Adviser advocates seek more privacy for SMA disclosures

Investment adviser advocates support the Securities and Exchange Commission’s effort to collect more information about separately managed accounts, but want the agency to keep the specifics of advisers’ strategies concealed.

The comment period ends today on a proposal that the SEC advanced unanimously in May that would require advisers to disclose on their Form ADVs information about assets held in SMAs and the use of derivatives and borrowings.

The rule would require all investment advisers who use SMAs to report their asset allocations in 10 “broad asset categories, such as exchange-traded equity securities and U.S. government/agency bonds,” the proposal states.

The reporting of derivatives and borrowings applies to accounts of $10 million or more, and to advisers who have at least $150 million in separately managed accounts. Advisers with at least $10 billion in SMAs would have to report both midyear and year-end information as part of their annual filing.

In a comment letter it will file later today, the Investment Adviser Association will ask the SEC not to make SMA asset allocations part of the publicly available portion of the ADV, because they could reveal an adviser’s investment strategy.

“Those things are the secret sauce in our industry,” said Robert Grohowski, IAA general counsel.

The information that the SEC is collecting could be “reverse engineered” to allow insight into counterparties and other investment tactics, said Jay Baris, a partner at the Morrison & Foerster law firm.

“They should consider making some of that information nonpublic,” Mr. Baris said.

The SEC wants to collect more information on SMAs because they are an increasingly popular vehicle among investment advisers, and the agency “needs a wider and deeper lens to assess possible risks,” SEC Chairwoman Mary Jo White said when the commission released the proposal this spring.

Ms. White said 73% of the approximately 11,500 investment advisers registered with the agency manage assets in separately managed accounts.

The ADV reform is part of a rulemaking initiative designed to upgrade the SEC’s ability to monitor potential systemic market risks posed by the asset management industry.

“It’s positive in that it gives the regulators more information to do their jobs, but I’m not sure if ultimately Form ADV is the appropriate forum for them to get that information,” said Genna Garver, of counsel and chairwoman of the investment regulation group at Dorsey & Whitney. “The changes are asking for a lot more detail [about SMAs] than what is currently required, and even more than what is required for private funds.”

The increasing regulatory burden surrounding SMAs is making some advisers reconsider that business line.

“From my clients’ perspective, Form ADV is getting quite burdensome,” Ms. Garver said.

The IAA wants the SEC to ease the reporting requirement regarding SMA derivatives and borrowings by raising the reporting threshold from $150 million in assets to $500 million. That move would mean 3,000 fewer advisers would fall under that part of the rule, but the IAA says the SEC would still collect more than 95% of the information that it’s seeking. About 7,000 advisers have $150 million or more of client assets in SMAs.

“The industry is supportive of the SEC having the data it needs as long as it is collected efficiently and effectively,” Mr. Grohowski said.

Related Topics: Securities and Exchange Commission