The SEC adopted proposed amendments "with several modifications" in order to enhance the reporting and disclosure of information by investment advisers.
The modified final amendments require investment advisers to:
- provide additional information regarding their separately managed account business, including aggregate data related to the use of borrowings and derivatives;
- provide information about other aspects of their advisory business, including branch office operations and the use of social media; and
- maintain additional records related to the calculation and distribution of performance information, which "will be useful to the [SEC] examinations staff in evaluating adviser[s'] performance claim[s], and could reduce the incidence of misleading or fraudulent advertising and communications by advisers."
The SEC adopted additional requirements imposed on investment advisers, including a simplified umbrella registration procedure that will be made available to the private fund adviser who operates as a "single advisory business" through multiple legal entities.
SEC Chair Mary Jo White emphasized that the additional regulatory requirements are part of an ongoing effort to enhance regulation of the industry:
These amendments are an important step in a series of rulemakings to enhance the SEC's monitoring and regulation of the asset management industry. Requiring investment advisers to report this additional information will provide investors and the [SEC] with a better understanding of the risk profile of each adviser and the industry as a whole.
The final amendments will become effective 60 days after their publication in the Federal Register. Investment advisers must comply with the final amendments beginning on October 1, 2017.
Commentary
According to the SEC, amendments requiring additional financial data about managed accounts will provide more information to investors and regulators, and will help regulators understand the economy better. The SEC claims that the new requirements are modeled on those in Form PF. That is most unfortunate. As noted in the past, Form PF is poorly designed. Many of the questions in the form generate little useful information. In fact, Form PF is so flawed that even the Office of Financial Research conceded that it contains material problems. See " OFR Researchers Question the Utility of SEC Form PF as a Risk Management Tool." Instead of fixing this flawed form, regulators now have expanded its use. If the financial industry is to be required to expend vast resources providing the government with financial information, then the government should ensure that the information it collects is actually useful.
From a compliance standpoint, the most significant new information required by the SEC concerns record keeping as to performance calculations. The new recordkeeping requirements will force advisers to formalize their performance-reporting process to an unprecedented degree. No one can dispute that preventing fraudulent performance reporting is necessary. On the other hand, determining the "right" way to calculate performance can be difficult when at different time periods, the same "account" may have been sized differently, charged different fee amounts, led by different individuals or involved in different strategies. Undoubtedly, the increased recordkeeping obligations will lead to a more developed body of law concerning how performance should be calculated. At least part of that law likely will be developed through enforcement actions.
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