Asset managers now obliged to supply more data to the SEC

04 Jun, 2015

The Securities and Exchange Commission (SEC) is proposing that US registered investment advisers and US registered investment companies supply more information about their activities and holdings as regulators globally assess whether asset managers and funds are systemically important financial institutions (SIFIs).

The SEC has proposed a number of amendments to Form ADV as part of its efforts to better comprehend the risk profile of the asset management industry. Perhaps the biggest change to the investment adviser registration regime would be an obligation on firms to report information on aggregate holdings, derivatives and borrowings in separately managed accounts, which are advised by approximately 73% of SEC-registered investment advisers. Unlike similar information requested for private funds, however, this information would not be confidential due to its inclusion in Form ADV. The registered adviser proposals would also require advisers to supply information about their branch office operations, use of social media and their use of a CCO employed by an outside firm.

Under a separate proposal, registered investment companies, including mutual funds and exchange-traded-funds (ETFs), would be required to provide the SEC with Form N-PORT, a monthly reporting form containing information on portfolio-wide and position-level holdings data. This would theoretically allow the SEC to better understand fund risk exposures and the impact a change in market conditions could have on the funds’ operations and investments, and the fund industry as a whole.

The SEC has said this data would include information relating to the pricing of portfolio securities, information about repurchase agreements and securities lending, as well as terms of derivative contracts. This is all part of the regulator’s ever growing effort to better understand the investment management industry and the systemic risks posed by the industry. Data reported on Form N-PORT for the third month of each fiscal quarter would be publicly available 60 days after each quarter end so as to minimise the risk of front-running and other predatory trading practices.

Funds would also be obligated to supply an annual reporting form known as Form N-CEN, containing census-type information, according to the SEC’s release.  This would replace existing Form N-SAR and would streamline much of the data already reported to the SEC, although it will require more information on ETFs and securities lending. Instead of being supplied semi-annually like Form N-SAR, the Form N-CEN would need to be supplied annually, within 60 days after the end of the fund’s fiscal year.

Other fund-related changes include enhanced disclosure requirements in financial statements such as specific information on derivative transactions and securities lending activities.

The increased reporting requirements for funds will likely be expensive. In its release, the SEC estimates that to comply with Form N-PORT’s requirements, the fund industry overall will incur initial annual costs of $515.5 million and ongoing annual costs of $445 million.

SEC Chair Mary Jo White has stated that the additional reporting requirements on funds and advisers will enable the SEC to better monitor the asset management industry and address any system risks that it poses. While Chair White noted that the new requirements will complement the Financial Stability Oversight Council’s (FSOC) efforts to assess whether asset managers pose systemic risks, others believe the requirements are intended to defend the SEC’s position from other financial regulators, including FSOC, which have signalled their interest in overseeing the asset management industry.

By Paul Miller, Seward & Kissel