by Jinyan Li
Back in June of 2018, the Securities and Exchange Commission (SEC) started to require large registered investment companies to report their monthly position holdings under Form N-PORT, but now it’s time for smaller companies to follow suit.
Form N-PORT is completed for every calendar month-end, which is submitted to the SEC via EDGAR[1] portal in the XML format. In February 2019, the SEC changed the initial monthly submission deadline to 60 days after end of the fiscal quarter every quarter, stating this change “will allow the Commission to fulfill its mission while reducing its cyber risk profile[2]”.
The compliance timeline of Form N-PORT comes in two parts: first, the larger entities—funds that together with other investment companies in the same group of related investment companies with net assets of $1 billion or more as of the end of the most recent fiscal year of the fund (“larger fund groups”)—began reporting Form N-PORT from June 1, 2018. Smaller entities are now required to start submitting via the EDGAR system from 30th April 2020. There is no difference in the scope or frequency of reporting between the larger and smaller entities.
As the compliance date of smaller entities is imminent, let us recap on the reporting requirements and leverage our experience filing for the larger entities to examine areas which could cause problems.
See below the timetable of reporting requirement for the N-PORT smaller filers[3]
Each fund must attach its portfolio holdings for the last month of its first and third fiscal quarters to Form N-PORT. In accordance with the Paper Reduction Act to avoid duplication of information reported, the SEC has rescinded Form N-Q[4] effective from 1st August 2019. Form N-CSR’s Certification Requirements has also been amended to fill the gap that would otherwise occur with the rescission of Form N-Q.
Concurrent with Modernization of Investment Company Reporting, the Commission adopts new Rule 22e-4 – Investment Company Liquidity Risk Management Programs[5]. In February 2019, the SEC amended Form N-PORT final rule to require all funds to report their holdings’ liquidity classification breakdown and information on a fund’s highly liquid investment minimum on a monthly basis, as well as its holdings of cash and cash equivalents. The compliance date for rule 22e-4 in N-PORT for large entities was 1st June 2019, and will be 1st March 2020 for smaller entities.
Form N-PORT is relatively straightforward compared with ESMA’s AIFMD Annex IV and SEC’s Form PF. The key burden of reporting comes from Part C/D: Schedule of Portfolio Investment, where the fund itemizes all of its position holdings as of the reporting month-end. In particular, Item C.11 Derivatives requires in-depth drilldown of derivative’s reference instrument.
Our team is highly experienced in working with the Commission- we follow the N-PORT guidance and supporting publications closely. After two years of experience in preparing Form N-PORT filings for larger entities, we conclude that each monthly filing fund takes between five to ten working hours to complete, depending on complexity of the portfolio holdings (with larger, more derivatives heavy portfolios needing more time). Additional hours will also need to be accounted for during review and submission. The first year of implementation requires significantly more work hours due to the different ways funds and firms are set up. Small investment firms can also expect similar levels of regulatory burden once they start reporting.
Funds can choose to file N-PORT by either licensing a software solution, or preparing the report in-house. Based upon the Commission’s estimated figures in 2016, “funds that choose to license a software solution to file reports on Form N-PORT, that completing, reviewing, and filing Form N-PORT will cost $56,682 for each fund, including small entities, in its first year of reporting and $47,465 per year for each subsequent year”[6]. Extrapolating these figures, an investment company with ten funds could be expected to pay between $475,000 to $600,000 per year to complete Form N-PORT[7].
Contact us to learn more about how our experienced regulatory reporting team can help you address your N-PORT requirements and reduce your regulatory costs.
[1] EDGAR, the Electronic Data Gathering, Analysis, and Retrieval System (https://www.sec.gov/edgar.shtml)
[2] https://www.sec.gov/news/press-release/2019-23 SEC Modifies Timing for Filing Non-Public Form N-PORT Data to Align with Its Approach to Data Management and Cybersecurity.
[3] https://www.sec.gov/investment/investment-company-reporting-modernization-faq Investment Company Reporting Modernization Frequently Asked Questions
[4] Form N-Q – Quarterly Schedule of Portfolio Holdings of Registered Management Investment Company; which funds currently report their first and third fiscal quarters’ portfolio holdings, prepared in accordance with Regulation S-X (https://www.ecfr.gov/cgi-bin/text-idx?amp;node=17:3.0.1.1.8&rgn=div5#sg17.3.210.sg0).
[5] https://www.sec.gov/divisions/investment/guidance/secg-liquidity.htm Investment Company Liquidity Risk Management Program Rules
[6] https://www.sec.gov/rules/final/2016/33-10231.pdf Investment Company Reporting Modernization, III. Economic Analysis, B. Form N-PORT, 3. Cost (pg. 360).
[7] Ignoring inflation since publication in 2016.
