November 10, 2015

Help or Hindrance? The SEC’s Proposals to Modernize Registered Investment Company and Adviser Reporting

By Nikohl Stegman, Manager, Alternative Investment Industry Group

Help or Hindrance? The SEC’s Proposals to Modernize Registered Investment Company and Adviser Reporting Assurance

Since the financial crisis of 2007-2008, the U.S. Securities and Exchange Commission (“SEC”) has issued and amended many rules related to investment advisers in an effort to better monitor the industry and restore investor confidence. The most recent proposed amendments and rules are intended to improve both the quality and usefulness of the information being reported, and to make the reporting process easier for registrants, where possible. The most significant changes and the pros and cons that would come of implementing such changes are what we will focus on in this article.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was the legislative response to the 2008 financial crisis and brought about significant regulatory and reporting change for the investment community. From banks to brokers to investment firms, very few were left unscathed. By March of 2012, most investment advisers with $100 million or more in assets under management (“AUM”) had to register with and report to the SEC. The main purpose of requiring these advisers to register was to help the SEC gather information that could be used to monitor industry trends, identify potential risks, and assist the SEC in its examination and enforcement efforts. This process is still in its infancy, and as the SEC staff work with the forms and information provided within, they begin to see where improvements can be made. What information isn’t helpful? What is duplicative? What is lacking? How can the information be more easily processed? How can the process be streamlined? These are some of the questions the SEC has been trying to address as they continue to evaluate the reporting requirements of investment advisers.

On May 20, 2015, the SEC released two new proposals. One proposed amendments to Form ADV and certain of the Investment Adviser Act rules that impact Registered Investment Advisers (“RIAs”), and the other proposed rules, forms and amendments to modernize and enhance information reported by Registered Investment Companies (“RICs”).

Proposed Rules, Forms and Amendments Affecting Registered Investment Advisers

The SEC proposed rules and amendments to Form ADV include:

  • Additional aggregate information related to separately managed accounts (“SMAs”) 1, such as:
    • The approximate percentage of AUM that an adviser invests in ten asset categories, to be reported annually.
    • The use of derivatives and borrowings.
    • The identity of any custodians that account for at least 10 percent of SMA AUM, as well as the total amount of such assets held at each custodian.
  • Additional information on an adviser’s use of social media platforms, such as Twitter, Facebook and LinkedIn.
  • An amendment to expand information about an adviser’s largest offices (by number of employees) from five to twenty five locations.
  • A requirement to report the exact number of, rather than an approximate range, and the types of advisory clients and regulatory AUM attributable to client types.
  • A formalized rule for the allowance of the registration of multiple private fund adviser entities operating a single advisory business on one Form ADV, known as “umbrella registration” (SEC staff has provided guidance to private fund advisers in the past through the “2012 ABA Letter” 2).
  • Information on third-party providers of compliance officer services. If the chief compliance officer is employed by a person or company other than the adviser, the name and EIN number of that person or company should be supplied.

In addition to the amendments to Form ADV, the SEC proposed amendments to Investment Advisors Act Rule 204-2, (the “books and records” rule) which would require an adviser to maintain support for the calculation of every rate of return that it disseminates to any person, either directly or indirectly (currently, it is required only if the adviser is distributing the information to 10 or more persons). It would also require that an original copy of all written communications received or sent, regarding performance or rate of return or securities recommendations, be maintained by the adviser.

Proposed Rules, Forms and Amendments Affecting Registered Investment Companies

The SEC proposed rules, forms and amendments include:

  • A new monthly portfolio reporting form (Form N-PORT) to be filed within thirty days of each month close, with every third month available to the public sixty days after quarter end 3. This form would replace Form N-Q (currently filed quarterly) and would require the following information to be provided:
    • Summary of portfolio holdings
    • Data related to pricing
    • Security lending, repurchase & reverse repurchase activity
    • Counterparty exposures
    • Certain risk metrics as they relate to a company’s exposure to interest rates, credit spreads, and asset prices
  • A new annual census information form (Form N-CEN; also applicable to mutual funds & ETFs) to be filed within sixty days of fiscal year-end. This form would replace Form N-SAR (currently filed semi-annually).
  • A requirement to use a structured XML (“Extensible Markup Language”) format to report information in Forms N-PORT and N-CEN, as opposed to the plain text or hypertext format currently used on other forms. XML format is used to create common information formats and share both the format and the data on the internet and/or intranets. Using this XML format will enable the SEC and the public to better analyze and compare the information being reported in these forms.
  • An amendment to Regulation S-X, which would require a change in derivative disclosure to standardize the information and make it more comparable across companies.
  • The ability (NOT the requirement) to provide reports to shareholders electronically via email and/or through a secure website.

Pros and Cons of the Proposed Rules, Forms and Amendments

Some of the positives that could come out of these proposals for RIAs and RICs are the elimination of outdated Forms N-Q & N-SAR and the implementation of a structured data format on new Forms N-PORT and N-CEN, which will help the SEC and other public users (such as research service providers) to more effectively and efficiently analyze the data being collected. In addition, the standardization of derivative disclosure in RIC financials would take the guessing out of how to prepare the disclosure and would make it easier for readers to compare the information across entities. One of the best potential changes is the formal awareness of “umbrella registration”, which gives multiple private fund adviser entities operating as a single advisory business the ability to file a single Form ADV. It was suggested by a few leading industry service providers, as well as RIAs and RICs, that the SEC consider expanding to whom the “umbrella registration” should be applicable; if the SEC takes these comments into serious consideration, it could mean a significant amount of saved time and cost for RIAs and RICs. Lastly, the proposed requirement to maintain support for rate of return calculations would provide investors with additional confidence that the returns being reported to them are well supported and verifiable.

Based on many of the comments left by individuals, leading industry service providers, and both large and small RIAs and RICs that would be directly impacted by these changes, the most prominent concerns were the frequency of the reporting required for Form N-PORT (monthly versus quarterly) and the amount of time and cost that would be incurred by an investment company or adviser to compile and file the new information requested in Form N-PORT and Form ADV. Also, the public disclosure of aggregate holdings, derivatives and borrowings in SMAs on Form ADV is an issue, as the identity, investments or affairs of such accounts could be deduced by service providers that have access to certain private account information. And last, but not least, there is concern about whether the SEC has the resources to actually utilize the additional information being requested.

These modernization proposals will need some tweaking to address the concerns mentioned above before any rules, forms or amendments are finalized, but there are clearly many benefits that could come from them. Streamlining the reporting process and putting it on a standardized platform that makes it easier to extract and compare information, standardizing financial statement disclosures to make information more comparable and meaningful to readers, and holding investment companies and advisers accountable for what they are reporting to their investors are all positive developments that could help bring back some of the investor confidence that has been lost since the financial crisis. Without change, there can be no growth. Modernization is the way to go.


  1. See Proposed Form ADV, Part 1A, Items 5.K.(1)-(4), 1.I. and 1.F and Sections 5.K.(1)-(3), 1.I. and 1.F. of Schedule D for full detail.
  2. See American Bar Association, Business Law Section, SEC Staff Letter (Jan. 18, 2012), available at
  3. The SEC staff believe that delaying the public release of portfolio information for 60 days will deter tendencies for front running or free riding on an entity’s investment research

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