On May 20, 2015, the SEC unanimously approved proposed rules, forms and amendments that are intended to modernize and enhance the reporting and disclosure of information by funds and investment advisers. The fund proposals are intended primarily to help the SEC and other market participants better assess the risks of different fund products. Funds would be required to provide information in a structured data format that would make it easier for the SEC and other market participants to analyze it. As to investment advisers, the proposed amendments to Form ADV seek to gather additional information for the SEC and the public to better understand the risk profile of individual investment advisers and the industry overall. Among other things, the proposed changes to reporting by investment advisers are intended to provide the SEC with information about separately managed accounts.

Proposed Rules for Funds

Form N-PORT and the Elimination of Form N-Q

The SEC proposed a new portfolio holdings report, Form N-PORT, which would be filed by all registered management investment companies (other than money market funds and small business investment companies) and unit investment trusts (“UITs”) that operate as exchange-traded funds (“ETFs”). Reports would be filed with the SEC on a monthly basis, within 30 days after the close of each month, in a structured data format that facilitates collection and analysis of the data by the SEC. Proposed Form N-PORT would require funds to report information about the fund and its investments held as of the close of the preceding month, including several items of information not required under current rules.

Under the proposed Form, funds would be required to provide detailed information about individual investments, including data related to the pricing of securities, information regarding repurchase agreements and securities lending activities. In addition, Form N-PORT would significantly expand reporting obligations relating to derivatives and would require enhanced, standardized disclosure of each derivative contract, including the type of derivative (e.g., forward, future, option, etc.), the full name and Legal Entity Identifier (if any) of the counterparty and the terms and conditions of each derivative instrument. Form N-PORT also would require reporting of certain risk metric calculations that would measure a fund’s exposure and sensitivity to changing market conditions, such as changes in asset prices, interest rates or credit spreads.

Although funds would be required to file Form N-PORT monthly, only information reported for the third month of each fund’s fiscal quarter would be publicly available, and that information would not be made public until 60 days after the end of the fiscal quarter. The delayed public availability of data reported on Form N-PORT is intended to “deter front-running and other predatory practices, while still allowing the Commission to have a complete record of the portfolio for monitoring, analysis, and checking for compliance with Regulation S-X.”

The SEC is also proposing to rescind Form N-Q, the current portfolio holdings report, because the data required by Form N-PORT would make it unnecessarily duplicative.

The expected compliance dates for the new Form N-PORT requirements are 18 months after the effective date of the new rules for funds with net assets of $1 billion or more, and 30 months after the effective date for smaller funds.

Amendments to Regulation S-X

The SEC is proposing amendments to Regulation S-X that would modify the presentation and content of fund financial statements which are included in shareholder reports and fund registration statements. The proposals would amend Regulation S-X to require standardized and enhanced disclosure regarding derivatives in a manner that is comparable to the information that would be required for reports on proposed Form N-PORT. In particular, the proposed rule amendments would require the presentation of standardized disclosure regarding fund holdings in various open futures, forwards and swap contracts, as well as for any written and purchased option contracts. The proposed rule amendments also would enhance the prominence of derivatives-related disclosures in a fund’s financial statements, rather than permitting such information to be placed in the notes to the financial statements. In addition, the proposed rule amendments would require new disclosure in the notes to the financial statements relating to a fund’s securities lending activities, including related amounts paid or received by the fund, the compensation terms of any lending agent, and the monthly average value of portfolio securities on loan.

The expected compliance date for the amendments to Regulation S-X is 8 months after the effective date of the proposed rule amendments.

Option for Website Transmission of Shareholder Reports

Proposed new Rule 30e-3 under the 1940 Act would provide funds with the option to fulfill periodic shareholder reporting requirements by making shareholder reports and quarterly portfolio holdings available on a website, subject to certain conditions regarding accessibility, shareholder consent and notice. (Currently, funds satisfy delivery requirements by printing and mailing shareholder reports, unless investors have affirmatively requested electronic delivery.)

Funds seeking to rely on Rule 30e-3 would be required to send notices to shareholders regarding the change to electronic delivery and online availability of shareholder reports on a regular basis, including instructions on how to continue to receive paper copies, free of charge.

Form N-CEN and Elimination of Form N-SAR

The SEC proposed a new annual reporting form, Form N-CEN, that would require funds to annually report certain census-type information to the SEC. Under the proposed rules, Form N-CEN would replace Form N-SAR, the form currently used to report fund census information. The new form would include many of the same reporting elements of Form N-SAR but would eliminate certain outdated and duplicative items. The new form would require funds to provide, among other changes, information on service providers, new disclosures relating to matters submitted to shareholders, as well as enhanced securities lending information.

Notably, Form N-CEN would require data related specifically to ETFs, including: (a) identifying information about the ETF’s authorized participants (i.e., broker-dealers who have contractual arrangements with the ETF to purchase from or redeem to the ETF large blocks of shares known as creation units); (b) the number of ETF shares required to form a creation unit as of the last business day of the reporting period; and (c) the exchange on which the ETF is listed. In addition, Form N-CEN would require ETFs to report: (a) transactional fees (fixed and variable) applicable to the last creation unit purchased and the last creation unit redeemed during the reporting period; and (b) the total value (i)of creation units that were purchased by authorized participants primarily in exchange for portfolio securities on an in-kind basis, (ii) of those that were redeemed primarily on an in-kind basis, (iii) of those purchased by authorized participants primarily in exchange for cash, and (iv) of those that were redeemed primarily on a cash basis. Index funds (including ETFs which seek to track the performance of a specified index) would be required to report certain standard industry calculations, including tracking difference and tracking error.

According to the SEC, the form would streamline and update information reported to the agency to reflect current information needs. Reports would be filed annually within 60 days of the end of the fund’s fiscal year, rather than semi-annually as is currently required by Form N-SAR for most funds. The expected compliance date for the new Form N-CEN requirements is 18 months after the effective date of the proposed rules.

Proposed Rules for Investment Advisers

Amendments to Form ADV

The SEC proposed several amendments to Form ADV that would require more detailed information regarding separately managed accounts (“SMAs”) than the SEC currently collects, including information relating to the types of assets held in SMAs, the use of derivatives and borrowings in SMAs and the investment adviser’s regulatory assets under management attributable to SMAs (“SMA RAUM”). For purposes of these proposed amendments, any accounts other than accounts of investment companies, business development companies and other pooled investment vehicles would be considered SMAs.

Under the proposed amendments to Form ADV, all investment advisers reporting that they have regulatory assets under management attributable to separately managed accounts would be required to report the approximate percentage of SMA RAUM invested in ten broad asset categories consistent  with the asset categories contained in Form PF, such as exchange-traded equity securities, U.S. government/agency bonds, corporate bonds (investment grade and non-investment grade) and derivatives. The scope of certain additional SMA reporting would vary based on the SMA RAUM of the adviser, with certain requirements applicable only to those advisers that have SMA RAUM in excess of $150 million. Investment advisers also would be required to disclose the custodians that account for at least 10% of SMA RAUM.

In addition to SMA-related disclosure and other technical and clarifying amendments, the proposed amendments to Form ADV would add other questions to Part 1A of Form ADV to collect additional information regarding the adviser, its advisory business and affiliations, including:

  • Social media information (i.e., web addresses of the adviser’s social media accounts, such as Twitter, LinkedIn and Facebook);
  • Branch office operations information (i.e., total number of offices at which the adviser conducts investment advisory business and information regarding the 25 largest offices in terms of number of employees);
  • Information on whether the adviser’s chief compliance officer is compensated or employed by any other person and identifying information relating to such other person; and
  • Percentage ownership of qualified clients (as defined by Advisers Act Rule 205-3) in each private fund reported on the adviser’s Form ADV.

The SEC’s proposals also would permit by rule certain filing arrangements for the registration of multiple private fund adviser entities operating as a single advisory business (known as an “umbrella registration”) that are currently outlined in staff guidance, through proposed Schedule R to Form ADV.

Amendments to Advisers Act Rule 204-2 (Books and Records)

The SEC also proposed amendments to Rule 204-2 under the Advisers Act. The proposed amendments would require advisers to maintain records on the calculation of performance information distributed to any person, along with adding certain additional requirements on communications related to performance, rate of return of accounts and securities recommendations. Currently, Rule 204-2 generally requires maintenance of such records only on materials distributed to 10 or more persons.

Comments on the proposed rules are due by August 11, 2015. The SEC release relating to the fund proposals, “Investment Company Reporting Modernization,” Investment Company Act Release No. 31610 (May 30, 2015), is available at: http://www.sec.gov/rules/proposed/2015/33-9776.pdf. The release relating to the investment adviser proposals, “Amendments to Form ADV and Investment Advisers Act Rules,” Investment Advisers Act Release No. 4091 (May 20, 2015), is available at: http://www.sec.gov/rules/proposed/2015/ia-4091.pdf.