On May 20, 2015, the Securities Exchange Commission (the “SEC”) approved a set of proposals relating to registered investment companies and investment advisers to modernize and enhance information reporting. Among other things, the proposals require data to be provided in a structured data format which will allow the SEC to more efficiently aggregate and analyze the data to monitor industry trends, inform policy and rulemaking, identify risks and assist the SEC’s staff in examination and enforcement efforts.
Investment Adviser Act Rulemakings
The SEC has proposed a number of revisions to Form ADV to fill data gaps, enhance reporting requirements, designed to capture information on advisers to separately managed accounts akin to that now captured on Form PF for private fund advisers. The SEC also took the opportunity to rationalize the way in which private fund managers operating with multiple general partner entities will be able to register their” relying advisers” under an umbrella registration approach. The SEC is also proposing record keeping rule changes, designed to capture the basis for performance advertisements sent to individuals, in part to close what appears to be a loophole that precluded the Staff from successfully prosecuting an investment adviser in the context of potentially misleading performance advertising. In addition, the SEC proposes numerous technical and clean up amendments to Form ADV and to certain Dodd-Frank related transitional rules.
ADV Amendments. In particular, the Form ADV changes would require an adviser to provide certain aggregate information on the separately managed accounts it advises, including information on regulatory assets under management, investments and use of derivatives and borrowings. Advisers would update this information annually, although larger advisers ($10 billion in “separately managed account regulatory assets under management”) would annually supply annual and semi-annual data. The proposed new Form ADV will require an adviser to disclose other information concerning its advisory business including the use of social media and information relating to branch office operations. Advisers to separately managed accounts would also have to identify the custodians that hold 10% or more of their clients’ separately managed account RAUM and the amount of assets that those custodians hold. The enhanced reporting is designed to improve the quality and depth of the information the SEC collects from investment advisers and to facilitate its risk monitoring initiatives.
Umbrella Registration. The SEC has also proposed amendments to Form ADV that will establish a more efficient and more easily navigable method for the registration of multiple private fund adviser entities operating a single advisory business on one Form ADV. These amendments follow recent no-action guidance to advisers from the SEC Staff, make availability of umbrella registration more widely known to advisers, regularize the registration process for umbrella filers and provide more consistent data about, and create a clearer picture of, groups of advisers that operate as a single business as well as allowing for greater comparability across private fund advisers. It is noteworthy that this relief is limited – effectively – to private fund advisers, and is not proposed to be extended to all registered investment advisers.
Performance Advertising Recordkeeping. In addition to the proposed revisions to Form ADV, the SEC has proposed revisions to Rule 204-2, which would require advisers to make and maintain originals of supporting documentation demonstrating performance calculations or rates of return in any written communications that the adviser circulates or distributes, directly or indirectly, to any person, including those related to the performance or rate of return of any or all managed accounts or securities recommendations. Such revisions are intended to better protect investors from fraudulent performance claims.
Investment Company Act Rulemakings
Many of the SEC’s proposed series of rules, forms and amendments are intended to increase the transparency of fund portfolios and investment practices, modernize information reporting and disclosure by taking advantage of technological advances and, where appropriate, reduce duplicative or otherwise unnecessary reporting burdens, such as by providing funds with an optional method under new Rule 30e-3 to satisfy shareholder report transmission requirements by posting such reports online if they meet certain conditions.
The investment company proposals include the introduction of new Form N-Port, which would replace Form N-Q and would require monthly reporting of a fund’s portfolio-wide and position level holdings including additional information relating to derivative instruments and certain risk metric calculations intended to measure a fund’s exposure and sensitivity to changing market conditions. Although funds would be required to file Form N-Port on a monthly basis, only information contained on Form N-Port for the last month of the fund’s last fiscal quarter would be made available to the public following a 60-day delay.
In addition, the SEC has proposed amendments to Regulation S-X that would require standardized enhanced disclosures concerning the fund’s investments in derivatives as well as other disclosures related to liquidity and pricing of investments, including securities on loan. The SEC’s proposed rules conform to the disclosures required by both Regulation S-X and Form N-Port to eliminate inconsistent disclosures across funds’ financial statements thereby facilitating greater comparability and analysis of derivatives instruments industry-wide.
The SEC also proposed new Form CEN to replace Form N-SAR. Form CEN will include many of the same census data elements but would replace those that are outdated or of little usefulness with those the SEC believes to be of greater relevance today. In addition, Form CEN will be filed in a structured data format to allow for more effective data aggregation and analysis and will be filed on an annual basis rather than semi-annually to further reduce burden on funds.
The comment period for the proposals will be 60 days after publication in the Federal Register, or July 19, 2015.