SEC expands disclosure demands for investment advisers

The Securities and Exchange Commission will require investment advisers to report additional information it says will provide both it and investors with a better understanding of the risk profile of each adviser and the industry as a whole.

On Thursday, the Commission adopted amendments to several Investment Advisers Act rules and the investment adviser registration and reporting form to enhance the reporting and disclosure of information by investment advisers.

The approved amendments to Form ADV, according to the SEC, will “improve the depth and quality of information [it collects] on investment advisers, facilitate [its] risk monitoring initiatives and assist staff in its risk-based examination program.

Form ADV is used by investment advisers to register with the Commission and states. In May 2005, the SEC proposed amendments to Part 1A of the forms to embellish what it perceived as data gaps.

The changes require investment advisers to provide additional information regarding their separately managed account business, including aggregate data related to the use of borrowings and derivatives, and information about other aspects of their advisory business, including branch office operations and the use of social media.  In addition, the amendments will facilitate streamlined registration and reporting for groups of private fund adviser entities operating a single advisory business.

Amendments to Investment Advisers Act Rule 204-2 will require advisers to maintain additional records related to the calculation and distribution of performance information. These records will be used to evaluate adviser performance claims, and could reduce the incidence of misleading or fraudulent advertising and communications by advisers.

The amendments will be published on the Commission’s website and in the Federal Register. They will become effective 60 days after publication in the Federal Register, and advisers will need to begin complying with the amendments on Oct. 1, 2017.

“We are pleased that the SEC has adopted enhanced data reporting for investment advisers with separately managed accounts, which will further strengthen the SEC’s ability to oversee asset managers and conduct risk-based examinations,” says Karen Barr, president and CEO of the Investment Adviser Association. She appreciates that, as the IAA recommended, the SEC raised the threshold from $150 million to $500 million in separately managed accounts for advisers to report clients’ use of derivative. This “will alleviate the burden on thousands of smaller advisers while still allowing the SEC to meet its regulatory objectives.”

“We also commend the SEC for adopting an appropriate compliance date of one year, which should provide firms with necessary time to develop the collection and reporting of new data to the SEC,” Barr added.

 There are, however, some continuing concerns. The rule is imposing Form PF-type reporting requirements to managed accounts, “except that this information would be publicly available,” says Kevin Scanlan, a partner at law firm Kramer Levin Naftalis & Frankel.

“Given information such as leverage levels and use of derivatives would be disclosed, this is creating the fear that proprietary investment information could be revealed,” he says.

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