[Federal Register Volume 83, Number 132 (Tuesday, July 10, 2018)]
[Rules and Regulations]
[Pages 31859-31877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14366]



[[Page 31859]]

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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 274

[Release No. IC-33142; File No. S7-04-18]
RIN 3235-AM30


Investment Company Liquidity Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to its forms designed to improve the reporting and 
disclosure of liquidity information by registered open-end investment 
companies. The Commission is adopting a new requirement that funds 
disclose information about the operation and effectiveness of their 
liquidity risk management program in their reports to shareholders. The 
Commission in turn is rescinding the requirement in Form N-PORT under 
the Investment Company Act of 1940 that funds publicly disclose 
aggregate liquidity classification information about their portfolios. 
In addition, the Commission is adopting amendments to Form N-PORT that 
will allow funds classifying the liquidity of their investments 
pursuant to their liquidity risk management programs to report multiple 
liquidity classification categories for a single position under 
specified circumstances. The Commission also is adding a new 
requirement to Form N-PORT that funds and other registrants report 
their holdings of cash and cash equivalents.

DATES: Effective Date: This rule is effective September 10, 2018.
    Compliance Dates: The applicable compliance dates are discussed in 
section II.D of this final rule.

FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman, Senior Counsel, or 
Thoreau Bartmann, Senior Special Counsel, at (202) 551-6792, Division 
of Investment Management, Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549-8549.

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

Contents

I. Background
II. Discussion
    A. Amendments to Liquidity Public Reporting and Disclosure 
Requirements
    B. Amendments to Liquidity Reporting Requirements
    C. Treasury Asset Management Report and Evaluation of Other 
Approaches
    D. Compliance Dates
III. Economic Analysis
    A. Introduction
    B. Economic Baseline
    C. Economic Impacts
    D. Reasonable Alternatives
IV. Paperwork Reduction Act
    A. Introduction
    B. Form N-PORT
    C. Form N-1A
V. Final Regulatory Flexibility Analysis
    A. Need for the Amendments
    B. Significant Issues Raised by Public Comment
    C. Small Entities Subject to the Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Authority
Text of Rules and Forms

I. Background

    On October 13, 2016, the Commission adopted new rules and forms as 
well as amendments to its rules and forms to modernize the reporting 
and disclosure of information by registered investment companies 
(``funds''),\1\ including information about the liquidity of funds' 
portfolios.\2\ In particular, the Commission adopted new Form N-PORT, 
which requires mutual funds and ETFs to report monthly portfolio 
investment information to the Commission in a structured data 
format.\3\ The Commission also adopted 17 CFR 270.22e-4 (``rule 22e-
4'') and related reforms to enhance the regulatory framework for 
liquidity risk management of funds.\4\ Among other things, rule 22e-4 
requires a fund to classify each portfolio investment into one of four 
defined liquidity categories, sometimes referred to as ``buckets.'' \5\
---------------------------------------------------------------------------

    \1\ The term ``funds'' used in this release includes open-end 
management companies, including exchange-traded funds (``ETFs''), 
and excludes money market funds.
    \2\ Investment Company Reporting Modernization, Investment 
Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 
2016)] (``Reporting Modernization Adopting Release''). See also 
Investment Company Liquidity Risk Management Programs, Investment 
Company Act Release No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18, 
2016)] (``Liquidity Adopting Release'').
    \3\ Registered money market funds and small business investment 
companies are exempt from Form N-PORT reporting requirements.
    \4\ Specifically, we adopted rule 22e-4 and 17 CFR 270.30b1-10 
(``rule 30b1-10''), new Form N-LIQUID, as well as amendments to 
Forms N-1A, N-PORT, and N-CEN. See Liquidity Adopting Release, supra 
footnote 2.
    \5\ Rule 22e-4 requires each fund to adopt and implement a 
written liquidity risk management program reasonably designed to 
assess and manage the fund's liquidity risk. A fund's liquidity risk 
management program must incorporate certain specified elements, 
including the requirement that a fund classify the liquidity of each 
of the fund's portfolio investments into one of four defined 
liquidity categories: Highly liquid investments, moderately liquid 
investments, less liquid investments, and illiquid investments 
(``classification''). This classification is based on the number of 
days in which a fund reasonably expects an investment would be 
convertible to cash (or, in the case of the less-liquid and illiquid 
categories, sold or disposed of) without the conversion 
significantly changing the market value of the investment. Rule 22e-
4 requires funds to establish a highly liquid investment minimum, 
and includes requirements related to policies and procedures on 
redemptions in kind and evaluation of the liquidity of new unit 
investment trusts (``UITs''). Rule 22e-4 also includes other 
required elements, such as limits on purchases of illiquid 
investments, reporting to the board, and recordkeeping.
---------------------------------------------------------------------------

    In connection with the liquidity classification requirement of rule 
22e-4, a fund is required to report confidentially to the Commission 
the liquidity classification assigned to each of the fund's portfolio 
investments on Form N-PORT.\6\ As originally adopted, Form N-PORT 
requires a fund to assign each portfolio holding to a single 
classification bucket and publicly disclose the aggregate percentage of 
its portfolio investments falling into each of the four liquidity 
classification categories noted above.\7\ Form N-PORT did not require 
funds to report the cash they hold.\8\
---------------------------------------------------------------------------

    \6\ Item C.7 of Form N-PORT.
    \7\ Item B.8.a of Form N-PORT. This information would be 
disclosed to the public only for the third month of each fiscal 
quarter with a 60-day delay. Form N-PORT also required public 
reporting of the percentage of a fund's highly liquid investments 
that it has segregated to cover, or pledged to satisfy margin 
requirements in connection with, derivatives transactions that are 
classified as moderately liquid, less liquid, or illiquid 
investments. Item B.8.b of Form N-PORT.
    \8\ Although the requirements of rule 22e-4 and Form N-PORT 
discussed above are in effect, the compliance date has not yet 
occurred. Accordingly, no funds are yet reporting this liquidity-
related information on Form N-PORT. We previously extended the 
compliance date for certain classification-related provisions of 
rule 22e-4 and their associated Form N-PORT reporting requirements 
by six months. See Investment Company Liquidity Risk Management 
Programs; Commission Guidance for In-Kind ETFs, Investment Company 
Act Release No. 33010 (Feb. 22, 2018) [83 FR 8342 (Feb. 27, 2018)] 
(``Liquidity Extension Release'').
---------------------------------------------------------------------------

    Rule 22e-4 and the related rules and forms were designed to promote 
effective liquidity risk management throughout the fund industry and to 
enhance disclosure regarding fund liquidity and redemption 
practices.\9\ However, since we adopted these requirements, interested 
parties have

[[Page 31860]]

raised concerns that the public disclosure of a fund's aggregate 
liquidity classification information on Form N-PORT may not achieve our 
intended purpose and may confuse and mislead investors.\10\
---------------------------------------------------------------------------

    \9\ See Liquidity Adopting Release, supra footnote 2, at n.112 
and accompanying text.
    \10\ See Investment Company Liquidity Disclosure, Investment 
Company Act Release No. 33046 (Mar. 14, 2018) [83 FR 11905 (Mar. 19, 
2018)] (``Proposing Release'').
---------------------------------------------------------------------------

    In light of these concerns,\11\ we proposed to replace the Form N-
PORT requirement for a fund to publicly report aggregate liquidity 
portfolio classification information on a quarterly basis with new 
disclosure in the fund's annual shareholder report that provides a 
narrative discussion of the operation and effectiveness of the fund's 
liquidity risk management program over the most recently completed 
fiscal year.\12\ We also proposed additional amendments to Form N-PORT 
that would allow a fund to report a single portfolio holding in 
multiple classification buckets under defined circumstances where 
splitting the holding into multiple buckets would provide the 
Commission with more or equally accurate information at lower cost to 
funds (and thus, to fund shareholders). Finally, we proposed additional 
amendments to Form N-PORT designed to help us monitor trends in the use 
of cash and cash equivalents and more accurately assess the composition 
of a fund's highly liquid investment minimum (``HLIM'').\13\
---------------------------------------------------------------------------

    \11\ Letters detailing these concerns, as well as letters on the 
Proposing Release, are available at https://www.sec.gov/comments/s7-04-18/s70418.htm (File No. S7-04-18). See, e.g., Letter from SIFMA 
AMG to Chairman Jay Clayton, Commissioner Stein, and Commissioner 
Piwowar (Sept. 12, 2017) (urging the SEC not to publicly disclose 
the liquidity classification information submitted via Form N-PORT); 
Letter from the Investment Company Institute to The Honorable Jay 
Clayton (July 20, 2017) (``ICI Pre-proposal Letter I'').
    \12\ See Proposing Release, supra footnote 10.
    \13\ See id.
---------------------------------------------------------------------------

    We received 24 comment letters on the proposal. A significant 
majority of commenters generally supported replacing public disclosure 
of aggregate liquidity classification information on Form N-PORT with a 
new narrative discussion of a fund's liquidity risk management program 
in its report to shareholders.\14\ Some expressed concerns, however, 
about the placement and content of the discussion regarding the 
operation and effectiveness of the fund's liquidity risk management 
program in the annual report, and provided alternatives for us to 
consider.\15\ A few commenters objected to the proposed rescission of 
public aggregate liquidity reporting on Form N-PORT, arguing that 
classification information would be useful and understandable to 
investors, and would not result in the potential negative consequences 
suggested in the proposal.\16\ Commenters generally supported the other 
proposed changes to Form N-PORT.\17\ In addition, the majority of 
commenters urged us to re-examine more broadly the classification 
requirements and related elements of rule 22e-4.\18\ We discuss in 
Section II.C below additional efforts the Commission and its staff will 
take in relation to rule 22e-4 and its requirements.
---------------------------------------------------------------------------

    \14\ See e.g., Comment Letter of Investment Company Institute 
(May 18, 2018) (``ICI Comment Letter''); Comment Letter of SIFMA AMG 
(May 18, 2018) (``SIFMA AMG Comment Letter''); Comment Letter of 
BlackRock Inc. (May 17, 2018) (``BlackRock Comment Letter'').
    \15\ See e.g., Comment Letter of the Capital Group Companies 
(May 18, 2018) (``Capital Group Comment Letter''); Comment Letter of 
Fidelity Investments (May 18, 2018) (``Fidelity Comment Letter''); 
ICI Comment Letter; Comment Letter of the Investment Adviser 
Association (May 18, 2018) (``IAA Comment Letter'').
    \16\ See Comment Letter of Better Markets (May 18, 2018) 
(``Better Markets Comment Letter''); Comment Letter of Americans for 
Financial Reform Education Fund (``AFR Comment Letter''); See 
Comment Letter of Ya Li, J.D. Candidate, Boston College of Law (May 
1, 2018) (``Ya Li Comment Letter'').
    \17\ See, e.g., Comment Letter of the Independent Directors 
Council (May 17, 2018) (``IDC Comment Letter''), Fidelity Comment 
Letter, and IAA Comment Letter (supporting our proposal to provide 
funds with the option to split a holding into more than one 
classification category in certain circumstances); ICI Comment 
Letter and Comment Letter of State Street Corporation (May 18, 2018) 
(``State Street Comment Letter'') (supporting our proposal to 
require additional disclosure relating to holdings of cash and cash 
equivalents not otherwise reported on Form N-PORT); SIFMA AMG 
Comment Letter and BlackRock Comment Letter (supporting our proposal 
to keep the percentage of the fund's highly liquid investments 
segregated to cover, or pledged to satisfy margin requirements in 
connection with, certain derivatives transactions non-public).
    \18\ See e.g., Comment Letter of Federated Investors, Inc. (May 
15, 2018) (``Federated Comment Letter''); IAA Comment Letter; 
Comment Letter of the Vanguard Group, Inc. (May 17, 2018) 
(``Vanguard Comment Letter'').
---------------------------------------------------------------------------

    Today, after considering comments we received, we are adopting 
amendments to Forms N-PORT and N-1A largely as proposed.\19\ The 
amendments will replace the requirement in Form N-PORT that a fund 
publicly disclose on an aggregate basis the percentage of its 
investments allocated to each liquidity classification category with a 
new narrative discussion in the fund's shareholder report regarding its 
liquidity risk management program.\20\
---------------------------------------------------------------------------

    \19\ If any provision of rule 22e-4 or the related rules and 
forms, including the amendments adopted today, or the application 
thereof to any person or circumstance, is held to be invalid, such 
invalidity shall not affect other provisions or the application of 
such provisions to other persons or circumstances that can be given 
effect without the invalid provision or application.
    \20\ We also are adopting, as proposed, a related change to make 
non-public (but not eliminate) the disclosure required under Item 
B.8 of Form N-PORT about the percentage of a fund's highly liquid 
investments segregated to cover, or pledged to satisfy margin 
requirements in connection with, certain derivatives transactions, 
given that this information is only relevant when viewed together 
with full liquidity classification information. See Item B.8.b of 
Form N-PORT. The commenters that discussed this change supported 
keeping it non-public. See, e.g., ICI Comment Letter.
---------------------------------------------------------------------------

    The Commission also is adopting amendments to Form N-PORT that will 
provide funds the flexibility to split a fund's portfolio holdings into 
more than one classification category in three specified circumstances 
when split reporting equally or more accurately reflects the liquidity 
of the investment or eases cost burdens. Finally, we are adopting as 
proposed a Form N-PORT requirement that funds, and other registrants, 
disclose their holdings of cash and cash equivalents not reported in 
Parts C and D of the Form.\21\ We discuss the comments and changes from 
the proposal below.
---------------------------------------------------------------------------

    \21\ See Proposing Release, supra footnote 10, at n.15 (noting 
that the term ``registrant'' refers to entities required to file 
Form N-PORT, including all registered management investment 
companies, other than money market funds and small business 
investment companies, and all ETFs (regardless of whether they 
operate as UITs or management investment companies)).
---------------------------------------------------------------------------

II. Discussion

A. Amendments to Liquidity Public Reporting and Disclosure Requirements

    Today we are replacing the requirement in Form N-PORT that a fund 
publicly disclose on an aggregate basis the percentage of its 
investments that it has allocated to each liquidity classification 
category with new narrative discussion in the fund's shareholder report 
regarding its liquidity risk management program.\22\ Funds already are 
required to disclose a summary of the principal risks of investing in 
the fund, including liquidity risk if applicable, in its 
prospectus.\23\
---------------------------------------------------------------------------

    \22\ See revised Item B.8 of Form N-PORT and new Item 
27(d)(7)(b) of Form N-1A.
    \23\ See Item 4(b) of Form N-1A. In addition, Item 9(c) of Form 
N-1A requires a fund to disclose all principal risks of investing in 
the fund, including the risks to which the fund's particular 
portfolio as a whole is expected to be subject and the circumstances 
reasonably likely to affect adversely the fund's net asset value, 
yield, or total return.
---------------------------------------------------------------------------

    The new narrative discussion will include disclosure about the 
operation and effectiveness of the fund's implementation of its 
required liquidity risk management program. Additionally, we are 
clarifying how funds should discuss liquidity events that materially 
affected performance in the management's discussion of fund performance 
(``MDFP'') section of the annual shareholder report.\24\ We expect

[[Page 31861]]

that the clarity we are providing and the shareholder report disclosure 
we are adopting will improve funds' disclosure about liquidity events 
that materially affect fund performance as well as the operation and 
effectiveness of their liquidity risk management programs.\25\ These 
disclosures will provide new and existing investors with a holistic 
view of the liquidity risks of the fund and how effectively the fund's 
liquidity risk management program managed those risks on an ongoing 
basis over the reporting period. This revised approach is designed to 
provide accessible and useful disclosure about liquidity risks and risk 
management to investors, with appropriate context, so that investors 
have a more comprehensive picture of the fund's liquidity risks and 
their management and may understand the nature and relevance of these 
risks to their investments.
---------------------------------------------------------------------------

    \24\ See infra footnote 59 and accompanying text.
    \25\ See new Item 27(d)(7)(b) of Form N-1A.
---------------------------------------------------------------------------

1. Public Aggregate Liquidity Profile
    As noted in the Proposing Release, since the Commission adopted 
rule 22e-4 and the related reforms, Commission staff has engaged 
extensively with interested parties and we have received letters from 
industry participants discussing the complexities of the classification 
process. These letters raised three general types of concerns that 
informed our revised approach to public fund liquidity-related 
disclosure. First, the commenters described how variations in 
methodologies and assumptions used to conduct liquidity classification 
can significantly affect the classification information reported on 
Form N-PORT in ways that investors may not understand 
(``subjectivity'').\26\ Second, they suggested that Form N-PORT may not 
be the most accessible and useful way to communicate information about 
liquidity risk and may not provide the necessary context for investors 
to understand how the fund's classification results relate to its 
liquidity risk and risk management (``lack of context'').\27\ Third, 
they argued that because this reporting item on Form N-PORT singles out 
liquidity risk, and does not place it in a broader context of the risks 
and factors affecting a fund's risk, returns, and performance, it may 
inappropriately focus investors on one investing risk over others 
(``liquidity risk in isolation'').\28\
---------------------------------------------------------------------------

    \26\ See Proposing Release, supra footnote 10, at nn.20-27 and 
accompanying text.
    \27\ See id., at nn.28-30 and accompanying text.
    \28\ See id., at n.31 and accompanying text.
---------------------------------------------------------------------------

    As we discussed in the Proposing Release, these concerns led us to 
propose a new approach to liquidity-related disclosure. Most commenters 
on the proposal agreed with our approach, and supported replacing 
quarterly public disclosure of aggregate liquidity classification 
information on Form N-PORT with a new requirement that funds discuss 
the operation and effectiveness of their liquidity risk management 
program in their shareholder reports.\29\ These commenters generally 
reiterated the concerns that led us to propose these changes, stating 
that the new approach would be less likely to confuse or mislead 
investors.\30\ These commenters emphasized that classification data is 
inherently subject to variability due to model design and the 
assumptions used, and that this model risk introduces yet another 
element of subjectivity to the classification process.\31\ Several 
commenters also argued that the forward-looking nature of 
classification data, which is based on assumptions about how fast a 
fund could sell securities, makes the data inappropriate for public 
consumption.\32\
---------------------------------------------------------------------------

    \29\ See, e.g., IDC Comment Letter; BlackRock Comment Letter; 
SIFMA AMG Comment Letter.
    \30\ See, e.g., IDC Comment Letter (``A narrative discussion 
about a fund's liquidity risk management program would provide 
shareholders with clearer, more understandable, and more useful 
information about the fund--in plain English.'').
    \31\ See Comment Letter of MSCI (May 18, 2018) (``MSCI Comment 
Letter'').
    \32\ See, e.g., ICI Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    However, a few commenters objected to the proposed amendments, 
arguing that investors would benefit from being able to access the 
aggregated liquidity bucketing information of the funds in which they 
invest.\33\ They argued that the Commission should err on the side of 
providing more information to investors about their funds, rather than 
less.\34\ While these commenters acknowledged that there may be 
subjectivity in funds' classification decisions, they argued that 
subjectivity is inherent in finance and the use of subjective judgments 
was an intended consequence of the rule.\35\ One commenter stated that 
replacing a ``quantitative measure with a qualitative discussion is an 
inherently more subjective approach.'' \36\ One commenter also 
suggested that investors are capable of understanding the aggregate 
liquidity classification data and weighing its value in the context of 
other types of disclosure and information available to them.\37\ 
Finally, one commenter asserted that, because the Commission had not 
engaged in investor testing of classification data, any conclusions as 
to its utility or the potential confusion to investors would not have 
an empirical basis.\38\
---------------------------------------------------------------------------

    \33\ See Ya Li Comment Letter; Better Markets Comment Letter; 
AFR Comment Letter; Comment Letter of Bondview (May 17, 2018) 
(``Bondview Comment Letter'').
    \34\ See Better Markets Comment Letter.
    \35\ See Better Markets Comment Letter; Bondview Comment Letter.
    \36\ See AFR Comment Letter.
    \37\ See Better Markets Comment Letter (arguing that investors 
``can and do read and digest a broad range of information when 
making investment decisions'' and stating that the aggregated 
liquidity classification data ``can easily be understood as it 
simply states the percentages of liquid-to-illiquid holdings a fund 
has in its portfolio. Investors and those who serve them then can 
add this liquidity classification information to their total mix of 
information and make better and more informed investment 
decisions.'').
    \38\ See Better Markets Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that it is important for investors to 
understand the liquidity risks of the funds they hold and how those 
risks are managed. We appreciate commenters' concerns regarding the 
elimination of public disclosure of aggregate liquidity classification 
reporting. We also recognize that subjectivity is inherent in many 
financial decisions and is in fact desirable to some extent in the 
classification information that is reported to us.\39\ However, the 
subjectivity of the classification process when applied to this public 
disclosure concerns us for several specific reasons.
---------------------------------------------------------------------------

    \39\ Liquidity Adopting Release, supra footnote 2, at text 
accompanying n.597.
---------------------------------------------------------------------------

    First, the quantitative presentation of the aggregate liquidity 
information may imply precision and uniformity in a way that obscures 
its subjectivity. When disclosure is clearly subjective, we believe 
investors are likely better able to understand and appreciate its 
nature. In this case, however, we believe the presentation of 
quantitative data may pose a significant risk of confusing and 
misleading investors.\40\ Second, we continue to share the concern 
expressed by many commenters that public dissemination of the aggregate 
classification information, without an accompanying full explanation to 
investors of the underlying subjectivity, model risk, methodological 
decisions, and assumptions that shape this information, may potentially 
be misleading to investors.\41\ Absent that kind of detailed contextual 
explanation, we believe that such aggregate classification data may not 
be useful for investors, as it would not result in an ``apples to 
apples'' comparison between

[[Page 31862]]

funds, and may result in investor confusion if they believe it 
does.\42\ Additionally, we continue to believe that public 
dissemination of the aggregate classification information could create 
perverse incentives to classify investments as more liquid, and may 
inappropriately highlight liquidity risk compared to other, potentially 
more salient risks of the fund.\43\ Finally, we are concerned that 
disclosing funds' aggregate liquidity profile may potentially create 
risks of coordinated investment behavior, if funds were to create more 
correlated portfolios by purchasing investments that they believed 
third parties, such as investors or regulators, may view as ``more 
liquid.'' \44\
---------------------------------------------------------------------------

    \40\ For example, because the aggregate liquidity profile would 
be a backward looking review of a fund's liquidity presented only 
quarterly, with a 60-day delay, it may be misleading if investors 
were to base investing decisions on this information without being 
provided a significant amount of additional context about its 
staleness.
    \41\ See Proposing Release, supra footnote 10, at n.32.
    \42\ See Proposing Release, supra footnote 10, at text following 
n.13.
    \43\ See Proposing Release, supra footnote 10.
    \44\ See ICI Pre-proposal Letter I. These risks may both 
increase the possibility of correlated market movements in times of 
stress and may potentially reduce the utility of the classification 
data reported to us.
---------------------------------------------------------------------------

    Additionally, we do not believe it is appropriate to adapt Form N-
PORT to add the level of detail and narrative context that we believe 
would be necessary for investors to appreciate better the fund's 
liquidity risk profile and the subjective nature of classification. The 
commenters who addressed potentially adapting Form N-PORT generally 
agreed that it may take significant detailed disclosure and nuanced 
explanation to effectively inform investors about the subjectivity and 
limitations of aggregate liquidity classification information so as to 
allow them to properly make use of the information.\45\ Such a long 
narrative discussion would not be consistent with the nature of, and 
could undermine the purpose of, Form N-PORT.\46\ Also, to the extent 
that such disclosure would need to be granular and detailed to 
effectively explain the process of compiling the liquidity information, 
it is not consistent with the careful balancing of investor interests 
that the Commission performed in determining to require disclosure of 
sensitive granular information, including position-level data, only on 
a non-public basis.
---------------------------------------------------------------------------

    \45\ See, e.g., MSCI Comment Letter (``While we are generally in 
favor of promoting public transparency about fund liquidity, we 
agree with [the proposal]. The classification involves a high level 
of model risk . . . which does not allow a direct comparison of 
results obtained from different funds unless more and more technical 
information is provided on the nature of the models and the 
parameters used to generate the result.'').
    \46\ See Proposing Release, supra footnote 10, at n.33 (noting 
that ``due to the variability and subjective inputs required to 
engage in liquidity classification under rule 22e-4, providing 
effective information about liquidity classifications under that 
rule to investors poses more difficult and different challenges than 
the other data that is publicly disclosed on Form N-PORT, which is 
more objective and less likely to vary between funds based on their 
particular facts and circumstances''). See also Comment Letter of 
J.P. Morgan Asset Management (May 18, 2018) (``J.P. Morgan Comment 
Letter'') (``It would not be practical to provide an investor-
friendly explanation of each input, and associated effect on the 
classification output. Absent this information, however, investors 
may reasonably believe that they are looking at an objective 
assessment of a fund's liquidity profile.'').
---------------------------------------------------------------------------

    For these reasons, and in light of the concerns above, it is our 
judgment that effective disclosure of liquidity risks and their 
management would be better achieved through prospectus and shareholder 
report disclosure rather than Form N-PORT. Most commenters agreed, 
suggesting that shareholder report disclosure would have the benefit of 
allowing funds to produce tailored disclosure suited to the particular 
liquidity risks and management practices of the specific fund.\47\ This 
would avoid use of a one-size-fits-all approach when providing 
liquidity risk information to investors, and would avoid giving 
investors the ``false impression that they can rely on the sole results 
of time bucketing for comparing liquidity of different funds in making 
their investment decisions.'' \48\ Accordingly, we are adopting the 
amendments to Form N-PORT eliminating public disclosure of aggregate 
liquidity classification information as proposed.
---------------------------------------------------------------------------

    \47\ See, e.g., SIFMA AMG Comment Letter (``AMG believes the 
proposal strikes the right balance and appropriately provides funds 
the flexibility to tailor their disclosure in the most meaningful 
way for their investors.''); IDC Comment Letter.
    \48\ See MSCI Comment Letter.
---------------------------------------------------------------------------

2. Shareholder Report Liquidity Risk Disclosure
    We also are adopting, largely as proposed, a new requirement for 
funds to discuss briefly the operation and effectiveness of a fund's 
liquidity risk management program in the fund's report to shareholders. 
In response to commenters, we are moving this discussion of the 
operation and effectiveness of a fund's liquidity risk management 
program from the MDFP section of the annual report to a new section of 
the shareholder report (annual or semi-annual) following the discussion 
of board approval of advisory contracts.\49\ As proposed, this 
subsection will require funds to discuss the operation and 
effectiveness of their liquidity risk management program over the 
period covered. However, funds will have flexibility to cover an annual 
period that does not coincide with the fund's most recently completed 
fiscal year.\50\
---------------------------------------------------------------------------

    \49\ New Item 27(d)(7)(b) of Form N-1A.
    \50\ The item will require a discussion of the operation and 
effectiveness of the fund's liquidity risk management program during 
the period covered as part of the board's annual review of the 
funds' liquidity risk management program. Rule 22e-4(b)(2)(iii) 
requires a fund board to review, no less frequently than annually, a 
report prepared by the program administrator that addresses the 
operation of the program and its adequacy and effectiveness.
---------------------------------------------------------------------------

    The majority of commenters generally agreed with our proposed 
requirement that funds provide a narrative discussion of the operation 
and effectiveness of a fund's liquidity risk management program, noting 
that such disclosure is a better way to provide investors with useful 
and accessible liquidity information and reduces the risk of investor 
confusion.\51\ However, some commenters suggested certain modifications 
to our proposed disclosure, largely focused on its placement.\52\ These 
commenters objected to including the narrative disclosure in the MDFP, 
arguing that, in many cases, the required liquidity disclosures would 
not concern primary drivers of fund performance. Commenters had a 
variety of ideas on where disclosure on the operation and effectiveness 
of the liquidity risk management program should be placed, with some 
suggesting that it be in its own subsection within the annual 
report,\53\ in the fund's Statement of Additional Information 
(``SAI''),\54\ or in the section of the shareholder report discussing 
the bases for the board's approval of the advisory contract.\55\ 
Several commenters also suggested that allowing funds to include the 
new disclosure in either the fund's annual or

[[Page 31863]]

semiannual report would ease some of the cost burdens of compliance 
with the new requirement by allowing funds to synchronize the new 
shareholder report disclosure with liquidity reporting to the 
board.\56\
---------------------------------------------------------------------------

    \51\ See e.g., SIFMA AMG Comment Letter; Comment Letter of 
Wellington Management Company LLP (May 18, 2018) (``Wellington 
Comment Letter''); Fidelity Comment Letter; State Street Comment 
Letter.
    \52\ One commenter suggested that the new narrative disclosure 
included in the shareholder report be reported in a structured 
format. See Comment Letter of XBRL US, Inc. (May 18, 2018) (``XBRL 
US Comment Letter''). We are not creating an obligation to use a 
structured format at this time, but will consider the issue in 
connection with other Commission initiatives. See Fund Retail 
Investor Experience and Disclosure Request for Comment, Investment 
Company Act Release No. 33113 (June 5, 2018) [83 FR 26891 (June 11, 
2018)].
    \53\ See e.g., J.P. Morgan Comment Letter; BlackRock Comment 
Letter.
    \54\ See Comment Letter of T. Rowe Price Associates, Inc. (May 
18, 2018) (``T. Rowe Comment Letter'').
    \55\ See e.g., IAA Comment Letter (stating that, because a 
fund's liquidity risk management program is within the purview of 
the fund's board, the new disclosure should ``recognize the board's 
governance function and such disclosure should be included in the 
section of the form that covers the process of fund operations and 
factors considered by the board in its review of the liquidity risk 
management program'').
    \56\ See, e.g., ICI Comment Letter (arguing that, if the 
required liquidity risk management disclosure must be included in 
the annual report, fund complexes offering multiple funds with 
fiscal year-ends spread throughout the year will be frustrated in 
their ability to leverage their board reporting for this new 
shareholder report requirement); Capital Group Comment Letter 
(noting that many fund families are expected to provide the annual 
liquidity risk management report to the board of all their funds at 
the same time once a year without regard to fiscal year ends).
---------------------------------------------------------------------------

    We believe the approach to shareholder report liquidity disclosure 
that we are adopting addresses commenters' concerns. Funds are required 
to discuss in their MDFP factors that materially affected performance 
of the fund during the most recently completed fiscal year.\57\ 
Liquidity events are factors that may materially affect a fund's 
performance. Accordingly, to the extent a liquidity event has such an 
effect, this event must be discussed in the MDFP.\58\ This discussion 
of liquidity events in the MDFP should include sufficient specificity 
that investors can understand the liquidity event, how it affected 
performance, and any other relevant market conditions. This is 
consistent with the views of the commenters who asked that we clarify 
that factors that affected performance would include liquidity events 
and that such events should still be discussed in the MDFP section, 
even if we were to move the required new disclosure to a new 
section.\59\
---------------------------------------------------------------------------

    \57\ See Disclosure of Mutual Fund Performance and Portfolio 
Managers, Investment Company Act Release No. 19382 (Apr. 6, 1993) 
[58 FR 21927 (Apr. 26, 1993)] (noting that the MDFP requires funds 
to ``explain what happened during the previous fiscal year and why 
it happened'').
    \58\ See Item 27(b)(7)(i) of Form N-1A. See also Shareholder 
Reports and Quarterly Portfolio Disclosure of Registered Management 
Investment Companies, Investment Company Act Release No. 26372 (Aug. 
9, 2004) [69 FR 49805 (Aug. 12, 2004)] (noting that ``investors rely 
on MDFP to explain the investment operations and performance of a 
mutual fund''). We understand that because liquidity events can 
materially affect fund performance during a fiscal year, funds 
currently discuss such events in their MDFP.
    \59\ See, e.g., T. Rowe Comment Letter (suggesting that 
discussion of the overall structure and operations of the liquidity 
risk management program should be in the fund's SAI, but that the 
MDFP section could still contain disclosure of liquidity events and 
the use of liquidity risk management tools that had a material 
effect on the investment operations and performance of a fund); 
Vanguard Comment Letter (suggesting that focusing the MDFP narrative 
disclosure on material liquidity risks faced during the relevant 
period would help ensure that this disclosure does not become 
boilerplate).
---------------------------------------------------------------------------

    At the same time, we agree with those commenters who argued for 
moving the more operational disclosure outside of the MDFP because this 
information does not directly relate to performance results. Moving 
disclosure about the operation and effectiveness of the liquidity risk 
management program to a new subsection would be more effective and 
would avoid concerns about unduly focusing investors on liquidity risk 
and diluting the MDFP. Moving this disclosure to Item 27(d)(7) of Form 
N-1A may have several other benefits. The MDFP is included only in 
annual reports, not semi-annual reports. By moving this disclosure to a 
new subsection that may be included in either a fund's annual or semi-
annual report,\60\ it will allow funds to synchronize the required 
annual board review of liquidity risk management programs with the 
production of this discussion in the shareholder report, reducing costs 
and allowing funds to provide more effective disclosure.\61\ We believe 
that this new narrative disclosure will complement existing liquidity 
risk disclosure that funds already provide in their prospectus (if it 
is a principal investment risk of the fund) and as part of their 
discussion of the factors that materially affected performance in the 
MDFP. It also should keep more operational disclosure separate from the 
performance-related disclosure required in the MDFP section.
---------------------------------------------------------------------------

    \60\ See new Item 27(d)(7)(b) of Form N-1A. The discussion 
required by Item 27(d)(7)(b) will be included in the shareholder 
report following the board's review of the fund's liquidity risk 
management program. Thus, for example, if the board reviews the 
operation of the fund's liquidity risk management program during the 
first half of a fund's fiscal year, the disclosure will be required 
in the semi-annual report for that period. However, if a board 
reviews the liquidity program more frequently than annually, the 
disclosure need only be included in the annual or semi-annual 
report, not both. See new Instruction to Item 27(d)(7)(b) of Form N-
1A (clarifying that ``[i]f the board reviews the liquidity risk 
management program more frequently than annually, a fund may choose 
to include the discussion of the program's operation and 
effectiveness over the past year in one of either the fund's annual 
or semi-annual reports, but does not need to include it in both 
reports).
    \61\ Allowing this flexibility may result in the narrative 
disclosure potentially not consistently being in a single document 
(the annual report), but instead being in either the annual or semi-
annual report. This may lead to the risk that some investors may not 
review this data if they read only one of these shareholder reports 
and the narrative disclosure is in the other. Nonetheless, we 
believe that the benefits of the flexibility we are providing today 
(both in cost savings and potentially in better disclosure) justify 
this risk.
---------------------------------------------------------------------------

    Several commenters suggested that we exempt funds that primarily 
hold assets that are highly liquid investments (``highly liquid 
funds'') and In-Kind ETFs from including this new narrative disclosure 
about liquidity risk management programs in their shareholder 
reports.\62\ They explained that because such funds face significantly 
lower liquidity risks, and are already treated differently and subject 
to less stringent requirements under rule 22e-4, it would be 
appropriate to exempt them from the requirement.\63\ We are not 
providing such an exemption. Highly liquid funds and In-Kind ETFs are 
exempt from certain requirements under the liquidity rule, but both 
still must have a liquidity risk management program. We believe that 
investors would benefit from a discussion of the operation and 
effectiveness of the liquidity risk management program of these funds, 
much like any other fund.\64\ However, we note that all funds may 
include tailored and proportionate discussion appropriate to the 
liquidity risks they face and the scale of their program. Highly liquid 
funds or In-Kind ETFs may face fewer, or different, liquidity risks 
than other funds, and thus the discussion in their shareholder reports 
may be proportionate or different than for other funds.
---------------------------------------------------------------------------

    \62\ See e.g., IDC Comment Letter; Vanguard Comment Letter; ICI 
Comment Letter; Capital Group Comment Letter. Rule 22e-4, in 
relevant part, defines a ``highly liquid investment'' as any cash 
held by a fund and any investment that the fund reasonably expects 
to be convertible to cash in current market conditions in three 
business days or less without the conversion to cash significantly 
changing the market value of the investment. Rule 22e-4(a)(6). The 
rule defines an ``In-Kind ETF'' as an ETF that meets redemptions 
through in-kind transfers of securities, positions and assets other 
than a de minimis amount of cash and that publishes its portfolio 
holdings daily. Rule 22e-4(a)(9).
    \63\ For example, highly liquid funds and In-Kind ETFs are not 
required to determine an HLIM. See rule 22e-4(b)(1)(iii).
    \64\ Highly liquid funds and In-Kind ETFs must consider a 
variety of factors specific to their operations as part of their 
liquidity risk management program, which may be relevant to 
investors. For example, both types of funds must analyze issues such 
as shareholder or portfolio concentration, holdings of cash and cash 
equivalents, and other factors. In-Kind ETFs must consider factors 
specific to ETFs, such as the operation of the arbitrage function 
and the level of active participation by market participants. See 
rule 22e-4(b)(1).
---------------------------------------------------------------------------

    To satisfy this new disclosure requirement, a fund generally may 
provide information that was provided to the board about the operation 
and effectiveness of the program, and insight into how the program 
functioned over the past year.\65\ This discussion should

[[Page 31864]]

provide investors with enough detail to appreciate the manner in which 
a fund manages its liquidity risk, and could, but is not required to, 
include discussion of the role of the classification process, the 15% 
illiquid investment limit, and the HLIM in the fund's liquidity risk 
management process.
---------------------------------------------------------------------------

    \65\ The disclosure included in new Item 27(d)(7)(b) of Form N-
1A generally should provide a high level summary of the report that 
must be provided to the fund's board under rule 22e-4(b)(2)(iii) 
addressing the operation of the fund's liquidity risk management 
program and the adequacy and effectiveness of its implementation. We 
believe that the conclusions in this report may be largely 
consistent with the overall conclusions disclosed to investors in 
the shareholder report. Therefore, because funds will already need 
to prepare a report on the program for purposes of board reporting, 
we believe that the disclosure requirement we are adopting today 
would be unlikely to create significant additional burdens.
---------------------------------------------------------------------------

    As part of this new disclosure, a fund might opt to discuss the 
particular liquidity risks that it faced over the past year, such as 
significant redemptions, changes in the overall market liquidity of the 
investments the fund holds, or other liquidity risks, and explain how 
those risks were managed and addressed. If the fund faced any 
significant liquidity challenges in the past year, it would discuss how 
those challenges affected the fund and how they were addressed 
(recognizing that this discussion may occur in the new sub-section or 
the MDFP, as appropriate). In the new sub-section, funds also may wish 
to provide context and other supplemental information about how 
liquidity risk is managed in relation to other investment risks of the 
fund. Additionally, one commenter suggested that funds can provide 
investors with useful empirical data metrics that would be informative 
of the fund's liquidity profile.\66\ We agree and believe that funds 
may include, as part of this new sub-section, a discussion of other 
empirical data metrics such as the fund's bid-ask spreads, portfolio 
turnover, or shareholder concentration issues (if any) and their effect 
on the fund's liquidity risk management.\67\ Overall, we believe that 
this disclosure will provide context and an accessible and useful 
explanation of the fund's liquidity risk in relation to its management 
practices and other investment risks as appropriate.
---------------------------------------------------------------------------

    \66\ See MSCI Comment Letter.
    \67\ Id.
---------------------------------------------------------------------------

    We continue to believe, and commenters generally agreed, that this 
new disclosure will better inform investors about the fund's liquidity 
risk management practices than aggregate liquidity classification data 
on Form N-PORT.\68\ The shareholder report disclosure provides funds 
the opportunity to tailor the disclosure to their specific liquidity 
risks, explain the level of subjectivity involved in liquidity 
assessment, and give a narrative description of these risks and how 
they are managed within the context of the fund's investment strategy. 
Accordingly, we are adopting these changes substantially as proposed 
with the modifications discussed above.
---------------------------------------------------------------------------

    \68\ See e.g., SIFMA AMG Comment Letter; Wellington Comment 
Letter; Fidelity Comment Letter; State Street Comment Letter.
---------------------------------------------------------------------------

B. Amendments to Liquidity Reporting Requirements

    We also are adopting certain changes to Form N-PORT related to 
liquidity data. As discussed in the Proposing Release, we believe these 
changes may enhance the liquidity data reported to us.\69\ In addition, 
for some funds, these changes also may reduce cost burdens as they 
comply with the rule.
---------------------------------------------------------------------------

    \69\ See Proposing Release, supra footnote 10, at text 
accompanying n.50.
---------------------------------------------------------------------------

1. Multiple Classification Categories
    We are adopting as proposed amendments to Form N-PORT to allow 
funds the option of splitting a fund's holding into more than one 
classification category in certain specified circumstances.\70\ The 
requirement to classify each entire position into a single 
classification category poses difficulties for certain holdings and may 
not accurately reflect the liquidity of that holding, or be reflective 
of the liquidity risk management practices of the fund. Commenters 
generally supported these proposed amendments to Form N-PORT, noting 
that they appreciated the flexibility and better accuracy that may 
result.\71\ However, as discussed below, three commenters raised 
questions or suggested amendments related to the third circumstance 
(``full liquidation'') \72\ and one questioned the utility of the first 
two circumstances (``differences in liquidity characteristics'' and 
``differences in sub-adviser classifications'').\73\
---------------------------------------------------------------------------

    \70\ See new Item C.7.b of Form N-PORT and Instructions to Item 
C.7 of Form N-PORT. As discussed above, Form N-PORT required a fund 
to classify each holding into a single liquidity bucket.
    \71\ See IDC Comment Letter; Fidelity Comment Letter; IAA 
Comment Letter.
    \72\ SIFMA AMG Comment Letter; ICI Comment Letter; J.P Morgan 
Comment Letter.
    \73\ MSCI Comment Letter.
---------------------------------------------------------------------------

    Other commenters suggested that we not allow funds to classify 
portions of a portfolio holding separately because it would ``reduce 
the utility of the entire bucketing exercise.'' \74\ Similarly, a few 
commenters suggested that allowing funds to classify portions of a 
portfolio holding for some of their holdings could lead to inconsistent 
interpretations of the fund's classifications, and that we should 
instead require a fund to apply a uniform approach across all of its 
holdings.\75\ We believe that allowing funds to split classification in 
these circumstances will actually enhance, rather than reduce the 
utility of the process. Because funds will be required to indicate 
which circumstance led to their choice to split a classification, we 
will be able to identify which positions are split and why. This will 
allow us a more fine-grained understanding of funds' views of a 
position's liquidity. We also do not believe that we should require a 
fund to consistently use a single classification splitting approach for 
all its positions, as different positions may have different but 
equally valid circumstances justifying a split classification.\76\
---------------------------------------------------------------------------

    \74\ See MSCI Comment Letter.
    \75\ See State Street Comment Letter; MSCI Comment Letter.
    \76\ For example, a fund may have multiple sub-advisers that 
differ on position A's classification, and also have a different 
position that has differential liquidity characteristics for part of 
the position. We believe that requiring a fund to only use one of 
the circumstances in such a situation could result in worse, not 
better, data reported to us.
---------------------------------------------------------------------------

    In the first circumstance, even though a holding may nominally be a 
single security, different liquidity-affecting features may justify 
treating the holding as two or more separate investments for liquidity 
classification purposes. For example, a fund might hold an asset that 
includes a put option on a percentage (but not all) of the fund's 
holding of the asset.\77\ Such a feature may significantly affect the 
liquidity characteristics of the portion of the asset subject to the 
feature, such that the fund believes that the two portions of the asset 
should be classified into different buckets.\78\
---------------------------------------------------------------------------

    \77\ For example, if 30% of a holding is subject to a liquidity 
feature such as a put, and the other 70% is not, pursuant to the new 
Instructions to Item C.7 of Form N-PORT, a fund may split the 
position, evaluate the sizes it reasonably anticipates trading for 
each portion of the holding that is subject to the different 
liquidity characteristics, and classify each separate portion 
differently, as appropriate. The fund in such a case would use the 
classification process laid out in rule 22e-4, but would apply it 
separately to each portion of the holding that exhibits different 
liquidity characteristics.
    \78\ As another example, a fund might have purchased a portion 
of an equity position through a private placement that makes those 
shares restricted (and therefore illiquid) while also purchasing 
additional shares of the same security on the open market. In that 
case, certain shares of the same holding may have very different 
liquidity characteristics.
---------------------------------------------------------------------------

    As discussed above, commenters generally agreed that such an 
amendment would allow funds to more accurately reflect their liquidity 
profile and report their holdings in a manner more consistent with 
internal liquidity risk management programs.\79\ However,

[[Page 31865]]

one commenter suggested that this amendment would not be necessary, as 
such differences in liquidity characteristics should already result in 
the position being labeled as separate positions on Form N-PORT.\80\ 
Form N-PORT requires positions to be categorized based on CUSIP or 
other identifier, and in many circumstances, positions with differences 
in liquidity characteristics may have identical identifiers. 
Accordingly, we continue to believe that offering this flexibility is 
appropriate and providing clarity that a position can be split in such 
a circumstance would be useful. Therefore, we are adopting this 
amendment as proposed.
---------------------------------------------------------------------------

    \79\ See, e.g., Comment Letter of ICE Data Services (May 18, 
2018) (``ICE Comment Letter''); Fidelity Comment Letter; ICI Comment 
Letter.
    \80\ MSCI Comment Letter.
---------------------------------------------------------------------------

    Second, it is our understanding that when sub-advisers manage 
different portions or ``sleeves'' of a fund's portfolio, sub-advisers 
may have different views of the liquidity classification of a single 
holding that is held in multiple sleeves.\81\ We believe that allowing 
a fund to report each sub-adviser's classification of the proportional 
holding it manages, instead of putting the entire holding into a single 
category, will avoid the need for costly reconciliation and may provide 
useful information to the Commission on each sub-adviser's 
determination about the investment's liquidity.\82\
---------------------------------------------------------------------------

    \81\ See Proposing Release, supra footnote 10, at text preceding 
n.53.
    \82\ Similar to the ``differences in liquidity characteristics'' 
examples discussed above, the fund effectively will be treating the 
portions of the holding managed by different sub-advisers as if they 
were two separate and distinct investments, and bucketing them 
accordingly. See new Instructions to Item C.7 of Form N-PORT.
---------------------------------------------------------------------------

    Commenters generally agreed that this flexibility would allow for 
these benefits.\83\ However, one commenter suggested that splitting 
positions in this circumstance would merely signal an inconsistency 
between sub-adviser models and would not provide useful 
information.\84\ We disagree, and believe that getting more granular 
insight into sub-advisers' views on liquidity positions may be 
informative in some circumstances. We also believe it is appropriate to 
allow this flexibility to avoid unnecessary costs associated with the 
reconciliation process. Therefore, we are adopting this amendment as 
proposed.\85\
---------------------------------------------------------------------------

    \83\ See, e.g., J.P. Morgan Comment Letter, ICE Comment Letter.
    \84\ MSCI Comment Letter.
    \85\ These amendments also would have the effect of making 
inapplicable staff FAQ 8 on the liquidity rule for funds that choose 
to rely on this option. See Liquidity Staff FAQs, available at 
https://www.sec.gov/investment/investment-company-liquidity-risk-management-programs-faq. FAQ 8 provides guidance for funds on the 
process of reconciling classifications for sub-advisers when 
reporting on Form N-PORT. As this is an option, not a requirement, 
the FAQ would still be relevant for those funds that choose not to 
rely on the optional reporting method. The staff will amend the FAQ 
accordingly.
---------------------------------------------------------------------------

    Third, it is our understanding that for internal risk management 
purposes some funds may currently classify their holdings 
proportionally across buckets, based on an assumed sale of the entire 
position.\86\ In such cases, it is our understanding that allowing a 
fund to have the option of reporting the position assuming a full 
liquidation on Form N-PORT would be more efficient and less costly than 
using a single classification category.\87\ We believe that in such 
cases, this form of reporting will not impair the Commission's 
monitoring and oversight efforts as compared to our approach of 
classifying based on ``sizes that the fund would reasonably anticipate 
trading.'' \88\ Further, we believe the approach, which allows, but 
does not require, funds to use the full liquidation/proportional 
approach, will maintain the quality of the information reported to us 
and potentially be less costly than the approach we adopted.\89\ 
Commenters generally agreed that permitting the option to use such a 
full liquidation approach would be useful,\90\ though one cautioned 
that it would not use such an approach in practice.\91\ This approach 
is optional, and therefore, if it could have negative consequences such 
as inflating the fund's illiquid investment bucket, a fund could choose 
not to use it. We are adopting this third circumstance as proposed.
---------------------------------------------------------------------------

    \86\ See Proposing Release, supra footnote 10, at n.54.
    \87\ See id., at n.55.
    \88\ For example, a fund using the full liquidation approach and 
holding $100 million in Asset A could determine that it would be 
able to convert to cash $30 million of it in 1-3 days, but could 
only convert the remaining $70 million to cash in 3-7 days. This 
fund could choose to split the liquidity classification of the 
holding on Form N-PORT and report an allocation of 30% of Asset A in 
the Highly Liquid category and 70% of Asset A in the Moderately 
Liquid category. Such a fund would not use sizes that it reasonably 
anticipates trading when engaging in this analysis, but instead 
would assume liquidation of the whole position. See Proposing 
Release, supra footnote 10, at n.56.
    \89\ As discussed in the economic analysis below, allowing 
classification in multiple categories may be less costly if it 
better aligns with current fund systems or allows funds to avoid 
incurring costs related to the need to develop systems and processes 
to allocate each holding to exactly one classification bucket.
    \90\ ICI Comment Letter; State Street Comment Letter; MSCI 
Comment Letter.
    \91\ J.P. Morgan Comment Letter (explaining that a full 
liquidation approach may result in negative consequences, by for 
example, inflating the amount of illiquid assets in a fund based 
solely on the calculation method used).
---------------------------------------------------------------------------

    In the proposal, we also requested comment on other circumstances 
where classification splitting might be appropriate. Commenters 
suggested that we also allow certain methods of classification 
splitting when a fund's reasonably anticipated trade size falls across 
multiple liquidity buckets.\92\ As discussed in the Liquidity Adopting 
Release, the reasonably anticipated trade size method for analyzing 
positions replaced the full liquidation approach that we originally 
proposed.\93\ Classifying liquidity based on reasonably anticipated 
trading sizes allows for a simpler analytic process in some respects 
and avoids certain issues where a full liquidation analysis may create 
disparate results between funds of different sizes.\94\ However, it 
also is an imperfect proxy for the actual liquidity characteristics of 
fund investments, potentially skewing classifications to more liquid 
``buckets.'' \95\
---------------------------------------------------------------------------

    \92\ SIFMA Comment Letter; ICI Comment Letter. For example, if a 
fund had a $100 million position, and a reasonably anticipated trade 
size of $10 million, the fund might determine that $4 million of 
that trade size would fall in the highly liquid asset bucket, and $6 
million would fall in the moderately liquid asset bucket. Commenters 
differed on how funds should classify the remainder of the position 
($90 million) in this circumstance.
    \93\ Liquidity Adopting Release, supra footnote 2.
    \94\ Id. (discussing commenters' concerns that the full 
liquidation method ``could result in large funds' portfolio 
liquidity appearing artificially low compared to smaller funds 
because large funds are more likely to hold larger positions and 
determine that they could not quickly liquidate these positions 
entirely without a value impact'').
    \95\ For example, a fund with a $100 million position might 
determine that it could sell $10 million in 1-3 days and the rest in 
4-7 days using the full liquidation approach. However, using the 
reasonably anticipated trade size proxy, it might determine $10 
million was a reasonable trade size, and because it could sell that 
in 1-3 days, the fund would be permitted to bucket the entire 
position in the highly liquid category potentially skewing the 
classification to a more liquid bucket.
---------------------------------------------------------------------------

    We believe that allowing funds to split the reasonably anticipated 
trade size and use such a split in classifying the rest of a fund's 
position could further exacerbate these imperfections, leading to more 
distorted liquidity profiles for funds. The staff will continue to 
evaluate potential other approaches to liquidity risk management, 
including other approaches to classifying fund liquidity. Interested 
parties may provide feedback on the use of reasonably anticipated trade 
size as part of classification, and whether we should consider any 
further modifications.
    Two commenters asked us to clarify that funds may use these 
classification-splitting approaches not just for Form N-PORT reporting, 
but for all classification purposes under rule 22e-

[[Page 31866]]

4.\96\ The requirement to assign a position into a single bucket is 
specific to Form N-PORT.\97\ Rule 22e-4(b)(ii) requires funds to 
classify their positions among four categories for liquidity risk 
management purposes, but does not require positions to be put into a 
single category. Accordingly, we clarify that funds following the 
classification splitting approaches delineated on Form N-PORT may apply 
such splitting more generally in their classification processes under 
rule 22e-4.
---------------------------------------------------------------------------

    \96\ SIFMA Comment Letter; ICI Comment Letter.
    \97\ See Item C.7 of Form N-PORT.
---------------------------------------------------------------------------

    While we believe that we should permit funds to report liquidity 
classifications in the three ways discussed above, we also continue to 
believe it is necessary to limit split reporting to these circumstances 
in order to maintain the effectiveness of our monitoring efforts. As we 
stated in the Proposing Release, we believe that allowing funds to 
engage in such split reporting under these circumstances will allow for 
a more precise view of the liquidity of these securities.\98\ Because 
funds that choose to classify across multiple categories under this 
approach will be required to indicate which of the circumstances led to 
the split classification, we will be able to monitor more effectively 
the liquidity of a fund's portfolio and determine the circumstances 
leading to the classification. Therefore, we are amending Item C.7 of 
Form N-PORT to provide funds the option of splitting the classification 
categories reported for their investments on a percentage basis in 
these specified circumstances.\99\ We are also adopting new 
Instructions to Item C.7 that explain the specified circumstances where 
a fund may split classification categories.\100\ In addition, we are 
adopting new Item C.7.b, which will require funds taking advantage of 
the option to attribute multiple classifications to a holding to note 
which of the circumstances led the fund to split the classifications of 
the holdings.\101\
---------------------------------------------------------------------------

    \98\ See Proposing Release, supra footnote 10, at text 
accompanying n.58.
    \99\ Revised Item C.7 of Form N-PORT and new Instructions to 
Item C.7 of Form N-PORT. Funds that choose not to take advantage of 
these options may continue to use the approach laid out in the final 
rule of bucketing an entire position based on the liquidity of the 
sizes the fund would reasonably anticipate trading.
    \100\ Revised Item C.7 of Form N-PORT and new Instructions to 
Item C.7 of Form N-PORT. These instructions provide an explanation 
for how funds that choose to take advantage of split reporting 
should implement it.
    \101\ New Item C.7.b of Form N-PORT. A fund may also choose to 
provide (but is not required to) additional context on its process 
for classifying portions of the same holding differently in the 
explanatory notes section of Form N-PORT. See Part E of Form N-PORT.
---------------------------------------------------------------------------

2. Disclosure of Cash and Cash Equivalents
    We also are adopting as proposed amendments to Form N-PORT to 
require additional disclosure relating to a registrant's holdings of 
cash and cash equivalents not reported in Parts C and D of the 
Form.\102\ This disclosure will be made publicly available each 
quarter.\103\ Form N-PORT currently does not require registrants to 
specifically report the amount of cash and cash equivalents held by the 
registrant. As we noted in the Reporting Modernization Adopting 
Release, Part C of Form N-PORT was designed to require registrants to 
report certain information on an investment-by-investment basis about 
each investment held by the registrant.\104\ However, cash and certain 
cash equivalents are not considered an investment on Form N-PORT, and 
therefore registrants are not required to report them in Part C of the 
Form as an investment. Similarly, Part B.1 of Form N-PORT (assets and 
liabilities) will require information about a registrant's assets and 
liabilities, but does not require specific disclosure of a registrant's 
holdings of cash and cash equivalents.\105\
---------------------------------------------------------------------------

    \102\ See supra footnote 21.
    \103\ See new Item B.2.f of Form N-PORT.
    \104\ See Reporting Modernization Adopting Release, supra 
footnote 2. Part D of Form N-PORT requires the disclosure of 
miscellaneous securities.
    \105\ In addition to cash, a registrant's disclosure of total 
assets on Part B.1.a. also could include certain non-cash assets 
that are not investments of the registrant, such as receivables for 
portfolio investments sold, interest receivable on portfolio 
investments, and receivables for shares of the registrant.
---------------------------------------------------------------------------

    Cash held by a fund is a highly liquid investment under rule 22e-4 
and would have been included in the aggregate liquidity profile that we 
are eliminating. Without the aggregate liquidity profile, we may not be 
able to effectively monitor whether a fund is compliant with its HLIM 
unless we know the amount of cash held by the fund. The additional 
disclosure of cash and certain cash equivalents by funds also will 
provide more complete information to be used in analyzing a fund's 
HLIM, as well as trends regarding the amount of cash being held, which 
also correlates to other activities the fund is experiencing, including 
net inflows and outflows.
    Most commenters who discussed this addition supported it. They 
agreed that providing this information is necessary for the 
Commission's monitoring of a fund's HLIM, and that this information 
would help provide a more complete picture of a fund's holdings.\106\ 
However, two commenters were concerned about potential investor 
confusion if they interpreted this item as the totality of a fund's 
highly liquid investments.\107\ They were concerned that investors 
could mistakenly believe that a fund's ability to meet redemption 
requests depended only on these cash holdings.\108\ One such commenter 
asked that the Commission make this item non-public to avoid these 
concerns,\109\ while another suggested changing the title of the item 
to further clarify that a fund may report cash equivalents in response 
to other items on the form.\110\
---------------------------------------------------------------------------

    \106\ ICI Comment Letter; State Street Comment Letter; IDC 
Comment Letter.
    \107\ See, e.g., Fidelity Comment Letter.
    \108\ SIFMA AMG Comment Letter; Fidelity Comment Letter.
    \109\ SIFMA AMG Comment Letter.
    \110\ Fidelity Comment Letter.
---------------------------------------------------------------------------

    While we appreciate the concerns for investor confusion, we believe 
that the title of the item makes clear that it covers only cash and 
cash equivalents not reported in other parts of the form, and therefore 
investors would be on notice that this item does not necessarily 
include all cash or cash equivalents held by the fund. We also note 
that funds may provide further public explanations about their cash 
holdings as part of the explanatory notes associated with the item.
    We are therefore adopting as proposed amendments to Item B.2 of 
Form N-PORT (certain assets and liabilities) to include a new Item 
B.2.f, which will require registrants to report ``cash and cash 
equivalents not reported in Parts C and D.'' Current U.S. Generally 
Accepted Accounting Principles (``GAAP'') define cash equivalents as 
``short-term, highly liquid investments that . . . are . . . [r]eadily 
convertible to known amounts of cash . . . [and that are] [s]o near 
their maturity that they present insignificant risk of changes in value 
because of changes in interest rates.'' \111\ However, we understand 
that certain categories of investments currently reported on Part C of 
Form N-PORT (schedule of portfolio investments) could be reasonably 
considered by some registrants as cash equivalents. For example, Item 
C.4 of Form N-PORT requires registrants to identify asset type, 
including ``short-term investment vehicle (e.g., money market fund, 
liquidity pool, or other cash management vehicle),'' which could 
reasonably be categorized by some registrants as a cash equivalent. In 
order to ensure the amount reported under Item B.2.f is accurate and 
does

[[Page 31867]]

not double count items that are more appropriately reported in Parts C 
(Schedule of portfolio investments) and D (Miscellaneous securities) of 
Form N-PORT, we are requiring registrants to only include the cash and 
cash equivalents not reported in those sections.\112\
---------------------------------------------------------------------------

    \111\ See FASB Accounting Standards Codification Master 
Glossary.
    \112\ We also are adopting other amendments to Form N-PORT as 
proposed. In particular, we are amending General Instruction F 
(Public Availability) to remove the phrase ``of this form'' from 
parenthetical references to Item B.7 and Part D for consistency with 
other parenthetical cross references in the Form. We also are 
amending Part F (Exhibits) to fix a typographical error in the 
citation to Regulation S-X. In addition, for consistency with the 
amendments we are adopting, we are adding Item B.8 (Derivative 
Transactions) to General Instruction F.
---------------------------------------------------------------------------

C. Treasury Asset Management Report and Evaluation of Other Approaches

    In its 2017 Asset Management and Insurance Report, the Department 
of Treasury highlighted the importance of robust liquidity risk 
management programs, but recommended that the Commission embrace a 
``principles-based approach to liquidity risk management rulemaking and 
any associated bucketing requirements.'' \113\ The proposal requested 
comment on whether there were advantages to the Treasury report's 
suggested approach and, if so, what additional steps should be taken to 
shift towards a more principles-based approach.\114\
---------------------------------------------------------------------------

    \113\ See A financial System That Creates Economic 
Opportunities; Asset Management and Insurance, U.S. Department of 
the Treasury (Oct. 2017) available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-That-Creates-Economic-Opportunities-Asset_Management-Insurance.pdf.
    \114\ See Proposing Release, supra footnote 10, at n.49.
---------------------------------------------------------------------------

    We received many comments that suggested alternative approaches to 
liquidity risk management regulation.\115\ Most of these commenters saw 
little benefit in the classification provisions of rule 22e-4, and 
associated requirements such as the HLIM.\116\ Some stated that if 
requirements related to classification were removed or if we allowed 
funds to design their own classification systems, the funds could 
define what qualifies as a highly liquid asset and an illiquid 
asset.\117\ Several of these commenters noted that they already have 
liquidity risk management practices in place that differ from the 
specific classification requirements of rule 22e-4, and that they 
expected to maintain their own processes alongside those required by 
the rule.\118\ They stated that this results in duplication of effort 
and wasted resources, and suggested that replacing the classification 
provisions with a principles-based approach would reduce burdens on 
funds and investors while still ensuring effective liquidity risk 
management practices by funds.\119\ We note that funds that believe 
they would have to maintain dual liquidity classification programs as 
part of their liquidity risk management may choose to seek an exemption 
from the Commission from the classification requirements of rule 22e-4 
if they believe that their existing systems would effectively 
accomplish the Commission's stated goals.\120\
---------------------------------------------------------------------------

    \115\ See, e.g., Federated Comment Letter; Fidelity Comment 
Letter; Vanguard Comment Letter.
    \116\ See, e.g., Fidelity Comment Letter; Vanguard Comment 
Letter.
    \117\ See, e.g., J.P. Morgan Comment Letter; Vanguard Comment 
Letter.
    \118\ See, e.g., T. Rowe Comment Letter; Vanguard Comment 
Letter.
    \119\ See, e.g., T. Rowe Comment Letter (``We believe that the 
bucketing requirement goes beyond what is necessary for a robust 
risk management regime, and will ultimately prove to be of limited 
additional utility to fund managers, fund boards, and fund 
shareholders.'').
    \120\ The Commission would evaluate appropriate terms and 
conditions for any exemption under the standard set forth in Section 
6(c) of the Investment Company Act.
---------------------------------------------------------------------------

    One commenter acknowledged that moving to a principles based 
approach would come at a cost, for example, because it would limit the 
Commission's ability to compare fund reporting in an ``apples-to-
apples'' manner.\121\ However, that commenter stated that such a cost 
would be worthwhile in light of the benefits and cost savings 
associated with allowing funds to continue to manage liquidity in the 
way they believed was most appropriate for their funds.\122\ Another 
commenter disagreed that moving to a principles-based approach was 
appropriate.\123\ One commenter also pointed to additional costs 
associated with moving to such a principles based approach in light of 
the expense and effort incurred already to comply with the rule.\124\
---------------------------------------------------------------------------

    \121\ See ICI Comment Letter.
    \122\ Id.
    \123\ AFR Comment Letter (``[W]e continue to believe the 
Commission should require granular information about the liquidity 
classifications of individual assets; provide strong oversight of 
fund liquidity classifications; or strengthen and enforce the 15 
percent illiquid investments limit.'').
    \124\ See BlackRock Comment Letter (``Any material changes to 
the requirements of fund managers under rule 22e-4 at this point in 
time would have a cost of its own that would need to be factored in. 
We believe the proposed refinements to the disclosure associated 
with rule 22e-4 would be sufficient to address the material concerns 
raised by the industry, which were reflected in the Treasury report 
recommendation, without materially altering the rule at this late 
stage (a development that would be counterproductive at this 
time.'')). Conversely, one commenter cautioned the Commission from 
falling victim to the ``sunk cost fallacy'' arguing that the costs 
incurred already in complying with rule 22e-4 should not deter the 
Commission from moving to a principles-based approach. See Vanguard 
Comment Letter.
---------------------------------------------------------------------------

    Today, we are modifying certain aspects of our liquidity framework, 
largely as proposed. However, we recognize that a broad range of 
commenters continue to believe that alternative approaches to 
classification would better achieve the Commission's goals. 
Accordingly, during and following the implementation of the rule and 
reporting requirements, the staff will continue its efforts to monitor 
and solicit feedback on implementation. As part of this monitoring, the 
staff will analyze the extent to which the liquidity classification 
process and data are achieving the Commission's goals and any other 
feedback provided from interested parties to the Commission.\125\ The 
staff will then inform the Commission what steps, if any, the staff 
recommends in light of this monitoring.
---------------------------------------------------------------------------

    \125\ See infra footnote 129 and accompanying text.
---------------------------------------------------------------------------

    We expect that this evaluation will include, at a minimum: (i) The 
costs and benefits of rule 22e-4 and its associated classification 
requirements; (ii) whether there should be public dissemination of 
fund-specific liquidity classification information; (iii) whether the 
Commission should propose amendments to rule 22e-4 to move to a more 
principles-based approach in light of this evaluation; (iv) and whether 
the Commission should propose to require certain empirical data metrics 
be disclosed.\126\
---------------------------------------------------------------------------

    \126\ See supra section II.A.2.
---------------------------------------------------------------------------

    To properly engage in such an evaluation and to ground it on an 
empirical basis, we believe it is important for funds and the 
Commission to gain experience with the classification process, to allow 
analysis of its benefits and costs based on actual practice.\127\ 
Accordingly, we expect that this staff evaluation will take into 
account at least one full year's worth of liquidity classification data 
from large and small entities.\128\
---------------------------------------------------------------------------

    \127\ Retrospective review of regulations is often viewed as a 
best practice in federal agency rulemaking. See e.g., Government 
Accountability Office, Opportunities remain for OMB to improve the 
transparency of rulemaking processes (Mar. 2016), available at 
https://www.gao.gov/assets/680/675810.pdf (``We have long advocated 
the potential usefulness to Congress, agencies, and the public of 
conducting retrospective regulatory analyses.'').
    \128\ One commenter argued that any such review of liquidity 
data should take into account a full year's worth of data at a 
minimum, and preferably more, to ensure that the data includes 
stressed periods and other fund outflows. See ICI Comment Letter.
---------------------------------------------------------------------------

    We welcome public feedback as part of this evaluation, and have set 
up an email inbox where funds, investors, or other interested parties 
may submit

[[Page 31868]]

information, now and during the first year of reporting, to help assist 
the staff and the Commission.\129\ In particular, we would appreciate 
information about the following subjects.
---------------------------------------------------------------------------

    \129\ Email: [email protected].
---------------------------------------------------------------------------

     To what extent will funds continue to maintain separate 
liquidity risk management processes and practices alongside those 
required by the classification provisions of rule 22e-4? What costs are 
associated with maintaining such dual systems? Are there synergies or 
other benefits that would result? Do funds expect to eventually combine 
existing systems and rule 22e-4 classification programs over time, or 
do they expect to keep them separate?
     Were the implementation and ongoing cost estimates and 
assumptions made in adopting rule 22e-4 and rule and form amendments 
accurate? In particular, were the assumptions made about vendor usage 
and associated costs correct considering the widespread use of vendors 
(as opposed to in-house systems) that we understand has taken place?
     What benefits have investors, funds, and the markets 
gained from liquidity classification, including matters associated with 
classification such as the HLIM and the illiquid investment limit? Is 
there a way to retain these benefits while moving to a more principles-
based system? Do certain aspects of the classification process, such as 
the classification of illiquid investments and/or the classification of 
highly liquid investments, generate greater benefits than others?
     To what extent would investors and others benefit from 
public liquidity classification information? Are there other types of 
information that may allow investors to better understand the liquidity 
of their funds? For example, instead of classification information, 
would investors (or the Commission) be better able to evaluate fund 
liquidity through public disclosure of empirical data such as bid-ask 
spreads of portfolio securities, portfolio turnover, or shareholder 
concentration measures?
     If we were to propose amendments to rule 22e-4 to move to 
a more principles-based approach, would the benefits of such a new 
approach outweigh the costs of implementation? On what principles 
should we base such an approach?
    Finally, as we discussed in the proposal, our staff anticipates 
publishing a periodic report containing aggregated and anonymized 
information about the fund industry's liquidity may be beneficial. One 
commenter objected, arguing that even aggregated and anonymized 
classification data would still be derived from the same disparate and 
subjective inputs, and accordingly may be of limited value to the 
Commission or the public.\130\ As part of the staff evaluation noted in 
the proposal and discussed above, we expect that our staff will 
consider whether publishing such aggregated and anonymized 
classification data would be useful, and include a recommendation as 
part of that evaluation as to whether the staff should publish such a 
periodic report.\131\
---------------------------------------------------------------------------

    \130\ ICI Comment Letter.
    \131\ Staff from the Division of Investment Management as well 
as staff from the Division of Economic and Risk Analysis also may 
publish ad hoc papers on fund liquidity based on Form N-PORT 
liquidity data.
---------------------------------------------------------------------------

D. Compliance Dates

    As proposed, we are providing a tiered set of compliance dates 
based on asset size.\132\ However, in a change from the proposal, we 
are not aligning the compliance date for the amendments to Form N-1A we 
are adopting today with the revised compliance dates we previously 
adopted for the liquidity-related portions of Form N-PORT.\133\ 
Instead, we are providing additional time so that funds have at least a 
full year's experience with the liquidity risk management program 
before including the new narrative disclosure in their shareholder 
report.
---------------------------------------------------------------------------

    \132\ ``Larger entities'' are defined as funds that, together 
with other investment companies in the same ``group of related 
investment companies,'' have net assets of $1 billion or more as of 
the end of the most recent fiscal year of the fund. ``Smaller 
entities'' are defined as funds that, together with other investment 
companies in the same group of related investment companies, have 
net assets of less than $1 billion as of the end of its most recent 
fiscal year. See Liquidity Adopting Release, supra footnote 2, at 
n.997.
    \133\ See Liquidity Extension Release, supra footnote 8.
---------------------------------------------------------------------------

    A number of commenters argued that the first time a fund includes 
the new narrative disclosure on the operation of a fund's liquidity 
risk management program, it should have at least a year's experience 
operating a liquidity risk management program under the rule.\134\ We 
agree. Therefore, we are providing additional time so that funds would 
not need to comply with the new shareholder report amendments to Form 
N-1A until they have had their liquidity risk management programs in 
effect for a full year. We have provided additional time for funds to 
comply with certain aspects of the liquidity risk management program 
(classification and related elements).\135\ As result, we expect that 
only the aspects of the liquidity risk management program operation and 
effectiveness that are legally required to be in place need be 
discussed during the first reporting cycle.
---------------------------------------------------------------------------

    \134\ See, e.g., ICI Comment Letter.
    \135\ Liquidity Extension Release, supra footnote 8.
---------------------------------------------------------------------------

    However, we are not changing the compliance date for the Form N-
PORT amendments from the proposal. Most commenters did not object to 
the proposed Form N-PORT compliance dates, although a few asked that 
funds be provided at least one year from adoption to implement the 
changes to Form N-PORT.\136\ We believe that we are adopting this 
change sufficiently in advance that funds should be able to implement 
this change without difficulty, and accordingly are not amending the 
proposed compliance dates for Form N-PORT.
---------------------------------------------------------------------------

    \136\ ICI Comment Letter; State Street Comment Letter.
---------------------------------------------------------------------------

    Below is a chart that describes the compliance dates for the Form 
N-PORT and Form N-1A amendments that we are adopting today.

------------------------------------------------------------------------
                                                    First N-PORT filing
                                 Compliance Date            date
------------------------------------------------------------------------
Form N-PORT:
    Large Entities............  June 1, 2019.....  July 30, 2019.
    Small Entities............  March 1, 2020....  April 30, 2020.
Form N: \137\
    Large Entities............  Dec. 1, 2019.....
    Small Entities............  June 1, 2020.....
------------------------------------------------------------------------
\137\ Funds that distribute annual or semi-annual shareholder reports
  after the compliance dates discussed above would be subject to the new
  requirement.


[[Page 31869]]

III. Economic Analysis

A. Introduction

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

B. Economic Baseline

    The costs and benefits of the amendments as well as any impact on 
efficiency, competition, and capital formation are considered relative 
to an economic baseline. For the purposes of this economic analysis, 
the baseline is the regulatory framework and liquidity risk management 
practices currently in effect, and any expected changes to liquidity 
risk management practices, including any systems and processes that 
funds have already implemented in order to comply with the liquidity 
rule and related requirements as anticipated in the Liquidity Adopting 
Release and the Liquidity Extension Release.\138\
---------------------------------------------------------------------------

    \138\ See supra footnotes 2 and 8.
---------------------------------------------------------------------------

    The economic baseline's regulatory framework consists of the rule 
requirements adopted by the Commission on October 13, 2016 in the 
Liquidity Adopting Release. Under the baseline, larger entities must 
comply with some of the liquidity rule's requirements, such as the 
establishment of a liquidity risk management program, by December 1, 
2018 and must comply with other requirements, such as the 
classification of portfolio holdings, by June 1, 2019.\139\ Smaller 
entities must comply with some of the liquidity rule's requirements by 
June 1, 2019 and other requirements by December 1, 2019.\140\ Because 
these compliance dates have not yet occurred, the Commission has not 
yet received portfolio classification data and investors have not yet 
received aggregate portfolio classification disclosures from funds. 
Accordingly, the baseline does not include experience on the part of 
the Commission or investors with interpreting or analyzing the 
quantitative data that will be reported on Form N-PORT.
---------------------------------------------------------------------------

    \139\ See supra footnote 136 for a detailed description of 
larger and smaller entities. The compliance date for some of the 
requirements related to portfolio holding classification was 
delayed. See the Liquidity Extension Release, supra footnote 8, for 
a more detailed discussion of the requirements that were delayed.
    \140\ In a change from the proposal, we are not aligning the 
compliance dates for the amendments to Form N-1A with those for Form 
N-PORT, as discussed above in section II.D. As a result, funds would 
not need to comply with the new Form N-1A amendments until they have 
had their liquidity risk management program in effect for a full 
year. Moving the compliance date could provide benefits to funds 
relative to the proposal as they should be able to implement changes 
to shareholder reports with less difficulty.
---------------------------------------------------------------------------

    The primary SEC-regulated entities affected by these amendments are 
mutual funds and ETFs. As of the end of 2017, there were 9,154 mutual 
funds managing assets of approximately $19 trillion,\141\ and there 
were 1,832 ETFs managing assets of approximately $3.4 trillion.\142\ 
Other potentially affected parties include investors, investment 
advisers that advise funds, issuers of the securities in which these 
funds invest, and other market participants that could be affected by 
fund and investor behavior.
---------------------------------------------------------------------------

    \141\ See ICI, 2018 ICI Fact Book (58th ed., 2018) (``2018 ICI 
Fact Book''), available at https://www.ici.org/pdf/2018_factbook.pdf, at nn.52, 208, 212. The number of mutual funds 
includes funds that primarily invest in other mutual funds but 
excludes 382 money-market funds.
    \142\ See 2018 ICI Fact Book, supra footnote 145, at nn.218, 
219.
---------------------------------------------------------------------------

C. Economic Impacts

    We are mindful of the costs and benefits of the amendments to Form 
N-PORT and Form N-1A we are adopting. The Commission, where possible, 
has sought to quantify the benefits and costs, and effects on 
efficiency, competition and capital formation expected to result from 
these amendments. However, as discussed below, the Commission is unable 
to quantify certain of the economic effects because it lacks 
information necessary to provide reasonable estimates. The economic 
effects of the amendments fall into two categories: (1) Effects 
stemming from changes to public disclosure on Form N-PORT and Form N-
1A; (2) effects stemming from changes to non-public disclosure on Form 
N-PORT.
Changes to Public Disclosure
    The amendments to Form N-PORT and Form N-1A we are adopting alter 
the public disclosure of information about fund liquidity in three 
ways. First, the amendments rescind the requirement that funds publicly 
disclose their aggregate liquidity profile on a quarterly basis with a 
60-day delay in structured format on Form N-PORT.\143\ Second, the 
amendments require funds and other registrants to report to the 
Commission, on a non-public basis, the amount of cash and cash 
equivalents in their portfolio on Form N-PORT on a monthly basis and to 
publicly disclose this amount on a quarterly basis with a 60-day delay 
through EDGAR. Finally, the amendments require a fund to provide a 
narrative description of the fund's liquidity risk management program's 
operation and effectiveness in an unstructured format in the fund's 
shareholder report.\144\ Most commenters generally supported rescinding 
the requirement for quarterly public disclosure of aggregate liquidity 
classification information on Form N-PORT, adopting the requirement for 
funds to disclose their cash and cash equivalents on Form N-PORT, and 
requiring funds to provide a narrative discussion in the shareholder 
report.\145\
---------------------------------------------------------------------------

    \143\ See supra footnote 1 for a definition of ``funds.'' The 
requirement to publicly disclose aggregate liquidity profiles does 
not apply to funds that are In-Kind ETFs under the baseline, so it 
is only rescinded for funds that are not In-Kind ETFs. In-Kind ETFs 
are included as funds that provide a narrative description of their 
liquidity risk management program pursuant to Form N-1A.
    \144\ The Commission will continue to receive non-public 
position level liquidity information on Form N-PORT.
    \145\ See Fidelity Comment Letter; J.P. Morgan Comment Letter; 
State Street Comment Letter; ICI Comment Letter; SIFMA Comment 
Letter; Vanguard Comment Letter. One commenter recommended a delay 
in compliance to any changes to Form N-PORT or the reporting 
requirement of cash and cash equivalents. See State Street Comment 
Letter. The Commission changed the compliance dates for the Form N-
1A requirements from what it proposed, as discussed above in section 
II.D above.
---------------------------------------------------------------------------

    Funds and other registrants will experience benefits and costs 
associated with the amendments to public disclosure requirements on 
Form N-PORT. Funds will no longer incur the one-time and ongoing costs 
associated with preparing the portion of Form N-PORT associated with 
the aggregate liquidity profile. These costs likely would have 
constituted a small portion of the aggregate one-time costs of $158 
million and the ongoing costs of $3.9 million for Form N-PORT that we 
estimated in the Liquidity Adopting Release.\146\ At the same time, 
funds and other registrants will also incur additional costs, relative 
to the baseline, associated with the adoption of the requirement that 
they report their holdings of cash and cash equivalents on Form N-PORT. 
Because funds and other registrants are already preparing Form N-PORT 
and already need to keep track of their cash and cash equivalents

[[Page 31870]]

for valuation purposes, we expect that these additional costs will not 
be significant.
---------------------------------------------------------------------------

    \146\ See Liquidity Adopting Release, supra footnote 2, at 
nn.1188-1191. We estimated the total one-time costs associated with 
the rule's disclosure and reporting requirements on Form N-PORT as 
being approximately $55 million for funds that will file reports on 
Form N-PORT in house and approximately $103 million for funds that 
will use a third-party service provider. Similarly, we estimated the 
total ongoing annual costs as being approximately $1.6 million for 
funds filing reports in house and $2.3 million for funds that will 
use a third-party service provider.
---------------------------------------------------------------------------

    In aggregate, we expect any additional costs associated with the 
requirement that funds and other registrants disclose their holdings of 
cash and cash equivalents to be offset by the savings associated with 
funds no longer having to report an aggregate liquidity profile. 
Therefore, we expect that funds and other registrants will not 
experience a significant net economic effect associated with the direct 
costs of filing Form N-PORT.\147\ Additionally, to the extent that any 
risk of herding or correlated trading would exist if funds executed 
trades in order to make their aggregate liquidity profiles appear more 
liquid to investors, rescinding the requirement that funds publicly 
disclose an aggregate liquidity profile will mitigate such risk.\148\
---------------------------------------------------------------------------

    \147\ See infra paragraph following footnote 190.
    \148\ See supra footnote 43.
---------------------------------------------------------------------------

    Relative to the baseline, funds will incur costs associated with 
preparing an annual narrative discussion of their liquidity risk 
management programs in the fund's shareholder report. We estimate that 
funds will incur aggregate one-time costs of approximately $18 million 
and aggregate ongoing costs of approximately $9 million in preparing 
this narrative discussion.\149\ Several commenters suggested excluding 
funds that primarily hold highly liquid investments from providing the 
narrative discussion,\150\ and that the benefits of the narrative 
disclosure to investors that hold these funds would be outweighed by 
the costs of including the narrative in the shareholder report.\151\ We 
disagree because, even for funds that predominantly hold highly liquid 
investments, such discussion can benefit investors to the extent that 
such disclosures may enhance their understanding of liquidity risk 
management for individual funds and when comparing funds.
---------------------------------------------------------------------------

    \149\ We estimate funds will incur an additional aggregate one-
time burden of 54,890 hours and an additional aggregate annual 
burden of 27,445 hours. See infra footnotes 194 and 197. Assuming a 
blended hourly rate of $329 for a compliance attorney ($345) and a 
senior officer ($313), that translates to an additional aggregate 
one-time burden of $18,058,810 = 54,890 x $329 and an additional 
aggregate annual burden of $9,029,405 = 27,445 x $329.
    \150\ See ICI Comment Letter; Capital Group Comment Letter.
    \151\ See Capital Group Comment Letter.
---------------------------------------------------------------------------

    As discussed above, and in response to comments, the Commission is 
not adopting the requirement that the narrative disclosure be part of 
the MDFP and instead is requiring that the narrative disclosure of the 
operation and effectiveness of a fund's liquidity management programs 
be part of the fund's shareholder report (annual or semi-annual) in the 
section following the discussion of board approval of advisory 
contracts.\152\ Moving the narrative disclosure from the MDFP to this 
section of the shareholder report will allow funds to align the 
production of the narrative disclosure with the review of the liquidity 
risk management practices by the fund's board of directors, which may 
reduce costs to funds relative to the proposal by allowing funds to 
avail themselves of any efficiencies from the overlap between these 
requirements.\153\
---------------------------------------------------------------------------

    \152\ However, as discussed in section II.A.2 above, funds 
should include in the MDFP a discussion of any events relating to a 
fund's liquidity that materially affected the fund's performance 
during the most recently completed fiscal year. One commenter stated 
that although such a disclosure would increase ``administrative and 
compliance burden on funds that face material liquidity risks, it 
may be eased by relevant disclosure that may already be included in 
the management discussion as a material factor that impacts fund 
performance. In order to ensure that investors receive proportionate 
liquidity risk disclosure relative to the risks within a particular 
fund, we believe the modest additional expense would be warranted.'' 
See Vanguard Comment Letter. Because we understand that funds often 
already discuss such events in their MDFP today, we agree with the 
commenter that increases in costs would be limited and that the 
disclosure would benefit investors in promoting informed decision-
making.
    \153\ See ICI Comment Letter. See also Capital Group Comment 
Letter. Further, another commenter suggested that moving the 
narrative disclosure from the MDFP would also benefit investors by 
reducing confusion for investors. See Blackrock Comment Letter.
---------------------------------------------------------------------------

    Investors will also experience costs and benefits as a result of 
the changes to public disclosure requirements on Form N-PORT and Form 
N-1A that we are adopting.\154\ To the extent that aggregate liquidity 
profiles within the structured format of Form N-PORT could have helped 
certain investors make more informed investment choices that match 
their liquidity risk preferences, rescinding the aggregate liquidity 
profile requirement will reduce those investors' ability to make more 
informed investment choices.\155\ However, to the extent that portfolio 
holding classifications incorporate subjective factors that may be 
interpreted differently by different funds, aggregate liquidity 
profiles may not have been comparable across funds. Therefore, 
rescinding the aggregate liquidity profile requirement may reduce the 
likelihood that investors make investment choices based on any 
confusion about how the fund's liquidity risk profile should be 
interpreted.\156\ Further, the narrative discussion in shareholder 
reports may mitigate any reduction in investors' ability to make more 
informed investment choices, though this disclosure will be less 
frequent than the quarterly public disclosure of aggregate liquidity 
profiles that was previously adopted and will provide information about 
a fund's liquidity risk management rather than the aggregate liquidity 
profile of the fund's investments.\157\
---------------------------------------------------------------------------

    \154\ See ICE Comment Letter (discussing the benefits to the 
``investing public'' by ``injecting additional rigor and discipline 
into funds' liquidity assessment procedures.'').
    \155\ See Better Markets Comment Letter (stating that the 
aggregated public reports in N-PORT would have benefited investors 
by empowering them to make more informed investment decisions 
through the analysis provided by third-party analysts). Another 
commenter stated that the removal of the aggregate liquidity 
profiles will reduce the information offered to the public and 
opposed the elimination of the public disclosure of funds' aggregate 
liquidity profiles. AFR Comment Letter.
    \156\ Even if aggregate liquidity profiles are not comparable 
across funds, they might be comparable across time for a given fund, 
which might provide useful information to investors. This would be 
the case if a fund maintains a consistent position classification 
process over time. Funds, however, may change their classification 
processes over time.
    \157\ See Comment Letter of Mutual Fund Directors Forum (May 18, 
2018) (``MFDF Comment Letter'') (discussing that the narrative 
disclosure will benefit investors by providing ``information on a 
fund's management of liquidity risk . . . in a format that will 
allow those investors to assess the importance of the 
information'').
---------------------------------------------------------------------------

    As discussed above, the compliance date for rule 22e-4 and related 
reporting on Form N-PORT has not yet occurred and the Commission has 
not yet received portfolio classification data from funds, nor is 
aggregated liquidity classification information currently being made 
public. As a result, the Commission's assessment of the costs and 
benefits of these changes is, necessarily, informed by qualitative 
concerns, together with what we know about the subjectivity of inputs, 
assumptions, and methods that funds are likely to utilize in 
classifying portfolio assets and the nature of the information to be 
reported. The liquidity classifications that funds would have used to 
construct an aggregate liquidity profile are based on several factors 
that are subjective and fund specific. Such factors include a fund's 
determination of the reasonably anticipated trade size for a given 
holding and its determination of what constitutes significant market 
impact.\158\ As a result of these subjective factors, aggregate 
liquidity profiles are likely to vary across otherwise similar funds, 
diminishing their comparability.\159\ However, without yet receiving 
and evaluating liquidity classification data,

[[Page 31871]]

we cannot anticipate with any quantitative precision the extent to 
which they will vary across otherwise similar funds as a result of the 
above factors.\160\ As a result, the adopted approach will enable the 
Commission to evaluate and consider how the quantitative data from 
funds' N-PORT filings might be fashioned into common quantitative 
metrics. This approach will also enable the Commission to assess the 
potential costs and benefits of future public dissemination of 
quantitative metrics derived from data contained in N-PORT filings and 
whether such metrics would be comparable across funds.
---------------------------------------------------------------------------

    \158\ See Liquidity Adopting Release, supra footnote 2, at 
section III.C.3.
    \159\ See supra footnotes 41 and 42.
    \160\ A few commenters objected to the proposed changes, arguing 
that the Commission should err on the side of providing more 
information and that investors would understand and use the 
aggregated liquidity information. See supra footnote 33 and 
accompanying text.
---------------------------------------------------------------------------

    The overall impact of the amendments on an investor's use of data 
for informing investment choices will likely depend on how the investor 
accesses and processes information about fund liquidity. If certain 
investors prefer to base their investment decisions on information that 
is accessible to them in an unstructured document, those investors will 
be more likely to use the narrative discussion of a fund's liquidity 
risk management program in shareholder reports than they would have 
been to use the aggregate liquidity profile within the structured 
format of Form N-PORT to inform their investment decisions. However, 
certain other investors may prefer to access, reuse, and compare the 
information about a fund's liquidity risk if included within a 
structured format on Form N-PORT. These investors will have a reduced 
ability to make as timely and accurate an analysis within an entity's 
filings, perform text analysis of an entity's narrative disclosures, 
and potentially combine narrative and numeric information when the 
narrative disclosures related to their liquidity risk management 
programs are provided to them in the unstructured format of an annual 
report. Further, there may be an increased burden on these third-party 
providers to search, parse, and assess the quality of the unstructured 
information in funds' annual reports. To the extent that certain 
investors rely on third parties to provide them with information for 
analysis, this increased burden may be partially or fully passed on to 
these investors in the form of higher costs.
    One commenter recommended that narrative disclosures, as well as 
all financial data, be reported in a consistent, structured format to 
promote comparison across filings and filers.\161\ While for some 
retail investors, an unstructured narrative disclosure will be useful 
and accessible, standardized, structured, machine-readable disclosures 
facilitate timely access and accurate identification and parsing of 
information for other investors and market participants relative to 
unstructured disclosures. As discussed in the Proposing Release, while 
we acknowledge that there are costs to our amendments for investors, 
filers, and third party platforms that prefer to access and use 
financial information in a structured format, we believe there are also 
benefits to investors that prefer the narrative discussion of a fund's 
liquidity risk management program accessible to them in an unstructured 
shareholder report.\162\ We are currently soliciting feedback on the 
use of structured data in fund investor disclosure generally.\163\
---------------------------------------------------------------------------

    \161\ See XBRL US Comment Letter.
    \162\ See Proposing Release, supra footnote 10, at section 
III.C.
    \163\ See supra footnote 52.
---------------------------------------------------------------------------

    Finally, the amendment to Form N-PORT that requires funds and other 
registrants to publicly disclose their holdings of cash and cash 
equivalents that are not reported in Parts C and D of the Form on a 
quarterly basis with a 60-day delay will give investors some 
potentially useful information about the most liquid assets that a fund 
previously had available to, for example, meet its redemption 
obligations.\164\
---------------------------------------------------------------------------

    \164\ See supra section II.B.2.
---------------------------------------------------------------------------

Changes to Non-Public Disclosure
    In addition to the amendments to public disclosures of liquidity 
information discussed above, the amendments to Form N-PORT give funds 
the option to split a given holding into portions that may have 
different liquidity classifications on their non-public reports on Form 
N-PORT. Funds may benefit from the amendment because it gives them the 
option to either include an entire holding within a classification 
bucket or to allocate portions of the holding across classification 
buckets. This could benefit a fund and the fund's investors if a more 
granular approach to classification that assigns portions of a 
portfolio holding to separate classification buckets is more consistent 
with the fund's preferred approach to liquidity risk management. This 
approach also reduces the need for funds to develop systems and 
processes to allocate each holding to exactly one classification bucket 
for the purposes of regulatory compliance.\165\ In addition, to the 
extent that providing the option to choose the position classification 
method most suitable to a given fund results in disclosures on Form N-
PORT that more accurately reflect the fund's liquidity profile, the 
amendments may improve the Commission's ability to monitor liquidity 
risks in markets and protect investors from liquidity-related 
developments. However, we acknowledge that providing funds with this 
option does add an additional subjective decision to the portfolio 
holding classification process. Thus, the amendments could result in 
classifications that are less comparable across funds relative to the 
baseline.\166\
---------------------------------------------------------------------------

    \165\ For example, funds that use multiple sub-advisers to 
manage different sleeves of a portfolio might have had to establish 
more complex systems and processes for combining the classifications 
of individual sub-advisers into a single classification for the 
portfolio's aggregate holding of a given security under the rule as 
originally adopted. The ability to split a portfolio holding across 
multiple classification buckets provides funds with a 
straightforward way of combining the classifications of different 
sub-advisers.
    \166\ Portfolio classifications on Form N-PORT will include 
CUSIPs or other identifiers that allow Commission staff to identify 
when different funds classify the same investment using different 
classification methods. However, comparing such classifications will 
require some method of adjustment between classifications based on, 
for example, reasonably anticipated trade size and those based on 
splitting a position into proportions that are assigned to different 
classification buckets.
---------------------------------------------------------------------------

    Several commenters supported the amendments to Form N-PORT that 
will give funds the option to split a given holding into portions that 
may have different liquidity classifications on their non-public 
reports on Form N-PORT, noting that this option will allow funds 
increased flexibility and higher precision when classifying the 
liquidity of an investment.\167\ One commenter, however, stated that 
this option is unlikely to reduce burdens or costs to funds, and is 
likely to be incompatible with the 15% illiquid asset restriction.\168\ 
We note that this approach is optional, and therefore funds could 
choose not to use it if it had negative consequences, such as inflating 
the fund's illiquid investment bucket. Several commenters recommended 
that the proportionality option be revised to include categories based 
on reasonably anticipated trade size, which would allow increased 
flexibility and potential increased efficiency for funds that choose to 
implement this classification option.\169\ We note that, while in some 
circumstances classifying liquidity based on reasonably anticipated 
trade size may be a simpler analytic approach

[[Page 31872]]

and avoids certain issues related to full liquidation, as discussed 
above in section II.B.1, it also is an imperfect proxy for the actual 
liquidity characteristics of fund investments, potentially skewing 
classifications to more liquid ``buckets.'' \170\
---------------------------------------------------------------------------

    \167\ See Fidelity Comment Letter; IAA Comment Letter; State 
Street Comment Letter; ICE Comment Letter; and J.P. Morgan Comment 
Letter.
    \168\ See J.P. Morgan Comment Letter.
    \169\ See SIFMA Comment Letter and ICI Comment Letter.
    \170\ See supra footnote 95.
---------------------------------------------------------------------------

    Other commenters suggested that we should not allow funds to 
classify portions of a portfolio holding separately because it would 
reduce the value of the information and would ``reduce the utility of 
the entire bucketing exercise.'' \171\ However, the Commission does not 
consider allowing portfolio splitting to affect its ability to monitor 
liquidity risks, an ability that ultimately benefits investors. The 
Commission is adopting amendments to Form N-PORT to allow funds the 
option of splitting a fund's holding into more than one classification 
category in certain specified circumstances as proposed.
---------------------------------------------------------------------------

    \171\ See MSCI Comment Letter. Several commenters stated that 
allowing funds to classify portions of a portfolio holding for some 
of their holdings could lead to inconsistent interpretations of the 
funds classifications, and that we should instead require a fund to 
apply a uniform approach across all of its holdings. See State 
Street Comment Letter and MSCI Comment Letter.
---------------------------------------------------------------------------

Efficiency, Competition, and Capital Formation
    The amendments we are adopting have several potential effects on 
efficiency, competition, and capital formation. First, if publicly 
disclosed aggregate liquidity profiles may have created an incentive 
for a fund to classify its holdings in a manner that led to a 
relatively more liquid aggregate liquidity profile in order to attract 
investors, the amendments remove any such incentive and potentially 
reduce the likelihood that funds compete based on their aggregate 
liquidity profiles. To the extent that a fund or other registrant's 
cash and cash equivalent holdings are interpreted by investors as being 
associated with lower liquidity risk, funds and other registrants may 
still have some incentive to compete based on their holdings of cash 
and cash equivalents as a result of the amendments.\172\ We do not 
expect the proposed amendments to require narrative discussions in 
shareholder reports to have a significant competitive effect.
---------------------------------------------------------------------------

    \172\ However, because cash and cash equivalent holdings do not 
generate significant returns relative to other holdings, funds and 
other registrants may have an incentive to shift to non-cash or cash 
equivalent holdings that generate higher returns.
---------------------------------------------------------------------------

    Second, to the extent that those publicly disclosed aggregate 
liquidity profiles would have helped investors more accurately evaluate 
fund liquidity risk and make more informed investment decisions, the 
amendments could reduce allocative efficiency. The annual discussion of 
a fund's liquidity risk management program in shareholder reports and 
the requirement that funds and other registrants publicly disclose 
their holdings of cash and cash equivalents on Form N-PORT could 
mitigate this reduction in allocative efficiency if these requirements 
provide information that helps investors evaluate fund liquidity risk. 
Furthermore, to the extent that aggregate liquidity profiles on Form N-
PORT would have increased the likelihood of investors making investment 
choices based on any confusion about a fund's liquidity risk profile, 
which would have harmed the efficient allocation of capital, the 
amendments could increase allocative efficiency.
    Lastly, to the extent that the information provided by aggregate 
liquidity profiles would have promoted increased investment in certain 
funds, and the assets those funds invest in, rescinding the aggregate 
liquidity profile requirement could reduce capital formation. At the 
same time, we note that the new public disclosure requirements we are 
adopting could offset any reduction in capital formation.
    In summary, we note that all of the effects described above are 
conditioned upon the usefulness to investors of information that we 
will no longer require relative to the usefulness of additional 
disclosure requirements we are adopting. We cannot estimate the 
aggregate effect on efficiency, competition, or capital formation that 
will result from the new amendments because we do not know the extent 
to which aggregate liquidity risk profiles, narrative discussion of a 
fund's liquidity risk management program, or the amount of cash and 
cash equivalents held by a fund and other registrants are useful to 
investors in making more informed investment choices.\173\
---------------------------------------------------------------------------

    \173\ See supra paragraph following footnote 157.
---------------------------------------------------------------------------

D. Reasonable Alternatives

    The Commission considered several alternatives to the amendments to 
funds public and non-public disclosure requirements that we are 
adopting.\174\
---------------------------------------------------------------------------

    \174\ Several commenters also addressed potential costs 
associated with modifying the bucketing requirements of rule 22e-4. 
As discussed above, in section II.C, we are not adopting 
modifications to the rule 22e-4 bucketing requirements today.
---------------------------------------------------------------------------

    First, in order to address any potential issues with the 
interpretation of a fund's aggregate liquidity profile by investors, we 
could have maintained the public disclosure of this profile on Form N-
PORT and added a requirement that funds publicly disclose on Form N-
PORT additional information providing context and clarification 
regarding how their aggregate liquidity profiles were generated and 
should be interpreted. This alternative would have provided investors 
with some of the benefits of the additional context provided by the 
narrative discussion on Form N-1A that we are adopting, and, to the 
extent that it increased investors' understanding of a fund's aggregate 
liquidity profile, could have allowed them to make more informed 
investment choices relative to the baseline. However, some investors 
may believe that they can more easily obtain information in a fund's 
annual report compared to information in the fund's Form N-PORT filings 
if they are not as interested in being able to access, reuse, and 
compare the information if included in a structured format on Form N-
PORT. This alternative would have required these investors to seek out 
this additional information on EDGAR.
    Second, instead of requiring a fund to briefly discuss the 
operation and effectiveness of its liquidity risk management program in 
a shareholder report, we could have required a more specific discussion 
of the fund's exposure to liquidity risk over the preceding year, how 
the fund managed that risk, and how the fund's returns were affected 
over the preceding year. This alternative could have helped investors 
understand both a fund's liquidity risk and the fund's approach to 
managing that risk, which might lead to more informed investment 
decisions than a discussion of the fund's liquidity risk management 
program. However, this alternative could have been more costly for some 
funds to implement than the proposed narrative discussion in the 
shareholder report, and funds still have the flexibility to provide 
this information in the course of complying with the final rule if they 
think it will benefit their investors.\175\ Further, as discussed 
above, a fund should discuss, with specificity, as part of its MDFP, 
any factor such as liquidity events that the fund experienced that 
materially affected the fund's performance during the past fiscal 
year.\176\
---------------------------------------------------------------------------

    \175\ See supra paragraph following footnote 65.
    \176\ See supra section II.A.2.
---------------------------------------------------------------------------

    Third, we could have required funds to disclose an aggregate 
liquidity profile in their annual report along with additional 
information providing context and clarification regarding how its 
aggregate liquidity profile was generated and should be interpreted. If 
such disclosure increased investors'

[[Page 31873]]

understanding of a fund's aggregate liquidity profile, this would have 
allowed them to make more informed investment choices relative to the 
baseline, though they would have received this information at an annual 
rather than quarterly frequency. However, such disclosures still may 
not be able to fully explain how the subjective factors inherent in the 
classification process affect aggregate fund liquidity profiles, so 
they still may not be comparable across funds. Therefore, investors' 
ability to make more informed investment choices based on the inclusion 
of this information may be limited.
    Fourth, we could have amended both Form N-PORT and rule 22e-4 to 
prescribe an objective approach to classification in which the 
Commission would specify more precise criteria and guidance regarding 
how funds should classify different categories of investments. Such an 
approach could permit consistent comparisons of different funds' 
aggregate liquidity profiles, allowing investors to make more informed 
investment decisions without requiring funds to provide additional 
contextual discussion of their liquidity risk management programs. 
However, as discussed in the Liquidity Adopting Release, the Commission 
may not be able to respond as quickly as market participants to dynamic 
market conditions that might necessitate changes to such criteria and 
guidance.
    Fifth, we could have required that if funds chose to split the 
classification of any of their portfolio holdings across liquidity 
buckets when reporting them on the non-public portion of Form N-PORT, 
they do so for all of their portfolio holdings. This would have ensured 
that all of the portfolio holdings within a given fund could be 
interpreted more consistently for any monitoring purposes by the 
Commission. However, to the extent that being able to choose the 
classification approach appropriate to each portfolio holding more 
accurately reflects a manager's judgment of that portfolio holding's 
liquidity, any reduction in the consistency of portfolio 
classifications under the amendments we are adopting could be offset by 
a more accurate description of the manager's assessment of fund 
liquidity risk.

IV. Paperwork Reduction Act

A. Introduction

    The amendments to Form N-PORT and Form N-1A contain ``collections 
of information'' within the meaning of the Paperwork Reduction Act of 
1995 (``PRA'').\177\
---------------------------------------------------------------------------

    \177\ 44 U.S.C. 3501 through 3521.
---------------------------------------------------------------------------

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

B. Form N-PORT

    As discussed above, on October 13, 2016, the Commission adopted new 
Form N-PORT, which requires mutual funds and ETFs \178\ to report 
monthly portfolio investment information to the Commission in a 
structured data format.\179\ The Commission also adopted amendments to 
Form N-PORT requiring a fund to publicly report on Form N-PORT the 
aggregate percentage of its portfolio investments that falls into each 
of the four liquidity classification categories noted above.\180\ 
Today, the Commission is rescinding the requirement that funds publicly 
disclose their aggregate liquidity profile on a quarterly basis with a 
60-day delay. The Commission also is amending Form N-PORT to require 
funds and other registrants to report to the Commission on a non-public 
basis the amount of cash and cash equivalents in their portfolio on 
Form N-PORT on a monthly basis and to publicly disclose this amount on 
a quarterly basis with a 60 day delay.\181\ Finally, the Commission is 
amending Form N-PORT to allow funds the option of splitting a fund's 
holding into more than one liquidity classification category in certain 
specified circumstances.\182\ As of the end of 2017, there were 9,154 
mutual funds managing assets of approximately $19 trillion, and there 
were 1,832 ETFs managing assets of approximately $3.4 trillion.\183\ 
Preparing a report on Form N-PORT is mandatory and is a collection of 
information under the PRA, and the information required by Form N-PORT 
will be data-tagged in XML format. Except for certain reporting items 
specified in the form,\184\ responses to the reporting requirements 
will be kept confidential for reports filed with respect to the first 
two months of each quarter; the third month of the quarter will not be 
kept confidential, but made public sixty days after the quarter end.
---------------------------------------------------------------------------

    \178\ Registered money market funds and small business 
investment companies are exempt from Form N-PORT reporting 
requirements.
    \179\ Reporting Modernization Adopting Release, supra footnote 
2.
    \180\ Item B.8.a of Form N-PORT. Form N-PORT also requires 
public reporting of the percentage of a fund's highly liquid 
investments that it has segregated to cover, or pledged to satisfy 
margin requirements in connection with, derivatives transactions 
that are classified as moderately liquid, less liquid, or illiquid 
investments. Item B.8.b of Form N-PORT.
    \181\ See supra footnote 21 (noting that the term ``registrant'' 
refers to entities required to file Form N-PORT, including all 
registered management investment companies, other than money market 
funds and small business investment companies, and all ETFs 
(regardless of whether they operate as UITs or management investment 
companies)).
    \182\ See new Item C.7.b of Form N-PORT and Instructions to Item 
C.7 of Form N-PORT.
    \183\ See supra footnote 142 and accompanying text.
    \184\ These items include information reported with respect to a 
fund's Highly Liquid Investment Minimum (Item B.7), derivatives 
transactions (Item B.8), country of risk and economic exposure (Item 
C.5.b), delta (Items C.9.f.v, C.11.c.vii, or C.11.g.iv), liquidity 
classification for portfolio investments (Item C.7), or 
miscellaneous securities (Part D), or explanatory notes related to 
any of those topics (Part E) that is identifiable to any particular 
fund or adviser. See new General Instruction F of Form N-PORT.
---------------------------------------------------------------------------

    In the Liquidity Adopting Release, we estimate that, for the 35% of 
funds that would file reports on Form N-PORT in house, the per fund 
average aggregate annual hour burden will be 144 hours per fund, and 
the average cost to license a third-party software solution will be 
$4,805 per fund per year.\185\ For the remaining 65% of funds that 
would retain the services of a third party to prepare and file reports 
on Form N-PORT on the fund's behalf, we estimate that the average 
aggregate annual hour burden will be 125 hours per fund, and each fund 
will pay an average fee of $11,440 per fund per year for the services 
of third-party service provider. In sum, we estimate that filing 
liquidity-related information on Form N-PORT will impose an average 
total annual hour burden of 144 hours on applicable

[[Page 31874]]

funds, and all applicable funds will incur on average, in the 
aggregate, external annual costs of $103,787,680, or $9,118 per 
fund.\186\
---------------------------------------------------------------------------

    \185\ See Liquidity Adopting Release, supra footnote 2, at 
n.1237 and accompanying text.
    \186\ See Liquidity Adopting Release, supra footnote 2, at 
n.1238 and accompanying text.
---------------------------------------------------------------------------

    We are adopting, substantially as proposed, amendments to Form N-
PORT to rescind the requirement that a fund report the aggregate 
percentage of the fund's portfolio representing each of the four 
liquidity categories. As discussed above, we are rescinding this 
requirement because we believe, and commenters generally agree,\187\ 
that Form N-PORT may not be the most accessible and useful way to 
convey to the public information about a fund's liquidity risks and the 
fund's approach to liquidity risk management. Because there would no 
longer be public disclosure of a fund's aggregate liquidity 
classification information, we also will re-designate reporting about 
the amount of a fund's highly liquid investments that are segregated or 
pledged to cover less liquid derivatives transactions to the non-public 
portion of the form. Finally, we are adopting amendments to Form N-PORT 
to add an additional disclosure requirement relating to a fund's or 
other registrant's holdings of cash and cash equivalents not reported 
in Parts C and D of the Form \188\ and to allow funds the option of 
splitting a fund's holding into more than one classification category 
in three specified circumstances.\189\ We believe these additional 
amendments enhance the liquidity data reported to the Commission.\190\ 
In addition, for some funds, these changes may also reduce cost burdens 
as they comply with the rule.
---------------------------------------------------------------------------

    \187\ See, e.g., IDC Comment Letter; BlackRock Comment Letter; 
SIFMA AMG Comment Letter.
    \188\ See new Item B.2.f. of Form N-PORT.
    \189\ See new Instructions to Item C.7 of Form N-PORT.
    \190\ See Liquidity Adopting Release, supra footnote 2, at n.293 
and accompanying text (discussing the Commission's need for the 
information reported on Form N-PORT).
---------------------------------------------------------------------------

    Based on Commission staff experience, we believe that rescinding 
the requirement that funds publicly report the aggregate classification 
information on Form N-PORT will reduce the estimated burden hours and 
costs associated with Form N-PORT by approximately one hour. We 
believe, however, that this reduction in cost will be offset by the 
increase in cost associated with the other amendments to Form N-PORT, 
which we also estimate to be one hour. Therefore, we believe that there 
will be no substantive modification to the existing collection of 
information for Form N-PORT. Commenters did not provide comment on our 
estimated reduction in burden hours and costs associated with Form N-
PORT. As a result, the Commission believes that the current PRA burden 
estimates for the existing collection of information requirements 
remain appropriate.

C. Form N-1A

    Form N-1A is the registration form used by open-end investment 
companies. The respondents to the amendments to Form N-1A adopted today 
are open-end management investment companies registered or registering 
with the Commission. Compliance with the disclosure requirements of 
Form N-1A is mandatory, and the responses to the disclosure 
requirements are not confidential. In our most recent Paperwork 
Reduction Act submission for Form N-1A, we estimated for Form N-1A a 
total hour burden of 1,602,751 hours, and the total annual external 
cost burden is $131,139,208.\191\
---------------------------------------------------------------------------

    \191\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2018.
---------------------------------------------------------------------------

    We are adopting, largely as proposed, amendments to Form N-1A to 
require funds disclose information about the operation and 
effectiveness of their liquidity risk management program in their 
reports to shareholders. Specifically, in response to commenters, we 
are moving the discussion of the operation and effectiveness of a 
fund's liquidity risk management program to the section of the 
shareholder report (annual or semi-annual) following the discussion of 
board approval of advisory contracts.\192\ As proposed, this subsection 
will require funds to discuss the operation and effectiveness of their 
liquidity risk management program over the period covered. However, 
funds will have flexibility to cover either the most recently completed 
fiscal year or the most recently completed calendar year.
---------------------------------------------------------------------------

    \192\ New Item 27(d)(7)(b) of Form N-1A.
---------------------------------------------------------------------------

    Form N-1A generally imposes two types of reporting burdens on 
investment companies: (i) The burden of preparing and filing the 
initial registration statement; and (ii) the burden of preparing and 
filing post-effective amendments to a previously effective registration 
statement (including post-effective amendments filed pursuant to 17 CFR 
230.485(a) or (b) (``rule 230.485(a) or (b)'') under the Securities 
Act, as applicable). As in the proposal, we estimate that each fund 
will incur a one-time burden of an additional five hours \193\ to draft 
and finalize the required disclosure. In aggregate, we estimate that 
funds will incur a one-time burden of an additional 54,890 hours,\194\ 
to comply with the new Form N-1A disclosure requirements. Amortizing 
the one-time burden over a three-year period results in an average 
annual burden of an additional 18,296.7 hours.\195\
---------------------------------------------------------------------------

    \193\ This estimate is based on the following calculation: 5 
Hours (3 hours for the compliance attorney to consult with the 
liquidity risk management program administrator and other investment 
personnel in order to produce an initial draft of the shareholder 
report disclosure + 2 hours for senior officers to familiarize 
themselves with the new disclosure and review the report). These 
calculations stem from the Commission's understanding of the time it 
takes to draft and review shareholder report disclosure.
    \194\ This estimate is based on the following calculations: 5 
hours x 10,978 open-end funds (excluding money market funds and ETFs 
organized as UITs, and including ETFs that are management investment 
companies) = 54,890 hours. We estimate that there are 8 ETFs 
organized as UITs as of December 31, 2017.
    \195\ This estimate is based on the following calculation: 
54,890 hours / 3 = 18,296.7 average annual burden hours.
---------------------------------------------------------------------------

    Based on Commission staff expertise and experience, we estimate 
that each fund will incur an ongoing burden of an additional 2.5 hours 
each year to review and update the required disclosure.\196\ In 
aggregate, we estimate that funds will incur an annual burden of an 
additional 27,445 hours,\197\ to comply with the new shareholder report 
disclosure requirements in Form N-1A.\198\ Amortizing these one-time 
and ongoing hour and cost burdens over three years results in an 
average annual increased burden of approximately 3.3 hours per fund, as 
in the proposal.\199\ In total, we estimate that funds will incur an 
average annual increased burden of approximately 45,741.7 hours,\200\ 
to comply with the shareholder report disclosure requirements.
---------------------------------------------------------------------------

    \196\ This estimate is based on the following calculation: 2.5 
hours (2 hours for the compliance attorney to consult with the 
liquidity risk management program administrator and other investment 
personnel in order to produce an initial draft of the shareholder 
report disclosure + .5 hours for senior officers to review the 
shareholder report).
    \197\ This estimate is based on the following calculation: 2.5 
hours x 10,978 open-end funds (excluding money market funds and ETFs 
organized as UITs, and including ETFs that are management investment 
companies) = 27,445 hours.
    \198\ The calculations included in this PRA have been modified 
from the Proposing Release to reflect updated estimates for the 
number of entities that the Commission believes will be required to 
comply with the new shareholder report amendments on Form N-1A. The 
estimated cost burdens per fund remain the same.
    \199\ This estimate is based on the following calculation: (5 
burden hours (year 1) + 2.5 burden hours (year 2) + 2.5 burden hours 
(year 3)) / 3 = 3.3
    \200\ This estimate is based on the following calculation: 
18,296.7 hours + 27,445 hours = 45,741.7 hours.

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

[[Page 31875]]

V. Final Regulatory Flexibility Analysis

    The Commission has prepared the following Final Regulatory 
Flexibility Analysis in accordance with section 3(a) of the Regulatory 
Flexibility Act (``RFA'').\201\ It relates to new amendments to Form N-
PORT and new amendments to Form N-1A. We prepared an Initial Regulatory 
Flexibility Analysis (``IRFA'') in conjunction with the Proposing 
Release in March 2018.\202\ The Proposing Release included, and 
solicited comment, on the IRFA.
---------------------------------------------------------------------------

    \201\ 5 U.S.C. 603(a).
    \202\ See Proposing Release, supra footnote 10, at section V.
---------------------------------------------------------------------------

A. Need for the Amendments

    The Commission adopted rule 22e-4 and related rule and form 
amendments to enhance the regulatory framework for liquidity risk 
management of funds.\203\ In connection with rule 22e-4, a fund is 
required to publicly report on Form N-PORT the aggregate percentage of 
its portfolio investments that falls into each of the liquidity 
categories enumerated in rule 22e-4. This requirement was designed to 
enhance public disclosure regarding fund liquidity and redemption 
practices. However, since we adopted these requirements, we have 
received letters raising concerns that the public disclosure of a 
fund's aggregate liquidity classification information on Form N-PORT 
may not achieve our intended purpose and may confuse and mislead 
investors. As we discuss further in section II.A above, these letters 
have led us to believe that the approach of disclosing liquidity 
information to the public through Form N-PORT may not be the most 
accessible and useful way to convey fund liquidity information to the 
public, given that only the Commission, and not the public, would have 
access to the more granular information and can request information 
regarding the fund's methodologies and assumptions that would provide 
needed context to understand this reporting.\204\
---------------------------------------------------------------------------

    \203\ See supra section I.
    \204\ See supra section II.A.1 at text accompanying footnote 27.
---------------------------------------------------------------------------

B. Significant Issues Raised by Public Comment

    In the Proposing Release, we requested comment on the IRFA, 
requesting in particular comment on the number of small entities that 
would be subject to the proposed amendments to Form N-1A and Form N-
PORT and whether these proposed amendments would have any effects that 
have not been discussed. We requested that commenters describe the 
nature of any effects on small entities subject to the proposed 
amendments to Form N-1A and Form N-PORT and provide empirical data to 
support the nature and extent of such effects. We also requested 
comment on the estimated compliance burdens of the proposed amendments 
to Form N-1A and Form N-PORT and how they would affect small entities. 
We did not receive comments regarding the impact of our proposal on 
small entities.

C. Small Entities Subject to the Amendments

    An investment company is a small entity if, together with other 
investment companies in the same group of related investment companies, 
it has net assets of $50 million or less as of the end of its most 
recent fiscal year.\205\ Commission staff estimates that, as of 
December 31, 2017, there were 54 open-end investment companies that 
would be considered small entities. This number includes open-end 
ETFs.\206\
---------------------------------------------------------------------------

    \205\ See 17 CFR 270.0-10(a) (``rule 270.0-10(a)'') under the 
Investment Company Act.
    \206\ This estimate is derived from an analysis of data obtained 
from Morningstar Direct as well as data reported on Form N-SAR filed 
with the Commission for the period ending December 31, 2017. This 
estimate has been modified from the Proposing Release to reflect 
updated estimates for the number of small entities that the 
Commission believes will be required to comply with the new 
shareholder report amendments on Form N-1A.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    We are adopting amendments to Form N-1A and Form N-PORT to enhance 
fund disclosure regarding a fund's liquidity risk management practices. 
Specifically, the amendments to Form N-PORT \207\ will rescind the 
requirement that funds publicly disclose aggregate liquidity 
classification information about their portfolios and amendments to 
Form N-1A will require funds to discuss certain aspects of their 
liquidity risk management program as part of their reports to 
shareholders.\208\ In addition, we are adopting amendments to Form N-
PORT to allow funds to report multiple classification categories for a 
single position in certain cases \209\ and require funds and other 
registrants to report their holdings of cash and cash equivalents.\210\
---------------------------------------------------------------------------

    \207\ See revised Item B.8 of Form N-PORT.
    \208\ See new Item 27(d)(7)(b) of Form N-1A.
    \209\ See new Item C.7.b of Form N-PORT and Instructions to Item 
C.7 of Form N-PORT.
    \210\ See new Item B.2.f. of Form N-PORT.
---------------------------------------------------------------------------

    All funds will be subject to the new disclosure and reporting 
requirements, including funds that are small entities. We estimate that 
54 funds are small entities that will be required to comply with the 
disclosure and reporting requirements. As discussed above, we do not 
believe that our amendments will change Form N-PORT's estimated burden 
hours and costs.\211\ We estimate that each fund will incur a one-time 
burden of an additional five hours,\212\ at a time cost of $1,645 \213\ 
each year to draft and finalize the required shareholder report 
disclosure required in Form N-1A. For purposes of this analysis, 
Commission staff estimates, based on outreach conducted with a variety 
of funds, that small fund groups will incur approximately the same 
initial and ongoing costs as large fund groups. Therefore, in the 
aggregate, we estimate that funds that are small entities will incur a 
one-time burden of an additional 270 hours,\214\ at a time cost of 
$88,830,\215\ to comply with the new Form N-1A disclosure requirements. 
Amortizing the one-time burden over a three-year period results in an 
average annual burden of an additional 90 hours,\216\ at a time cost of 
$29,610.\217\ We estimate that each fund will incur an ongoing burden 
of an additional 2.5 hours,\218\ at a time cost of $822.50,\219\ each 
year to review and update the required Form N-1A disclosure. Therefore, 
we estimate that funds that are small entities will incur an ongoing 
burden of an additional 135

[[Page 31876]]

hours,\220\ at a time cost of $44,415,\221\ to comply with the new Form 
N-1A disclosure requirements.
---------------------------------------------------------------------------

    \211\ See supra text accompanying footnote 152.
    \212\ See supra footnote 197 (noting that this estimate is based 
on the Commission staff's understanding of the time it takes it 
takes to draft and review shareholder report disclosure, including 
the time it takes for the compliance attorney to consult with the 
liquidity risk management program administrator and other investment 
personnel in order to produce an initial draft of the shareholder 
report disclosure as well as the time it takes for senior officers 
to familiarize themselves with the new disclosure and review the 
report).
    \213\ This estimate is based on the following calculations: 5 
hours x $329 (blended rate for a compliance attorney ($345) and a 
senior officer ($313)) = $1,645.
    \214\ This estimate is based on the following calculations: 5 
hours x 54 = 270 hours.
    \215\ This estimate is based on the following calculations: 
$1,645 x 54 = $88,830.
    \216\ This estimate is based on the following calculations: 270 
hours / 3 = 90 average annual burden hours.
    \217\ This estimate is based on the following calculations: 
$88,830 / 3 = $29,610.
    \218\ See supra footnote 194 and accompanying text (noting that 
this estimate is based on the Commission staff's understanding of 
the time it takes it takes to review shareholder report disclosure, 
including the time it takes for the compliance attorney to consult 
with the liquidity risk management program administrator and other 
investment personnel in order to produce an initial draft of the 
shareholder report disclosure as well as the time it takes for 
senior officers to review the report).
    \219\ This estimate is based on the following calculations: 2.5 
hours x $329 (blended rate for a compliance attorney ($345) and a 
senior officer ($313)) = $822.50.
    \220\ This estimate is based on the following calculations: 2.5 
hours x 54 = 135 hours.
    \221\ This estimate is based on the following calculations: 
$822.50 x 54 = $44,415.
---------------------------------------------------------------------------

    Amortizing these one-time and ongoing hour and cost burdens over 
three years results in an average annual increased burden of 
approximately 4.2 hours,\222\ at a time cost of $1,370.83,\223\ per 
fund. In total, we estimate that funds that are small entities will 
incur an average annual increased burden of approximately 226.8 hours, 
at a time cost of $74,617.20,\224\ to comply with the new Form N-1A 
disclosure requirements.
---------------------------------------------------------------------------

    \222\ This estimate is based on the following calculations: (135 
hours + 90 hours) / 54 funds = 4.2 hours.
    \223\ This estimate is based on the following calculations: 
($44,415 + $29,610) / 54 funds = $1,370.83.
    \224\ This estimate is based on the following calculations: 
226.8 hours x $329 (blended rate for a compliance attorney ($345) 
and a senior officer ($313)) = $74,617.20.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The RFA directs the Commission to consider significant alternatives 
that would accomplish our stated objectives, while minimizing any 
significant economic impact on small entities. Alternatives in this 
category include: (i) Exempting funds that are small entities from the 
disclosure requirements on Form N-1A, or establishing different 
disclosure or reporting requirements, or different disclosure 
frequency, to account for resources available to small entities; (ii) 
clarifying, consolidating, or simplifying the compliance requirements 
under the amendments for small entities; (iii) using performance rather 
than design standards; and (iv) exempting funds that are small entities 
from other amendments to Form N-PORT.
    The Commission does not believe that exempting any subset of funds, 
including funds that are small entities, from the amendments would 
permit us to achieve our stated objectives. Nor do we believe that 
clarifying, consolidating, or simplifying the amendments for small 
entities would satisfy those objectives. In particular, we do not 
believe that the interest of investors would be served by these 
alternatives. We believe that all fund investors, including investors 
in funds that are small entities, would benefit from accessible and 
useful disclosure about liquidity risk, with appropriate context, so 
that investors may understand its nature and relevance to their 
investments.\225\ The changes we are making will allow funds of all 
sizes to more accurately reflect their liquidity.\226\ The current 
disclosure requirements for reports on Forms N-1A and N-PORT do not 
distinguish between small entities and other funds. Finally, we 
determined to use performance rather than design standards for all 
funds, regardless of size, because we believe that providing funds with 
the flexibility to determine how to design their shareholder report 
disclosures allows them the opportunity to tailor their disclosure to 
their specific risk profile. By contrast, we determined to use design 
standards for our amendments to Form N-PORT because we believe 
information reported to the Commission on the Form must be uniform to 
the extent practicable in order for the Commission to carry out its 
oversight and monitoring responsibilities.
---------------------------------------------------------------------------

    \225\ See supra text accompanying footnote 192.
    \226\ See supra section IV.B at text accompanying footnote 188.
---------------------------------------------------------------------------

VI. Statutory Authority

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

List of Subjects in 17 CFR Part 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Rules and Forms

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

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

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

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203, sec 
939A, 124 Stat. 1376 (2010), unless otherwise noted.

* * * * *

0
2. Amend Form N-1A (referenced in 274.11A) by:
0
a. In Item 27, renumbering paragraph (d)(7) to (d)(7)(a); and
0
b. In Item 27, adding new paragraph (d)(7)(b).
    The addition reads as follows:

    Note:  The text of Form N-1A does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 27. Financial Statements

    (a) * * *
    (d) Annual and Semi-Annual Reports.
* * * * *
    7. Board Approvals and Liquidity Reviews.
    (a) Statement Regarding Basis for Approval of Investment Advisory 
Contract.
* * * * *
    (b) Statement Regarding Liquidity Risk Management Program. If the 
board of directors reviewed the Fund's liquidity risk management 
program pursuant to rule 22e-4(b)(2)(iii) of the Act [17 CFR 270.22e-
4(b)(2)(iii)] during the Fund's most recent fiscal half-year, briefly 
discuss the operation and effectiveness of the Fund's liquidity risk 
management program over the past year.

Instruction

    If the board reviews the liquidity risk management program more 
frequently than annually, a fund may choose to include the discussion 
of the program's operation and effectiveness over the past year in one 
of either the fund's annual or semi-annual reports, but does not need 
to include it in both reports.
* * * * *
0
3. Amend Form N-PORT (referenced in Sec.  274.150) by:
0
a. In the General Instructions, revising the second paragraph of F. 
Public Availability;
0
b. In Part B, amending Item B.2 by adding Item B.2.f;
0
c. In Part B, revising Item B.8;
0
d. In Part C, revising Item C.7; and
0
e. Revising Part F.
    The revisions 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

* * * * *

F. Public Availability

* * * * *
    The SEC does not intend to make public the information reported on 
Form N-PORT for the first and second months of each Fund's fiscal 
quarter that is identifiable to any particular fund or adviser, or any 
information

[[Page 31877]]

reported with respect to a Fund's Highly Liquid Investment Minimum 
(Item B.7), derivatives transactions (Item B.8), country of risk and 
economic exposure (Item C.5.b), delta (Items C.9.f.v, C.11.c.vii, or 
C.11.g.iv), liquidity classification for portfolio investments (Item 
C.7), or miscellaneous securities (Part D), or explanatory notes 
related to any of those topics (Part E) that is identifiable to any 
particular fund or adviser. However, the SEC may use information 
reported on this Form in its regulatory programs, including 
examinations, investigations, and enforcement actions.
* * * * *

Part B: Information About the Fund

* * * * *
    Item B.2.f. Cash and cash equivalents not reported in Parts C and 
D.
* * * * *
    Item B.8 Derivatives Transactions. For portfolio investments of 
open-end management investment companies, provide the percentage of the 
Fund's Highly Liquid Investments that it has segregated to cover or 
pledged to satisfy margin requirements in connection with derivatives 
transactions that are classified among the following categories as 
specified in rule 22e-4 [17 CFR 270.22e-4]:
    1. Moderately Liquid Investments
    2. Less Liquid Investments
    3. Illiquid Investments
* * * * *

Part C: Schedule of Portfolio Investments

* * * * *
    Item C.7.a Liquidity classification information.
    For portfolio investments of open-end management investment 
companies, provide the liquidity classification(s) for each portfolio 
investment among the following categories as specified in rule 22e-4 
[17 CFR 270.22e-4]. For portfolio investments with multiple liquidity 
classifications, indicate the percentage amount attributable to each 
classification.
    i. Highly Liquid Investments
    ii. Moderately Liquid Investments
    iii. Less Liquid Investments
    iv. Illiquid Investments
    Item C.7.b. If attributing multiple classification categories to 
the holding, indicate which of the three circumstances listed in the 
Instructions to Item C.7 is applicable.
    Instructions to Item C. 7 Funds may choose to indicate the 
percentage amount of a holding attributable to multiple classification 
categories only in the following circumstances: (1) If portions of the 
position have differing liquidity features that justify treating the 
portions separately; (2) if a fund has multiple sub-advisers with 
differing liquidity views; or (3) if the fund chooses to classify the 
position through evaluation of how long it would take to liquidate the 
entire position (rather than basing it on the sizes it would reasonably 
anticipated trading). In (1) and (2), a fund would classify using the 
reasonably anticipated trade size for each portion of the position.
* * * * *

Part F: Exhibits

    For reports filed for the end of the first and third quarters of 
the Fund's fiscal year, attach no later than 60 days after the end of 
the reporting period the Fund's complete portfolio holdings as of the 
close of the period covered by the report. These portfolio holdings 
must be presented in accordance with the schedules set forth in 
Sec. Sec.  210.12-12--210.12-14 of Regulation S-X [17 CFR 210.12-12--
210.12-14].
* * * * *

    By the Commission.

    Dated: June 28, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-14366 Filed 7-9-18; 8:45 am]
 BILLING CODE 8011-01-P