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(Article from Registered Funds Alert, September 2015)

For more information, please visit the Registered Funds Alert Resource Center.

As noted in a prior Alert, the SEC recently proposed rules to modernize existing investment company reporting requirements. The proposed rules would require monthly reporting and drastically expand the scope of information required to be reported. On August 11, 2015, we submitted a comment letter regarding the proposal. Our main comment was that while any modernization effort would be expected to impose administrative and compliance burdens on investment companies, the proposed reforms may impose material competitive burdens on funds and investment advisers, particularly those employing alternative investment strategies.

Our assumption is that the SEC does not intend for the proposed new reporting requirements to disturb the competitive equilibrium among investment companies, asset managers, service providers or unrelated third parties. Accordingly, we urged the SEC to eliminate from any new disclosure requirements provisions that would compel disclosure of certain types of sensitive information. In this regard, our comments addressed four areas of concern:

• Disclosure of whether a debt security is in default, or otherwise distressed, would impose a competitive burden on funds that hold private loans. The disclosure could disrupt fund management and the private loan market.
• Reporting of position-level information regarding derivatives would place an unintended competitive burden on investment companies and asset managers that employ alternative investment strategies, as such detailed information is more likely to cause investor confusion than improve investor understanding.
• Disclosure of portfolio-level interest rate risk, credit spread risk and duration would pose a competitive risk that an investment strategy could be reverse-engineered, especially for fixed-income funds that hold a relatively low number of positions.
• Disclosure of securities lending “splits” in financial statements could disrupt the securities lending market, thereby imposing a competitive burden on investment companies and securities lending agents alike.

In addition to our comments regarding the imposition of competitive burdens, we addressed four other topics in our comment letter:

• We noted that some of the new information that would be required to be reported regarding derivatives and convertible securities may not be readily available or easily obtainable.
• We urged the SEC to provide additional details regarding cybersecurity and the safekeeping of confidential reported information prior to finalizing the new reporting requirements.
• We discussed our belief that the SEC’s burden estimates are not realistic given the frequency and volume of new reports.
• We suggested an improvement to proposed Rule 30e-3 that would allow investors to opt for electronic notification of the availability of shareholder reports in addition to receiving reports electronically.

We will closely monitor developments related to the SEC’s proposals, and provide additional updates in future Alerts, as relevant.