Compliance August 29, 2016

New SEC Rule Impacts Adviser Reporting

The SEC adopted new final rules to enhance information reported by registered investment advisers under Form ADV. 
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The Securities and Exchange Commission (SEC) adopted amendments to several Investment Advisers Act rules and the investment adviser registration and reporting form (Form ADV) to enhance the reporting and disclosure of information by investment advisers.

According to SEC, the amendments will improve the quality of information that investment advisers provide to investors and the commission. 

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“These amendments are an important step in a series of rulemakings to enhance the SEC’s monitoring and regulation of the asset management industry,” says SEC Chair Mary Jo White.  “Requiring investment advisers to report this additional information will provide investors and the Commission with a better understanding of the risk profile of each adviser and the industry as a whole.”

In short, the amendments will require investment advisers to provide additional information regarding their separately managed account business, “including aggregate data related to the use of borrowings and derivatives, and information about other aspects of their advisory business, including branch office operations and the use of social media.”  In addition, the amendments “will facilitate streamlined registration and reporting for groups of private fund adviser entities operating a single advisory business.”  

Further amendments to Investment Advisers Act Rule 204-2 will require advisers to maintain additional records related to the calculation and distribution of performance information. According to the SEC, these records will be useful to the commission’s examinations staff in evaluating adviser performance claims, “and could reduce the incidence of misleading or fraudulent advertising and communications by advisers.”

By way of background, on May 20, 2015, SEC proposed amendments to Part 1A of Form ADV in three areas: revisions to fill certain data gaps and to provide additional information about investment advisers, including their separately managed account business; amendments to incorporate a method for private fund adviser entities operating a single advisory business to register with us using a single Form ADV; and clarifying, technical and other amendments to existing items and instructions.

“Several of the amendments to Form ADV relate to separately managed accounts,” SEC explains. “These amendments will require advisers to provide certain aggregate information about separately managed accounts that they advise. Other amendments to Form ADV that we are adopting are designed to improve the depth and quality of information that we collect on investment advisers, facilitate our risk monitoring initiatives and assist our staff in its risk-based examination program. Moreover, because Form ADV is available to the public on our website, these amendments also are intended to provide advisory clients and the public additional information regarding registered investment advisers.”

NEXT: Breaking down the rulemaking 

SEC officials note the are also adopting amendments to Part 1A that will “provide a more efficient method for the registration on one Form ADV of multiple private fund adviser entities operating a single advisory business (umbrella registration).”

“The SEC staff has provided guidance to private fund advisers regarding umbrella registration, and the amendments to incorporate umbrella registration into Form ADV will make the availability of umbrella registration more widely known to advisers,” SEC explains. “Uniform filing requirements for umbrella registration in Form ADV will provide more consistent data about, and create a clearer picture of, groups of private fund advisers that operate as a single business.”

The last set of amendments to Part 1A of Form ADV includes clarifying, technical and other amendments that are based on SEC staff’s experience with the form and responding to inquiries from advisers and their service providers. The amendments are designed to make it easier for advisers to understand and complete the form.

Separate from Form ADV, SEC is also adopting amendments to several Advisers Act rules: “First, we are adopting amendments to the books and records rule, rule 204-2, to require advisers to make and keep supporting 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. Advisers also will be required to maintain originals of all written communications received and copies of written communications sent by them related to the performance or rate of return of any or all managed accounts or securities recommendations.” Finally, SEC is further adopting “several technical amendments to rules under the Advisers Act to remove transition provisions that were adopted in conjunction with previous rulemaking initiatives, but that are no longer necessary.”

“We received 50 comment letters on our proposals, most of which were from investment advisers, trade or professional organizations, law firms and consultants. Commenters generally supported the goals of the proposal,” SEC concludes. “The majority of comments focused on reporting of separately managed accounts and umbrella registration. Several commenters supported collection of information on separately managed account clients, but many raised concerns about the public availability of the information and reporting on derivatives and borrowings. A diverse group of commenters supported umbrella registration. Commenters also generally supported the amendments to certain Advisers Act rules. We are adopting the proposed amendments with several modifications to address commenters’ concerns.”

The amendments have been published in full on the SEC website, and advisers will need to begin complying with the amendments on October 1, 2017. 

Data & Research August 29, 2016

Strategic Insight Research Ties DOL Rule to Institutional Pricing

A new study from Strategic Insight predicts the DOL fiduciary rule will accelerate demand for institutional pricing of mutual funds sold through intermediaries.
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Strategic Insight (SI), an Asset International company providing authenticated business intelligence and actionable insight for the asset management community, published a new study focused on implications of the Department of Labor (DOL) fiduciary rule, slated to take effect in 2017 and 2018.

According to SI, much of the recent growth in institutional pricing demand has come from fee-based advisory programs which have seen demand shift rapidly toward funds’ lowest-cost available share classes, in anticipation of the new fiduciary paradigm. 

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“No Load shares with zero 12b-1 fees accounted for 66% of total mutual fund sales within fee-based advisory programs during 2015, rising significantly from just 36% in 2009,” Dennis Bowden, Strategic Insight managing director of U.S. research, tells PLANADVISER. “At the same time, A-shares sold with the load waived but carrying typically 25 basis points of 12b-1 fees declined from 51% of total fee-based sales in 2009 to 27% in 2015.”

The findings come from SI’s new report, “Fund Sales Benchmarking: 2016 Perspectives on Intermediary Sales by Share Class and Distribution Channel.” Bowden explains the study is based on SI’s proprietary survey of 35 fund firms that distribute primarily through financial advisers. Survey participants managed in aggregate $5.2 trillion in U.S. open-end stock and bond fund assets as of the end of 2015, and reported over $1 trillion in overall fund sales during the year.

“A noteworthy impact of the DOL fiduciary rule will be an acceleration of the existing movement toward lowest-cost share classes,” Bowden adds. “We have already seen this trend increasingly eliminate the use of 12b-1 fees within fee-based accounts, but looking ahead, the potential for further ‘institutionalization’ of pricing demand is an important area to monitor.”

NEXT: Implications for DC sponsors and their advisers 

SI measures some additional implications from the DOL rulemaking that may be less intuitive, but which will have crucial implications for product offerings in the coming years. For example, at a high level margins are being squeezed, but the trend of sponsors pushing for access to lowest-cost institutional pricing also implies they will rely on advisers to find great deals, to keep on top of the fee monitoring, etc.

“Looking at complying with the DOL rulemaking, distributors need to equalize payment streams which they receive from funds across their platform,” Bowden says. “This may be a more powerful impetus driving further externalization of fees outside of the fund expense ratio, including payments for asset servicing. Such evolution in pricing demand would impact not only the types of share classes that mutual fund managers need to offer but also carry potential profitability implications.”

For plan sponsors, the big consideration will be: “How will costs such as those for asset servicing now be paid, and who would pay them?"

“For investors, paying for certain services outside of fund expenses does not always equate to cost savings,” Bowden warns. “And for fund managers, different potential scenarios around 'out of pocket' payment demands by distributors can carry an important profitability impact.”

The SI report goes on to suggest share classes carrying point-of-sales commissions (commissionable A-and B-shares) continue to encompass a diminishing share of overall fund activity. Such classes accounted for just 11% of aggregate sales during 2015 and only 6% of sales for the median firm in SI's study.

“At a broad level, I would say that the key pricing consideration in the context of the DOL rule is the need for price equalization up and down the value chain—between investors and advisers, funds and advisers, funds and distributor home offices, etc.,” Bowden adds. “This would definitely favor fee-based advisers from a compensation structure perspective, versus those still relying variable point-of-sale commissions, although the Best-Interest Contract Exemption would obviously allow for this, when executed properly. So the movement from brokerage to fee-based advisory will definitely be accelerated by the DOL rule.

“I would agree generally that DC specialist advisers are probably in a good place, but the impact of the DOL rule on IRA assets and also general taxable assets held at broker/dealers will be most significant—both for those advisers and brokers who must transition their business from brokerage to fee-based, as well as brokers’ compliance costs in monitoring such assets post-DOL. Within these IRA and taxable accounts, mutual fund managers will likely face increasing margin pressures as their retail distribution partners demand more institutional pricing while still requiring certain cost/revenue sharing payments.”

The Strategic Insight Fund Sales Benchmarking: 2016 Perspectives on Intermediary Sales by Share Class and Distribution Channel study was recently published as part of the new Strategic Insight In-Depth Research report series. Additional research findings and information on SI are at online at www.sionline.com. 

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