Asset managers groaning under the weight of regulatory requirements scrambled to learn more about recent SEC proposals that would increase their data collection and reporting requirements about their holdings.

The SEC would require bond funds to report how vulnerable their holdings are to interest rate changes, while asset managers would need to report on their holdings, including ETFs and derivatives, any securities lending activities they engage in, as well as the liquidity and pricing of portfolio instruments. The reporting changes would see N-PORT, a monthly portfolio reporting form, and N-CEN, an annual census form, replace the current N-SAR semi-annual reporting form.

Paul Soltis, North American market manager at Confluence, discussed the challenges facing asset managers as a result of the reporting proposal in a conversation with Money Management Executive. Even companies that have reporting systems in place will have to reexamine their resources, he explains. He adds it's still early to say how much implementation will cost.

Can you explain what has been proposed for replacing Form N-SAR?

There are a lot of things that I'm learning and I'm digging into the details of it. But at a high level there is really this theme of what the SEC is doing with this proposal, which is to extend the reporting on systemic risk data out to mutual funds and technically managed accounts.

It's kind of a long-awaited extension. I think it was pretty much common knowledge in the industry that it was coming - it was just a matter of when, not if.

The SEC has made no secret of how much they love what they get from Form N-MFP which is for money market mutual funds, and Form PF, which is for private funds, then they also made this secret that there is this huge gap in their data, and that mutual funds' separately managed accounts don't report this same kind of systemic risk data to the SEC.

So that's really the basic theme of what's going on here. The SEC is filling that gap. They're now going to collect data for the purpose of monitoring systemic risk in the asset management space out to a much larger audience.

What will be the final result of the SEC's proposal?

It is still in the works. I don't believe it has yet been published with the federal register, which kind of makes the proposal official. The process that follows from that is that they make the proposal and when they know they should draft, they'll publish that proposal in the federal register, at which point people in the industry will have 60 days to comment on that proposal.

Then the SEC, after that 60 day comment period, will take back all of those comments, look at the comments and then potentially revise the proposal and then will make a final rule, taking into account all of those comments. And then a part of that final rule will be what is known as the compliance dates, and that will be the dates at which people will have to actually start complying with these rules. That's when they will actually have to start making these filings.

Based on past experience from things like N-NFP, Forms PF and similar types of systemic risk data collections, there probably will be about a nine-to-12-month period between publishing the proposal and when the final rule comes out, and then there will probably be a nine-to-12-month period in between when the final rule comes out and the compliance date, which is when people will actually have to start making those filings. We're at the very early stages of potential changes.

What are the reporting requirements that asset managers have to prepare for as a result of this proposal?

The big challenge, and this is something kind of looking at past experience with things like N-MFP and Form PF, there's a bit of a unique challenge associated with reporting systemic risk data that's a little bit different from a lot of the rules in the past, which were formed much more around the purpose of investor protection.

So, now they're now reporting information that's going to be collected by the SEC in a structured data format so the SEC can run their analytics and then evaluate systemic risk, they can look at what trends are in the industry, it can reform move-making, it can reform compliance inspections and the idea here is that there's going to be a lot of new types of information that are going to be collected.

Things like derivatives, collateral, counterparties - a lot of times what that means is you're adding more sources of data and a lot of times those additional sources around things like derivatives and collateral, counterparties - it can be a little bit of low quality.

You have this unstructured data and you're maintaining Excel files and things like that, that can be changes. And those unstructured files can be difficult to deal with as well. You're going to have to aggregate all of those sources of information, and gather them to make a filing.

For instance, where is all the reference information that you might need to determine the exposure and learn the sources of that for your collateral? You have to aggregate information from multiple structured and unstructured source files to prepare these kinds of systemic risk filings, and that's no easy endeavor.

And then, once you've done so and once you've made the filing, there's also the challenge of finding the providence of your answers - in other words, being that you track an answer down to the source of that information.

Where did that data come from? That was aggregated or calculated or put into the report so that it bears a question after the fact, after the filing is made, how hard is it going to be able to figure out why you answered it or what the source of information to justify the answer?

That's kind of the big challenge, without having, again, the details of it but just knowing the idea that systemic risk data filing is a big challenge. There is a challenge around data management in the recording and moving into that type of filing. That's going to be new for a lot of firms. It will be a challenge, for one reason because the scope of filing is going to increase significantly.

When you look at something like N-NFP, there are about 600 of those, this is extending out to about 13,000 mutual funds. When you look at something like a Form PF, which looks at the advisors to private funds, and there are about 5,000 private fund advisors with PF, and now that's going to extend out to about 9,000 advisors who are reporting or who managed the separate accounts in file Form ADV which will have to change along the same line.

So, there are some big challenges with this type of filing and the scope of it is magnified to a very large degree. Those are going to be the big challenges at a high level where you can dig into any individual item that are required for reporting, and that might be challenging in of itself as well.

Are asset managers currently prepared to handle this sort of enhanced reporting that's been proposed?

There are two parts. There's the Form N-PORT, and the Form N-PORT is a filing that is going to be required of the fund itself. The default for that would be a requirement of the fund administrators. Pretty much whenever you have a filing that's the requirement of the pooled investment product of the fund, that's going to be the responsibility of the administrator, so that's one group that's going to have to do those preparations.

And then the second group would be those that have to meet Form ADV requirements. Form ADV is an advisor form, so the asset managers are the ones that are the default and ones that have to prepare that to accommodate the new requirements that have been added to Form ADV Form ADV isn't a new form. It just added some requirements for separately managed accounts.

I think on the mutual fund side, there are some people that got a taste of it with N-MFP and they kind of know what's involved. But there are some expansions in the types of investments that are made. These types of investments that money markets make are a little different from what we'd observe in NAV funds. As well, it will be a volume issue because, again, there are 600 money market funds and 13,000 mutual funds.

So the administrator of mutual funds got a taste of it but there will be an expansion there in terms of the types of instruments that they have to now report on and collect data on as well as the scope.

For Form ADV, it could be new to a lot of these guys and for some of them it could be about a taste of Form PF because there's going to be overlap there.

What types of costs are expected here? How does that change business?

We can't be really sure until we can dig into it a lot deeper. I think it would be a bit premature for me to speculate as to how much this will cost the industry before I dig in a little more into what's included in the details, because that's where the costs will come out.

But, I think it would be safe to say that the cost is going to be substantial in terms of compliance, especially for the mutual fund side of things.

As far as what exactly that means, again I think in a couple of months, once we have had a chance to digest it and talk to people in the industry to see what kind of specific challenges there are, we'll be able to get a more precise number. [But I assume] it will be a pretty big cost.

One other thing - when we were talking about the cost there, I think it would be interesting to see how it plays out. There was another piece of this rule that was not quite around the systemic risk management aspect, but was around the electronic delivery of financial reports. The SEC is kind of changing from either the current [method], which is an opt-out environment where the investor has to take action to not receive paper, to an opt-in environment where the investor will have to take action to have a report mailed to them.

That has the potential to significantly decrease the cost of running the current because we would expect that moving from opt-out to opt-in, the number of reports that you have to physically print and physically mail will go down, so the fund cost will also go down because of that.

I thought it was kind of an interesting pairing in the proposal itself, and I think it would be interesting to see how that plays out, especially in the comments and the final ruling. With those two parts, one makes the cost to significantly go up and one that would make the costs come significantly down. 

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