At this moment in time, most “40 Act” managers in the US should have an active and very high profile SEC Reporting Modernization program. Someone, somewhere in each firm should be under a lot of pressure to make the right decisions to ensure their firm is not exposed in a very public fashion come July 2018.

As a result, quite understandably many firms are focussing on delivery risk as a key element of the decision criteria in their partner selection process. Less understandable is the fact that many firms are choosing their accounting/custody service provider as the least risky option.

While the service providers will have a lot of the data required for the form, it is by no means a slam dunk in terms of the data availability. In fact, one could argue they would typically have direct access to at most 60% of what’s required, with the balance being data domains they typically wouldn’t handle or simply data that is new to everyone involved. In addition, this service provider option typically leaves the mutual fund sponsor blind to the data management process, and with a limited quality checking window right at the end, just before the data is filed with the SEC.

This situation is leading many managers to ponder the risks they face when engaging their TPA / service provider to do their filings. So what are these risks?

  • The TPA view of the world is (correctly) focussed on the ABOR side of the fence, yet the management firm is more acquainted with the IBOR side of the fence. It is critical they reconcile each view prior to reporting to ensure nothing has slipped through the ABOR: IBOR cracks

 

  • The TPA typically uses its own generic Security Master File (SMF) and reference data sources, and will rarely consume the manager’s SMF/reference master data, as to do so would add major inefficiencies to their process. The problem is the SMF of a manager will have evolved to align specifically with the investment management methodology of that manager and the differences in approach between the manager and the TPA can lead to wildly different results depending on the perspective taken. In essence, both data sets could technically be “correct” but could tell very different stories. This problem will exacerbate the challenge of ensuring N-PORT filings line up with other external manifestations of the data e.g. in factsheets and on their own website.

 

  • Each manager will want the opportunity to test and check the data prior to filing. Ideally, the manager would have the opportunity to sign off the form question-by-question, fund-by-fund, as the various elements of data are posted. The problem here is that majority of the TPAs are promoting an operating model for N-PORT where the TPA will deliver the draft filing for signoff as a one-off job 2-3 days prior to filing; this is simply not enough time to do the checks in any diligent fashion. Instead, the manager needs to be in a position to automate these checks to whatever extent possible to facilitate appropriate oversight.

 

The upshot of this situation is that many management firms are now looking to build a shadow filing internally off their own IBOR data with their own SMF and reference data. This allows them to build up a signed-off view question-by-question, fund-by-fund. Because they can do this in greater detail themselves they can implement the more granular workflows and automated business rule checks that facilitate this more efficient sign-off. Then when the TPA does deliver the draft filing using their own reference data, the manager can implement automated checks on a question-by-question basis across each fund, looking for outliers and inconsistencies with other public views of the same data.

To move forward with a shadow strategy, you can start today. Don’t leave it too late to implement what will be a critical element of oversight and quality control where you have delegated N-PORT production to your service provider.