The SEC has finalized a rule requiring registered advisers to report certain information related to the use of derivatives and borrowings in separately managed accounts (“SMAs”). The release can be found here (the “Release”). This posts seeks to provide advisers with a quick snap shot of the information they will need to collect and disclose. The compliance date is October 1, 2017.
Purpose of New Derivatives Disclosure: To provide SEC with information regarding the scale of derivatives usage and borrowings in separately managed accounts.
New Disclosure Requirements:
Category Percentages: Advisers will be required to report the approximate percentage of SMA regulatory AUM that are invested in twelve different asset classes, including derivatives, in Section 5.K.(1) of Schedule D. Advisers with greater than $10B of regulatory AUM SMAs will have to provide such information as of two dates: (1) end of year (the date used to calculate regulatory AUM for purposes of the annual updating amendment) and (2) mid-year (the date six months before the end of the year date). Advisers with less than $10B must provide such information only as of end of year date.
Borrowings and Derivatives: Advisers must also report information regarding the use of Borrowings and derivatives in SMAs, as summarized in the table below:
| Requirements Based on Adviser’s Regulatory AUM in SMAs | |||
| Less than $500M of regulatory AUM in SMAs | At least $500M but less than $10B regulatory AUM in SMAs | $10B or more in regulatory AUM in SMAs | |
| Date(s) of Snapshot of Disclosure | N/A | Once: date used to calculate regulatory AUM (end of year date) | Twice: date used to calculate regulatory AUM (end of year date) and date 6 months prior to such date (mid-year date). |
| Disclosure Item 1 |
N/A | Amount of SMA AUM for each of three levels of Gross Notional Exposure (i.e., Less than 10%; 10-149% and 150% or more) | Amount of SMA AUM for each of three levels of Gross Notional Exposure (e.g. Less than 10%; 10-149% and 150% or more) |
| Disclosure Item 2 |
N/A | Dollar amount of Borrowings used in each of the 3 levels of Gross Notional Exposure | Dollar amount of Borrowings used in each of the 3 levels of Gross Notional Exposure |
| Disclosure Item 3 |
N/A | N/A | Aggregate Gross Notional Value of derivatives divided by that aggregate assets under management for each of the amounts included in the three levels of Gross Notional Exposure with respect to the following six (6) categories of derivatives:
1. Interest Rate; |
| In respect of Disclosure Items 1-3, the adviser may limit such disclosure to SMAs with regulatory AUM of $10M or more. | |||
Custodians for SMAs: Advisers must complete a separate Schedule D, Section 5.K.(3) for each custodian that holds 10% or more of the aggregate SMA regulatory AUM. The following information must be provided:
- Legal name of custodian;
- Primary business name of custodian;
- Location of custodian’s office(s) responsible for custody of the assets;
- Indicate whether custodian is a related person of the adviser;
- If custodian is a broker-dealer, provide the SEC registration number;
- If custodian is not a broker-dealer, or is a broker-dealer but does not have an SEC registration number, provide its LEI; and
- Amount of regulatory AUM attributable to SMA that is held at the custodian.
Definitional Key:
AUM means, for purposes of these SMA reporting requirements, total regulatory assets under management (as reported in Item 5.F.) minus the amounts reported in Item 5.D.(3)(d) [investment companies], (e) [business development companies], and (f) [pooled investment vehicles (other than investment companies and business development companies)]. See Amended Form ADV, Part 1A, Schedule D, Item 5.K.(1).
Borrowings include “secured borrowings and unsecured borrowings, collectively. Secured borrowings are obligations for borrowed money in respect of which the borrower has posted collateral or other credit support and should include any reverse repos (i.e., any sale of securities coupled with an agreement to repurchase the same (or similar) securities at a later date at an agreed price). Unsecured borrowings are obligations for borrower money in respect of which the borrower has not posted collateral or other credit support.” See Amended Form ADV, Glossary of Terms, Item 3.
Gross Notional Exposure means, in respect of an SMA, “the percentage obtained by dividing (i) the sum of (a) the dollar amount of any borrowings and (b) the gross notional value of all derivatives, by (ii) the regulatory assets under management of the account.” See Amended Form ADV, Part 1A, Schedule D, Item 5.K.(2).
Gross Notional Exposure means the “gross nominal or notional value of all transactions that have been entered into but not yet settled as of the reporting date. For contracts with variable nominal or notional principal amounts, the basis of reporting is the nominal or notional principal amounts as of the reporting date. For options, use delta adjusted notional value.” See Amended Form ADV, Glossary of Terms, Item 24.
Separately managed account or SMA means, for purposes of reporting on Form ADV, “advisory accounts other than those that are pooled investment vehicles (i.e., registered investment companies, business development companies, and pooled investment vehicles that are not registered (including, but not limited to, private funds))”. The SEC considers such accounts to be separately managed accounts for purposes of reporting on Form ADV, though they have not formally adopted this definition by rulemaking. See the Release at 60419.