On December 8th, 2017, the SEC released temporary final rule 30b1-9(T) “that requires funds in larger fund groups to maintain in their records the information that is required to be included in Form N-PORT, in lieu of filing reports with the Commission, until April 2019”. This information will be “subject to examination by the Commission.” Press Release
The information contained in Form N-PORT must still be prepared and compiled starting as of June 2018, but will not need to be created in an XML format and will not need to be filed with the SEC until the March 2019 as of date.
Between June 2018 and March 2019, fund companies will be responsible for storing and maintaining the Form N-PORT information as per general record keeping requirements which will be subject to examination by the Commission.
Liquidity requirements with respect to N-PORT reporting originally required for filing by January 30th 2019 will now be required on April 30th 2019.
This temporary final rule 30b1-9(T) has no impact on the original filing requirements for Form N-CEN.
What was once considered undefined and simply a conduit for everything between the front and back office investment areas, the middle office, also referred to as investment operations, is a strategic component of the investment lifecycle. It has now evolved into a clearly defined business model including trade capture, investment accounting, data management, reconciliation, performance, compliance, and client reporting. Trading and specifically derivatives, are achieving greater automation capabilities. Data management has led to more efficiency and consolidation that has significantly improved a firm’s ability to leverage data across their business and technology architecture. System integration is a beneficiary of the improvements with data management and has allowed for higher rates of straight through processing. Even operating models and leveraging offshore capabilities continue to improve while still addressing the challenges with service levels and business continuity.
However, there are still many challenges that the industry is facing in the middle office with regards to building automation, retaining expertise, and outsourcing. Many firms have focused their attention to implement innovative technology and have gotten stuck in never-ending development efforts, open-ended business requirements, and continued demands from investment managers. Other firms have explored and initiated outsourcing efforts that have achieved similar results. In many cases, achieving a ‘live’ environment and/or the target operating model is near impossible given the on-going demands of the market, regulators, and the business.
As firms continue to achieve successes and address the myriad of challenges, many are also struggling to measure success in the middle office. Accurate and timely NAV’s works for the back office, but the middle office has only so many KPI’s. They are also measured by the general satisfaction of the front office investment managers which is not usually covered in an SLA. Managers are not willing to compromise to change what’s been done for years. The concept that managers don’t need to change the way they work needs to change. Firms jump through hoops to make things work for managers, yet when one gets into the details, what the manager actually needs is quite different than what is being produced and could be supported in a different way.
Outsourcing is still a popular option for many managers. Both service providers and technology vendors have grown significantly over the years to offer more streamlined services. The industry leaders are guiding their clients and prospects as opposed to the reactive approach that existed when the funds business was growing, evolving and still in the learning phase. However, they still face implementation challenges as many times the scope of work is a moving target and often too large for a long phased implementation. In some case, the scope of work at the time of the deal is often stale by the time the implementation is in progress. In addition, sometimes managers don’t know enough about the work that they’re outsourcing. “Scope creep” even within a manager’s organization is often unknown. Managers are used to simply asking for what they need, which is fine, but often it just gets done without any tracking of it or documentation. This all comes to a head when outsourcing and can often lead to compromise or conflict.
Another key component in the middle office is the talent and skills of the team. For many firms, the business and technology areas may only be comprised of a few resident experts. These few people are very often required for every single meeting, decision, and design. This resource bottleneck significantly slows down and can negatively impacts progress. While the expertise continues to grow, it’s essential that the middle office is equipped with the right resources. The best firms in the industry are the ones that have a proactive team that works well together and can predict or strategize with their end user or client. They are quick to plan and apply action to resolve new requirements, meet market demands, and address issues.
One of the primary initiatives in meeting the requirements for SEC Modernization is evaluating the alternative solutions in the marketplace. There are many vendors and service providers that are offering technology solutions and managed services to support the data collection, preparation, creation, and filings for forms N-PORT and N-CEN. The measurement criteria for finding the best solution for SEC Modernization should focus on the primary needs of the business. In our experience, the leading practices should focus on, 1) the ability to collect ALL required data, 2) automated data and filing validation, 3) achieving STP / technology integration and 4) subject matter expertise to implement the solution, and 5) the capabilities of your service team to deliver now and in the future.
Ability to Collect ALL Required Data: We know that a majority of the data will come from custody, fund accounting and administration, performance and risk, but it does not mean that all of the data is easily accessible even if it currently exists for purposes of SEC Modernization. In addition, many funds use multiple sub-advisers, one or more service providers, and possibly more than one fund accounting and financial reporting technology platform in which the data will need to be normalized and aggregated to support the N-PORT and N-CEN filings. For N-PORT specifically, once the filing cycle is complete for month one, the process for month two will start soon thereafter. The solution and operating model needs the ability to capture and track the receipt of data in an efficient way. Dashboards that can track and report the status of data throughout the filing cycle are effective tools to help facilitate the process.
Automated Data and Filing Validation: Once the data is collected and aggregated, it is important that both the data and filing elements are validated against a predefined set of rules and tolerances. The best solutions will have the ability to apply automated tolerance checks that support an exception based environment for the users and/or business owners. Some of the significant checks should include: validating the completeness of the filing data, changes in calculations such as performance and risk, and filing comparisons from one period to another. This also includes additional workflow controls to manage data updates, threshold breaks, fund specific control checks, etc. The frequency of form N-PORT alone will require efficient control checks that allow for quick validations and filing approvals.
Achieving STP / Technology Integration: As with any solution, data needs to be communicated between systems. Messaging capabilities will vary across platforms, businesses, and third parties. In addition, much of the data may reside within files such as Excel and Word that may be collected via email. Given the quick turnaround from one filing period to the next, it is imperative that the solution can handle multiple file and messaging formats and can work with the data sources to automate integration. Data trace-ability and mapping needs to be completed up front and tested to ensure true integration that achieves straight through processing. Anything short of this will require additional resources to support the inefficiencies.
Subject Matter Expertise to Implement the Solution: The solution, whether outsourced or in-house with vendor technology, requires subject matter expertise and deep knowledge of the SEC Modernization and financial reporting requirements to make the implementation successful. Ability to complete the filings is one thing, but it’s also critical that the required data is fully understood, calculations and derived filing elements are complete and accurate, and an overall understanding of the fund(s) is the baseline for comprehensive and useful validations. When evaluating solutions, firms need to assess the expertise required versus what’s available to ensure a successful implementation. Long, drawn out implementations will increase the risk of missing the first set of deadlines for these filings.
Capabilities of Your Service Team to Deliver Now and in the Future: While automation and data collection are critical to the filing process, people matter. Their ability to navigate and manage through SEC Modernization will be key to a solid operating model. Many of the industry solutions are viewing SEC Modernization as an opportunity to offer a broader regulatory service and/or technology capability. This will be important and should be a consideration when evaluating solutions. The near and now may be one set of filings, but the solution needs scale and a vision towards the future. A dedicated team to drive these filings at varying frequencies will be essential in not only managing the process, but adapting to the many challenges that arise during the filing cycle including missing data, incorrect elements, filing analysis, and possibly inaccurate filings.
As the key dates are approaching, many firms will be looking at the same vendors and service providers, so to stay on track, vendor assessments should be efficient, focused, and driven by experienced resources.
As the industry is aggressively working towards meeting the new reporting rules, amendments and requirements under the Investment Company Reporting Modernization (“SEC Modernization“) guidelines, firms are taking strategic steps in preparing for the compliance deadline of June 1st, 2018 for implementation of Forms N-PORT and N-CEN for funds with assets under management of greater or equal to $1 billion:
Data Due Diligence: It all starts with data and the due diligence needed to develop comprehensive mapping and traceability. This includes a complete data inventory and sourcing to identify the impacts and gaps. Data management and governance has been a growing trend in the industry, but in this case, it’s a necessity to successfully meeting the requirements for Forms N-PORT and N-CEN.
Operating Model Development: The operations and technology impacts will need to be understood and developed into a streamlined operating model. This is the opportunity to reduce the reliance on manually intensive tools such as Excel. The timing and frequency of these filing will require an exception based workflow and oversight. The estimated impact on labor is expected to be 40-50% of the existing teams that support financial reporting. This alone stresses the need for a strong integrated operations and technology model.
Testing: Thorough testing of the solution will be required to ensure seamless data communication and exception based oversight. Given the filings require lookbacks, it’s important that testing is underway and completed in Q1 of 2018.
Implementation/Execution: This effort cannot be a long drawn out implementation, it needs to be done right. Resources will need to be trained and fully deployed. Technology will need to be developed and integrated. Workflows and procedures need to be documented and in action. Service levels needs to be clearly defined and measured.
Data is the Foundation
The foundation of successfully meeting the filing requirements is locking down and developing the end to end data workflows. This includes defining the elements needed for each fund portfolio, determining the source location and messaging, and integrating technology that supports the operating model.
There are also many discussions in the industry as to how to solve for Form N-PORT and N-CEN including in-house deployment, leveraging technology vendors, outsourcing to a third-party administrator, and/or a combination of solutions. The common denominator with all of them is that the data needs to be defined and mapped for each fund portfolio regardless of the solution.
We have done extensive research into the rules and believe the data set for N-PORT and N-CEN is north of 1,000 data elements to support both forms. This includes fund data, performance and risk calculations, and security reference information. In most cases, if not all, this data resides in various systems throughout the investment architecture. There are also many instances where this data doesn’t reside anywhere today and needs to be extracted to meet the filing requirements. While many of the technology and provider solutions adequately meet the automation, and filing requirements, the aggregation, ownership, maintenance, and normalization of the data is still needed to make the implementation successful.
In October of 2016, the SEC finalized rules for SEC Reporting Modernization with the first transformational impact to the asset management industry around financial reporting impacting registered investment companies (40 Act Funds) to occur on June 1, 2018 for funds with AUM greater than or equal to $1 billion with the compliance date for Form N-PORT and Form N-CEN which will ultimately replace forms N-Q and N-SAR, respectively.
SEC Reporting Modernization is for the most part an exercise in data aggregation, validation and reporting from multiple sources to be delivered to the SEC monthly in an XML tagged format and made public to investors for the first and third quarter end, 60 days after the reporting period. This strategic initiative to the industry and companies will require frequent reporting in a compressed timeline and impact most functional teams across the organization requiring a well-coordinated effort and E2E automation.
Up until now, a lot of effort has been put forward by some vendors, service providers and some of the larger fund complexes in the asset management industry to address the challenges posed by this strategic initiative around data collection and processing requirements, automation to support complex calculations, decisions to build vs buy a vendor solution or outsource to a third-party administrator or perform filings in-house just to name a few.
There is still much more to do in order to be ready for the June 1, 2018 compliance date and a number of firms have not even begun to touch the surface. With over 600 data elements for N-PORT alone and multiple source systems, implementing a target operating model and testing by the beginning of 2018, funds and service providers need to start their planning NOW for SEC Reporting Modernization if they have not done so already.
Up until now, there are only a few firms that have put a lot of attention to these requirements. In a recent industry conference that we participated on the panel, we heard that one provider has spent over a year with 30+ resources dedicated to this effort to date. Unfortunately, this is not the same as what we’re seeing across the industry. With the estimated resource needed to be 40-50% incremental to the teams that support financial reporting, the time is ticking and firms need to prepare now.
The primary areas of focus to prepare for these filings are data sourcing and aggregation, technology integration, and operating model. There are a handful of solutions in the market that collectively will assist in the sourcing of the data, but each firm will need to perform a detailed data traceability to ensure adequate coverage across their funds. STP will be critical to this effort as the filing frequency is monthly with look back requirements. Integration of technology will be needed to minimize manual intervention and allow for an analytic oversight role of the data. The operating model is key to making this all work. Firm are considering service provider solutions, vendor technology, in-house undertaking, or a combination of all three. Defining the process and locking down responsibilities is yet another critical component to solving this equation.