Form N-PORT reporting   

Form N-PORT collects comprehensive data on a fund's portfolio holdings, including specific details about each security, its valuation, and liquidity classification. It also gathers information on the fund's risk exposures, such as interest rate, credit, and liquidity risks, along with data on the use of derivatives and borrowings. The form aims to collect sufficient information to allow for continuous monitoring of the fund's financial position and risk management practices. Currently, before the implementation of the final rule, monthly Form N-PORT reports must be filed quarterly within 60 days after the end of each fiscal quarter, but only the last month's report of each quarter (i.e. March, June, September, and December) is made public. Under the new rule, investment funds must file Form N-PORT monthly within 30 days after month’s end. Additionally, the SEC will make available All Form N-PORT reports within 60 days after the end of the month to which a report refers.

Form N-CEN reporting 

Form N-CEN collects comprehensive annual data from open-end and exchange traded funds, including information on fund structure, operations, service providers, and compliance practices. It thereby requires in-scope funds to disclose details about their legal status, investment advisers (fund managers), and third-party service providers and gathers certain financial data, such as net assets and distribution payments during the year. Form N-CEN must be filed annually within 75 days after the end of the fund's fiscal year. Under the final rule, the SEC will collect additional information on service providers investment funds use to meet their liquidity risk management program requirements (open-end funds only). Specifically, the SEC will require the disclosure of:

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• the name of each liquidity service provider;

• the legal entity identifier (if available) and location of each provider;

• the asset classes for which the liquidity service provider offered classifications;

• whether the liquidity service provider is affiliated with the fund or its investment adviser; and

• whether the service provider was hired or terminated during the reporting period.

Guidance as regards certain fund liquidity risk management program requirements 

The SEC has clarified some of the provisions under the SEC's liquidity rule under 17 CFR § 270.22e-4, which was adopted in 2016 and requires open-end funds to implement liquidity risk management programs to ensure they can meet redemption obligations and reduce the dilution of shareholder interests. The rule mandates regular assessments, management, and periodic reviews of liquidity risk, including the classification of portfolio investments into prescribed liquidity categories.

• Clarification of the frequency of liquidity classifications: The SEC has clarified that funds are required to review liquidity classifications more frequently than monthly if certain market conditions or investment-specific considerations materially affect the classification of investments. Such conditions or events may include situations of significant market volatility, such as during a financial crisis or other market disruptions, a downgrade in the credit rating of an issuer or a default event of an issuer, or significant geopolitical developments, such as the imposition of economic sanctions or the materialization of armed conflict or other political instability.

• Definition and treatment of cash: The SEC has clarified that "cash" in the context of the liquidity rule refers specifically to U.S. dollars, not foreign currencies or cash equivalents. If a fund holds foreign currencies or cash equivalents denominated in non-U.S. dollars, these do not automatically qualify as "cash" for liquidity classification purposes. In this case, funds must assess how long it would take to convert those assets into U.S. dollars. Although the SEC does not state what is considered "too much time" when it comes to converting investments into U.S. dollars for liquidity classification purposes, the Commission expects funds to exercise careful judgment based on their individual circumstances, taking into account factors such as market conditions, the type of asset, and the potential impact on the fund's ability to meet redemption requests.

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• Highly liquid investment minimums: The liquidity rule currently requires funds that do not primarily hold highly liquid assets to establish and periodically review a highly liquid investment minimum. This minimum is intended to ensure that funds can meet redemptions without significantly diluting the interests of remaining investors. In the final rule, the SEC has now clarified that funds should tailor their highly liquid investment minimums based on their unique investment strategies and portfolio characteristics. For example, funds that invest significantly in less liquid or illiquid assets such as bank loans are advised to set a higher highly liquid investment minimum. Similarly, funds with investment strategies that historically experience or are expected to experience higher volatility in investor flows should consider higher highly liquid investment minimums. The SEC has also clarified that - while borrowing arrangements (such as lines of credit) can be considered in the determination of the highly liquid investment minimum- the Commission cautions that liquidity risk management should primarily be conducted through the construction of the fund’s portfolio, rather than relying heavily on such arrangements.

Effects for market participants

Investment fund managers need to closely review the final rule and take adequate steps to prepare for the revised reporting requirements. This includes the setup of revised reporting processes to align with the modified frequency of Form N-Port reporting and the implementation of policies for the collection of additional data on their liquidity service providers. Open-end funds are also strongly recommended to review the guidance issued by the SEC on liquidity risk management and reflect upon own processes to ensure compliance with the SEC's expectations as regards the frequency of liquidity classifications, the classification of cash and cash equivalents in non-U.S. dollars, and the determination of highly liquid investment minimums for funds with otherwise rather non-liquid investments.

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Averroes Concept Lounge (ACL) with its Regulatory Intelligence Service Portal (RISP) can support clients in a variety of ways with the implementation of the final rule:

• Regulatory Compliance Consulting: The experts of ACL can help investment companies understand and implement the new SEC rule, ensuring compliance with the reporting and disclosure obligations of Form N-PORT and Form N-CEN. They can assist in reviewing existing practices, identifying gaps, and helping funds meet the 30-day reporting timeline for Form N-PORT and the updated requirements for Form N-CEN, particularly in relation to service provider disclosures and liquidity management.

• Technology and Data Solutions: Given that investment companies must report comprehensive data on portfolio holdings, risk exposures, and liquidity management, ACL can provide expertise in developing or optimizing technology solutions for data collection and reporting. Its focus on technology enables it to streamline the filing process, ensuring that monthly and annual reports are timely and accurate, thereby leveraging on automated processes where possible.

• Liquidity Risk Management Programs: The SEC's liquidity rule under 17 CFR § 270.22e-4 requires  frequent liquidity classifications and stringent liquidity risk management practices, taking into account the new clarifications issued by the Commission. ACL can provide advisory services to help funds tailor their liquidity strategies, establish appropriate highly liquid investment minimums, and improve their liquidity risk management frameworks. This could include helping funds assess how non-U.S. dollar assets should be classified and offering strategic advice on managing liquidity under volatile market conditions.

• Training and Education: The new SEC rule may require staff education and upskilling. Averroes can provide workshops, training, or ongoing support to help investment fund teams understand the intricacies of the new rule and how to implement it effectively.

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