SEC Proposes Rules to Modernize and Enhance Investment Adviser and Investment Company Reporting

May 22, 2015

On May 20, the U.S. Securities and Exchange Commission (“SEC”) proposed rules, forms, and amendments to modernize and enhance the reporting and disclosure of information by investment companies and investment advisers. The SEC has stated that the rulemaking is aimed at enhancing the quality of information available to investors and would allow the SEC to more effectively collect and use data provided by investment companies and investment advisers. The SEC forwarded six proposals, four of which are aimed at mutual funds, ETFs, and other registered investment companies (40 Act Funds) and two of which will impact registered investment advisers. ACA has provided a summary of the changes below. The text of the proposed investment company rules can be found here. The text of the proposed investment adviser rules can be found here.

Proposed Rules Impacting Registered Investment Companies

Form N-PORT
The SEC is proposing to rescind Form N-Q and replace it with Form N-PORT. Open-end funds, closed-end funds, and ETFs, with the exception of money market funds, will have to file this new form on a monthly basis. The Form N-PORT will be similar to Form N-Q, but will require more information from the funds. The Form N-PORT will specifically require information regarding derivatives holdings, including the terms of the derivatives, information on the derivatives’ gains/losses by exposure types, the delta on options, and the measures of duration and spread duration, as well as information regarding counterparty exposure and portfolio-level risk metrics. The Form N-PORT will be structured in XML format and made publicly available 60-days after the third month of the fund's fiscal quarter (similar to Form N-Q).

Form N-CEN
The SEC is proposing to rescind Form N-SAR and replace it with Form N-CEN, which will be required on an annual basis instead of semi-annually. The SEC determined that the information being reported on Form N-SAR rarely changes between semi-annual filings and is therefore proposing a more efficient annual filing cycle. The Form N-CEN will require much of the same information as Form N-SAR, but will also require more detailed information on securities lending activities and risk sensitivities. ETFs filing Form N-CEN will also be required to answer additional questions regarding “basket” creation.

Form N-CSR
With the rescission of Form N-SAR, Form N-CSR will be amended to change the certification requirement to cover the previous half-yearly period as opposed to reliance on the certifications contained in the Form N-SAR for those periods. This change is meant to ensure that there are no gaps in the certification periods.

Regulation S-X
The proposed amendments to Regulation S-X would, among other things, require similar disclosures to those in Form N-PORT to be included in a fund’s financial statements in its shareholder reports and, as applicable, website disclosures in order to provide investors with clear and consistent disclosures across funds concerning fund investments in derivatives in a human-readable format as opposed to the XML format for Form N-PORT.

In addition, the SEC is proposing to amend Articles 6 and 12 of Regulation S-X to: (1) require new, standardized disclosures regarding fund holdings in open futures contracts, open forward foreign currency contracts, and open swap contracts, and additional disclosures regarding fund holdings of written and purchased option contracts; (2) update the disclosures for other investments, as well as reorganize the order in which some investments are presented; and (3) amend the rules regarding the general form and content of fund financial statements. The amendments would also require the prominent placement of disclosures regarding investments in derivatives in a fund’s financial statements, rather than allowing such schedules to be placed in the notes to the financial statements. Finally, the amendments would require a new disclosure in the notes to the financial statements relating to a fund’s securities lending activities.

The SEC is also proposing a new rule under Regulation S-X. Rule 30e-3 would permit, but not require, funds to transmit shareholder reports by posting the reports on their websites. The SEC stated that electronic delivery has evolved over time and more shareholders want more information available electronically through the website. This new rule is meant to accommodate those needs. The SEC also highlighted that such reporting should lower fund expenses, thus creating an additional benefit to shareholders. To rely on Rule 30e-3, a fund would need to meet certain conditions including:

  • The report must be publicly accessible, free of charge, and at a specified website from the time of the report’s filing until the filing of the next report.
  • The fund must post on its website any previous shareholder report transmitted to shareholders of record within the last 244 days and in the case of a fund that is not a money market fund or an SBIC, the fund’s complete portfolio holdings as of the close of its most recent first and third fiscal quarters, if any, after the date on which its registration statement became effective.
  • A fund that is not a money market fund or an SBIC would be required to make its portfolio holdings as of the end of the next fiscal quarter accessible in the same manner within 60 days after the close of that period.
  • The website must provide disclosures that are easily understood and familiar to investors and be presented in a similar manner as disclosures currently included in shareholder reports.
  • All filings must be on the same website and the website address on which the shareholder reports and other required portfolio information are made accessible can not be the SEC’s website address for electronic filing.
  • The materials required to be posted on the website must be presented in a format that is convenient for both reading online and printing on paper, and persons accessing the materials would have to be able to permanently retain (free of charge) an electronic copy of the materials in this format.
  • Shareholders must consent to electronic delivery or must receive a printed copy of the disclosures. Implied consent will be allowed where specific rules in obtaining the consent are followed.
  • Funds must provide notice of the posting of the reports within 60 days of the close of the reporting period, similar to the proxy voting notices.

Proposed Rules Impacting Registered Investment Advisers

Amendments to Form ADV
The proposed rules would result in amendments to Form ADV requiring advisers to provide additional aggregate information regarding their separately managed accounts, including the types of assets held, specific derivatives used, and any other types of “borrowing.” The SEC is also proposing to collect additional information regarding the use of social media by advisers as well as information on specific activities undertaken in advisers' branch offices.

Changes are also proposed with regard to private fund advisers. The proposed rules would codify the previous guidance provided by the SEC which allows private fund advisers that are organized as a group of related advisers to register using a single Form ADV (i.e., an “Umbrella Registration”). A new schedule, Schedule R, would be added to Form ADV to collect specific information regarding each of the relying advisers.

Finally, the SEC is proposing a number of clarifying, technical, and other amendments based on the SEC staff's experiences with the form and assisting advisers and their service providers in completing the form. These changes are aimed at making the form "easier to understand and complete."

Amendments to the Investment Advisers Act of 1940
The SEC is also proposing a number of changes to the Advisers Act. First, amendments to Rule 204-2 (the Books and Records Rule) would require advisers to "make and keep supporting documentation that demonstrates performance calculations or rates of return in any written communications that the adviser circulates or distributes, directly or indirectly, to any person." Advisers will also need to maintain originals of all written communications sent or received that relate to the performance or rate of return of any or all managed accounts of the adviser or any securities recommendations. The SEC has stated that these proposals are aimed at mitigating the opportunity for fraudulent performance claims by advisers. In addition, the SEC is proposing several other technical amendments that would remove previously adopted transition provisions that are no longer needed.

Comments on the proposals will be accepted by the SEC for a period of 60 days after the publication in the Federal Register. If you are interested in submitting a comment on any of the proposed changes, please see the instructions for submission here.

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