December 1997 feels like it was yesterday. That was when I, along with a team of individuals went head on into the Blue Sky world and developed our technology solution. At the time, some direct and indirect competition existed. However, I’m proud to say that we are still the only commercially available solution on the market today.
With success, however, comes the need to keep ahead of the curve in innovation, and push the boundaries of technology. One such way we are accomplishing that is the unveiling of a new version of our Blue Sky Solution system, which has been used by industry for 21 years, and will start to be showcased by the time this article hits the press. Unfortunately, the platform is only as good as the backend of the sales reporting capabilities.
If you have read our previous commentary in our May / June 2018 e-news, we talked about this in great detail and outlined how over 90% of all blue sky sales reporting flows through omnibus relationships for which the intermediary is providing a feed directly to the fund or blue sky administrator. This “full omnibus reporting” model introduces myriad challenges in the identification of exempt transactions which are key to the management of blue sky expenses.
To that effect, my team and I became part of a workgroup with the Investment Company Institute (ICI) that was challenged with analyzing and recommending options for improving blue sky reporting data; a process that has been in place with member firms for many years. During the discussions, members provided suggestions to intermediaries to improve reporting, however, they also identified issues within the recommendations that have brought to light the challenges in agreeing to a new standard. Having a lot of industry experience and working with Peter Baird to direct the on-going development of our Transaction Exemption Module, my team and I made several recommendations which we thought could work.
Using our application as an example for best business practices, we outlined how TEM was designed to repurpose data files developed to support Rule 22c-2 compliance – Data Share Activity (“DSA”) files and Data Share Position (“DSP”) files – to support blue sky compliance reporting. With the output files created by TEM, a fund sponsor could successfully replace omnibus reporting feeds one relationship at a time and see gradual improvements in the data quality and categorization of daily sales transactions as reportable or exempt. And the categorization of the exemptions could go a step further and identify those transactions that were exempt as “sales to existing security holders” and those that are exempt as “institutional transactions” of one kind or another.
Specifically, this works by having the application consume DSA files and DSP files, categorize DSA transactions as reportable or exempt from reporting by applying user-defined rules, and creating an output file with highly aggregated data resulting in increased accuracy and effectiveness for reporting over the current omnibus formats.
Criteria for eligibility for the exemptions is tied to key attributes of the transaction or the investor. TEM already supports these exemption filters by capturing the attributes and testing them against the rules library.
For example, Institutional Exemptions are in many cases tied to state specific asset thresholds for particular kinds of investors. Using TEM as an example, we outlined how the solution processes Data Share Position (DSP) files which contain information about the investor and their aggregate assets on each platform, supporting the need to identify investors with assets over certain key thresholds. Purchases by an identified “institutional investor” are categorized as “exempt” and reported in the institutional exemption column in the output file.
While the industry has for decades relied upon the load structure of funds to determine whether certain fund sales transactions are eligible for the sales to existing security holder (“SES”) exemption, TEM facilitates capture and classification of transactions in load funds that are made at NAV, which would not qualify for the SES Exemption, as SES exempt transactions.
Other research and feedback highlighted concerns around PII data contained in the DSA/DSP files. The sensitive nature of the data significantly influenced the design of our application. TEM resides behind the firewall of the fund sponsor, and the output files contain none of the NPPI data from the DSA files. The output file contains data that has been highly filtered and aggregated while providing more detailed categorical breakouts for each CUSIP/State over and above that which is provided in today’s omnibus data feeds from intermediaries. And additional columns in the output file facilitate reconciliation of the output file to the input data to ensure complete accounting for all transactions.
While the committee came up with a consolidated list of recommendations, in the end, the efforts were suspended for the time being, and current processes remained in place. However, we still hold hope that eventually, the recommendations will be re-explored and implemented for the benefit of the Investment Company community. Until then, we have worked in our corner of the Blue Sky world to implement these improvements in blue sky reporting for the betterment of our client base with the NRS Blue Sky Solution Transactional Exemption Module.
