SEC Proposes Amended Reporting and Disclosure Requirements for Investment Companies and Advisers

The SEC approved two rulemaking proposals at its open meeting about the modernization of investment company and investment adviser reporting. The proposals pertained to the reporting and disclosure of information.


Investment Adviser Act Rule Changes, Including to Form ADV

The following aspects of the changes are most relevant to investment advisers:

(i) The changes would require an investment adviser to provide additional general information about its business, such as the physical locations where its employees are based, how the firm’s CCO is compensated, how the firm uses Web sites and social media, as well as significant information about wrap fee accounts and the adviser’s own assets.

(ii) The changes would facilitate the registration of, and obtain more information regarding, separate legal entities that are affiliated and that may effectively operate as a single advisory business even though they don’t comprise a single legal entity (so-called “umbrella registration”).

(iii) Detailed books and records requirements would be imposed on both the calculation of performance information and the distribution of such information.

(iv) The changes would require investment advisers to provide information about “gross notional exposure” and the “weighted average amount of borrows” in separately managed accounts. Larger advisers would be required to provide information as to “six different categories of derivatives” based on “commonly used metrics . . . [that would be] comparable to the information collected on Form PF regarding private funds.”

A link to a more detailed summary of the IAA/ADV rule changes appears below.

Investment Company Act Rule Changes

The proposed amendments for investment companies’ reporting and disclosure requirements would create new monthly and annual portfolio reporting forms (Form N-PORT and Form N-CEN, respectively).

Form N-PORT would require registered funds other than money market funds to provide, on a monthly basis, portfolio-wide and position-level holdings data, including: (i) the pricing of portfolio securities; (ii) information regarding repurchase agreements, securities lending activities and counterparty exposures; (iii) the terms of derivatives contracts; and (iv) discrete portfolio level and position level risk measures.

New Form N-CEN would replace Form N-SAR and require funds to report certain census-like information annually. The proposal also would require funds to report data in an structured data format which would aggregate the data across all funds and link the reported information with information from other sources.

In addition, the proposal would allow mutual funds and other investment companies to provide shareholder reports by making them accessible on a Web site, and require that derivative disclosures be “displayed prominently in the financial statements.”

Commissioner Piwowar’s Statement

SEC Commissioner Piwowar voiced his support for the proposals. However, he also expressed concern about the requirement that funds must include the legal identifier recognized by the Global LEI Regulatory Oversight Committee or the Global LEI Foundation, which in his view could result in the SEC helping to “establish a monopoly for the provision of legal identifiers.” Commissioner Piwowar also conveyed his reservations about the derivative investment disclosure requirements, placing particular emphasis on the possiblity that index providers may not be willing to allow the components of their indices to be disclosed publicly, which could negatively impact funds that make such investments as well as the index providers.

Lofchie Comment: Among the proposals, the most significant for investment advisers pertain to the disclosure of financial information for separately managed accounts. The new requirements would be in addition to those by Form PF, in addition to what’s required of registered investment companies, in addition to those by the CFTC, in addition to those by the NFA and in addition to those for information gathered by FSOC. Rather than adding to the reporting and recordkeeping burden, is it not reasonable to suggest that the SEC and all of the other regulators get together and decide jointly what they need/require/desire/insist upon? They could do so as a group that represents the government as a whole and not as individual regulators.

Further, the additional information requirements are “comparable to the information collected by Form PF”. Anyone knowledgeable about finance can read the questions in Form PF and tell that the data collected is meaningless because the questions are nonsensical. If the government is going to impose further recordkeeping and reporting requirements on the financial industry, then it should at least make the effort to ensure that the data it collects is valuable.

See: Cadwalader Summary of IAA/ADV Rule Changes; Cadwalader Summary of ICA Rule Changes.