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Regulation and Compliance > Federal Regulation > SEC

SEC Wants Big Form ADV Changes

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The Securities and Exchange Commission unanimously approved Wednesday proposed amendments to Form ADV requiring advisors to not only provide more information about their use of derivatives in separately managed accounts, but also about their branch office operations and their use of social media.

The agency also proposed measures to enhance data reporting for registered investment companies, which include mutual funds and ETFs.

The SEC unanimously approved issuing the proposals for a 60-day comment period.

SEC Chairwoman Mary Jo White said at the open meeting at SEC headquarters in Washington that beyond the measures approved for comment at the Wednesday meeting, SEC staff is also developing recommendations to enhance the “management and disclosure of liquidity risk by mutual funds and ETFs, and to update the liquidity requirements for the use of derivatives by funds.”

White said that oversight of funds and advisors “is one of the most important functions” of the Commission, adding that more than 28,000 funds and investment advisors file reports with the agency.

She stated that the proposals are part of a series of rulemakings the agency is putting forth to enhance the agency’s monitoring and regulation of the asset management industry, and that the agency also plans to use the additional data to enhance its ability to conduct “more targeted” exams.

SEC Commissioner Daniel Gallagher, who is resigning his post, said that the proposals “are the organic proposals we [the SEC] should be pursuing.” SEC Commissioner Michael Piwowar agreed that the proposals are “a welcome respite from the Dodd-Frank Act rulemakings.”

The proposed changes to Form ADV include requiring disclosure of aggregate information related to assets held and use of borrowings and derivatives in separately managed accounts.

The SEC stated that approximately 73% of SEC-registered advisors manage a wide variety of client assets in separately managed accounts, which generally provide advisory clients with individualized investment advice and direct ownership of the securities and other assets in the account. 

Robert Grohowski, general counsel for the Investment Adviser Association in Washington, told reporters after the meeting that while the enhancements would be an “additional reporting burden” for advisors, “as long as regulators are getting the information they need and the public is getting the information it needs, the industry is largely supportive.”

Grohowski, added, however, that he didn’t believe advisors are increasingly using derivatives in separately managed accounts.

Bob Plaze, a partner at the law firm Stroock & Stroock & Lavan in Washington, who spent 30 years at the Commission, said that it will “be interesting to see how the proposal defines what a derivative is. There is no data about this as far as I know, and that is probably why the SEC is proposing to collect the data.” Karen Barr, IAA’s president and CEO, said that IAA appreciates that the proposal “would tier reporting requirements based on firm size. Most investment advisors have more than $150 million in separately managed account assets, necessitating responses to additional questions. About 800 advisors have more than $10 billion in RAUM, triggering further data reporting.”

In crafting its response to the proposal, Barr said that IAA “would pay special attention to the proposed amendments to Form ADV and the new information required about separately managed accounts, including the tiering method, the proposal’s focus on derivatives and borrowings, and the details of the recordkeeping changes.”

For registered investment companies, the SEC proposes a new monthly portfolio reporting form (Form N-PORT) and a new annual reporting form (Form N-CEN) that would require census-type information. 

The information would be reported in a structured data format, which would allow the Commission and the public to better analyze the information. The proposals would also require enhanced and standardized disclosures in financial statements, and would permit mutual funds and other investment companies to provide shareholder reports by making them accessible on a website.

— Check out SEC’s Gallagher, Aguilar to Depart as Agency Crafts Fiduciary ‘Term Sheet’ on ThinkAdvisor.


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