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Funds Seek Guidance on Investment Disclosure, Fair Value

As significant federal regulation passed earlier this year begins to take effect, industry professionals are seeking greater guidance from the Securities and Exchange Commission on specific reporting mandates and examining the benefits of implementing optional requirements.

One such mandate is the filing of Form N-Q. The rule requires investment companies to provide complete portfolio schedules of investments to the SEC for the first and third fiscal quarters. Firms are required to submit the filing within 60 days at the end of a quarter. The rule also mandates that officers of the company, the principal executive officer (PEO) and the principal financial officer (PFO) certify that information is complete and accurate. The rule took effect in May, but firms only had to start coming into compliance and provide the reports for periods ending on or after July 9.

Firms also have to disclose any changes in internal controls during the most recent fiscal quarter. However, not everyone is clear about the level of detail needed in the reports. "This is a new requirement to file with the SEC," said John S. Capone, a partner in the investment management and funds division of KPMG, and a speaker at the Investment Company Institute's Tax & Accounting Conference in San Antonio, Texas, this week. Capone is speaking on a panel about fund financial reporting.

"This is the first wave, the first round of filings on N-Q and there is a divergence in practice in what people are including in disclosures," Capone said. "That has led to a lot of discussions between lawyers and accountants over what should be included and what shouldn't." The main area of uncertainty arises from the information to be included in the footnotes of the documents, he said.

Jami D. Waggoner, director of financial reporting at American Century Investments and also on the same panel as Capone, said that although the increased disclosure requirements are beneficial to shareholders, firms need to truly examine all aspects of the new rules passed in February to make sure they are not taking unnecessary risks.

Waggoner said her firm is viewing the new N-Q requirements as an opportunity to provide more information to shareholders. It will help investors see the holdings so that they can understand the risks and investment objectives within its funds.

"We are making this available with a 30-day lag on our Web site to our shareholders, and this information isn't even required to be filed with the SEC until 60 days," she said. "So, we feel like we are going above and beyond to make sure that our customer base has that information in a more timely manner."

However, American Century is not adopting all of the non-mandated portions of the new rules. Specifically, American Century is shunning the summary schedule, a document that is meant to streamline reporting and focus on the principal holdings of a fund to help investors better grasp the risks of a fund.

The document would include the disclosure of the top 50 holdings and issues that are greater than 1% of net assets, among other requirements. "In terms of the summary schedule, a lot of folks are doing cost-benefit analysis and finding that unless you hold a large number of securities within the funds themselves, that it is not cost effective to actually implement this rule. And it's not required, it's an option," Waggoner said. "I think more people are leaning towards full disclosure of their holdings, even in their annual and semi-annual reports."

Waggoner said the summary schedule may be beneficial to portfolios with several hundred holdings, but for a portfolio with 70 holdings, for example, the benefits versus the risks may not be to a firm's advantage. "You still have to file complete holdings even if you choose to do the summary," she said. "So it's more paper, and the both of those schedules have to be certified by the PEO and the PFO. We felt like there's potentially more risk because you have to review and create two documents."

Risky Business