Today, the Securities and Exchange Commission (“SEC”) unanimously approved two recommendations by the SEC’s Division of Investment Management to modernize and enhance the reporting regime for registered investment funds and investment advisers. The open meeting of the SEC marks David Grim’s debut as the Director of the Division of Investment Management. Today’s proposals are part of a series of rulemakings to enhance the SEC’s monitoring and regulation of the asset management industry.

The two recommendations include four principal reforms for registered funds and two principal reforms for registered investment advisers. Specifically, the SEC proposed new Form N-PORT and Form N-CEN under the Investment Company Act of 1940 (“Investment Company Act”), new rule 30e-3 under the Investment Company Act, amendments to Regulation S-X and other rules and forms under the Investment Company Act, and the rescinding of existing Form N-Q and Form N-SAR. In addition, the SEC proposed amendments to Form ADV under the Investment Advisers Act of 1940 (“Advisers Act”), and amendments to rule 204-2 and certain other rules under the Advisers Act. See SEC News Release No. 2015-95, May 20, 2015

Investment Company Reporting Modernization Proposal

New Form N-PORT

The SEC proposed to create a new form, Form N-PORT, for monthly reporting of portfolio-wide and position-level holdings data and risk metrics. The proposed Form N-PORT would require detailed information on options, derivatives-- including detailed disclosure on counterparties, repurchase agreements, underlying positions and notional amounts--and securities lending positions. Information reported on reports for the last month of each fund’s fiscal quarter would be available to the public on a delayed basis (60 days) to minimize the risk of front-running and reverse engineering of strategies. Reporting on Form N-PORT would be submitted in the standardized XML format to allow for easy aggregation and analysis of portfolio information. At the meeting, Commissioner Stein stated that requiring a structured XML format would allow the SEC, investors and other third party users to aggregate, analyze and compare portfolio data on a fund-by-fund basis and across funds. The current Form N-Q would be eliminated to avoid duplication.

Amendments to Regulation S-X Reporting on Financial Statements

The proposed changes to Regulation S-X would require financial statements to have standardized and prominent disclosure of derivative positions (in the statements rather than the notes) and would require more detailed information on changes in valuation of derivatives, options and illiquid positions. As proposed, the changes would also require enhanced disclosure of the components of an underlying index, which Commissioner Piwowar noted might negatively impact funds because many index providers may not be willing to make such public disclosures. The proposed changes would also require Information in the notes to the financial statements relating to a fund’s securities lending activities.

New Form N-CEN

The SEC proposed to create a new form, Form N-CEN, to gather census-type information and to replace Form N-SAR. The new Form N-CEN would require the report of enhanced census-type information annually (rather than the current semi-annually) within 60 days of the fund’s fiscal year-end. Information would be reported in the standardized XML format.

New Rule 30e-3 — Option for Web-based Delivery of Shareholder Reports

The SEC proposed new rule 30(e)-3 to allow the conditional posting of shareholder reports and quarterly portfolio holdings on a website to increase transparency and potentially lower fund expenses. The rule would require investment companies to regularly send notices to investors regarding the change to electronic delivery and the availability of the information on the website. Investment companies would also be required to continue to provide paper reports to investors who request them. Commissioner Aguilar expressed concern that moving to a web-based distribution model for shareholder reports could discourage shareholders from reading shareholder reports. He noted that since the promulgation of e-proxy notice and access rules that allow electronic, rather than paper, distribution of proxy statements, shareholder participation had plummeted; the SEC’s research also suggests that the e-proxy model may have made shareholders less likely to read proxy materials. Commissioner Aguilar urged the SEC to proceed with caution before adopting a similar electronic delivery model for investment companies. He also requested that safeguards, redundancies and other features be incorporated to make it clear to shareholders that if they do not respond to notices, they may lose the ability to keep apprised of their fund’s performance.

Commissioner Gallagher expressed his pleasure to see his suggested scaled compliance period for smaller investment funds incorporated into the proposal. He said smaller issuers will need a longer period to implement the technical and procedural changes necessary to comply with the new proposals and to allow website transmission of shareholder reports. He also urged the SEC to revisit all SEC disclosure rules and make similar updates where appropriate.

Investment Adviser Reporting Proposal

Amendments to Form ADV — Uniform Application for Investment Adviser Registration and Report Form by Exempt Reporting Advisers

The SEC proposed changes to Form ADV to gather more information on separate managed accounts (“SMAs”) and to improve disclosure for “umbrella registration” on the same Form ADV. As proposed, the additional disclosure for SMAs would include the types of assets held for those accounts. For advisers with assets under management (“AUM”) of at least $150 million attributable to SMAs, disclosure would include the value of and exposure to derivatives and borrowings in those accounts. For advisers with AUM of at least $10 billion attributable to SMAs, additional disclosures would be required. New disclosures would also include information regarding custodians that account for at least 10% of SMA assets under management with a particular adviser, AUM from non-U.S. clients and information on affiliated wrap fee programs. Commissioner Stein has specifically asked for public comment on whether the Form ADV disclosure of SMAs would be useful for risk management purposes and whether the SEC should include more or less information on these types of accounts.

New Schedule R to Form ADV would require additional information regarding advisers who currently rely on the guidance set forth in the SEC’s No-Action Letter to the American Bar Association, Business Law Section, dated January 18, 2012. Under the conditions set forth in the No-Action Letter, these investment advisers file a single Form ADV (“filing adviser”) on behalf of itself and each other adviser that is controlled by or under common control with the filing adviser that is registering through a single registration with the filing adviser (each, a “relying adviser”) where the filing adviser and each relying adviser collectively conduct a single advisory business.

The proposed amendments would also require additional disclosure regarding branch office operations and the use of social media and remove transition provisions where the transition period is complete.

Amendments to Advisers Act Rule 204-2 Books and Records to be Maintained by Investment Advisers — Performance Information Calculation and Distribution

The SEC proposed to amend Advisers Act Rule 204-2 books and records requirements to require investment advisers to maintain performance records and records of correspondence with investors. Specifically, the required books and records would include documentation relating to the calculation and distribution of performance information to any person. The current rule requires books and records to be maintained only with respect to distribution of performance information to groups of 10 or more persons. Additionally, the proposal would require maintenance of original communications received and copies of communications sent relating to performance of SMAs and recommendations. This proposal is not surprising given the SEC’s increased scrutiny and enforcement actions involving valuation and performance advertising.

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During the open meeting, Commissioner Gallagher alluded to false narratives from the financial crisis that the asset management regulatory program is deficient and that the industry and its participants pose systemic risk. He expressed his hopes that these proposals would show that the SEC is more than up to the task. The full text of the proposals is not yet available. The SEC has requested comments on the proposed rules, which must be received on or before 60 days after publication in the Federal Register. In the coming weeks we will be providing additional information regarding the proposals.