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Wall Street Trade Group’s Comment Letter Criticizes Proposed Reporting Rules for Fund Managers

Wall Street’s lead trade group said the SEC’s proposed reporting requirements for fund managers will be challenging and costly to put into practice. The proposed changes are part of a series of rules the SEC wants to use to increase its supervision of the asset management industry’s 16,600 funds and 11,500 investment advisers.

In its comment letters to the SEC, Wall Street’s lead trade group said it will be challenging and costly to implement the agency’s proposal to have fund managers report more information about their activities.

“The work relating to setting up the data collection, validation and reporting process presents an extensive burden on asset management firm resources,” wrote Timothy Cameron, head of the asset management group of the Securities Industry and Financial Markets Association (SIFMA), in a January 13, 2016, letter. The trade group’s members manage combined assets of $30 trillion.

SIFMA was responding to the SEC’s May 2015 proposal in Release No. 33-9776, Investment Company Reporting Modernization . The comment period ended in August, but the SEC reopened it for comment until January in Release No. 33-9922, Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment Company Reporting Modernization Release. The amended release also proposed that mutual funds and exchange-traded funds (ETFs) better manage access to cash so that shareholders can redeem their shares in an orderly fashion, particularly during market declines.

The proposals are part of a series of rules the SEC wants to use to increase its supervision of the asset management industry’s 16,600 funds and 11,500 investment advisers.

Since its initial comment letter in August on Release No. 33-9776, SIFMA members have continued reviewing the proposed requirements and concluded that they will not be able to comply manually with new reporting requirements without “significantly bolstering existing staff and existing infrastructure.”

SIFMA said investment managers will need to hire outside consultants to help manage and oversee the process. Under Release No. 33-9776, mutual funds will have to fill out a new monthly document, Form N-PORT, with information about the pricing of the securities they hold, repurchase agreements, securities lending activities, exposures to trading partners, and terms of derivatives contracts.

SIFMA’s Cameron wrote that asset managers are uncertain about the ability of outside service providers to generate the required information to file the form. Much of the information for the new reporting requirement is not available in managers’ systems, and they are looking to third-party providers for help on Form N-PORT.

“The large number of data sources needed to complete the N-PORT filing, and the technology and infrastructure that is necessary both to obtain the data and to centrally manage the data, makes it difficult for asset managers to meet the time-frame required by the SEC,” Cameron wrote. “Larger firms may need to gather data for hundreds of funds and more than 50,000 positions at any one time. For some asset managers, a multi-manager fund structure will significantly add complexity to the data gathering process.”

If the proposed requirements for Form N-PORT are adopted by the SEC, fund managers will have calculate risk in a variety of ways, that include measuring a fund’s exposure and sensitivity to changing market conditions, such as changes in market prices, interest rates, and bond yields. Form N-PORT will require separate reporting of certain assets and liabilities. SIFMA said investment managers face additional challenges in meeting the requirements.

“The risk metric calculations rely on a variety of assumptions, and to the extent that those assumptions differ between firms, the comparability of the data provided will be compromised,” SIFMA wrote.

Investment firms also have serious concerns with making the Form N-PORT information public, SIFMA wrote.

“Firms note that risk metrics could be easily misunderstood by investing individuals, and potentially be harmful to investors,” SIFMA said. “Asset managers also note that underlying methodologies of risk metrics may not be the same, making it wrong to compare across different funds.”

In the same vein, the Investment Company Institute (ICI) in an August comment letter asked the SEC not to mandate public disclosure of many widely used measurements of risk because they require confidentiality.

“While we are confident that the commission can analyze this data for its regulatory oversight purposes, we are concerned that it would be of limited utility and would be confusing to investors,” the ICI said.

To ensure that the information remains non-public, the ICI recommended that the items be reported confidentially.

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