SEC Passes on Swing Pricing, Adopts Amendments to Forms N-PORT and
N-CEN, Issues Guidance on Mutual Fund Liquidity Risk

On August 28, 2024, by a 3–2 vote, the U.S. Securities and Exchange Commission (SEC or the Commission) adopted amendments to reporting requirements to provide the SEC and investors with additional and more timely information about certain registered investment companies (funds) on Form N-PORT. These amendments will triple the amount of Form N-PORT data available to investors in a given year by increasing public reporting from quarterly to monthly. In addition, the SEC adopted amendments to Form N-CEN requiring open-end funds (mutual funds) to report certain information about service providers used to fulfill the conditions of liquidity risk management programs, allowing the SEC to better track fund liquidity risk management practices. The SEC also provided guidance related to certain aspects of mutual fund liquidity risk management requirements.

Though addressed in the original proposing release, the SEC declined to adopt mandatory swing pricing of mutual fund shares, a "hard close" for transacting in fund shares, or proposed changes to the mutual fund liquidity rule. These proposals would have applied to all open-end investment companies, but not money market funds or exchange-traded funds (ETFs).

Our Take. After strenuously objecting to the SEC proposal to mandate swing pricing, which was the signature provision in the original rulemaking package here, mutual fund sponsors are certainly relieved that the SEC did not move forward on swing pricing or the related hard close. Proposed amendments to the mutual fund liquidity rule (Rule 22e-4 under the Investment Company Act of 1940, as amended (Investment Company Act)), also not adopted, were similarly far reaching and could have jeopardized some product types and forced reassessments of others. The decision to leave those to the side as well likely generated another industry sigh of relief. However, liquidity rule amendments, including “dilution management,” remain on the SEC’s public regulatory agenda, with the possibility that they could be reproposed.

While the SEC makes a case that more frequent N-PORT reporting will help the agency monitor and respond to market events, it remains to be seen whether the benefits of such additional reporting will outweigh the likely substantial additional costs of compiling and filing such reports. Also unclear is the extent to which more frequent public disclosure of portfolio holdings will be a disadvantage to registered funds relative to other market participants like hedge funds, family offices, and collective investment trusts that are not subject to the same reporting requirements.

I. Amendments to Form N-PORT

 Currently, registered open-end and closed-end investment companies (other than money market funds and small business investment companies) and ETFs organized as unit investment trusts are required to file periodic reports about their portfolio holdings on Form N-PORT on a quarterly basis and have up to 60 days after the end of the quarter to file such reports with the SEC. These reports contain information about the fund’s portfolio as of the end of each of the three months in the quarterly filing period. However, the SEC makes information public for only the third month of each quarter, and information for the first and second months of each quarter remains confidential.

In the SEC’s view, certain recent market events have reinforced a regulatory need for more timely data regarding funds’ portfolios. These events include actual or potential market disruptions relating to (1) the Covid-19 pandemic that began in March 2020, (2) the Russian invasion of Ukraine that began in February 2022, (3) the transition away from the London Interbank Offered Rate, and (4) the insolvency of certain regional banks in spring 2023. When analyzing these events, portfolio data available to the SEC from Form N-PORT reports was seen as stale, reflecting fund portfolios and activities as of several months earlier.

The SEC believes that more frequent and more timely Form N-PORT data is needed to allow it to (1) conduct more targeted and timely monitoring efforts, (2) analyze risks and trends more accurately, and (3) better assess the breadth and magnitude of potential impacts of market events and stress affecting particular issuers, asset classes, counterparties, and market participants. Accordingly, the SEC adopted, substantially as proposed, certain amendments to the filing frequency and public availability features of Form N-PORT summarized below. In addition to giving the Commission timelier information to conduct comprehensive fund oversight, these changes are intended to give investors information to enhance their ability to make informed investment decisions.

Increased filing frequency

Rather than filing monthly reports with the Commission on a quarterly basis, the amendments to Form N-PORT require funds to file reports on a monthly basis. Funds will be required to make these monthly filings (which will not be publicly available) with the SEC within 30 days after the end of the month to which they relate, rather than no later than 60 days after the end of the fiscal quarter.

The SEC recognizes that filing the information within the 30-day deadline will likely increase burdens for funds (including fund internal systems and processes) and service providers relative to the current quarterly filing requirement or a monthly filing requirement with a longer filing delay (e.g., 45 or 60 days), as some commenters had suggested. The SEC downplays these burdens, believing they are unlikely to be significant given that Rule 30b1-9 under the Investment Company Act already requires funds to maintain records of the information Form N-PORT requires within the same 30-day period in which the amendments now require funds to file new, more frequent Form N-PORT reports. Commenters, however, had indicated that the records required to comply with Rule 30b1-9 are not always in the same form as the information to be filed and may be subject to less reconciliation and internal data tagging.

The SEC also discussed concerns that it (and many commenters) had raised — both previously and during this rulemaking — regarding the possibility that receipt of more frequent and more timely portfolio information would increase the risk of a cyberattack or other information leak targeting that information. In response, the SEC says that it has improved and modernized certain systems and is now generally more experienced in “receiving, maintaining, and protecting sensitive portfolio data.”

Increased publication frequency

While only the report for the third month of every quarter was made public under the prior reporting regime, the amendments require each monthly report on Form N-PORT to be made public 60 days after the end of the month. Current items that are nonpublic, including individual portfolio investment liquidity classifications, will remain nonpublic in individual reports under the amendments.

Some commenters stated that publicizing Form N-PORT information each month, rather than every third month, could increase the risk of predatory trading by other market participants (e.g., front running) and ultimately harm funds and their shareholders. However, the SEC pointed to the following mitigating factors:

• A fund’s continuing ability under existing rules to treat an instrument as a miscellaneous security for up to one year if the position does not exceed 5% of the fund and has not been previously disclosed to the public should help deter predatory trading.
• A monthly, rather than a quarterly, Form N-PORT disclosure regime is consistent with many funds’ existing practice of disclosing portfolio holdings on a monthly basis.

For these and other reasons, the SEC determined that publication of information collected on Form N-PORT with a 60-day delay appropriately balances the benefits of receiving additional data on portfolio holdings with the concerns raised by commenters about predatory trading.

Other amendments to Form N-PORT

The SEC adopted, as proposed, the following additional amendments to Form N-PORT:

• Requiring a fund to report certain return and flow information only for the month that the report covers rather than for the preceding three months
• Allowing funds to report publicly the aggregate amount of holdings in the miscellaneous securities category each month while requiring funds to provide more detailed information about the individual holdings in the miscellaneous securities category to the Commission on a nonpublic basis
• Requiring funds to identify specifically whether they are reporting a legal entity identifier (LEI) or a Replication Server System Database (RSSD) ID, if available

Proposed changes not adopted

The SEC declined to adopt proposed amendments that would have required funds to attach their complete portfolio holdings presented in accordance with Regulation S-X with respect to each month’s reporting period. Consequently, funds will not need to present portfolio holdings in accordance with Regulation S-X more frequently than the currently required cycle that aligns with the fund’s semiannual and annual financial statement preparation.

In another change from the proposal, funds will not be required to report swing-pricing-related information on Form N-PORT or comply with proposed changes to liquidity classifications. The SEC also did not go forward with a proposed requirement that funds aggregate information they report on liquidity classifications of their investments.

II. Amendments to Form N-CEN

The SEC adopted, as proposed, the following amendments to Form N-CEN:

• New requirements that a fund subject to the liquidity rule must identify and provide certain information about the service providers it uses to fulfill the requirements of that rule, including (1) naming each liquidity service provider; (2) providing identifying information, including the LEI, if available, and location, for each liquidity service provider; (3) identifying if the liquidity service provider is affiliated with the fund or its investment adviser; (4) identifying the asset classes for which that liquidity service provider provided classifications; and (5) indicating whether the service provider was hired or terminated during the reporting period
• Changes to separate the concepts of LEIs and RSSD IDs, consistent with the changes to Form N-PORT

Proposed changes not adopted

The SEC declined to adopt the proposed amendment to remove swing pricing disclosure from Form N-CEN.

III. Guidance Related to Open-End Fund Liquidity Risk Management Program Requirements

While the SEC did not adopt proposed amendments to the liquidity rule at this time, it did provide guidance, informed by its outreach and monitoring conducted following the market stress event in March 2020 due to the onset of the Covid-19 pandemic, to funds subject to the liquidity rule. The following summarizes the topics covered in this guidance.

Frequency of classification

The liquidity rule currently requires funds to review liquidity classifications more frequently than monthly if intramonth changes in relevant market, trading, and investment-specific considerations are reasonably expected to materially affect one or more of the fund’s investment classifications. Furthermore, funds must adopt and implement policies and procedures reasonably designed so that the funds can conduct the required intramonth review if such changes in conditions have occurred. With respect to the requirement to consider intramonth changes in investment-specific considerations, funds generally should

• Consider reviewing liquidity classifications intramonth if changes in portfolio composition (e.g., a substantial increase in the size of a position) are reasonably expected to materially affect one or more investment classifications
• Consider classifying newly acquired investments intramonth if acquiring a particular investment is reasonably expected to result in material changes to the liquidity profile of a fund (e.g., changes to the fund’s liquidity profile that may cause a shortfall below a fund’s highly liquid investment minimum or cause the fund to exceed the rule’s limit on illiquid investments)

Meaning of Cash

To determine whether an investment can be classified as highly liquid or moderately liquid, the liquidity rule requires a fund to consider the time it reasonably expects such investment to be “convertible to cash” (i.e., sold and settled) without significantly changing the market value of the investment. With respect to “cash” as used in the liquidity rule, the SEC clarifies the following:

• “Cash” means U.S. dollars and does not include foreign currencies or cash equivalents.
• Non-U.S.-dollar currencies are investments that would need to be classified considering conversion to U.S. dollars.
• Funds need to consider conversion to U.S. dollars when classifying an investment, including the amount of time it is reasonably expected to take to convert a reasonably anticipated trade size of that currency into U.S. dollars under current market conditions without significantly changing the currency exchange rate.
• For purposes of assessing the period of time for a currency conversion following the sale of an international noncurrency investment in its local market, it would be reasonable for a fund to assume that it initiates a hypothetical currency conversion at the same time as the hypothetical sale of the international investment.
• If a fund does not reasonably expect to be able to convert a foreign currency into U.S. dollars within seven calendar days because of currency controls or otherwise, then the foreign currency should be classified as an illiquid investment along with other investments in that jurisdiction that would be sold or disposed of in exchange for the illiquid local currency.
• When a fund converts an illiquid international investment into an illiquid local currency as a step toward reducing the fund’s illiquid investments, the SEC would not consider the fund as acquiring the illiquid currency in violation of the rule’s prohibition on acquiring illiquid investments in excess of the rule’s 15% limit.

Highly liquid investment minimums

The SEC took the opportunity to reiterate and highlight certain previous guidance relating to highly liquid investment minimums, particularly regarding funds with portfolios that are on the lower end of the liquidity spectrum, including the following:

• When considering a fund’s investment strategy and portfolio liquidity, a fund that invests significantly in less liquid or illiquid investments, such as a bank loan fund, generally should consider establishing a highly liquid investment minimum that is higher than that of a more liquid fund.
• Funds with investment strategies that have had greater volatility of flows than other investment strategies—or that are reasonably expected to have greater volatility in reasonably foreseeable circumstances—would generally need highly liquid investment minimums that are higher than funds whose strategies tend to entail less flow volatility.
• While a line of credit or similar arrangement can be taken into consideration when determining a fund’s highly liquid investment minimum, liquidity risk management is better conducted primarily through portfolio construction.
• The highly liquid minimum investment requirement does not require a fund to maintain continuously a specific level of highly liquid assets such that the fund cannot use those assets to meet redemptions. The only consequence under the liquidity rule of a fund dropping below its highly liquid investment minimum is board notification of the shortfall at the board’s next regularly scheduled meeting or, if the shortfall continues for more than seven consecutive calendar days, notifying the board and filing a confidential report with the Commission on Form N-RN within one business day.

IV. Technical and Conforming Amendments

The SEC adopted, as proposed, technical amendments to Form N-PORT and Form N-CEN to update the definition of “exchange-traded fund” in those forms to refer directly to the Commission’s exemptive rule (Rule 6c-11) for ETFs.

V. Effective and Compliance Dates

The final amendments to Forms N-PORT and N-CEN have a delayed effective date of November 17, 2025, instead of an extended compliance period, as proposed. While funds in larger fund complexes are expected to comply with the amendments starting with Form N-PORT reports filed on or after November 17, 2025, funds in smaller fund complexes will receive an additional six-month compliance period and will be required to comply with such amendments starting with reports filed on or after May 18, 2026. All funds will be required to comply with the Form N-CEN amendments starting with reports filed on or after November 17, 2025.

VI. Statements From the Dissenting Commissioners

Commissioners Hester M. Peirce and Mark T. Uyeda dissented from the majority and declined to approve the amendments, each issuing separate statements on August 28, 2024. Commissioner Peirce believes that the majority oversells the benefits of the amendments and gives too little attention to the costs of preparing additional information for filing on a complex form like Form N-PORT. Commissioner Uyeda objects to the requirement that monthly Form N-PORT information be made available to the public 12 times per year. He described fund portfolios as “the intellectual work product of investments advisers” and stated that "the idea that fund advisers need to provide their investment ideas to the general public for free is highly concerning.” In his view, the SEC has not adequately justified the decision to substantially increase the frequency of public disclosure of Form N-PORT data.