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SEC Staff Discusses Investment Company Reporting Modernization and Asset Management Industry Trends at SEC Speaks in 2017 Conference

Posted in Fund Regulation, Investment Adviser Regulation

On February 24, 2017, the U.S. Securities and Exchange Commission’s Division of Investment Management (the “Staff”) participated in a panel at the Practising Law Institute’s SEC Speaks in 2017 conference.  As part of the discussion, the Staff provided an update on the current initiatives relating to investment companies, as well as the Staff’s priorities for 2017, some of which are briefly summarized below.

Investment Company Reporting Modernization

The Staff discussed recently adopted rules, forms and amendments that, among other things, enhance transparency and modernize registration for registered funds.  The Staff stressed the importance of the new structured data format, and how it will help the Staff efficiently review and monitor investment companies.

  1. New Form N-PORT: New Form N-PORT requires “certain registered investment companies to report information about their monthly portfolio holdings to the SEC in a structure data format.”  Form N-PORT provides the Staff with monthly insight into investment companies’ holdings; however, public filings will remain quarterly in line with the requirements under Form N-Q.
  2. New Form N-CEN: New Form N-CEN requires “registered investment companies, other than face-amount certificate companies, to annually report census-type information to the SEC in a structured data format.”  Form N-CEN replaces N-SAR, which was required to be filed twice per year, because the form contains information that doesn’t change significantly from year to year.  Further, Form N-CEN eliminates data items that are no longer relevant, while also encompassing new data items that have appeared in recent years but were not previously covered.
  3. Amended Regulation S-X: The Staff adopted amendments to Regulation S-X that, among other things, requires standardized and “enhanced disclosure about derivatives in investment company financial statements.”

Asset Management Industry and Disclosure Trends

The Staff explained that the asset management industry was in a state of change throughout 2016.  The Staff saw a continuation of trends from previous years, including flows into fixed income funds, the evolution of robo-advisers, more complex strategies and new approaches to asset management.  The Staff noted that it reviewed more than 7,000 new product filings by funds in 2016, and highlighted the popularity of certain new products (e.g., smart-beta exchange-traded funds (“ETFs”)).

Furthermore, the Staff discussed the issue of strategy drift, which occurs when portfolio holdings change over time and leave registration statement disclosures inaccurate.  The Staff discussed the recently passed final rule that requires open-end mutual funds to have a liquidity risk management program, and highlighted that there are additional requirements for certain ETFs.  The Staff explained that the need for this rule was due in part to the fact that open-end funds have an obligation to provide redemption on demand.  Additionally, the Staff discussed the adopted amendments to Rule 22c-1 under the Investment Company Act of 1940, which permit swing pricing by registered open-ended management investment companies.  The Staff noted that the rule has a two-year delayed effective date, which will provide the industry with time to consider how swing pricing will be implemented.

The Staff responded to a question from former SEC Commissioner Steve Wallman, who asked about target-date mutual fund risk disclosure.  The Staff explained that, while such risk disclosures have been a topic of debate for several decades, it has proven to be very difficult to draft a measure, due to the differing views held within the industry.  Finally, the Staff discussed the trend of investors moving away prime money market funds into government-only money market funds, and noted that the Staff is closely monitoring this shift.