In 2015, the Commission issued two proposals to modernize reporting requirements for registered investment advisers and registered investment funds. We adopted the first of these proposals in August. Those updates will enhance the information that investment advisers must provide on Form ADV – the form that advisers use to register and report annually.[1] The enhancements will fill important data gaps, such as providing the Commission with new detail about the size and activities of separately managed accounts. Because we finalized the Form ADV revisions without an open meeting, I want to take this opportunity to acknowledge the excellent work of the staff on the August release. Thank you to all who contributed – in particular, to the rulemaking staff in the Division of Investment Management.
This morning, we are considering the second of our reporting proposals. This proposal outlined an ambitious redesign of certain reporting requirements for mutual funds, ETFs, and other registered funds. Over the last two decades, funds have become central to the financial plans of millions of Americans.[2] Individuals entrust their savings to these investment funds as they prepare for retirement, college tuition payments, home purchases and other important financial goals. The new data we are requesting will allow the Commission to better monitor the growth, trends, patterns, and activities of these funds. It will also help to put more useful information into the hands of investors as they make important investment decisions.
First, the new forms we are adopting today will modernize how funds report portfolio and census information to both the Commission and the public. Second, today’s rule will require additional and more frequent reporting to the Commission. In particular, it will require funds to provide critical new information about derivatives, ETFs, and risk measures. With markets that are faster and more complex than ever before, these changes represent an important step toward improved evaluation and monitoring. It should allow the Commission to more closely follow emerging trends and risks – all for the benefit of investors.
Perhaps one of the most important elements of today’s rule is how we ask registered funds to provide the reporting. Funds will submit the new forms in a structured, XML format. This means that, while the information can be read by a person, it can also be easily processed by computers for analysis. Today’s rule also embraces the use of the legal entity identifier, or LEI. The LEI is a way to uniquely identify financial market participants across reports and across markets. With thousands of registered funds and trillions of dollars in assets, LEI will help enhance both fund identification and analysis. Wider use of structured data and LEIs will enable market participants, the Commission, and other regulators to make the most of limited resources and better understand the data being reported.
For these reasons, I am happy to support the adoption of modernized and enhanced reporting.
I would like to thank the staff for their hard work on this release, including Dan Chang, Matt DeLesDernier, Jay Krawitz, Andrea Ottomanelli Magovern, Naseem Nixon, Mike Pawluk, Kristy Van Ohlen, Matt Giordano, Sara Cortes, Diane Blizzard and Dave Grim. Throughout the rulemaking process, the teams working on all of today’s rules have shown an exceptional commitment to thoughtful engagement, and I think that is reflected in the final rules.
Shareholder Reports – Changing Default to e-Delivery
I also want to comment on the part of the proposal that we are not adopting today. Last year, the Commission also proposed a rule that would change the way investors receive important information from their mutual funds.[3] For the first time, the proposed rule would allow funds to provide shareholder reports via the Internet even when investors do not actually choose e-delivery.[4]
Like many commenters, I am concerned about the potential effects of this proposal on investors. As I noted earlier, mutual funds and other registered funds have become an essential part of household financial planning for many Americans. But households are busy places. For those investors who prefer e-delivery, the electronic format may help them manage information. However, for investors who prefer paper, or who are only able to access paper, the proposed rule would impose new steps to obtaining disclosure. An investor would have to ask for paper delivery. It is unrealistic to expect that we can impose this additional burden on busy investors without negatively affecting their engagement. In fact, the evidence we have is that participation rates drop significantly when the Commission allows “notice and access.”
Commission rules already permit e-delivery. An investor can choose this option over paper at any time. The 2015 proposal seems to assume that, despite this existing flexibility, investors are not choosing what they actually prefer. Evidence suggests, however, that investors’ current choices do reflect their preferences.[5]
I also believe the potential for harm is lower with the current default to paper than with the proposed alternative. Under current rules, some investors who would be happy with e‑delivery, but who have not yet opted in, end up with extra paper. Not a perfect outcome, but all investors will actually receive the reports. In contrast, under the proposed e-delivery rule, some investors are likely to end up with no shareholder reports.
Perhaps the proposed rule is aimed at cost savings. However, costs must always be considered in balance with investor protection. Here, it is not clear that the tradeoff is worthwhile.
Updating our disclosures to take advantage of new technology is a very important initiative, and I have spoken often about the potential benefits.[6] However, the end result should be improved investor protection and enhanced investor engagement. We must also be careful, while embracing technology, that we do not leave groups behind, like seniors and those with less access to technology. Even digitally savvy investors may want paper disclosures because they are easier to read or are an important record-keeping tool or because they serve as a reminder. At this time, I remain concerned about interfering with investor choice without clearer evidence that it will not do more harm than good.
