N-PORT Derivatives Proposal - Supporting Statement

OMB CONTROL NUMBER: 3235-0730
SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 30b1-9 and Form N-PORT
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Section 30(b) of the Investment Company Act of 1940 [15 U.S.C. 80a-30(b)]
(“Act”) provides that “[e]very registered investment company shall file with the
Commission…such information, documents, and reports (other than financial
statements), as the Commission may require to keep reasonably current the information
and documents contained in the registration statement of such company….” Final rule
30b1-9 under the Act [17 CFR 270.30b1-9], entitled “Monthly Report,” provides that
each registered management investment company or exchange-traded fund organized as a
unit investment trust, or series thereof, other than a registered open-end management
investment company that is regulated as a money market fund under rule 2a-7 [17 CFR

270.2a-7] or a small business investment company registered on Form N-5 [17 CFR 239.24
and 274.5], must file a monthly report of portfolio holdings on Form N-PORT [17 CFR
274.150], current as of the last business day, or last calendar day, of the month.

On November 25, 2019, the Commission proposed rule 18f-4 under the Act. 1 The
proposed rule would apply to mutual funds (other than money market funds), exchangetraded funds, registered closed-end funds, and companies that have elected to be treated
as business development companies under the Act (collectively, “funds”). It would
permit these funds to enter into derivatives transactions and certain other transactions,

1

See Use of Derivatives by Registered Investment Companies and Business Development
Companies; Required Due Diligence by Broker-Dealers and Registered Investment Advisers
Regarding Retail Customers’ Transactions in Certain Leveraged/Inverse Investment Vehicles,
Investment Company Act Release No. 33704 (Nov. 25, 2019) (“Derivatives Proposing Release”).

notwithstanding the restrictions under sections 18 and 61 of the Act, provided that the
funds comply with the conditions of the rule. Funds that are not “limited derivatives
users” under the proposed rule would be required to comply with an outer limit on fund
leverage risk based on value at risk (“VaR”). The outer limit would be based on a relative
VaR test that compares the fund’s VaR to the VaR of a designated reference index for
that fund. If the fund is unable to identify an appropriate designated reference index, the
fund would be required to comply with an absolute VaR test. Proposed rule 18f-4 would
also require a fund to backtest the results of the VaR calculation model used by the fund
in connection with the relative VaR or absolute VaR test, as applicable.
In addition to proposed rule 18f-4, the Commission proposed to amend Form NPORT to add new items to Part B (“Information About the Fund”) and to make certain
amendments to the form’s General Instructions. Form N-PORT, as amended, would
require funds to provide information about their exposure to derivatives instruments and
short sales as of the end of the reporting period. Funds that are subject to the limit on
fund leverage risk would have to report on Form N-PORT their highest daily VaR during
the reporting period and its corresponding date, as well as their median daily VaR for the
monthly reporting period. Funds subject to the relative VaR test during the reporting
period would report the name of the fund’s designated reference index and index
identifier. These funds also would have to report the fund’s highest daily VaR ratio (that
is, the value of the VaR of the fund’s portfolio divided by the VaR of the designated
reference index) during the reporting period and its corresponding date, as well as the
fund’s median daily VaR ratio for the reporting period. A fund that is subject to the
proposed limit on fund leverage risk also would have to report the number of exceptions

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the fund identified during the reporting period arising from backtesting the fund’s VaR
calculation model.
The information would be publicly available for the third month of each fund’s
quarter and would provide market-wide insight into the levels of funds’ derivatives
exposure to the Commission, its staff, and market participants. It also would allow the
Commission and its staff to oversee and monitor compliance with the proposed rule 18f4.
2.

Purpose and Use of the Information Collection

The title for the collection of information is: Rule 30b1-9 and Form N-PORT.
The information provided in reports on Form N-PORT will be used by the Commission
in its regulatory, disclosure review, inspection, and policymaking roles. Unlike many
other federal information collections, which are primarily for the use and benefit of the
collecting agency, this information collection will also be for the use and benefit of
investors. The Commission will make information reported for the third month of each
fund’s fiscal quarter on Form N-PORT publicly available
3.

Consideration Given to Information Technology

The Commission’s EDGAR electronic filing system is designed to automate the
filing, processing and dissemination of full disclosure filings. The system permits filers
to transmit filings to the Commission electronically. This automation has increased the
speed, accuracy and availability of information, generating benefits to investors and
financial markets. Reports on Form N-PORT are filed with the Commission
electronically on EDGAR. The public may access filings on EDGAR through the
Commission’s Internet Web site (http://www.sec.gov) or at EDGAR terminals located at

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the Commission’s public reference rooms.
4.

Duplication

The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication, and reevaluates them whenever it proposes a rule or a
change in a rule. The information collection required by the proposed amendments to
Form N-PORT is not duplicated elsewhere.
5.

Effect on Small Entities

The information collection required by the proposed amendments to Form NPORT would not distinguish between small entities and other funds in terms of what
information would be required to be reported, including the information required by the
amendments. The Commission believes that imposing different reporting requirements on
smaller funds would not be consistent with investor protection and the purposes of the
reports. Differing reporting requirements would not provide comparable information
about derivatives exposure of small entities and other funds that could be used by
Commission staff to identify trends and outliers and by investors to make informed
investment decisions.
The Commission reviews all rules periodically, as required by the Regulatory
Flexibility Act, to identify methods to minimize recordkeeping or reporting requirements
affecting small entities.
6.

Consequences of Not Conducting Collection

Funds will be required to file reports on Form N-PORT with the Commission no
later than 30 days after the end of each month. Less frequent collection would mean that
current information will not be available to the Commission.

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7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

Rule 30b1-9 requires funds to submit reports on Form N-PORT for each month in
the fund’s fiscal quarter not later than 60 days after the end of that fiscal quarter. The
collections of information required by the proposed amendments to Form N-PORT,
which require monthly portfolio investment information, also are required to be filed with
the Commission on a quarterly basis. Given the rapidly changing composition of fund
portfolios, including fund derivatives exposures, monthly portfolio information filed on a
quarterly basis is necessary to ensure that the Commission receives timely and accurate
derivatives exposure and VaR-related information.
8.

Consultation Outside the Agency

The Commission and the staff of the Division of Investment Management
participate in an ongoing dialogue with representatives of the investment company
industry through public conferences, meetings, and informal exchanges. These various
forums provide the Commission and the staff with a means of ascertaining and acting
upon paperwork burdens confronting the industry. Before adopting the proposed
amendments to Form N-PORT, the Commission will receive and evaluate public
comments on the proposal and its collection of information requirements.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

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No information of a sensitive nature, including social security numbers, will be
required under this collection of information. The information collection required by the
proposed amendments to Form N-PORT will not collect Personally Identifiable
Information (PII). The agency has determined that a system of records notice (SORN)
and privacy impact assessment (PIA) are not required in connection with the collection of
information that would be required by the amendments to Form N-PORT.
12.

Burden of Information Collection

The following estimates of average burden hours and costs are made solely for
purposes of the Paperwork Reduction Act (“PRA”) and are not derived from a
comprehensive or even representative survey or study of the cost of the Commission
rules and forms. 2
Form N-PORT, as amended, would require funds to provide information about
their derivatives exposure. We estimate that 5,091 funds would be subject to this
exposure-related disclosure requirement. 3
In addition, funds that are subject to the limit on fund leverage risk in proposed
rule 18f-4 would have to report certain VaR-related information, including: (1) the fund’s
highest daily VaR during the reporting period and its corresponding date; and (2) the
fund’s median daily VaR for the reporting period. Funds subject to the relative VaR test

2

The Commission’s estimates of the relevant wage rates in the tables below are based on salary
information for the securities industry compiled by the Securities Industry and Financial Markets
Association’s Office Salaries in the Securities Industry 2013. The estimated wage figures are
modified by Commission staff to account for an 1,800-hour work-year and multiplied by 2.93 to
account for bonuses, firm size, employee benefits, overhead, and adjusted to account for the
effects of inflation. See Securities Industry and Financial Markets Association, Report on
Management & Professional Earnings in the Securities Industry 2013.

3

See Derivatives Proposing Release, supra note 1, at nn.467, 498 and accompanying text, and
paragraph following n.525.

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during the reporting period also would have to report: (1) the name of the fund’s
designated reference index, (2) the index identifier, (3) the fund’s highest daily VaR ratio
during the reporting period and its corresponding date; and (4) the fund’s median daily
VaR ratio for the reporting period. Finally, all funds that are subject to the proposed limit
on fund leverage risk also would have to report the number of exceptions that the fund
identified as a result of the backtesting of its VaR calculation model. We estimate that
2,424 funds would be subject to these VaR-related disclosure requirements. 4
The information required by Form N-PORT must be data-tagged in XML format.
Responses to the reporting requirements will be kept confidential, subject to the
provisions of applicable law, 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 60
days after the quarter end. Form N-PORT is designed to assist the Commission its
regulatory, disclosure review, inspection, and policymaking roles, and to help investors
and other market participants better assess different fund products.
Based on current PRA estimates, we estimate that funds prepare and file their
reports on Form N-PORT either by (1) licensing a software solution and preparing and
filing the reports in house, or (2) retaining a service provider to provide data aggregation,
validation and/or filing services as part of the preparation and filing of reports on behalf
of the fund. We estimate that 35% of funds subject to the proposed N-PORT filing
requirements would license a software solution and file reports on Form N-PORT in
house, and the remainder would retain a service provider to file reports on behalf of the
fund.

4

See Derivatives Proposing Release, supra note 1, at paragraph following n.525.

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Table 1 below summarizes our PRA initial and ongoing annual burden estimates
associated with the proposed amendments to Form N-PORT.

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Table 1: Form N-PORT PRA Estimates
Internal initial
burden hours

Internal annual
burden hours1

Wage rate2

Internal time
costs

Initial external
cost burden

Annual external
cost burden

$5,590

$4,210

PROPOSED ESTIMATES
Report derivatives exposure
information

2 hours

4.33 hours3

×

$365 (compliance attorney)

$1,580

2 hours

4.33 hours

×

$331 (senior programmer)

$1,433

Total new burden for derivatives
exposure information

8.66 hours

$3,013

Number of funds for derivatives
exposure information

× 5,091

× 5,091

Total new annual burden for
derivatives exposure information (I)

44,088 hours

$15,339,183

Report VaR-related information

2 hours

4.33 hours

×

$365 (compliance attorney)

$1,580

2 hours

4.33 hours

×

$331 (senior programmer)

$1,433

Total new burden for VaR-related
information

8.66 hours

$3,013

Number of funds for VaR-related
information

× 2,424

× 2,424

Total new annual burden for VaRrelated information (II)

20,992 hours

$7,303,512

Total new annual burden (I + II)

65,080 hours

$22,642,695

Current burden estimates

1,803,826 hours

$103,776,240

Revised burden estimates

1,868,906 hours

$125,209,350

$21,433,1104

Notes:
1. Includes initial burden estimates annualized over a three-year period.
2. See supra note 2. These PRA estimates assume that the same types of
professionals would be involved in the proposed reporting requirements that we
believe otherwise would be involved in preparing and filing reports on Form N-PORT.
3. This estimate assumes that, annually after the initial 2 hours to comply with the
new N-PORT requirements, each of a compliance attorney and a senior programmer
would incur 1 burden hours per filing associated with the new reporting
requirements. The estimate of 4.33 hours is based on the following calculation: ((2
hours for the first filing x 1 = 2) + (3 additional filings in year 1 x 1 hour for each of
the additional 3 filings in year 1 = 3) + (4 filings in years 2 and 3 x 1 hour per filing x
2 years) = 8) / 3 = 4.33.
4. This estimate is based on the following calculation: $4,210 (average costs for
funds reporting the proposed information on Form N-PORT) * 5,091 funds (which
includes funds reporting derivative exposure information and VaR-related
information).

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13.

Cost to Respondents

Cost burden is the cost of goods and services purchased to prepare and update
filings on Form N-PORT. As discussed above, based on current PRA estimates, we
estimate that funds prepare and file their reports on Form N-PORT either by (1) licensing
a software solution and preparing and filing the reports in house, or (2) retaining a service
provider to provide data aggregation, validation and/or filing services as part of the
preparation and filing of reports on behalf of the fund. We estimate that 35% of funds
subject to the proposed N-PORT filing requirements would license a software solution
and file reports on Form N-PORT in house, and the remainder would retain a service
provider to file reports on behalf of the fund.
14.

Cost to the Federal Government

The annual cost of reviewing and processing new registration statements,
post-effective amendments, proxy statements, and shareholder reports of investment
companies amounted to approximately $22.2 million in fiscal year 2018, based on the
Commission’s computation of the value of staff time devoted to this activity and related
overhead.
15.

Change in Burden

The total annual hour burden of 1,868,906 hours represents an increase of 65,080
hours over the previous burden hour estimate of 1,803,826 hours. In addition, the annual
external cost burden of $125,209,350 represents an increase of $22,642,695 over the
previous annual external cost burden estimate of $103,776,240. The changes in burden
hours and external cost burdens are due to the staff’s estimates of the time costs and

external costs that would result from our proposed amendments to Form N-PORT.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to not display the expiration date for
OMB approval.
18.
Submission

Exceptions to Certification Statement for Paperwork Reduction Act

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS

Not applicable.

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