Don’t Worry, the SEC Will Be Perfectly Capable of Airing All of Your Dirty Laundry

Date: March 31, 2016

hanging dirty laundryDuring our periodic discussions with clients about Form N-PORT, inevitably, someone asks with no small amount of bitterness, “Just what does the SEC think it’s going to do with all of that data anyway? 

It is bad enough that we will be forced to spend a huge amount of time preparing the stupid thing month after month, and if the SEC doesn’t do anything with all that data extracted from the sweat of our brows, well that is like rubbing salt into an open wound.” I have good news for anyone with similar concerns – your efforts will not be wasted. By the time you start filing Form N-PORT, the SEC will have absolutely no problem whatsoever rooting around in all of your portfolio’s nooks and crannies.

With Form N-MFP and Form PF, the SEC has shown its capabilities both for collecting data and for utilizing the data it collects. The SEC gets monthly information from 600 or so money market funds via Form N-MFP each month and has used that data in at least one enforcement action. From Form PF, they get quarterly or annual information on about 8,600 hedge funds and annual information on about 8,400 private equity funds and 4,000 other private funds. At the end of December, the SEC published its Private Fund Statistics report presenting what they have learned from all those PF filings; a report that included not only basic statistics like fund counts, but also an analysis of risk factors like leverage, notional exposure, and portfolio liquidity.

Of course, all of that data collection pales in comparison to what will come with Form N-PORT, which will involve monthly reporting on the portfolios of over 14,000 mutual funds. But whether the SEC can handle that huge influx of data today is not really the question. The question is whether the SEC will be able to handle that huge influx of data at the time of the first N-PORT filing. The absolute earliest the SEC would start receiving data from Form N-PORT is January 2018, and it is more likely to be around the middle of 2018. A lot can change in two years, and based on the SEC’s plans and actions, a lot will change.

In the SEC’s strategic plan for the period between 2014 and 2018, they mention the collection, analysis, and distribution of machine readable data more than a few times, and there is an initiative “to improve its abilities to acquire, store, manage, and deliver data and information in support of its critical business functions.” Of a more recent vintage, a few weeks ago the SEC formed the Office of Risk and Strategy to “’lead our exam program’s risk-based, data-driven, and transparent approach to protecting investors’”. As well, the SEC’s 2017 budget request includes “Expanding data analytic tools that assist in the integration and analysis of huge volumes of financial market data” as a part of the technology spend, and more specifically requests three new positions to “conduct ongoing analysis of data, including new data that would be submitted to the SEC under [SEC Modernization]”.

I am sure it will give fund companies a warm and fuzzy feeling to know that their efforts are not in vain and that the SEC will indeed be able to collect, compile, aggregate, and analyze the massive amount of N-PORT data by the time it is first filed. They should, however, take a moment to consider what the SEC’s effective analysis means in terms of exam preparation. Before N-PORT is in place, fund companies will need to mirror the SEC’s initiative and up their capabilities for data analysis. And once N-PORT is in place, they will need to replicate the SEC’s data analysis to prepare for a whole new set of exam questions – and know what the SEC will find hidden amongst their dirty socks, and where a little stain pre-treating might be in order.

To learn more about 13f-2 watch our webinar replay Part 1: Unpacking the SEC's New Disclosure Rules for Shareholders
Join us for Part 2: Operationalizing the SEC's New Disclosure Rules, for Shareholders on December 12.