Whenever a momentous (or even not so momentous) event occurs, the horrible cliché of “this changes everything” is not far behind. Of course, many horrible clichés are horribly true, as in the case of the financial crisis, which really has “changed everything” about fund and asset manager regulatory reporting.
Post crisis, the SEC moved away from investor protection and towards systemic risk. In the years preceding 2008, it was all Enron and Sarbanes Oxley and N-CSR and Anderson and N-Q. The SEC was mostly concerned with making sure investors were not fooled by those who might benefit from fooling them, and their rulemaking and enforcement actions corresponded to that focus. Since 2008, however, it is mostly about measuring and evaluating systemic risk. It is Form PF and Form N-MFP and Asset Manager SIFIs and Money Market stress testing.
That shift in intent led to a fundamental change in what filings require and how asset managers and funds are examined. The SEC rulemaking went from looking at information to be viewed by potential and current investors to collecting large chunks of data to be loaded in some future database and processed by analytics software. As well, the SEC wants access to the data behind the old, viewable reports so that they can load and analyze that data too. In addition to the changes in format, the type of information has also changed. Funds and asset managers now have to report on collateral, counterparties, guarantors, and a whole host of derivatives information. These two changes have created four distinct challenges for the industry.
First, the new data is much harder to source than the old data. There are many new source files to merge and aggregate into a combined, single filing, and those new sources, especially on the collateral and derivative side, tend to be of a lower quality than the (relatively) clean records used pre-crisis. And just because the SEC is looking for data to analyze rather than reports to view does not mean that the data requires less scrubbing. In fact, with the need to merge data from a many low quality sources, more effort than ever is needed to aggregate, scrub, reconcile, and calculate the data before filing.
Second, the data behind viewable filings like ADV Part 2 and N-CSR will need to be kept separate from the style template so that the underlying data can be automatically compared to other filings. You see a mini-version of this with the current use of Form PF data by OCIE.
Third, in the future the SEC will be analyzing the data provided, and during examinations will be asking questions about the results of their analysis. Once the SEC has improved their infrastructure, as briefly described in their Fiscal 2014 to 2018 plan, they will start using it. In the past, asset managers worked with legal counsel to do a mock examination as preparation for a real examination. This process provided an advance look at what the SEC might find so that they could prepare a quick and effective response. Once the SEC begins incorporating the results of their data analysis into examinations, it will be prudent to change the mock exams as well, conducting a mock data analysis to predict the likely questions and prepare those quick and effective responses.
Fourth, today the SEC is mandating stress testing and portfolio analytics in the case of money market funds, and strongly suggesting it in the case of fixed income funds. There is also an initiative pending to require stress testing for large asset managers and investment companies. It is likely these trends will continue, extending the mandated stress testing to the industry at large.
As the SEC shifts away from human viewable disclosures and towards machine readable, systemic risk data, as they perform an analysis on that data and require asset managers to answer for the results of that analysis, and as they mandate that asset managers conduct portfolio analytics, regulatory filers really will need to “change everything” about how they approach regulatory reporting.