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10 Steps to a smooth N-PORT filing: a blueprint for investment companies

Jeanette Turner (pictured), Advise Technologies, LLC, writes that the SEC investment company reporting modernisation rules are a game-changer for mutual funds and ETFs.

In particular, the new Form N-PORT reporting requirement presents firms with an overwhelming task of collecting a wide range of data in a short amount of time. The requirements are forcing firms to revamp their systems and operations. The good news is that hedge funds, private equity firms, and commodity pool operators have already been through this process with the SEC. Based on observations of their successes and missteps, here is a blueprint that will help registered investment companies implement the new rules smoothly, with limited interruption to existing operations.

Step 1: Start now, she writes. Even if you are an efficient, well-run firm, it will take time to prepare for Form N-PORT. Filers and industry groups requested 24-36 months to prepare for N-PORT but the SEC is allowing only 18 months (30 months for fund families below USD1 billion in net assets). There is a lot to do and it involves various outside firms as well as an assortment of technology systems. Filers need to allow plenty of time for these other players to prepare. The time to start is now.
Step 2: Establish an N-PORT team. It is a mistake to think that reporting is solely the CCO’s responsibility. The information required comes from a variety of sources. Create an N-PORT team by identifying a person to be responsible for each item on the form. The team will likely include individuals from portfolio management, trading, risk, accounting, and legal and compliance, amongst other groups. You’ll also need to add a point person for technology and operations. Presumably these employees already have full time jobs, so do what is needed to obtain dedicated resources. Set up a meeting rhythm to discuss issues that arise and to keep the implementation on track.
Step 3: Put pencil to paper. It is easy to skim the form and think that the questions are fairly simple. To avoid this mistake, assign each question to the designated person on the N-PORT team and have them actually try to answer it. Perhaps do a mock filing, using information from the previous month. This exercise will show you how much work needs to be done. You will see that certain terms are undefined, certain information resides outside your firm, or that people in the firm disagree as to the methodology that should be applied or the assumptions that should be taken for a particular question. Determining the firm’s approach to each question, including assumptions made, requires time.
Step 4: Conduct a gap analysis. For each question, keep a running list of gaps, whether in knowledge or in technological capabilities. Gaps might include certain terms that need to be defined, assumptions that need to be made, data that is missing or in an improper format, or systems that need to be integrated.
Step 5: Decide on build vs. buy. Early in the process, firms will need to determine and budget for the costs involved in implementing Form N-PORT, as well as reporting on an on-going basis. Costs include identifying the type and number of people required, as well as any software that is needed. As part of this analysis, firms will decide whether to manage the reporting requirement internally or rely on service providers. If the firm is looking to handle N-PORT internally, it should confirm that it is capable of keeping up with changes from the SEC, including changes to regulatory guidance as well as to XML specifications. If the firm is going to license software, it should confirm that the system can handle validation checks as well as assist the firm with identifying any irregularities or “red flag” data points that deserve another look before filing.  With the short deadline, firms will not have time to validate data prior to filing. It is imperative that whatever approach is taken, firms are able to create an automated system that runs smoothly for each filing. This cost analysis will begin early, but will be better informed as firms go through the 10 steps presented here. With each step firms will have a clearer picture of their needs.
Step 6: Start collecting. Once you have identified the data gaps, get to work to resolve the issues. It is important that service providers have sufficient time to get you the information you need. Many are not prepared. For information that is sitting in various systems, determine whether the software can be integrated and how you can automate this process.
Step 7: Organize your data. In collecting information from various sources, the data will likely be in disparate formats. It needs to be standardized before you can aggregate it and run calculations. The best case scenario is to obtain and keep data at a granular level so that it is agile and adjustments can be made quickly when new guidance is published, and so that the data can be used for other purposes. Once you have a good set of data, you can manipulate it as reporting requirements or your methodologies change.
Step 8: Make a playbook. The approach taken to each question should be documented in an internal playbook. For each question, document the data and data source, the calculation used, the assumptions made, and any applicable guidance that is relevant. Include an audit trail that tracks any changes in methodology. A playbook is important for two reasons. First, firms have turnover.  New employees need to understand the reasoning behind an answer provided to the regulator, including the source of the data and the assumptions made to derive the answer. Second, for any examination, the SEC expects the compliance officer to understand the information provided. Creating a playbook and keeping it updated will save time and alleviate stress should a regulator ask questions.
Step 9: Form a workflow. Create an internal process that goes on auto-pilot after the initial filing is complete. Perhaps one person is responsible for answering a question, another person is responsible for signing-off on the answer, and a third person is responsible for signing-off on the entire filing before it is submitted. Automate information being collected from outside sources, such as service providers. Some workflows might include use of an outside auditor prior to certain filings being submitted (for example, the filings that will be made public).
Step 10: Prepare to file early. Even with an automated process, glitches can happen. The SEC might have a new validation rule in effect, or an answer might need a second look once a comparison report is generated. Give yourself some breathing room.

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Mon, 15/05/2017   - London
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