May 22, 2015 Nir Yarden

SEC Proposes Manager Disclosure: Investor Considerations

There are currently 4,364 SEC-registered investment managers that provide advice on $10.1 trillion in assets to 28,532 private fund clients. (1) Late Wednesday, May 20th, the SEC released proposed changes to Form ADV — the form that managers use to register with the SEC, along with amendments to the Investment Advisers Act.

What are material changes that the SEC is proposing that you should keep an eye on? If you’re one of those 28,532 investors, an investment adviser or a manager, here are some suggestions and thoughts:

1. Separate Managed Account Businesses are Now in Focus
To date, the SEC has collected “detailed information about pooled investment vehicles, but little specific information regarding separately managed accounts.” (2) The proposed changes to Form ADV seek to fill this gap: New proposed disclosure would require a manager to list certain aggregate information on their separate account business including 1) regulatory assets under management, 2) types of assets held in separate accounts and 3) the use of separate account derivatives and borrowings.

2. Greater Visibility on Manager’s Overall Business Mix and Capabilities
Investors allocating money to a manager typically fall into one of three categories. Their money is managed in 1) registered and/or unregistered pooled investment vehicles, 2) separate managed accounts, or 3) some combination of both. The proposed SEC changes, in my opinion, provide investors and their gatekeepers with greater insight on a manager’s overall business mix, product capability, and limitations when considering an investment allocation.

3. Specific Numerical Client Count
A manager’s overall client mix in terms of investor category is currently listed in Form ADV, pursuant to a range. A proposed SEC change would require managers to list out the specific number of clients whose money they manage, pursuant to different investor categories. For certain investors that are sensitive as to whether a manager’s composite mix of clients is reflective of their own status, this change may be useful.

4. All Written Performance Calculations Must be Retained
A regulatory record retention rule will be modified to provide that managers must now keep documentation that “demonstrates performance calculations or rates of return in any written communications that the adviser circulates or distributes, directly or indirectly, to any person.” (3) For managers that are currently not abiding by this standard (the current rule requires retention at a higher threshold), this is an important change. This change may provide investors with additional due diligence data points related to a manager’s investment performance both before and after an investment is made.

5. Comparable Analysis Across Different Managers
The overall thrust of the SEC changes, in my opinion, is to make comparable manager analysis across different products and capabilities easier. The proposed SEC changes are now subject to a public comment period after which the proposed changes may become effective subject to any SEC changes.

Here’s the release: http://www.sec.gov/rules/proposed/2015/ia-4091.pdf (PDF)

(1) Amendments to Form ADV and Investment Advisers Act Rules, May 20, 2015, p. 27.
(2) Ibid, p. 6.
(3) Ibid, p. 7.