What do politics, MS-DOS, and data analysis have in common? Before 2015 ends, all three will have driven the mutual fund industry head first into significant new regulatory territory, where the potential exists for new reporting requirements that will impact the mutual fund back office in ways that put after-tax returns and Sarbanes Oxley to shame.
While there is still a bit of reading the tea leaves, and nothing has been formally proposed, the signs are all there and point to a big change in the next 18 months.
The SEC Has Gone Public with its New Love, Data
First came monthly reporting of money market fund holdings on Form N-MFP, next came the reporting of private fund holdings on Form PF, and then came the rhapsodizing. In the roughly three-and-a-half years since the first N-MFP filing was made, the SEC has made no secret that it is enamored with the data it receives and the analysis it can now conduct. As Norm Champ, director of the SEC’s Division of Investment Management, remarked in March, when referring to a recent case brought against a money market fund using data from Form N-MFP, “We would like to look at the same things with mutual funds.”
As Long As We’re Modernizing N-SAR …
In 2012, mutual fund administrators were relieved to find out that the outdated MS-DOS based Form N-SAR would be updated to the more modern XML. However, in March of 2013 the SEC released a notice that the Form N-SAR modernization project would be put on hold “to consider changes to the format and frequency of portfolio holdings disclosure”. As luck would have it, the SEC has a couple of existing forms, N-MFP and PF, to serve as guides for making “changes to the format and frequency of portfolio holdings disclosure”.
A Challenge Within A Compromise
Last, but certainly not least, the politics. Towards the end of 2013, the Office of Financial Research (OFR), under direction from the Financial Stability Oversight Council (FSOC), released its “Asset Management and Financial Stability” study, its opening salvo into designating asset managers as SIFIs and its second foray (along with its own version of money market reform) into regulating the securities markets, a clear infringement on the SEC’s domain. In order to avoid SIFI status – and to protect her turf – SEC Chair Mary Jo White made the case that the SEC could better ensure financial stability with, in part, “more oversight and disclosure obligations.” Paul Schott Stevens of the Investment Company Institute (ICI) made a similar statement explaining that he would support an increase in mutual fund reporting if it meant avoiding SIFI designation.
Putting it all together, the SEC’s demand for data in a modern, usable format makes an N-MFP style disclosure for all mutual funds inevitable, and politics make it imminent. Form N-MFP had a huge impact on the back office, and it only involved about 600 funds. Imagine what that impact will be when the same thing is required for another 13,000 funds. And it might be only 18 months away.