SEC’s reporting modernization rules mark new era

For registered investment companies, the Securities and Exchange Commission’s investment company reporting modernization ‘final rule’ is so much more than a sign of the times. It signals the Commission’s next move, as it becomes even more entrenched in the private equity industry and marks a new era for the fund industry as a whole.

By moving beyond its focus on requiring advisors at a certain registered-assets-under-management threshold to register with the SEC and implementing presence exams to assess issues and risks, the Commission is now focused on modernizing fund reporting information and overall transparency. On the surface, improving the quality and type of information provided to the SEC seems logical and innovative.

Historically, the SEC has been reliant on fund reporting and related filing information to monitor funds and detect risks, fulfill its role as an advisor to policy- and rulemaking bodies and facilitate its examination and enforcement activities – the latter have been ramping up since 2010. In issuing its final rule in late 2016, the SEC noted it has been challenged by the fund industry’s evolution, most notably new fund products and investment techniques. This is especially applicable to exchange traded funds, targeted date funds and non-traditional bond funds. As a result, increased volume has been a pipeline for enhanced complexity in fund filings.

In the words of former SEC chair Mary Jo White, the final rule was designed as a “sweeping change for the industry by requiring strong transparency provisions and enhanced investor protections… collectively, these amendments will improve the information the Commission receives from investment companies.” The statement also exalted how the new rules will protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation.

New rule means new burdens and processes
Under the newly adopted investment company reporting modernization ‘final rule,’ funds must adhere to the following:

Form N-PORT, which nullifies Form N-Q
As the modernization initiative’s centerpiece, this form requires certain RICs and funds to report information about monthly portfolio holdings to the SEC in a structured data format. By requiring portfolio-wide or position-level information using this format, the SEC is counting on greater efficiency and, in turn, a rapid response to market changes as well as fund-specific events.
Portfolio-wide and position-level holdings data must be filed with the SEC on a monthly basis, no more than 30 days after the close of each month
Compliance date: June 1, 2018 (over $1 billion); June 1, 2019 (less than $1 billion)

Form N-CEN, which nullifies Form N-SAR
This requires registered investment companies – other than face-amount certificate companies – to report certain census-type information to the SEC in a structured data format annually.
Updates required disclosure items for all funds and includes new questions tailored to specific fund types
Compliance date: June 1, 2018 (all funds)

Regulation S-X, amendment
This requires standardized enhanced disclosure about derivatives in the RIC’s financial statement.
Amended disclosure requirements are intended to provide investors with access to similar information in a reader-friendly format and to promote comparability in derivatives. By standardizing the disclosures across fund, it will help investors to better assess funds’ use of derivatives.
Compliance date: August 1, 2017

Forms N-1A, N-3, N-CSR, amendments
This requires certain disclosures of the RIC’s securities lending activities.
Compliance date: August 1, 2017

There is no doubt the final rule is having a ripple effect throughout the fund industry. From the increased reporting burden – in terms of frequency and granularity – to implementing new processes to prepare filings utilizing Forms N-PORT and N-CEN, as well as the amended forms, industry and infrastructure challenges abound.
Speaking broadly, the industry has had – and continues to have – sweeping questions related to data sourcing and aggregation, implementation of a filing timeline that also is compressed and complex calculations. Furthermore, there are also infrastructure-related challenges posed when it comes to strategy, operations and – perhaps the greatest of these – technology.

To achieve even greater transparency, the SEC requires all information in a structured data format. What is this exactly? It is an extensible markup language file, commonly referred to as an XML format. This format enables the SEC to leverage today’s technology to collect, aggregate and analyze information like never before. All of this is now being accomplished with modern-day speed and effectiveness.

Once the final rule’s structured data really starts to roll in, the SEC will be in possession of a potentially powerful new tool – the likes of which it has never seen before. At the Commission’s fingertips will be a database chock-full of information to assess risk at a fund-specific level, spanning different types of funds, across entire industries. This information can be used in limitless ways to access fund registration compliance, identify funds for examination, monitor risk and inform rulemaking bodies.

There is no telling where this new centralized database and enhanced knowledge will ultimately lead the SEC. However, one thing is certain: the Commission is continuing its review and consideration of Rule 30e-3, which was omitted from the final rule when it was adopted in October 2016. Under the proposed Rule 30e-3, a fund would be able to satisfy current shareholder report-delivery obligations via a fund’s website. This only pertains to reports and certain other materials. With the proposed rule still under evaluation, all eyes are on the SEC. Of course, given the Commission’s other priorities, the proposed rule has an uncertain future, at least over the near term.

Registered investment companies find themselves in a race to meet the new deadlines – and the challenges they inherently create – set forth under the new reporting modernization rules. This, it seems, is a sign of not only the times, but a sign of the SEC’s future governance. ?

Tom Angell, CPA, is a practice leader in Withum’s Financial and Investment Services Group and head of the private equity and venture capital practice. In this role, he serves a diverse roster of private equity and venture capital clients, including domestic funds, offshore funds and fund of funds. From start-ups to long-established organizations, Angell spearheads a team of auditors, tax professionals and internal quality-control specialists who advance each entity’s strategies and objectives while ensuring reporting standards and tax compliance. He also is one of the firm’s authors of the Emerging Manager Desk Reference Manual. This details the various operational areas in which the fund manager needs to focus, such as building out the back office, outsourcing and service provider selection and organizational structure. His expertise also extends to raising financing and deal origination as well as organizational structure and operational issues.