The Securities and Exchange Commission unanimously voted Wednesday to propose increasing and modernizing risk disclosures for investment advisors and mutual funds.

Advisors would also be required to provide information on their social media activities on Form ADV for the first time. Advisors would need to include a list of all social media sites they sponsor, allowing clients, prospective clients and examiners to review them.

If finalized unchanged, the proposed rules would require individual advisors to disclose on Form ADV information on assets (including swaps and exchange-traded funds) and use of borrowings and derivatives in separately managed accounts.

Also, advisors would be mandated to provide additional information about their advisory business, including branch office operations.

Advisors would have to maintain records of the calculation and communication of performance information distributed to any person. Currently, advisors are required to maintain performance information that is distributed to 10 or more individuals.

Investment Adviser Association General Counsel Bob Grohowski praised the SEC commissioners for making the new disclosures the “least burdensome possible” for advisors.

 

To bring more light to the risks posed by mutual funds, the Commission proposes that the funds provide information on specific derivatives holdings including swaps, futures and forwards.

Derivatives holdings would be displayed prominently in the financial statements rather than aggregate information about them, which is currently buried in the notes.

For mutual funds other than money market funds, the Commission is proposing that they file monthly reports on the new Form N-PORT on portfolio holdings including:

• Data related to the pricing of portfolio securities.

• Information regarding repurchase agreements, securities lending activities, and counterparty exposures.

• Terms of derivatives contracts.

• Discrete portfolio level and position level risk measures to better understand fund exposure to changes in market conditions.

Registered funds of all types would be required to file more information annually on exchange-traded funds and securities lending. That information and other data would be disclosed on a new Form N-CEN which would replace Form N-SAR.

Mutual fund portfolio and other information would be required for the first time to be presented in a computer-friendly structured data format.

The SEC currently obligates structured data reporting to be provided by money market funds, through Form N-MFP, and certain private funds, through Form PF.  

A downside of the expanded and more current reporting requirements on mutual funds is they could provide an unfair advantage for high frequency traders and other sophisticated investors over the general public, warned SEC Chief Economist and Division of Economic and Risk Analysis Director Mark Flannery.

Funds would be allowed to place shareholder reports on their websites rather than be required to send paper copies.

Republican Commissioner Daniel Gallagher called the new mutual fund reporting rules a very important step forward that will allow the SEC to be a much more sophisticated and nimble overseer of the asset management industry.

He said the increased information will allow the agency to proactively identify risks that could potentially harm investors.

Gallagher also indicated he thinks the increased oversight will take pressure off the SEC by the Financial Stability Oversight Council on monitoring asset managers and show FSOC the agency is up to the task of regulating the industry by itself.

 

Democratic Commissioner Luis Aguilar said the added information disclosed on Form ADV should help retail investors make better decisions on the choice and retention of advisors.

During the Commission meeting, Chair Mary Jo White said her staff is developing recommendations to enhance the management and disclosure of liquidity risk by mutual funds and ETFs.

Additionally, she said new requirements for the stress testing of large investment advisors and large funds is in the works.

The SEC will accept comments on the proposed rules 60 days after they are published in the Federal Register, which should happen next week. However, the agency routinely accepts submissions after the formal deadline.

To see the proposed 104 pages of revisions to Form ADV, click here. To see the 506-page text of the new investment company rules, click here.