BOSTON - Fund companies will need to plan ahead to ensure they can meet new regulations on fund disclosure without costly delays to investors and brokers.
"One goal of the fund disclosure proposal is to make fund information more easily comparable," said James Kiernan, director and senior relationship manager in the wealth services unit at the Depository Trust and Clearing Corporation (DTCC).
The changing regulatory climate and other operations-centered concerns were front and center at last week's meeting of the National Investment Company Service Association during a panel focused on industry operational updates.
A plain English emphasis calls for key information in fund communication to replace the current risk/return summary at the front of every fund's statutory prospectus.
Some topics that will be on the checklist of key information are a fund's objectives and goals, fee table, investments with attendant risks and performance, portfolio holdings, schedule of purchase and sale of fund shares, tax information and levels of financial intermediary compensation.
Another plank in the reform proposal calls for funds to satisfy their prospectus delivery obligation by providing investors with a summary prospectus for a single fund that contains key information, to be updated on a quarterly basis.
Any supporting information, including the full statutory prospectus, will be available on the Internet and in paper upon request.
Interested parties will have a 90-day comment period to weigh in on these changes, starting on Feb. 28.
A second regulatory update provided by panel members was a summary of the industry's response to the two House bills passed last year that included cost basis reporting rules.
Among the changes from one bill is the extension of the information reporting deadline to Feb. 15 starting in 2010. It also calls for a Treasury department study on how to handle delayed reporting dates. The new rules also call for cost basis reporting for S corporation shares after year end 2010.
Another tweaking of the rules that conference attendees learned about was the requirement, growing out of the cost basis reporting legislation that states that brokers must transfer basis information no later than 45 days after transfer or by Jan. 15 following the calendar year during which the transfer occurred.
Other technical amendments that will affect the operations sector of the managed funds industry are further clarification on treatment of trifurcated accounts, the inclusion of gifted and inherited shares with default rules and the application of the new rules to all regulated investment companies beyond open-end funds.
More Operations Tips
As the presentation progressed from reporting on the latest regulatory developments to internal industry changes of standard operating procedures, discussion turned to a progress report on the launch of DTCC's new Mutual Fund Profile II (MFPS II) "Profile" database that went live last September.
The redesigned database aims to provide the fund community with an automated, centralized repository for the data points that are included in a fund's prospectus. It will expand the service's role as a primary industry source for rules-based processing.
The new model created for Profile aims to eliminate repetitive data entry, streamline the quality control process and increase reporting flexibility by fund companies and their distributor partners.
Updating NICSA conference attendees on the progress of the launch, Kiernan and the other DTCC representative on the panel, Paula Arthus, a managing director, reported that the product has been reengineered to provide the funds industry with an updated and automated central repository of a broad range of fund data.
It will allow for collaboration between funds, intermediaries and service providers. The database is the outgrowth of a collaborative effort between FINRA and the company.
The conversion process is making progress with over 100 fund participants representing 15,000 securities converted to MFPS II, which represents 86% of the securities listed in the preceding system.
Another initiative, announced in early January by DTCC, was the successful completion of end-to-end testing of the initial phase of the company's new Managed Accounts Testing Service. The test took place at DTCC clients Citigroup's Smith Barney and Global Transaction Service units. Having passed this benchmark, the service is on schedule for an industry wide launch this quarter.
Assets under management for managed accounts - which include separately managed accounts, unified managed accounts, dual-contract and multi-disciplined portfolios - reached $1.5 trillion by 2007. This growth is attributable to an expanding market of high-net-worth households and 78 million baby boomers who are seeking personalized investment portfolios that preserve capital accumulation and minimize the impact of taxes.
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