Are you prepared to implement the SEC’s latest regulations?
| Head of Global Fund Administration, BNY Mellon
Since 2008, the financial services industry has experienced regulatory change at a constant pace. Of note are two new rules the SEC has finalized since October 2016 which require asset managers’ attention and compliance:
- Investment Company Reporting Modernization—in order to drive more transparency about how funds operate and what potential risks exist in the market, the SEC has created two new forms, N-PORT and N-CEN. Each request an unprecedented amount of information, and one of them must be filed monthly. These requirements apply to all mutual funds and ETF’s, but not to money market funds, with compliance dates set for less than a year away, as of June 2018;
- Liquidity Risk Management—in order to promote effective liquidity risk management, the SEC will now require funds to establish a program to reduce liquidity risk and enhance disclosure around liquidity. New elements include limitations on illiquid investments and board oversight of the program. This rule, to take effect on December 1, 2018, for funds with net assets of $1 billion or more, will affect open-end mutual funds and ETFs, but not money market funds (“in-kind” ETFs are excluded from certain requirements).
Multiple challenges for asset managers
In order to comply with the new regulations, asset managers are contemplating significant changes in their operating models. They’re also trying to find sufficient resources to fund these changes. These changes present four main challenges to implementation:
- More data: The SEC is requesting an exhaustive amount of information, some of which it has never before received or analyzed, including portfolio level risk metrics, ETF authorized participants and creation units, and ETF tracking error.
- More sources: The SEC wants data that is housed across a wide swath of the asset management business. Firms will have to access this information – such as counterparties for securities lending, realized and unrealized gains for derivatives, and repurchase agreements and collateral – from multiple entities and applications.
- More often: In the past, SEC reporting was done quarterly, semiannually or annually. The new rules ask for information on a monthly basis. What’s more, that information is due 30 days after month-end, requiring rapid turnaround times
- Less time: As noted, the implementation window for these new rules is rather short. Large fund complexes have less than nine months to comply with the monthly reporting requirements.
What should asset managers look for in a solution provider?
Many firms are considering an outsourced solution to help them meet the new reporting and liquidity requirements. Building new capabilities in-house is costly and time-consuming. When considering a new partner or evaluating a current provider, it can be helpful to ask a few key questions:
- Do you have the scale to execute a project of this size? A provider should have a comprehensive and resilient technology strategy, as well as the funding to create the new infrastructure required by the SEC.
- Can you access and integrate data from multiple systems? The right solution will have the ability to automatically access data from other parties and platforms to create the SEC filings. The data must be housed in a single, secure repository and be refreshed monthly.
- Do you have broad knowledge of current and pending regulatory requirements? Today’s climate requires a partner with expertise in not only understanding, but implementing new regulations. The solution provider should understand how each requirement will impact the diverse and unique needs of asset managers.
- Can you deliver a robust control environment? Once gathered, the profusion of new data must be checked for accuracy. The technology solution should be able to compare each number to prior months, apply business logic to the numbers, understand any exceptions and ensure that the data is complete.
Ultimately, it boils down to this: Asset managers should look to partner with a provider who has a proven track record of responding to regulatory change, converting technology systems and onboarding new clients. If the provider is a proven partner in the industry, they will have the necessary infrastructure and technology capabilities to help asset managers meet their reporting obligations and liquidity analysis requirements under this new regulatory regime.
An uncertain future
These are early days. Until funds begin to comply with the new SEC rules, much will remain uncertain. There are concerns about how the SEC will secure the data reported on the new forms. Some expect that the additional information will lead to increased enforcement actions. And it remains to be seen whether regulation continues to increase or the forces of deregulation prevail. In the meantime, asset managers must prepare to fulfill their new obligations to the SEC.
As head of global fund administration, Victoria McGowan oversees BNY Mellon’s financial reporting, tax, and regulatory administration services.