This week, the SEC unanimously proposed amendments to certain reporting requirements for investment companies and investment advisers. The SEC explains that “as assets under management and complexity in the industry have grown, so too has the volume and complexity of information that the Commission must analyze to carry out its regulatory duties.” With the proposal, the Commission seeks to increase transparency, take advantage of technological advances, and reduce reporting burdens where possible.
In addition, the proposing release mentions that the data that would be required by the new forms is responsive to some of the issues identified by commenters on the FSOC’s request for comment on the asset management industry (while at the same time emphasizing that the proposal is independent of the FSOC). In her statement at the open meeting, Chair White indicated that the proposal is just part of the SEC’s regulatory agenda for funds. She noted that the staff is working on recommendations regarding liquidity risks and standards in mutual funds and ETFs; fund use of derivatives; and stress testing requirements for large funds and large advisers.
The proposal adds a new form, N-PORT, on which funds (other than money market funds) would report monthly data including:
• Data related to the pricing of portfolio securities.
• Information regarding repurchase agreements, securities lending activities, and counterparty exposures.
• Terms of derivatives contracts.
• Discrete portfolio level and position level risk measures to better understand fund exposure to changes in market conditions.
Data from the last month of each quarter would be made public 60 days after the end of the quarter. This new form would replace Form N-Q, on which funds currently report portfolio data semi-annually in plain text or hypertext format. The new form would be filed in a structured data format to better allow the Commission and the public to aggregate and analyze data. Funds in a “group of related investment companies” that collectively have net assets of $1 billion or more would have 18 months to comply with the filing requirement. Other funds would have 30 months from the effect date to begin compliance.
The proposal would also replace the 30-year-old Form N-SAR with a new Form N-CEN, which “would streamline and update information reported to the Commission to reflect current information needs, such as requiring more information on exchange-traded funds and securities lending.” The new form would collect “census-type information” and drop elements from the Form N-SAR that the commission feels are no longer relevant or duplicative and add other that would be valuable.
Although the information is available in the SAI and annual report, the form would request information about fund directors – including each director’s name, whether the director is an interested person, and the file number of any other investment companies for which the individual serves as a director. The release asks whether additional elements should be added to the new form regarding the board of directors, such as “information about the length of service of directors.” The form also would collect information on the fund’s CCO, including whether the “CCO is compensated or employed by any person other than the fund, or an affiliated person of the fund, for providing CCO services” and, if so, by whom. This requirement, the Commission notes, would provide information on all fund CCOs and allow SEC staff to contact a CCO directly.
As with the new Form N-PORT, the Form N-CEN would be filed in a structured data format to aid aggregation and analysis. The new form would be filed annually, as opposed to the requirement to file the N-SAR semi-annually. Funds would have 18 months to begin filing to the Form N-CEN.
The proposal also addresses disclosures in fund financial statements. In response to a 2011 concept release on fund use of derivatives, the SEC received comments that more disclosure on the risks underlying funds’ derivative use was necessary. As a result, the proposal would also require derivatives data similar to that which would appear prominently in the new form N-PORT to be included in the fund’s financial statements. Information related to the fund’s use of securities lending would also need to be included in the notes to financial statements. Under the proposal, funds could satisfy the requirement to supply shareholder reports to investors by posting them free of charge on a public website. Should a fund elect this option, it would send investors mailed notices with instructions on how to access the reports online, as well as how to request to continue receiving paper copies, free of charge.
A companion proposal would change Form ADV to require additional information related to borrowings, the use of derivatives, and the general risk profile of the adviser. Lastly, the changes would also require additional information such as “branch office operations and the use of social media.” The proposal would also formalize “umbrella registration,” currently permitted by staff guidance, which allows related “relying” advisers to file a single Form ADV.