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SEC Proposes Rules Affecting Funds and Advisers

Proposals would impose new disclosure requirements designed to enhance the SEC’s ability to monitor the industry.

On May 20, the US Securities and Exchange Commission (SEC) unanimously approved proposals intended to further modernize and enhance its monitoring and regulation of the asset management industry. In addition to providing more accurate and up-to-date information for investors, the proposed forms, rules, and other actions would improve the SEC’s use of technology for risk monitoring and overseeing registered funds and advisers. These proposals stem from an ongoing effort across the various divisions within the SEC and have been hinted at for the last several months by SEC Chair Mary Jo White.[1] The modernization proposals can be grouped into two categories: those applicable to investment companies and those applicable to investment advisers.

The “Registered Funds Proposal”

This proposal consists of four key elements: 

  • Registered funds will report information relating to
    • use of derivatives, including information on counterparties, asset and issuer type, and changes or losses in value, organized by types of derivative exposure;
    • securities lending activities;
    • liquidity and valuation of portfolio holdings; and
    • certain aspects of exchange-traded funds, including information on authorized participants and creation units.
  • Registered funds will disclose certain basic risk metrics relating to their exposures to potential changes in risk factors and asset prices.
  • Financial statements of registered funds will include new enhanced and standardized disclosure requirements relating to derivatives and securities lending.
  • Shareholder reports will be able to be delivered online.

Under the Registered Funds Proposal, the enhanced data reporting will be made on two new forms: Form N-PORT and Form N-CEN. Funds currently report portfolio holdings quarterly through shareholder annual and semi-annual reports and on Form N-Q for the other two quarters. As proposed, Form N-PORT would replace Form N-Q and would be filed monthly.[2] To avoid frontrunning concerns, only Form N-PORT information reported for the third month of a fund’s fiscal quarter would be publicly available, and such information would not be made public until 60 days after the end of the fund’s fiscal quarter.

Currently, registered funds report census-type information (used by the SEC Staff in its oversight functions) semi-annually through Form N-SAR. If the Registered Funds Proposal is adopted, Form N-SAR will be replaced by Form N-CEN, the new form N-CEN being filed annually. If Forms N-PORT and N-CEN are adopted as proposed, Forms N-Q and N-SAR would be rescinded. In addition to differences relating to required content and filing frequency, both Forms N-PORT and N-CEN will be designed in “structured data format,” which could allow investors and regulators to aggregate and analyze information.

As noted by Chair White in recent speeches referenced above, fund use of derivatives and liquidity management are of particular interest to the SEC Staff. Although Chair White has acknowledged that some funds use derivatives to manage risks or limit exposure to a certain market, sector, or security, she cautioned that such instruments often result in leveraged investment exposures and the potential for problematic future obligations. In an effort to better understand these risks, the Registered Funds Proposal, if adopted, will require funds to disclose certain metrics regarding risk exposures. It will also introduce changes to a fund’s financial statements, including standardized derivatives schedules and new financial notes disclosure requirements (e.g., additional detail on a fund’s securities lending activities).

Finally, the Registered Funds Proposal seeks to amend Rule 30e-3 under the Investment Company Act of 1940 to permit (but not require) a fund, after satisfying certain conditions, to transmit shareholder reports by posting them to its website. Because physical (“hard copy”) delivery of shareholder reports is currently required (unless a shareholder affirmatively elects to receive electronic copies), the SEC Staff hopes that the proposed “access equals delivery” change will more effectively and efficiently provide important information to investors. In remarks regarding the proposals, Commissioner Aguilar urged the SEC Staff to be cognizant of the potential that investors who have only online access may not read a report, noting that shareholder involvement in proxy voting decreased after the implementation of similar “e-proxy rules.” Commissioner Aguilar stated his hope that safeguards, redundancies, and other features will be considered to ensure that investors actually read shareholder reports posted online.

The “Adviser Proposal”

This proposal would require investment advisers to report certain new categories of information, particularly with respect to separately managed accounts and the types of assets and derivatives held in those accounts. Specifically, the Adviser Proposal would amend Part 1A of Form ADV to require information with respect to types of assets, derivatives positions, and borrowings associated with an adviser’s separately managed accounts. The amended Form ADV also would require advisers to identify any custodians that account for at least 10% of “separately managed account regulatory assets under management,” as well as the amount of the adviser’s regulatory assets under management attributable to separately managed accounts held by such custodian. These proposed amendments are intended to promote a better understanding by the SEC and investors of the risk profile of individual advisers and the industry as a whole. As such, Commissioner Stein requested that commenters provide feedback as to whether the new information being requested is appropriate for risk management purposes, or if other information would better serve this purpose.

In addition, the Adviser Proposal would codify SEC Staff guidance issued in 2012 relating to “umbrella registration” for groups of related advisers to private funds and amend Rule 204-2 under the Investment Advisers Act to require retention of performance calculations and communications related to performance that are distributed to any person. This increases the burden currently imposed by Rule 204-2, which requires retention only when such a distribution has been made to 10 or more persons.

The Registered Funds Proposal may be viewed here and the Adviser Proposal may be viewed here. We expect to issue a more detailed report on the reforms during the comment period for the proposed rules, which will be the 60-day period after publication in the Federal Register.


[1] Read a transcript of Chairman White’s February 20, 2015 speech at SEC Speaks here and her address at the New York Times DealBook Opportunities for Tomorrow Conference here.

[2] Commissioner Aguilar pointed out that this monthly reporting requirement would be consistent with the reporting obligations of money market funds.

Copyright © 2022 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume V, Number 142
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About this Author

Barry Hurwitz, Investment attorney, Fintech, Morgan Lewis
Partner

Barry N. Hurwitz represents mutual funds, hedge funds, and investment advisers, as well as public and private operating companies, in a number of areas, including securities offerings, regulatory and compliance issues, mergers and acquisitions, and commercial transactions.

617.951.8267
Christopher Menconi, Securities lawyer, Morgan Lewis
Partner

Christopher Menconi advises investment companies, including mutual funds and exchange-traded funds (ETFs), and their investment advisers and boards of directors on regulatory, compliance, organizational and operational matters. He also advises insurance companies on the regulation of variable insurance products under the federal securities laws. 

202.373.6173
John O'Brien, investment management lawyer, Morgan lewis law firm
Partner

John J. “Jack” O’Brien counsels registered and private funds and fund managers in connection with organizational, offering, transactional, and compliance matters. He regularly works with a variety of different fund structures, including open-end and closed-end funds, exchange-traded funds, and hedge funds. He also counsels investment adviser and broker-dealer clients on various matters, particularly with respect to registration and disclosure, marketing regulations, pay-to-play issues, and transactions in exchange-traded funds.

215.963.4969
Erica Zong-Everson, Morgan Lewis, Securities lawyer
Associate

Erica L. Zong Evenson’s practice focuses on investment company and investment adviser regulatory and compliance-related issues. She counsels on forming, registering, and ongoing regulation of investment companies, including active and passive exchange-traded investment companies. Additionally, she assists clients in multiple capacities regarding closed-end funds, including preparing shelf offering filings for review by the US Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority, and various exchanges. Erica also provides ongoing advice...

202.373.6182
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