
Investment Company Act Release No. 10515 (June 28, 2018) [83 FR
37332 (July 31, 2018)] (``ETFs Proposing Release''), at section V.

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

    We do not believe that permitting or requiring different treatment
for any subset of leveraged/inverse ETFs, including small leveraged/
inverse ETFs, under the proposed amendments to rule 6c-11, and the
rule's related recordkeeping, disclosure and reporting requirements,
would permit us to achieve our stated objectives. Similarly, we do not
believe that we can establish simplified or consolidated compliance
requirements for small leveraged/inverse ETFs under the proposed
amendments to rule 6c-11 without compromising our objectives. The
Commission discussed the bases for this determination (with respect to
ETFs other than leveraged/inverse ETFs) in more detail in the ETFs
Proposing Release and the ETFs Adopting Release, and we are extending
that analysis to leveraged/inverse ETFs in this Initial Regulatory
Flexibility Act Analysis. In addition, we do not believe it would be
appropriate to exempt small leveraged/inverse ETFs from the proposed
amendments to rule 6c-11 (or to establish different disclosure,
reporting, or recordkeeping requirements, or simplified or consolidated
compliance requirements under rule 6c-11 for these entities) because of
the particular risks that leveraged/inverse ETFs may present.\778\ We
also do not think it would be appropriate to establish different
requirements under rule 6c-11 for small leveraged/inverse ETFs, which
could produce a competitive advantage for these funds compared to
larger leveraged/inverse ETFs (and compared to other ETFs that rely on
the rule). This would conflict with our goals of creating a consistent,
transparent, and efficient regulatory framework for ETFs and to
facilitate greater competition and innovation among ETFs.
---------------------------------------------------------------------------

    \778\ See supra section II.G.1.
---------------------------------------------------------------------------

G. 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.

VI. 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), 18, 31(a), 38(a), and 61 of the
Investment Company Act of 1940 [15 U.S.C. 80a-6(c), 80a-12(a), 80a-18,
80a-30(a), 80a-37(a), and 80a-60]. The Commission is proposing
amendments to rule 6c-11 under the authority set forth in sections
6(c), 22(c), and 38(a) of the Investment Company Act [15 U.S.C. 80a-
6(c), 22(c), and 80a-37(a)]. The Commission is proposing new rule 15l-2
under the authority set forth in sections 3, 3(b), 3E, 10, 15(l), 15F,
17, 23(a), and 36 of the Securities Exchange Act of 1934 [15 U.S.C.
78c, 78c(b), 78c-5, 78j, 78o(l), 78o-10, 78q, 78w(a), and 78mm]. The
Commission is proposing new rule 211(h)-1 under the authority set forth
in sections 206, 206A, 208, 211(a), and 211(h), and of the Investment
Advisers Act of 1940 [15 U.S.C. 80b-6, 80b-6a, 80b-8, 80b-11(a), and
80b-11(h)]. The Commission is proposing amendments to Form N-PORT, Form
N-LIQUID (which we propose to re-title as ``Form N-RN''), Form N-CEN,
and Form N-2 under the authority set forth in sections 8, 18, 30, and
38 of the Investment Company Act of 1940 [15 U.S.C. 80a-8, 80a-18, 80a-
29, 80a-37, 80a-63], sections 6, 7(a), 10 and 19(a) of the Securities
Act of 1933 [15 U.S.C. 77f, 77g(a), 77j, 77s(a)], and sections 10, 13,
15, 23, and 35A of the Exchange Act [15 U.S.C. 78j, 78m, 78o, 78w, and
78ll].

Text of Rules and Forms

List of Subjects

17 CFR Parts 240 and 249

    Brokers, Fraud, Reporting and recordkeeping requirements,
Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements,
Securities.

17 CFR Part 275

    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 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The authority citation for part 240 is amended by adding a
subauthority for Section 240.15l-2 to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.15l-2 is also issued under Pub. L. 111-203, sec.
913, 124 Stat. 1376, 1827 (2010).
* * * * *
0
2. Section 240-15l-2 is added to read as follows:

Sec.  240.15l-2   Broker and dealer sales practices for leveraged/
inverse investment vehicles.

    (a) Required approval of customer account. No broker or dealer
registered or required to be registered under the Securities Exchange
Act of 1934, or any associated person of the broker or dealer, may
accept an order from a customer that is a natural person (or the legal
representative of a natural person) to buy or sell shares of a
leveraged/inverse investment vehicle unless the broker or dealer has
approved such a customer's account to engage in those transactions and
has adopted and implemented policies and procedures reasonably designed
to achieve compliance with this section. Any

approval of a customer's account for buying or selling leveraged/
inverse investment vehicles must be effected as provided in paragraph
(b).
    (b) Diligence in approving accounts. (1) In determining whether to
approve a customer's account to buy or sell leveraged/inverse
investment vehicles, the broker or dealer must exercise due diligence
to ascertain the essential facts relative to the customer, his or her
financial situation, and investment objectives, including, at a
minimum, the information specified in paragraph (b)(2) of this section
(and must seek to obtain information for all participants in a joint
account). Based upon this information, the broker or dealer must
specifically approve or disapprove the customer's account for buying
and selling shares of leveraged/inverse investment vehicles. An
approval of a customer account must be in writing. A broker or dealer
may provide this approval if the broker or dealer has a reasonable
basis for believing that the customer has such knowledge and experience
in financial matters that he or she may reasonably be expected to be
capable of evaluating the risks of buying and selling leveraged/inverse
investment vehicles.
    (2) A broker or dealer must seek to obtain the following
information at a minimum regarding the customer:
    (i) Investment objectives (e.g., safety of principal, income,
growth, trading profits, speculation) and time horizon;
    (ii) Employment status (name of employer, self-employed or
retired);
    (iii) Estimated annual income from all sources;
    (iv) Estimated net worth (exclusive of family residence);
    (v) Estimated liquid net worth (cash, liquid securities, other);
    (vi) Percentage of the customer's estimated liquid net worth that
he or she intends to invest in leveraged/inverse investment vehicles;
and
    (vii) Investment experience and knowledge (e.g., number of years,
size, frequency and type of transactions) regarding leveraged/inverse
investment vehicles, options, stocks and bonds, commodities, and other
financial instruments.
    (c) Recordkeeping. A broker or dealer must maintain a written
record of the information that it obtained under paragraph (b) of this
section and, if applicable, its written approval of the customer's
account, as well as the versions of the firm's policies and procedures
required under paragraph (a) that were in place when it approved or
disapproved the customer's account, for a period of not less than six
years (the first two years in an easily accessible place) after the
date of the closing of the customer's account.
    (d) Definitions. For purposes of this section:
    Associated person of the broker dealer means any partner, officer,
director, or branch manager of such broker or dealer (or any person
occupying a similar status or performing similar functions), any person
directly or indirectly controlling, controlled by, or under common
control with such broker or dealer, or any employee of such broker or
dealer, except that any person associated with a broker or dealer whose
functions are solely clerical or ministerial shall not be included in
the meaning of such term for purposes of section 15(b) of the Exchange
Act (other than paragraph (6) thereof).
    Commodity- or Currency-Based Trust or Fund means a trust or other
person:
    (1) Issuing securities in an offering registered under the
Securities Act of 1933 (15 U.S.C. 77a et seq.) and which class of
securities is listed for trading on a national securities exchange;
    (2) The assets of which consist primarily of derivative instruments
that reference commodities or currencies, or interests in the
foregoing; and
    (3) That provides in its registration statement under the
Securities Act of 1933 (15 U.S.C. 77a et seq.) that a class of its
securities are purchased or redeemed, subject to conditions or
limitations, for a ratable share of its assets.
    Leveraged/inverse investment vehicle means a registered investment
company (including any separate series thereof), or commodity- or
currency-based trust or fund, that seeks, directly or indirectly, to
provide investment returns that correspond to the performance of a
market index by a specified multiple, or to provide investment returns
that have an inverse relationship to the performance of a market index,
over a predetermined period of time.
    (e) Transition. This section applies to all customers of the broker
or dealer, including customers who have opened accounts with the broker
or dealer before the compliance date for this section, provided that
this section does not apply to, and therefore will not restrict a
customer's ability to close or reduce, a position in a leveraged/
inverse investment vehicle that a customer established before the
compliance date of this section.

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

0
3. 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.
* * * * *
    Section 270.6c-11 is also issued under 15 U.S.C. 80a-6(c) and
80a-37(a).
* * * * *

Sec.  270.6c-11   [Amended]

0
4. Amend Sec.  270.6c-11 by removing paragraph (c)(4).
0
5. Section 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) Definitions. For purposes of this section:
    Absolute VaR test means that the VaR of the fund's portfolio does
not exceed 15% of the value of the fund's net assets.
    Derivatives exposure means the sum of the notional amounts of the
fund's derivatives instruments and, in the case of short sale
borrowings, the value of the asset sold short. In determining
derivatives exposure a fund may convert the notional amount of interest
rate derivatives to 10-year bond equivalents and delta adjust the
notional amounts of options contracts.
    Derivatives risks means the risks associated with a fund's
derivatives transactions or its use of derivatives transactions,
including leverage, market, counterparty, liquidity, operational, and
legal risks and any other risks the derivatives risk manager (or, in
the case of a fund that is a limited derivatives user as described in
paragraph (c)(3) of this section, the fund's investment adviser) deems
material.
    Derivatives risk manager means an officer or officers of the fund's
investment adviser responsible for administering the program and
policies and procedures required by paragraph (c)(1) of this section,
provided that the derivatives risk manager:
    (1) May not be a portfolio manager of the fund, or if multiple
officers serve as derivatives risk manager, may not have a majority
composed of portfolio managers of the fund; and
    (2) Must have relevant experience regarding the management of
derivatives risk.
    Derivatives transaction means:
    (1) Any swap, security-based swap, futures contract, forward
contract, option, any combination of the foregoing, or any similar
instrument (``derivatives instrument''), under which a 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 margin or settlement
payment or otherwise; and
    (2) Any short sale borrowing.
    Designated reference index means an unleveraged index that: (1) Is
selected by the derivatives risk manager and that reflects the markets
or asset classes in which the fund invests; (2) is not administered by
an organization that is an affiliated person of the fund, its
investment adviser, or principal underwriter, or created at the request
of the fund or its investment adviser, unless the index is widely
recognized and used; and (3) is an ``appropriate broad-based securities
market index'' or an ``additional index,'' as defined in the
instruction to Item 27 in Form N-1A [17 CFR 274.11A]. In the case of a
blended index, none of the indexes that compose the blended index may
be administered by an organization that is an affiliated person of the
fund, its investment adviser, or principal underwriter, or created at
the request of the fund or its investment adviser, unless the index is
widely recognized and used.
    Fund means a registered open-end or closed-end company or a
business development company, including any separate series thereof,
but does not include a registered open-end company that is regulated as
a money market fund under Sec.  270.2a-7.
    Relative VaR test means that the VaR of the fund's portfolio does
not exceed 150% of the VaR of the designated reference index.
    Unfunded commitment agreement means a contract that is not a
derivatives transaction, under which a fund commits, conditionally or
unconditionally, to make a loan to a company or to invest equity in a
company in the future, including by making a capital commitment to a
private fund that can be drawn at the discretion of the fund's general
partner.
    Value-at-risk or VaR means an estimate of potential losses on an
instrument or portfolio, expressed as a percentage of the value of the
portfolio's net assets, over a specified time horizon and at a given
confidence level, provided that any VaR model used by a fund for
purposes of determining the fund's compliance with the relative VaR
test or the absolute VaR test must:
    (1) Take into account and incorporate all significant, identifiable
market risk factors associated with a fund's investments, including, as
applicable:
    (i) Equity price risk, interest rate risk, credit spread risk,
foreign currency risk and commodity price risk;
    (ii) Material risks arising from the nonlinear price
characteristics of a fund's investments, including options and
positions with embedded optionality; and
    (iii) The sensitivity of the market value of the fund's investments
to changes in volatility;
    (2) Use a 99% confidence level and a time horizon of 20 trading
days; and
    (3) Be based on at least three years of historical market data.
    (b) Derivatives transactions. If a fund satisfies the conditions of
paragraph (c) of this section, the fund may enter into derivatives
transactions, notwithstanding the requirements of sections 18(a)(1),
18(c), 18(f)(1), and 61 of the Investment Company Act (15 U.S.C. 80a-
18(a)(1), 80a-18(c), 80a-18(f)(1), and 80a-60), and derivatives
transactions entered into by the fund in compliance with this section
will not be considered for purposes of computing asset coverage, as
defined in section 18(h) of the Investment Company Act (15 U.S.C. 80a-
18(h)).
    (c) Conditions. (1) Derivatives risk management program. The fund
adopts and implements a written derivatives risk management program
(``program''), which must include policies and procedures that are
reasonably designed to manage the fund's derivatives risks and to
reasonably segregate the functions associated with the program from the
portfolio management of the fund. The program must include the
following elements:
    (i) Risk identification and assessment. The program must provide
for the identification and assessment of the fund's derivatives risks.
This assessment must take into account the fund's derivatives
transactions and other investments.
    (ii) Risk guidelines. The program must provide for the
establishment, maintenance, and enforcement of investment, risk
management, or related guidelines that provide for quantitative or
otherwise measurable criteria, metrics, or thresholds of the fund's
derivatives risks. These guidelines must specify levels of the given
criterion, metric, or threshold that the fund does not normally expect
to exceed, and measures to be taken if they are exceeded.
    (iii) Stress testing. The program must provide for stress testing
to evaluate potential losses to the fund's portfolio in response to
extreme but plausible market changes or changes in market risk factors
that would have a significant adverse effect on the fund's portfolio,
taking into account correlations of market risk factors and resulting
payments to derivatives counterparties. The frequency with which the
stress testing under this paragraph is conducted must take into account
the fund's strategy and investments and current market conditions,
provided that these stress tests must be conducted no less frequently
than weekly.
    (iv) Backtesting. The program must provide for backtesting of the
results of the VaR calculation model used by the fund in connection
with the relative VaR test or the absolute VaR test by, each business
day, comparing the fund's gain or loss with the corresponding VaR
calculation for that day, estimated over a one-trading day time
horizon, and identifying as an exception any instance in which the fund
experiences a loss exceeding the corresponding VaR calculation's
estimated loss.
    (v) Internal reporting and escalation. (A) Internal reporting. The
program must identify the circumstances under which persons responsible
for portfolio management will be informed regarding the operation of
the program, including exceedances of the guidelines specified in
paragraph (c)(1)(ii) of this section and the results of the stress
tests specified in paragraph (c)(1)(iii) of this section.
    (B) Escalation of material risks. The derivatives risk manager must
inform in a timely manner persons responsible for portfolio management
of the fund, and also directly inform the fund's board of directors as
appropriate, of material risks arising from the fund's derivatives
transactions, including risks identified by the fund's exceedance of a
criterion, metric, or threshold provided for in the fund's risk
guidelines established under paragraph (c)(1)(ii) of this section or by
the stress testing described in paragraph (c)(1)(iii) of this section.
    (vi) Periodic review of the program. The derivatives risk manager
must review the program at least annually to evaluate the program's
effectiveness and to reflect changes in risk over time. The periodic
review must include a review of the VaR calculation model used by the
fund under paragraph (c)(2) of this section (including the backtesting
required by paragraph (c)(1)(iv) of this section) and any designated
reference index to evaluate whether it remains appropriate.
    (2) Limit on fund leverage risk. (i) The fund must comply with the
relative VaR test or, if the derivatives risk manager is unable to
identify a designated reference index that is appropriate for the fund
taking into account the fund's investments, investment objectives, and
strategy, the absolute VaR test.
    (ii) The fund must determine its compliance with the applicable VaR
test at least once each business day. If the fund determines that it is
not in compliance with the applicable VaR test, the fund must come back
into compliance promptly and within no

more than three business days after such determination.
    (iii) If the fund is not in compliance with the applicable VaR test
within three business days:
    (A) The derivatives risk manager must report to the fund's board of
directors and explain how and by when (i.e., number of business days)
the derivatives risk manager reasonably expects that the fund will come
back into compliance;
    (B) The derivatives risk manager must analyze the circumstances
that caused the fund to be out of compliance for more than three
business days and update any program elements as appropriate to address
those circumstances; and
    (C) The fund may not enter into any derivatives transactions (other
than derivatives transactions that, individually or in the aggregate,
are designed to reduce the fund's VaR) until the fund has been back in
compliance with the applicable VaR test for three consecutive business
days and has satisfied the requirements set forth in paragraphs
(c)(2)(iii)(A) and (B) of this section.
    (iv) If the fund is complying with the relative VaR test, an open-
end fund must disclose in its annual report the fund's designated
reference index as the fund's ``appropriate broad-based securities
market index'' or an ``additional index,'' as defined in the
instruction to Item 27 in Form N-1A [17 CFR 274.11A], and a registered
closed-end fund or business development company must disclose its
designated reference index in the annual report, together with a
presentation of the fund's performance relative to the designated
reference index. A fund is not required to include this disclosure in
an annual report if the fund is a ``New Fund,'' as defined in Form N-1A
[17 CFR 274.11A], or would meet that definition if it were filing on
Form N-1A [17 CFR 274.11A], at the time the fund files the annual
report.
    (3) Limited derivatives users. A fund is not required to adopt a
program as prescribed in paragraph (c)(1) of this section, or comply
with the limit on fund leverage risk in paragraph (c)(2) of this
section, if the fund adopts and implements policies and procedures
reasonably designed to manage the fund's derivatives risks and:
    (i) The fund's derivatives exposure does not exceed 10 percent of
the fund's net assets; or
    (ii) The fund limits its use of derivatives transactions to
currency derivatives that hedge the currency risks associated with
specific foreign-currency-denominated equity or fixed-income
investments held by the fund, provided that the currency derivatives
are entered into and maintained by the fund for hedging purposes and
that the notional amounts of such derivatives do not exceed the value
of the hedged instruments denominated in the foreign currency (or the
par value thereof, in the case of fixed-income investments) by more
than a negligible amount.
    (4) Leveraged/inverse funds. A fund is not required to comply with
the limit on fund leverage risk in paragraph (c)(2) of this section if:
    (i) The fund is a leveraged/inverse investment vehicle as defined
in Sec.  240.15l-2 and Sec.  275.211(h)-1;
    (ii) The fund discloses in its prospectus that it is not subject to
the limit on fund leverage risk in paragraph (c)(2) of this section;
and
    (iii) The fund does not seek or obtain, directly or indirectly,
investment results exceeding 300% of the return (or inverse of the
return) of the underlying index.
    (5) Board oversight and reporting. (i) Approval of the derivatives
risk manager. A fund's board of directors, including a majority of
directors who are not interested persons of the fund, must approve the
designation of the derivatives risk manager, taking into account the
derivatives risk manager's relevant experience regarding the management
of derivatives risk.
    (ii) Reporting on program implementation and effectiveness. On or
before the implementation of the program, and at least annually
thereafter, the derivatives risk manager must provide to the board of
directors a written report providing a representation that the program
is reasonably designed to manage the fund's derivatives risks and to
incorporate the elements provided in paragraphs (c)(1)(i) through (vi)
of this section. The representation may be based on the derivatives
risk manager's reasonable belief after due inquiry. The written report
must include the basis for the representation along with such
information as may be reasonably necessary to evaluate the adequacy of
the fund's program and, for reports following the program's initial
implementation, the effectiveness of its implementation. The written
report also must include the derivatives risk manager's basis for the
selection of the designated reference index or, if applicable, an
explanation of why the derivatives risk manager was unable to identify
a designated reference index appropriate for the fund.
    (iii) Regular board reporting. The derivatives risk manager must
provide to the board of directors, at a frequency determined by the
board, a written report regarding the derivatives risk manager's
analysis of any exceedances described in paragraph (c)(1)(ii) of this
section, the results of the stress testing conducted under paragraph
(c)(1)(iii) of this section, and the results of the backtesting
conducted under paragraph (c)(1)(iv) of this section since the last
report to the board. Each report under this paragraph must include such
information as may be reasonably necessary for the board of directors
to evaluate the fund's response to any exceedances and the results of
the fund's stress testing.
    (6) Recordkeeping. (i) Records to be maintained. A fund must
maintain a written record documenting, as applicable:
    (A) The fund's written policies and procedures required by
paragraph (c)(1) of this section, along with:
    (1) The results of the fund's stress tests under paragraph
(c)(1)(iii) of this section;
    (2) The results of the backtesting conducted under paragraph
(c)(1)(iv) of this section;
    (3) Records documenting any internal reporting or escalation of
material risks under paragraph (c)(1)(v)(B) of this section; and
    (4) Records documenting the reviews conducted under paragraph
(c)(1)(vi) of this section.
    (B) Copies of any materials provided to the board of directors in
connection with its approval of the designation of the derivatives risk
manager, any written reports provided to the board of directors
relating to the program, and any written reports provided to the board
of directors under paragraph (c)(2)(iii)(A) of this section.
    (C) Any determination and/or action the fund made under paragraphs
(c)(2)(i)-(ii) of this section, including a fund's determination of:
The VaR of its portfolio; the VaR of the fund's designated reference
index, as applicable; the fund's VaR ratio (the value of the VaR of the
Fund's portfolio divided by the VaR of the designated reference index),
as applicable; and any updates to any VaR calculation models used by
the fund and the basis for any material changes thereto.
    (D) If applicable, the fund's written policies and procedures
required by paragraph (c)(3) of this section.
    (ii) Retention periods. (A) A fund must maintain a copy of the
written policies and procedures that the fund adopted under paragraphs
(c)(1) or (c)(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) A fund must maintain all records and materials that paragraphs
(c)(6)(i)(A)(1)-(4) and (c)(6)(i)(B)-(D) of this section describe for a
period of not less than five years (the first two years in an easily
accessible place) following each determination, action, or review that
these paragraphs describe.
    (7) Current reports. A fund that experiences an event specified in
the parts of Form N-RN [referenced in 17 CFR 274.223] titled ``Relative
VaR Test Breaches,'' ``Absolute VaR Test Breaches,'' or ``Compliance
with VaR Test'' must file with the Commission a report on Form N-RN
within the period and according to the instructions specified in that
form.
    (d) Reverse repurchase agreements. A fund may enter into reverse
repurchase agreements or similar financing transactions,
notwithstanding the requirements of sections 18(c), and 18(f)(1) of the
Investment Company Act, if the fund complies with the asset coverage
requirements of section 18 and combines the aggregate amount of
indebtedness associated with the reverse repurchase agreement or
similar financing transaction with the aggregate amount of any other
senior securities representing indebtedness when calculating the asset
coverage ratio.
    (e) Unfunded commitment agreements. (1) A fund may enter into an
unfunded commitment agreement, notwithstanding the requirements of
sections 18(a), 18(c), 18(f)(1), and 61 of the Investment Company Act,
if the fund reasonably believes, at the time it enters into such
agreement, that it will have sufficient cash and cash equivalents to
meet its obligations with respect to all of its unfunded commitment
agreements, in each case as they come due. In forming a reasonable
belief, the fund must take into account its reasonable expectations
with respect to other obligations (including any obligation with
respect to senior securities or redemptions), and may not take into
account cash that may become available from the sale or disposition of
any investment at a price that deviates significantly from the market
value of those investments, or from issuing additional equity. Unfunded
commitment agreements entered into by the fund in compliance with this
section will not be considered for purposes of computing asset
coverage, as defined in section 18(h) of the Investment Company Act (15
U.S.C. 80a-18(h)).
    (2) For each unfunded commitment agreement that a fund enters into
under paragraph (e)(1) of this section, a fund must document the basis
for its reasonable belief regarding the sufficiency of its cash and
cash equivalents to meet its unfunded commitment agreement obligations,
and maintain a record of this documentation for a period of not less
than five years (the first two years in an easily accessible place)
following the date that the fund entered into the agreement.
0
6. Revise Sec.  270.30b1-10 to read as follows:

Sec.  270.30b1-10   Current report for open-end and closed-end
management investment companies.

    Every registered open-end management investment company, or series
thereof, and every registered closed-end management investment company,
but not a fund that is regulated as a money market fund under Sec.
270.2a-7, that experiences an event specified on Form N-RN, must file
with the Commission a current report on Form N-RN within the period and
according to the instructions specified in that form.

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

0
7. The general authority for part 274 continues to read 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
8. Amend Form N-2 (referenced in Sec. Sec.  239.14 and 274.11a-1) by
revising instruction 2. to sub-item ``3. Senior Securities'' of ``Item
4. Financial Highlights'' to read as follows:

    Note:  The text of Form N-2 does not, and this amendment will
not, appear in the Code of Federal Regulations.

Form N-2

* * * * *

Item 4. Financial Highlights

* * * * *

3. Senior Securities

* * * * *

Instructions

* * * * *
    2. Use the method described in section 18(h) of the 1940 Act [15
U.S.C. 80a-18(h)] to calculate the asset coverage to be set forth in
column (3). However, in lieu of expressing asset coverage in terms of a
ratio, as described in section 18(h), express it for each class of
senior securities in terms of dollar amounts per share (in the case of
preferred stock) or per $1,000 of indebtedness (in the case of senior
indebtedness). A fund should not consider any derivatives transactions,
or any unfunded commitment agreements, that it enters into in
compliance with rule 18f-4 under the Investment Company Act [17 CFR
270.18f-4] for purposes of computing asset coverage.
* * * * *
0
9. Amend Form N-CEN (referenced in Sec. Sec.  249.330 and 274.101) by
adding new Item C.7.l. to read as follows:

    Note:  The text of Form N-CEN does not, and this amendment will
not, appear in the Code of Federal Regulations.

FORM N-CEN

ANNUAL REPORT FOR REGISTERED INVESTMENT COMPANIES

* * * * *
Item C.7. * * *
l. Rule 18f-4 (17 CFR 270.18f-4): _
    i. Is the Fund excepted from the rule 18f-4 (17 CFR 270.18f-4)
program requirement under rule 18f-4(c)(3)(i) (17 CFR 270.18f-
4(c)(3)(i))? __
    ii. Is the Fund excepted from the rule 18f-4 (17 CFR 270.18f-4)
program requirement under rule 18f-4(c)(3)(ii) (17 CFR 270.18f-
4(c)(3)(ii))? __
    iii. Is the Fund a leveraged/inverse fund covered by rule 15l-2
under the Exchange Act (17 CFR 240.15l-2) or rule 211(h)-1 under the
Investment Advisers Act of 1940 (17 CFR 275.211(h)-1) that, under rule
18f-4(c)(4) (17 CFR 270.18f-4(c)(4)), is excepted from the requirement
to comply with the limit on leverage risk described in rule 18f-4(c)(2)
(17 CFR 270.18f-4(c)(2))? __
    iv. Has the Fund entered into any reverse repurchase agreements or
similar financing transactions under rule 18f-4(d) (17 CFR 270.18f-
4(d))? __
    v. Has the Fund entered into any unfunded commitment agreements
under rule 18f-4(e) (17 CFR 270.18f-4(e))? __
* * * * *
0
10. Amend Form N-PORT (referenced in Sec.  274.150) by:
0
a. Adding to General Instruction E. ``Definitions'' in alphabetical
order, the following definitions:
0
i. ``Absolute VaR Test'';
0
ii. ``Designated Reference Index'';
0
iii. ``Derivatives Exposure'';
0
iv. ``Relative VaR Test'';
0
v. ``Value-at-risk'';
0
vi. ``VaR Ratio''; and
0
b. Adding Items B.9 and B.10.
    The additions read as follows:

    Note:  The text of Form N-PORT does not, and this amendment will
not, appear in the Code of Federal Regulations.

Form N-PORT

MONTHLY PORTFOLIO INVESTMENTS REPORT

* * * * *

GENERAL INSTRUCTIONS

* * * * *

E. Definitions

* * * * *
``Absolute VaR Test'' has the meaning defined in rule 18f-4(a) [17 CFR
270.18f-4(a)].
* * * * *
``Derivatives Exposure'' has the meaning defined in rule 18f-4(a) [17
CFR 270.18f-4(a)].
* * * * *
``Designated Reference Index'' has the meaning defined in rule 18f-4(a)
[17 CFR 270.18f-4(a)].
* * * * *
``Relative VaR Test'' has the meaning defined in rule 18f-4(a) [17 CFR
270.18f-4(a)].
* * * * *
``Value-at-risk'' or VaR has the meaning defined in rule 18f-4(a) [17
CFR 270.18f-4(a)].
* * * * *
``VaR Ratio'' means the value of the Fund's portfolio VaR divided by
the VaR of the Designated Reference Index.
* * * * *
PART B. * * *
Item B.9 Derivatives Exposure. Report as a percentage of the Fund's net
asset value:
a. Derivatives Exposure.
    i. Exposure from derivatives instruments.
    ii. Exposure from short sales.
Item B.10 VaR Information. For Funds subject to the limit on fund
leverage risk in rule 18f-4(c)(2) [17 CFR 270.18f-4(c)(2)], provide the
following information, as determined in accordance with the requirement
under rule 18f-4(c)(2)(ii) to determine the fund's compliance with the
applicable VaR test at least once each business day:
a. Highest daily VaR during the reporting period.
b. Date of highest daily VaR during the reporting period.
c. Median daily VaR during the reporting period.
d. For Funds that were subject to the Relative VaR Test during the
reporting period, provide:
    i. Name of the Fund's Designated Reference Index.
    ii. Index Identifier for the Fund's Designated Reference Index.
    iii. Highest VaR Ratio during the reporting period.
    iv. Date of highest VaR Ratio during the reporting period.
    v. Median VaR Ratio during the reporting period.
e. Backtesting Results. Number of exceptions that the Fund identified
as a result of its backtesting of its VaR calculation model (as
described in rule 18f-4(c)(1)(iv) [17 CFR 270.18f-4(c)(1)(iv)] during
the reporting period.
* * * * *
0
11. Revise Sec.  274.223, its sectional heading, and Form N-LIQUID
(referenced in Sec.  274.223) and its title to read as follows:

Sec.  274.223   Form N-RN, Current report, open- and closed-end
investment company reporting.

    This form shall be used by registered open-end management
investment companies, or series thereof, and closed-end management
investment companies, or series thereof, to file reports pursuant to
Sec.  270.18f-4(c)(7) and Sec.  270.30b1-10 of this chapter.

    Note:  The text of Form N-RN does not, and this amendment will
not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549

FORM N-RN

CURRENT REPORT FOR REGISTERED MANAGEMENT INVESTMENT COMPANIES AND
BUSINESS DEVELOPMENT COMPANIES

    Form N-RN is to be used by a registered open-end management
investment company or series thereof, but not including a fund that is
regulated as a money market fund under rule 2a-7 under the Act (17 CFR
270.2A-7) (a ``registered open-end fund''), a registered closed-end
management investment company (a ``registered closed-end fund''), or a
closed-end management investment company that has elected to be
regulated as a business development company (a ``business development
company''), to file current reports with the Commission pursuant to
rule 18f-4 and rule 30b1-10 under the Investment Company of 1940 Act
[15 U.S.C. 80a] (``Act'') (17 CFR 270.18f-4; 17 CFR 270.30b1-10). The
Commission may use the information provided on Form N-RN in its
regulatory, disclosure review, inspection, and policymaking roles.

GENERAL INSTRUCTIONS

A. Rules as to Use of Form N-RN

    (1) Form N-RN is the reporting form that is to be used for current
reports of registered open-end funds (not including funds that are
regulated as money market funds under rule 2a-7 under the Act),
registered closed-end funds, and business development companies
(together, ``registrants'') required by, as applicable, section 30(b)
of the Act and rule 30b1-10 under the Act, as well as rule 18f-4 under
the Act. The Commission does not intend to make public information
reported on Form N-RN that is identifiable to any particular
registrant, although the Commission may use Form N-RN information in an
enforcement action.
    (2) Unless otherwise specified, a report on this Form N-RN is
required to be filed, as applicable, within one business day of the
occurrence of the event specified in Parts B-G of this form. If the
event occurs on a Saturday, Sunday, or holiday on which the Commission
is not open for business, then the one business day period shall begin
to run on, and include, the first business day thereafter.
    (3) For registered open-end funds required to comply with rule 22e-
4 under the Investment Company Act [17 CFR 270.22e-4], complete Parts
B-D of this form, as applicable. For registrants that rely on rule 18f-
4 of the Act [17 CFR 270.18f-4], complete Parts E-G of this form, as
applicable.

B. Application of General Rules and Regulations

    The General Rules and Regulations under the Act contain certain
general requirements that are applicable to reporting on any form under
the Act. These general requirements should be carefully read and
observed in the preparation and filing of reports on this form, except
that any provision in the form or in these instructions shall be
controlling.

C. Information To Be Included in Report Filed on Form N-RN

    Upon the occurrence of the event specified in Parts B-G of Form N-
RN, as applicable, a registrant must file a report on Form N-RN that
includes information in response to each of the items in Part A of the
form, as well as each of the items in the applicable Parts B-G of the
Form.

D. Filing of Form N-RN

    A registrant must file Form N-RN in accordance with rule 232.13 of
Regulation S-T (17 CFR part 232). Form N-RN must be filed
electronically using

the Commission's Electronic Data Gathering, Analysis and Retrieval
System (``EDGAR'').

E. Paperwork Reduction Act Information

    A registrant is not required to respond to the collection of
information contained in Form N-RN unless the form displays a currently
valid Office of Management and Budget (``OMB'') control number. Please
direct comments concerning the accuracy of the information collection
burden estimate and any suggestions for reducing the burden to the
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. 3507.

F. Definitions

    (1) References to sections and rules in this Form N-RN are to the
Investment Company Act (15 U.S.C. 80a), unless otherwise indicated.
Terms used in this Form N-RN have the same meaning as in the Investment
Company Act, rule 22e-4 under the Investment Company Act (for Parts B-D
of the Form), or rule 18f-4 under the Investment Company Act (for Part
E-G of the Form), unless otherwise indicated. In addition, as used in
this Form N-RN, the term registrant means the registrant or a separate
series of the registrant, as applicable.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549

FORM N-RN

CURRENT REPORT FOR REGISTERED MANAGEMENT INVESTMENT COMPANIES AND
BUSINESS DEVELOPMENT COMPANIES

PART A. General Information

Item A.1. Report for [mm/dd/yyyy].
Item A.2. CIK Number of registrant.
Item A.3. EDGAR Series Identifier.
Item A.4. Securities Act File Number, if applicable.
Item A.5. Provide the name, email address, and telephone number of the
person authorized to receive information and respond to questions about
this Form N-RN.

PART B. Above 15% Illiquid Investments

    If more than 15 percent of the registrant's net assets are, or
become, illiquid investments that are assets as defined in rule 22e-4,
then report the following information:

Item B.1. Date(s) on which the registrant's illiquid investments that
are assets exceeded 15 percent of its net assets.
Item B.2. The current percentage of the registrant's net assets that
are illiquid investments that are assets.
Item B.3. Identification of illiquid investments. For each investment
that is an asset that is held by the registrant that is considered
illiquid, disclose (1) the name of the issuer, the title of the issue
or description of the investment, the CUSIP (if any), and at least one
other identifier, if available (e.g., ISIN, Ticker, or other unique
identifier (if ticker and ISIN are not available)) (indicate the type
of identifier used), and (2) the percentage of the fund's net assets
attributable to that investment.

PART C. At or Below 15% Illiquid Investments

    If a registrant that has filed Part B of Form N-RN determines that
its holdings in illiquid investments that are assets have changed to be
less than or equal to 15 percent of the registrant's net assets, then
report the following information:

Item C.1. Date(s) on which the registrant's illiquid investments that
are assets fell to or below 15 percent of net assets.
Item C.2. The current percentage of the registrant's net assets that
are illiquid investments that are assets.

PART D. Assets That Are Highly Liquid Investments Below the Highly
Liquid Investment Minimum

    If a registrant's holdings in assets that are highly liquid
investments fall below its highly liquid investment minimum for more
than 7 consecutive calendar days, then report the following
information:

Item D.1. Date(s) on which the registrant's holdings of assets that are
highly liquid investments fell below the fund's highly liquid
investment minimum.

PART E. Relative VaR Test Breaches

    If a registrant is subject to the relative VaR test under rule 18f-
4(c)(2)(i) [17 CFR 270.18f-4(c)(2)(i)], and the fund determines that it
is not in compliance with the relative VaR test and has not come back
into compliance within 3 business days after such determination,
provide:

Item E.1. The dates on which the VaR of the registrant's portfolio
exceeded 150% of the VaR of its designated reference index.
Item E.2. The VaR of the registrant's portfolio on the dates each
exceedance occurred.
Item E.3. The VaR of the registrant's designated reference index on the
dates each exceedance occurred.
Item E.4. The name of the registrant's designated reference index.
Item E.5. The index identifier for the registrant's designated
reference index.

PART F. Absolute VaR Test Breaches

    If a registrant is subject to the absolute VaR test under rule 18f-
4(c)(2)(i) [17 CFR 270.18f-4(c)(2)(i)], and the fund determines that it
is not in compliance with the absolute VaR test and has not come back
into compliance within 3 business days after such determination,
provide:

Item F.1. The dates on which the VaR of the registrant's portfolio
exceeded 15% of the value of the registrant's net assets.
Item F.2. The VaR of the registrant's portfolio on the dates each
exceedance occurred.
Item F.3. The value of the registrant's net assets on the dates each
exceedance occurred.

PART G. Compliance with VaR Test

    If a registrant that has filed Part E or Part F of Form N-RN has
come back into compliance with either the relative VaR test or the
absolute VaR test, as applicable, then report the following
information:

Item G.1. Dates on which the VaR of the registrant's portfolio
exceeded, as applicable, 150% of the VaR of its designated reference
index (if the registrant is subject to the relative VaR test under rule
18f-4(c)(2)(i) [17 CFR 270.18f-4(c)(2)(i)]) or 15% of the value of the
registrant's net assets (if the registrant is subject to the absolute
VaR test under rule 18f-4(c)(2)(i) [17 CFR 270.18f-4(c)(2)(i)]).
Item G.2. The current VaR of the registrant's portfolio.

PART H. Explanatory Notes (if any)

    A registrant may provide any information it believes would be
helpful in understanding the information reported in response to any
Item of this Form.

SIGNATURES

Pursuant to the requirements of the Investment Company Act of 1940, the
registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.

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

(Registrant)

Date-------------------------------------------------------------------

-----------------------------------------------------------------------
(Signature) *
* Print name and title of the signing officer under his/her signature.
* * * * *

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
12. The authority citation for part 275 continues to read, in part, and
the subauthority for Section 275.211h-1 is added to read as follows:

    Authority:  15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.
* * * * *
    Section 275.211(h)-1 is also issued under sec. 913, Pub. L. 111-
203, 124 Stat. 1827-28 (2010).
* * * * *
0
13. Section 275.211(h)-1 is added to read as follows:

Sec.  275.211(h)-1   Investment adviser sales practices for leveraged/
inverse investment vehicles.

    (a) Required approval of client account. No investment adviser
registered or required to be registered under the Advisers Act, or any
supervised person of the investment adviser, may place an order for the
account of an advisory client that is a natural person (or the legal
representative of a natural person) to buy or sell shares of a
leveraged/inverse investment vehicle unless the investment adviser has
approved such a client's account to engage in those transactions and
has adopted and implemented policies and procedures reasonably designed
to achieve compliance with this section. Any approval of a client's
account for buying or selling leveraged/inverse investment vehicles
must be effected as provided in paragraph (b).
    (b) Diligence in approving accounts. (1) In determining whether to
approve a client's account to buy or sell leveraged/inverse investment
vehicles, the investment adviser must exercise due diligence to
ascertain the essential facts relative to the client, his or her
financial situation, and investment objectives, including, at a
minimum, the information specified in paragraph (b)(2) of this section
(and must seek to obtain information for all participants in a joint
account). Based upon this information, the investment adviser must
specifically approve or disapprove the client's account for buying and
selling shares of leveraged/inverse investment vehicles. An approval of
a client account must be in writing. An investment adviser may provide
this approval if the investment adviser has a reasonable basis for
believing that the client has such knowledge and experience in
financial matters that he or she may reasonably be expected to be
capable of evaluating the risks of buying and selling leveraged/inverse
investment vehicles.
    (2) An investment adviser must seek to obtain the following
information at a minimum regarding the client:
    (i) Investment objectives (e.g., safety of principal, income,
growth, trading profits, speculation) and time horizon;
    (ii) Employment status (name of employer, self-employed or
retired);
    (iii) Estimated annual income from all sources;
    (iv) Estimated net worth (exclusive of family residence);
    (v) Estimated liquid net worth (cash, liquid securities, other);
    (vi) Percentage of the client's estimated liquid net worth that he
or she intends to invest in leveraged/inverse investment vehicles; and
    (vii) Investment experience and knowledge (e.g., number of years,
size, frequency and type of transactions) regarding leveraged/inverse
investment vehicles, options, stocks and bonds, commodities, and other
financial instruments.
    (c) Recordkeeping. An investment adviser must maintain a written
record of the information that it obtained under paragraph (b) of this
section and, if applicable, its written approval of the client's
account, as well as the versions of the firm's policies and procedures
required under paragraph (a) that were in place when it approved or
disapproved the client's account, for a period of not less than six
years (the first two years in an easily accessible place) after the
date of the closing of the client's account.
    (d) Definitions. For purposes of this section:
    Commodity- or currency-based trust or fund means a trust or other
person:
    (1) Issuing securities in an offering registered under the
Securities Act of 1933 (15 U.S.C. 77a et seq.) and which class of
securities is listed for trading on a national securities exchange;
    (2) The assets of which consist primarily of derivative instruments
that reference commodities or currencies, or interests in the
foregoing; and
    (3) That provides in its registration statement under the
Securities Act of 1933 (15 U.S.C. 77a et seq.) that a class of its
securities are purchased or redeemed, subject to conditions or
limitations, for a ratable share of its assets.
    Leveraged/inverse investment vehicle means a registered investment
company (including any separate series thereof), or commodity- or
currency-based trust or fund, that seeks, directly or indirectly, to
provide investment returns that correspond to the performance of a
market index by a specified multiple, or to provide investment returns
that have an inverse relationship to the performance of a market index,
over a predetermined period of time.
    Supervised person means any partner, officer, director (or other
person occupying a similar status or performing similar functions), or
employee of an investment adviser, or other person who provides
investment advice on behalf of the investment adviser.
    (e) Transition. This section applies to all clients of the
investment adviser, including clients who have opened accounts with the
investment adviser before the compliance date for this section,
provided that this section does not apply to, and therefore will not
restrict the ability to close or reduce, a client's position in a
leveraged/inverse investment vehicle that a client established before
the compliance date of this section.

    By the Commission.

    Dated: November 25, 2019.
Eduardo A. Aleman,
Deputy Secretary.

VIII. APPENDIX A

    Note: Appendix A will not appear in the Code of Federal
Regulations. Feedback Flier: Funds' Use of Derivatives

    We are proposing a new regulatory approach for funds' use of
derivatives. This includes proposed rule 18f-4 under the Investment
Company Act of 1940, a new exemptive rule designed 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. The proposal also
includes certain new proposed reporting requirements relating to
funds' derivatives use. More information about our proposal is
available at https://www.sec.gov/rules/proposed/2019/34-87607.pdf.
    We are particularly interested in learning what small funds
think about the requirements of proposed new rule 18f-4 and the
proposed new reporting requirements. Hearing from small funds could
help us learn how the proposed rule and new reporting requirements
would affect these entities, and evaluate how we could address any
unintended consequences resulting from the cost and effort of
regulatory compliance while still promoting investor protection. We
would appreciate your feedback on any or all of the following
questions.

    All of the following questions are optional, including any
questions that ask about identifying information. Please note that
responses to these questions--including any other general
identifying information you provide--will be made public.

Item 1: General Identifying Information

Instructions: At your option, you may include general identifying
information that would help us contextualize your other feedback on
the proposal. This information could include responses to the
following questions, as well as any other general identifying
information you would like to provide. Responses to these items--
like responses to the other items on this Feedback Flier--will be
made public.
a. How big is the fund in terms of net asset value? (This may be
expressed in a range, for example, $40 million-$50 million.)
b. What is/are the principal investment strategy/strategies of the
fund?
c. Does the fund use derivatives transactions (as defined in the
proposed rule) to pursue the fund's principal investment strategy/
strategies? [Y/N]
d. Is the fund part of a fund complex? [Y/N]
e. Please include any additional general identifying information
that you wish to provide, that could add context for your other
feedback on the proposal.

Item 2: Derivatives Risk Management Program

Instructions: If you believe the fund would be required to adopt and
implement a derivatives risk management program under the proposed
rules, please answer the following questions. If you do not believe
so, please proceed to Item 4.
a. The proposed derivatives risk management program requirement
would include the following seven elements. In the following chart,
please indicate which of the proposed program elements you think
would be the most expensive for the fund to implement and which
would be least expensive to implement, by ranking the following
elements from one (1)--most expensive--through seven (7)--least
expensive--using each number only once. If you have any comments
about the factors informing your analysis, please include.

------------------------------------------------------------------------
                                Rank by cost (1--
 Derivatives risk management   most expensive; 7--
      program elements        least expensive) Use        Comments
                                each number once
------------------------------------------------------------------------
(a) Risk identification and
 assessment
------------------------------------------------------------------------
(b) Risk guidelines
------------------------------------------------------------------------
(c) Stress testing
------------------------------------------------------------------------
(d) Backtesting
------------------------------------------------------------------------
(e) Internal reporting and
 escalation
------------------------------------------------------------------------
(f) Periodic review of the
 program
------------------------------------------------------------------------
(g) Board reporting and
 oversight
------------------------------------------------------------------------

b. Implementation timing.
    (1.) How many months do you think it would take the fund to
adopt and implement a derivatives risk management program (check one
box)?

----------------------------------------------------------------------------------------------------------------
     6 months-12 months          12 months-18 months          18 months-24 months             >24 months
----------------------------------------------------------------------------------------------------------------
                    [ ]                          [ ]                          [ ]                         [ ]
----------------------------------------------------------------------------------------------------------------

    (2.) If the response above is more than 12 months, what would
help to shorten that time period?
    (3.) Please provide any explanatory notes that you would like to
include.
c. Implementation cost.
    (1.) Approximately how much do you think it would cost the fund
to implement a derivatives risk management program (in terms of
combined internal and external costs) (check one box)?

----------------------------------------------------------------------------------------------------------------
                                               Estimated cost ($)
-----------------------------------------------------------------------------------------------------------------
        $0-$150,000               $150,001-$350,000            $350,001-$500,000               >$500,000
----------------------------------------------------------------------------------------------------------------
                    [ ]                          [ ]                          [ ]                         [ ]
----------------------------------------------------------------------------------------------------------------

    (2.) Please include any explanatory notes that you would like to
provide. These could describe, for example, how a fund that is part
of a fund complex might share these costs, any particular cost
considerations for a fund that uses sub-advisers, or the extent to
which the estimated costs would arise from internal versus external
costs (such as those associated with third-party service providers).
d. To the extent that the fund is a sub-advised fund, would any of
the proposed program elements present any particular challenges for
the fund to implement in light of its advisory structure? If so
please explain.

Item 3: Limit on Fund Leverage Risk

Instructions: The proposed rule would require certain funds to
comply with a limit on fund leverage risk based on value at risk
(``VaR''). The following questions relate to this proposed
requirement.
a. Does the fund currently use VaR testing? [Y/N]
b. Implementation cost.
    (1.) If you anticipate that, if the proposed rules were adopted,
the fund would have to comply with the VaR testing requirement,
approximately how much do you think it would cost the fund to
implement the proposed VaR test requirements (in terms of combined
internal and external costs) (check one box)?

----------------------------------------------------------------------------------------------------------------
                                               Estimated cost ($)
-----------------------------------------------------------------------------------------------------------------
         $0-$25,000                $25,001-$50,000              $50,001-$75,000                >$75,000
----------------------------------------------------------------------------------------------------------------
                    [ ]                          [ ]                          [ ]                         [ ]
----------------------------------------------------------------------------------------------------------------

    (2.) Please include any explanatory notes that you would like to
provide. These could describe, for example, how a fund that is part
of a fund complex might share these costs, any particular cost
considerations for a fund that uses sub-advisers, or the extent to
which the estimated costs would arise from internal versus external
costs (such as those associated with third-party service providers).
c. Use of relative VaR test and absolute VaR test.
    (1.) Would the fund anticipate that it would use the proposed
relative VaR test or the proposed absolute VaR test (check one box)?

----------------------------------------------------------------------------------------------------------------
                   Relative VaR test                                        Absolute VaR test
----------------------------------------------------------------------------------------------------------------
                                             [ ]                                                      [ ]
----------------------------------------------------------------------------------------------------------------

    (2.) If you anticipate that you would use the proposed relative
VaR test, and you already disclose a benchmark index for performance
disclosure, do you anticipate that the index would also qualify as a
designated reference index under the proposed rule? [Y/N]
d. To the extent that the fund is a sub-advised fund, would the
proposed limit on fund leverage risk present any particular
challenges for the fund to implement in light of its advisory
structure? If so please explain.

Item 4: Limited Derivatives Users

Instructions: If you believe the fund would qualify as a limited
derivatives user under the proposed rule, please answer the
following questions. If you do not believe so, please proceed to
question 5.
a. Please state which basis for the proposed limited derivatives
user exception you think the fund would seek to rely on (check one
box):

----------------------------------------------------------------------------------------------------------------
                                                             Currency hedging exception  (The fund only uses
 Exposure-based test  (The fund's derivatives exposure   derivatives for currency hedging  purposes as specified
  does not exceed  10% of the fund's net asset value)                     in the proposed rule)
----------------------------------------------------------------------------------------------------------------
                                             [ ]                                                      [ ]
----------------------------------------------------------------------------------------------------------------

b. Should the rule include any other bases for a fund to qualify as
a limited derivatives user? What alternative approach and why?
c. Implementation cost.
    (1.) Approximately how much do you think it would cost the fund
to adopt and implement policies and procedures reasonably designed
to manage its derivatives risks (in terms of combined internal and
external costs) (check one box)?

----------------------------------------------------------------------------------------------------------------
                                               Estimated cost ($)
-----------------------------------------------------------------------------------------------------------------
    $0-$25,000          $25,001-$50,000           $50,001-$75,000          $75,001-$100,000         >$100,000
----------------------------------------------------------------------------------------------------------------
           [ ]                       [ ]                       [ ]                      [ ]               [ ]
----------------------------------------------------------------------------------------------------------------

    (2.) Please include any explanatory notes that you would like to
provide.

Item 5: Recordkeeping

a. Approximately how much would it cost the fund to comply with the
proposed recordkeeping requirements associated with rule 18f-4 (in
terms of combined internal and external costs)?
b. Should we modify any of the proposed recordkeeping requirements,
and if so, how?

Item 6: Reporting Requirements

a. Approximately how much would it cost the fund to comply with the
proposed new requirements for reporting on Form N-PORT, Form N-CEN,
and Form N-RN (in terms of combined internal and external costs)?
b. Should we modify any of the proposed reporting requirements, and
if so, how?

Item 7: Other Feedback on Proposed Rule 18f-4 and Proposed New
Reporting Requirements

Instructions: Please include any other additional suggestions or
comments about proposed rule 18f-4, and/or the proposed new
reporting requirements, that you would like to provide.

We will post your feedback on our website. Your submission will be
posted without change; we do not redact or edit personal identifying
information from submissions. You should only make submissions that
you wish to make available publicly.

If you are interested in more information on the proposal, or want
to provide feedback on additional questions, click here. Comments
should be received on or before March 24, 2020

Thank You!

Other Ways to Submit Your Feedback
You also can send us feedback in the following ways (include the
file number S7-24-15 in your response):

Print Your Responses and Mail
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090

Print a PDF of Your Responses and Email
Use the printer friendly page and select a PDF printer to create a
file you can email to<EMAIL_ADDRESS>
Print a Blank Copy of This Flier, Fill it Out, and Mail
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090

IX. APPENDIX B

    Note: Appendix B will not appear in the Code of Federal
Regulations. Feedback Flier: Sales Practices Rules for Transacting
in Shares of Leveraged/Inverse Investment Vehicles

    We are proposing two new sales practices rules--rule 15l-2 under
the Securities Exchange Act of 1934, and Rule 211(h)-1 under the
Investment Advisers Act of 1940--that would require a broker,
dealer, or

registered investment adviser to exercise due diligence in approving
a retail customer's or client's account to buy or sell shares of
certain ``leveraged/inverse investment vehicles.'' More information
about our proposal is available at https://www.sec.gov/rules/proposed/2019/34-87607.pdf.
    We are particularly interested in learning what small broker-
dealers and investment advisers think about the proposed new sales
practices rules' requirements. Hearing from these smaller firms
could help us learn how our proposed rules would affect them, and
evaluate how we could address any unintended consequences resulting
from the cost and effort of regulatory compliance while still
promoting investor protection. We would appreciate your feedback on
any or all of the following questions.
    All of the following questions are optional, including any
questions that ask about identifying information. Please note that
responses to these questions--including any other general
identifying information you provide--will be made public.

Item 1: General Identifying Information

Instructions: At your option, you may include general identifying
information that would help us contextualize your other feedback on
the proposal. This information could include responses to the
following questions, as well as any other general identifying
information you would like to provide. Responses to these items--
like responses to the other items on this Feedback Flier--will be
made public.
a. Is the firm a Commission-registered investment adviser or a
broker-dealer?
b. What is the size of the firm in terms of:
    (1.) The number of retail investors (as defined in the release)?
    (2.) For Investment Advisers, regulatory assets under
management?
    (3.) For broker-dealers, regulatory net capital?
    (4.) Other (please specify)?
c. Please include any additional general identifying information
that you wish to provide, that could add context to your other
feedback on the proposal.
d. Does the firm accept orders from or place orders for the accounts
of retail investors to buy or sell shares of leveraged/inverse
investment vehicles (as defined in the proposed sales practices
rules)?

Item 2: Cost To Comply With the Proposed Due Diligence and Account
Approval Requirements

a. What do you expect the cost to your firm would be in order to
comply with these proposed requirements (in terms of combined
internal and external costs)?
    (1.) For an investment adviser (check one box):

------------------------------------------------------------------------
                           Estimated cost ($)
-------------------------------------------------------------------------
       $0-$5,000              $5,001-$10,000             >$10,000
------------------------------------------------------------------------
                 [ ]                      [ ]                     [ ]
------------------------------------------------------------------------

    (2.) For a broker-dealer (check one box):

------------------------------------------------------------------------
                           Estimated cost ($)
-------------------------------------------------------------------------
       $0-$25,000            $25,001-$50,000             >$50,000
------------------------------------------------------------------------
                 [ ]                      [ ]                     [ ]
------------------------------------------------------------------------

b. Are there any less expensive alternatives to the proposed
requirements you can suggest that would still preserve the proposed
rules' intended investor protection safeguards?

Item 3: Other Feedback on Proposed Sales Practices Rules

Instructions: Please include any other additional suggestions or
comments about the proposed sales practices rules that you would
like to provide.

We will post your feedback on our website. Your submission will be
posted without change; we do not redact or edit personal identifying
information from submissions. You should only make submissions that
you wish to make available publicly.

If you are interested in more information on the proposal, or want
to provide feedback on additional questions, click here. Comments
should be received on or before March 24, 2020.

Thank You!

Other Ways to Submit Your Feedback
You also can send us feedback in the following ways (include the
file number S7-24-15 in your response):

Print Your Responses and Mail
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090

Print a PDF of Your Responses and Email
Use the printer friendly page and select a PDF printer to create a
file you can email to<EMAIL_ADDRESS>
Print a Blank Copy of This Flier, Fill it Out, and Mail
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090

[FR Doc. 2020-00040 Filed 1-23-20; 8:45 am]
 BILLING CODE 8011-01-P