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News August 24, 2015 Issue

IAA Supports SEC Effort to Gather More Adviser Data, But Wants Some Changes

Enhanced risk monitoring and regulatory safeguards are fine, but please do it in a way that reduces the regulatory burden on small advisory firms and protects client confidentiality. Also, as long as you’re tinkering with Form ADV, please clear up the confusion on the current form regarding custody.

That would appear to sum up the main parts of the Investment Adviser Association’s August 11 comment letter to the SEC in regard to the Commission’s proposed rulemaking to gather additional data from advisers on Form ADV (ACA Insight, 5/21/15). The comment period for that proposal, unveiled by the SEC in May, ended on the same day the IAA dated its letter.

Under the proposed rulemaking, investment advisers would be required to provide additional Form ADV information on the "risk profile of individual advisers and the industry as a whole," the SEC said. In addition, the changes would require aggregate information related to assets held and use of borrowings and derivatives in separately managed accounts. Advisers would also need to maintain records of their calculation of performance information that is distributed to any person.

"We concur that the collection and analysis of additional census-type data about separately managed accounts will further strengthen the SEC’s ability to oversee the asset management industry, including assessing trends and risks," the IAA said in its comment letter. "Significantly, additional information will also help the SEC staff enhance its ability to conduct risk-based examinations of advisers, thus making the Commission more efficient and effective in overseeing the advisory industry."

"What is striking about most of the comments is just how supportive they are of the proposals in general," said Willkie Farr partner James Burns. "It speaks to the strong desire of funds and advisers to see the SEC, not the Financial Stability Oversight Council or some international coordinating body, assessing or setting requirements for the industry."

"What remains to be seen is how responsive the agency will be to what amounts to very supportive comments from a wide range of stakeholders," he said. "With relatively few adjustments and no real detriment to its underlying regulatory goals, the SEC could drive toward a final rule in relatively short order."

"It strikes me that the IAA’s asks are reasonable and that the SEC should be receptive to them," said Stroock partner and former SEC deputy director of the Division of Investment Management Robert Plaze.

Changes sought

In the same letter, however, the IAA noted that while the SEC should have access to appropriate data, "it should always seek to collect that information in the most efficient and cost-effective way possible, with a particularly keen eye on the way costs disproportionately affect smaller advisers." Within that theme, it suggested the following changes:

  • Raise the threshold for reporting use of borrowings and derivatives. The IAA wants the basic separately managed account reporting threshold increased from $150 million to $500 million. Doing so, it said, "would alleviate reporting burdens and associated costs on approximately 3,000 small firms, while retaining more than 95 percent of the data sought by the Commission." The association also recommended that the SEC make the exclusion of small accounts optional, rather than mandatory – something it said would "actually increase the amount of data reported to the SEC while simplifying the reporting process and reducing costs for advisers that choose to include those separately managed accounts in their reporting." This may seem counterintuitive, but some find it difficult to exclude accounts, as doing so requires them to "analyze, categorize and report separately managed accounts in ways not currently captured by the advisers’ systems," thereby adding to their reporting burden.
  • Make confidential the reporting of client assets and derivatives exposures in separately managed accounts. "This proposal may raise concerns about disclosure of client confidential information and advisers’ proprietary information under certain circumstances," the IAA said. It added that derivatives disclosure "is likely to be difficult to interpret and place in the appropriate context, and as a result may potentially confuse or mislead investors." The association suggests that, should the SEC nonetheless move forward on requiring public disclosure of this information, that it allow advisers to use generic responses, such as "fewer than five," when only one or a few accounts fit a particular category, and that it also make adjustments to information requested related to "gross notional" exposure and derivative values.
  • Clear up the custody confusion. "The Commission should take this opportunity to clarify Form ADV’s questions on custody," the IAA said. "While not necessarily related to the Commission’s immediate goals of enhancing its data on separately managed accounts, we strongly recommend that the Commission amend the questions on custody in Form ADV. These questions are a source of needless confusion for advisers." The association makes specific recommendations for such custody changes in an appendix found at the end of the letter, most of them related to Item 9 on Form ADV, including clarifying the difference between having "custody" and being a "custodian."

The IAA also asked the SEC to give advisers 12 months from adoption of the final rules to put the changes in place. Doing so, the association said, will "ensure that their accounting and data management systems can capture the newly required data."

"The main criticisms are relatively narrow and focused: addressing issues such as seeking assurances about data security for certain information filed with the Commission, preserving the confidentiality of some materials, adding lead time – whether to compliance dates or to the dates proposed for the release of data – and otherwise tailoring the proposals to impose lesser burdens on smaller firms," said Burns.