On May 20, 2015, the Securities and Exchange Commission proposed new rules and amendments to modernize and enhance information reported by investment companies and investment advisers. The proposed rules would be applicable to most investment companies registered under the Investment Company Act of 1940 and all investment advisers registered under the Investment Advisers Act of 1940.
The SEC is the primary regulator of the asset management industry, and over the years, assets under management have grown, new product structures have been developed, and technology has evolved. The SEC staff estimated that there were approximately 16,619 funds registered with the SEC as of December 2014 as well as 11,500 investment advisers and 2,845 exempt reporting advisers as of January 2015. Assets of registered investment companies exceeded $18 trillion at year-end 2014, having grown from $4.7 trillion at year-end 1997.
Per SEC 33-9776, the proposed rules aim to:
- Increase the transparency of fund portfolios and investment practices both to the Commission and to investors,
- Take advantage of technological advances both in terms of the manner in which information is reported to the Commission and how it is provided to investors and other potential users, and
- Where appropriate, reduce duplicative and otherwise unnecessary reporting burdens in the industry.
The proposed rules include two new forms (N-PORT and N-CEN), new rule 30e-3, and amendments to Regulation S-X that would rescind current Forms N-Q and N-SAR.
Management investment companies currently are required to report their complete portfolio holdings to the SEC on a quarterly basis (on Form N-Q for 1Q and 3Q and Form N-CSR for 2Q and 4Q). The proposed Form N-PORT would replace Form N-Q, would require registered funds other than money market funds to provide portfolio-wide and position-level holdings data to be filed monthly with the SEC, and would be available to the public every third month, sixty days after the end of the month. Form N-PORT requires a structured format that will make it easier to analyze and requires additional data not currently provided on Forms N-Q or N-CSR such as information relating to derivative investments and certain risk metric calculations that measure a fund’s exposure and sensitivity to market conditions.
Rule 30e-3 provides funds the option to meet shareholder report transmission requirements by posting reports online, if certain conditions are met.
The proposed amendments to the existing Regulation S-X require standardized enhanced derivatives disclosures in fund financial statements. Currently, Regulation S-X does not include standardized requirements as to the terms of derivatives that must be reported for most types of derivatives including swaps, futures, and forwards. The proposed amendments should allow for greater comparability between funds and help all investors better assess a fund’s use of derivatives.
Form N-CEN would replace the existing Form N-SAR, which was adopted thirty years ago, and continue to report census-type information similar to Form N-SAR. The new form will replace some of the outdated elements of Form N-SAR with ones that are more relevant today. In addition, Form N-CEN will be filed in XML format, which will reduce filing burdens and make it more user friendly for the SEC and other users. Finally, Form N-CEN would be filed annually, rather than semi-annually as is currently required by Form N-SAR
The investment adviser proposals include amendments to the investment adviser registration and reporting form (Form ADV) and amendments to Investment Advisers Act Rule 204-2. The proposed amendments to Form ADV would require aggregate information about separately managed accounts, incorporate certain “umbrella registration” filing arrangements that are currently outlined in staff guidance, and provide additional business information about the adviser’s offices, the number of employees, and the use of social media.
The amendments to the Investment Advisers Act Rule 204-2 would require advisers to maintain records of the calculation of performance information distributed to any person, which is more stringent than the existing rule that applies to information distributed to ten or more persons. Furthermore, the amendments would require advisers to maintain communications related to performance or rate of return of accounts as well as securities recommendations.
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