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Mutual Funds Update: Liquidity Risk Management and Reporting Modernization

 

Nearly a year after the Securities and Exchange Commission (SEC) released the final rules for Liquidity Risk Management (Rule 22e-4) and revamped investment company reporting, the industry is working diligently in preparation for the 2018 compliance dates.

Investment company reporting modernization has been a high priority, with an earlier compliance date of June 1, 2018 (for complexes with net assets over $1 billion). The new Form N-PORT will be a monthly filing that will include significantly more data than Form N-Q, which it replaces. In preparation for this filing, firms and service providers are mapping data, identifying sources of information and building operating models to ensure that all data is collected, reviewed and prepared for filing in a tight turnaround time—30 days following month end.

Northern Trust has extended our relationship with Donnelly Financial Services to include use of the ArcFiling tool for Forms N-PORT and N-CEN (replaces Form N-SAR and requires census data), and we are well underway with our implementation project. Our focus on the administrative support for the filings will allow clients to focus on their liquidity risk management programs, which must be in place by December 1, 2018.

Liquidity risk management programs will vary in complexity based on the characteristics of the funds. The much-discussed "four-bucket" classification requirement has been a hot topic at industry forums. With the SEC having clearly emphasized the asset manager’s responsibility for this classification, data providers are stepping in to offer starting point values for this classification. Managers will still be required to exercise discretion and review the appropriateness of any bucket categorization offered by a service provider to evaluate the liquidity of each portfolio holding as appropriate for the fund in consideration of the investor trade flows and overall portfolio characteristics.

Multimanager fund structures raise an additional question—who is responsible for the bucketing, the subadvisers or the named adviser? While there is no single answer to this question, program decision makers should bear in mind that for reporting purposes on Form N-PORT beginning with month-end December 2018, the SEC will seek a single-bucket classification for each security held in the portfolio. Liquidity risk management programs should be mindful of this when working with multimanager funds, as different subs may hold the same securities in their particular sleeve.

For more information about our project work in support of these rules, please contact your relationship manager.

 
Robert Angel

Robert Angel

Head of Regulatory Services, Product Solutions Group, EMEA
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Robert Angel

Robert Angel

Head of Regulatory Services, Product Solutions Group, EMEA
 
Robert joined Northern Trust in September 2013 as head of Regulatory Services, Product Solutions Group, EMEA. The Regulatory Services team acts as a consolidated point of contact on our portfolio of regulatory projects, with responsibility for regulatory client communication, and the services and products that Northern Trust can offer our clients in the regulatory space.
 
Prior to joining Northern Trust, Robert spent over 16 years at Merrill Lynch (now Bank of America Merrill Lynch) in Prime Brokerage and during this time ran the hedge fund client service, client consulting, product development and client on-boarding teams.

 

 

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