Funds with over $1bn in assets face strategic and operational challenges as a result of SEC’s Temporary Final Rule
Data security concerns have prompted the U.S. Securities and Exchange Commission (SEC) to issue a Temporary Final Rule to modify the previously adopted Company Reporting Modernization legislation. Across all fund sizes, the Temporary Final Rule (issued in December 2017) delays the date when funds are required to file the new Form N-PORT, by nine months.
However, funds with $1 billion or more in net assets are still required to gather and maintain all data elements for N-PORT, in accordance with the original compliance date of June 1, 2018. They are not required to formally file the form on EDGAR (the SEC’s corporate filing system) until March 1st, 2019, but may be asked to provide data prior to that. For large funds, this means pursuing dual processes to stay compliant.
The compliance dates for filing Form N-PORT have changed as follows:
- Larger fund companies ($1 bn or more in net assets) – from June 1st, 2018 to March 1st, 2019
- Smaller fund companies (under $1 bn in net assets) – from June 1st, 2019 to March 1st, 2020
BACKGROUND
In October 2016, the SEC voted to adopt three legislative changes to the Investment Company Act of 1940. Although the changes comprise three distinct rules, they were introduced as a package and are interdependent:
1. Liquidity Risk Management Programs
2. Investment Company Reporting Modernization (includes N-PORT and other new forms)
3. Swing Pricing
Collectively, these new rules aim to modernize information available to the SEC and investors, as well as improve open-end funds consumer protection. For more details of the new rules and their implications for asset managers read our white paper Enhanced SEC Oversight.
CAUSE FOR DELAY
In 2016 hackers breached the SEC’s corporate filing system EDGAR, compromising sensitive data including names, dates of birth, and Social Security numbers. Since then, the SEC has asked the House Committee on Financial Services for an additional $100 million to protect the agency and its electronic reporting infrastructure.
In July 2017, the Investment Company Institute (ICI), a national association of U.S. investment companies, formally expressed deep concerns about N-PORT compliance deadlines and the SEC’s ability to store sensitive portfolio-holding information securely. The Temporary Final Rule gives the SEC time to address industry concerns regarding cyber and data security.
IMPACT FOR ASSET MANAGERS
While an extra nine months to file new forms may seem like good news, funds with $1billion or more in net assets must now manage dual processes to stay compliant. Not only do large funds need to gather and maintain all data elements for Form N-PORT by the original compliance date of June 1st, 2018, they must also continue to file forms N-Q, which Form N-PORT will eventually replace.
Smaller funds get a break, relatively speaking. They are not required to gather and maintain data for Form N-PORT prior to their new filing date of March 1st 2020. However, filing of N-Q still applies.
Asset managers need to assess and address the specific impact to their business. The SEC rules and the recently announced delay for filing Form N-PORT present significant operational and strategic implications. Compliance will require substantial cross-functional adjustments that span reporting, operations, technology, and governance. For large funds, the delay adds complexity and operational costs, and it is imperative to drive a strategic response and timely implementation across impacted areas.