Regulatory bodies, such as the Securities and Exchange Commission (SEC), Internal Revenue Service (IRS) and Financial Industry Regulatory Authority, Inc. (FINRA), constantly adjust their policies in response to market changes. As a result, investment managers and regulated investment companies (i.e., mutual funds) face a barrage of new rules and requirements on an ongoing basis.
With the regulatory landscape always shifting, how can investment managers and mutual funds keep up? What can they do to identify the impact of new requirements and implement solutions? Is there a template of best practices they can follow?
In this article, we’ll look at the adoption process for one specific set of regulations – new SEC modernization and liquidity rules – and use it as an example to examine general preparation guidelines. Steps taken to assess and accommodate this set of rules are broadly applicable to other compliance situations now and into the future. With this model as a guide, you should have some practical, useful takeaways you can use to embrace regulatory obstacles, recruit support when necessary and weather the seas of change.
The mutual fund industry faced a significant challenge adopting the SEC modernization rules and the liquidity risk management program (with compliance dates of June 1, 2018 for large fund groups and March 1, 2020 for small fund groups for SEC modernization; and December 1, 2018 for large fund groups and June 1, 2019 for small fund groups for liquidity risk management). These rules impose extensive data gathering and reporting burdens on mutual fund groups to provide both enhanced data and regulatory filing details of their portfolio securities.
Once you’re aware of new regulations, one of the first steps in preparation is to assess their impact. It’s important to identify what compliance challenges they’ll impose. Specifically, you should examine how they’ll affect each of the following groups:
To help with this effort, an experienced service provider may implement a cross-disciplined team.
By bringing together professionals from mutual fund administration, compliance, legal, operations, risk and technology, service providers can apply significant experience and expertise to methodically and thoroughly develop solutions. A cross-disciplined team can assist with the following:
In preparation for SEC modernization, our cross-disciplined team focused on assessing needs and developing a solution from the time the rules were released in 2015. They assessed all SEC rule requirements, determined the data necessary to meet the newly modified reporting requirements, identified and evaluated alternative data service providers, created compliance processes and procedures and rolled out the services.
The team made a point of completing these steps well in advance of the first compliance deadline. As the result of their efforts, they developed a new service implementation process that involves the following:
Evaluating and selecting data providers for the comprehensive security data required for monthly N-PORT and annual N-CEN SEC filing requirements
Identifying and implementing an automated data aggregation solution, including doubling the size of our data governance team
Developing portfolio security liquidity classification recordkeeping, reporting and support to the adviser
Making significant investments in the systems, processes, data governance, and infrastructure to implement, maintain and provide daily support for an automated solution
Providing educational opportunities, by our fund administration professionals, to the various mutual fund client segments — investment managers, chief compliance officers and mutual fund boards — regarding the new rule requirements and our comprehensive recommended solution. Topics include our service development process, vendor evaluations, data procurement and governance, procedures, controls and technology.
As additional clarification is released from the SEC regarding the requirements, the cross-disciplined team continues to work together to develop the best solutions for our clients.
Ensuring your fund is in compliance with ever-changing regulations can be a complicated task and distract you from focusing on the growth of your business. However, you can remove much of this burden by partnering with a service provider who employs a standard product development process for assessing and implementing compliance programs, technology and procedures to meet new regulatory requirements. With a reliable partner, you’ll receive comprehensive, timely solutions. Investment managers can rely on the legal, compliance and risk expertise their service provider offers to help them understand the evolving regulatory requirements of the investment company industry.