Liquidity and Form N-PORT: Key Insights From a Compliance Expert

The Investment Company Institute’s Greg Smith sheds light on the evolution of Form N-PORT, the new liquidity rules and recently proposed changes.

Originally published May 2018

Upcoming changes from the Securities and Exchange Commission regarding reporting and disclosure requirements or “SEC Modernization” have been a source of concern for fund groups and filers since they were first announced back in 2015. With the June 1, 2018, compliance date fast approaching, Donnelley Financial Solutions’ (DFIN) ArcFiling Client Working Group wanted a deeper understanding of the rule changes and their impacts. The group met with Greg Smith — senior director of fund accounting and compliance at the Investment Company Institute — to discuss new regulatory changes and what to expect moving forward.

Greg shared updates and ICI views on the interpretation and implementation of Form N-PORT, provided context about why the regulatory changes were needed, discussed how the rules and timelines have been adjusted since they were first proposed, addressed current concerns and challenges, and shared some of ICI’s expectations for the compliance rule.

When SEC modernization was first proposed, the ICI put forward several recommendations, including:

  • Maintaining quarterly disclosure of portfolio holdings with a 60-day lag.

  • Bolstering the SEC’s cybersecurity capabilities.

  • Keeping some data, such as liquidity information, non-public.

  • Permitting filers to complete their submissions on a T+1 accounting basis.

“They have responded favorably to many of our concerns,” Smith said, adding that the SEC has been open to hearing recommendations.

One of the largest changes to implementation has been the SEC’s decision to delay the first Form N-PORT filing on its EDGAR system by nine months. While the compliance date is still June 1, 2018, the first filing has been postponed to April 2019. This shift in the timeline will allow the SEC to improve its cybersecurity defenses before it collects the new data from filers. Until that time, funds will be required to maintain the data in their books and records.

As filers test file Form N-PORT this spring, Smith expects the SEC to continue smoothing the process and fixing any quirks in the schema. However, he doesn’t expect there to be any major changes to the rules or form requirements going forward.

He also reminded participants not to use real, live data when test filing Form N-PORT. The current test filing period runs until May 31. Filers shouldn’t submit between 3:00 p.m. and 5:30 p.m. EST each day, and their filings shouldn’t contain more than 200,000 holdings.

During his discussion with the CWG, Smith addressed the new regulations around liquidity risk management, which he said are causing more concern among fund groups than the Form N-PORT rules.

When the SEC announced its modernization in October 2016, it also approved Investment Company Act rule 22e-4, which requires open-end funds (other than money market funds) and ETFs to create a liquidity risk management program.

As Smith explained, the most controversial part of the rule is the requirement that fund groups review each security and assign them to one of four liquidity categories (or “buckets”) prescribed by the rule. The process is viewed by filers as being both complex and subjective, making it a daunting task.

Third party groups, like MSCI, ICE Data Services and Bloomberg, are being hired to help fund groups perform the required liquidity classifications.

Smith also told the group that the SEC had just released proposed changes to N-PORT. One revision would no longer require fund groups to publicly disclose the percentage of investments that have been designated within each of the four liquidity categories. Instead, the proposed change mandates that funds include a more general update in annual shareholder reports to shed light on the operation and effectiveness of its liquidity risk management program.

Other changes would allow funds to “split” a portfolio holding into more than one liquidity bucket, and require funds to report cash and cash equivalents when completing Form N-PORT. Smith added that ICI will support these changes in its comment letter.

The DFIN ArcFiling Client Working Group

The ArcFiling Client Working Group meets monthly to discuss interpretation, best practices and technical questions. Each session features industry experts who give an hour-long talk on a hot-button issue, followed by a 30-minute discussion between clients and product developers.