N-PORT: How a Delay in Onerous New Rules Actually Leads to More Work

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By Barrie C. Ingman Mar 14, 2018

The SEC recently introduced a suite of new rules designed to boost its arsenal when conducting examinations, enforcement activity, and risk monitoring of the investment management industry. One of these rules: the replacement of Form N-Q with a new ”Form N-PORT” is forcing many investment managers to dig deep into their wallets to fund new data infrastructure and analytical tools.

This article provides a gentle introduction to Form N-PORT and looks at the impact that the recent delay to its commencement will have on the investment management community.   

Purpose

To enable the SEC to undertake examinations and monitor system-wide risk effectively it requires timely, accurate, and accessible data. The data provided at present is simply not up to the task given recent developments in technology and the financial markets.

Since many firms already have a much richer quality of data than they are currently required to report and since the reporting rules have not been updated in a decade, the SEC decided it was time to updated its rules

The structure and content of the form is designed specifically to make data-mining easier for the SEC and provide them with a richer quality of data across a broader range of metrics including details of leverage, liquidity, derivatives, and shadow banking exposures.

Moreover, the Form N-PORT reporting window is half that of Form N-Q: firms have just 30 days from the end of each month to report, compared with the more modest 60 days under Form N-Q; giving the SEC a more relevant picture of the sector and giving investment managers a migraine.

The new requirements also seek to intensify competition in the sector through greater transparency achieved by the SEC publishing segments of the data on a quarterly basis.

In short: good news for the regulator and investors; bad news for investment companies – depending on your perspective.

Application

Form N-PORT must be filed by registered investment companies (RICS) including mutual funds and ETFs operating as unit investment trusts. Small business investment companies and money market funds will not be required to file.

Timing

The commencement date has recently been delayed to allow the SEC more time to shore up its cybersecurity following an ignominious breach of its EDGAR system in 2016 which saw personal data accessed. The delay means:

  • RICs with NAVs above $1 billion must file their first report within 30 days of March 1, 2019
  • RICs with NAVs below $1 billion must file their first report within 30 days of March 1, 2020

For larger RICs the delay only applies to reporting: they still need to collect and retain the data from June 1, 2018.

Content

Form N-PORT filings must be in XML format as detailed in technical specifications, available here: link. There are just shy of 600 data points including details of:

  • Fund assets and liabilities
  • Details on each investment including country, risk and industry classifications
  • Portfolio level metrics including risk metrics
  • Securities lending counterparty data
  • Pricing of securities
  • Details of derivative counterparties and contract terms
  • Performance and returns data
  • Flow information
  • Liquidity analysis
  • Information on exposures through repos and securities lending

Compared with its predecessor, Form N-PORT requires more in-depth data gathered from multiple sources which will need to be aggregated, normalized, enriched, transformed, analyzed, and validated.

Impact

Although reporting has been delayed, collection and maintenance of data is still required. As such, firms will have additional time to test their reporting infrastructure but will need to have compliant collection and maintenance processes in place by the original deadline. Moreover, firms will still be required to report under Form N-Q and so, arguably, the delay actually increases a firm’s workload in the short-term rather than reducing it. Nevertheless, the delay may be welcome news for those firms who are having to expend significant amounts of time, money and effort to meet the new requirements.

Many in the private funds sector may be forgiven for experiencing schadenfreude right now, following a similar ordeal they underwent following the launch of Form PF in the U.S. and Annex IV in the EU: the private fund analogues of Form N-PORT. Indeed, many private funds experienced difficulties leading up to and well after the introduction of these new reports and this should serve as a warning for those soon to commence Form N-PORT filing.

Notwithstanding that many public fund managers are typically larger and have more sophisticated data infrastructure than private fund managers, the depth of granularity and analytics required by N-PORT and the technological challenges it presents should not be underestimated.

For this reason, the SEC is encouraging firms to commencing testing their reporting functionality before the requirement comes into effect and in furtherance /of this, they began accepting test filings on December, 31  2017. 

Next Steps for Firms

Form N-PORT requires the collection, storage, analysis, and validation of complex data sets from a multiplicity of sources as close to real time as possible to achieve compliant monthly reporting. This necessarily entails sophisticated analytics infrastructure and access to relevant data sets.

All firms will need to review their existing procedural arrangements across workflows and assess whether their existing technological infrastructure and the skills of their data analysts are adequate. The challenge posed by Form N-PORT may prompt some firms to reconsider whether maintaining an in-house solution remains viable or if outsourcing has now become a more appetizing prospect.

Achieving compliance with Form N-PORT will be a resource-sapping, time-consuming, strategic, and technical challenge. As such, firms would be well-advised to direct adequate resources to the task as soon as possible, since if a firm’s existing infrastructure is not up to the task, budget and time will need to be set aside to build new infrastructure, potentially hire new talent or, alternatively, select, onboard, and test outsourced solutions in time for the go-live date.

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