Last October, Craig Hollis CCO, AML officer and managing director for Boston Financial, introduced the expansion of Boston Financial’s Blue Sky compliance offering. In his post, he highlighted the challenges that asset management firms face with Blue Sky Administration, including the complexity of registration requirements. Recently, Craig moderated a NICSA webinar, “Helping Part the Clouds for Blue Sky Compliance,” providing timely insight and best practices regarding prominent issues and trends facing Blue Sky compliance today.
During the webinar, Craig noted that Blue Sky Administration has always been somewhat mysterious, as very few people outside legal departments have really understood it. There are 50 states and four U.S. Territories (District of Columbia, Puerto Rico, Virgin Islands, and Guam) where fund companies must register mutual fund dollars for sale in order to sell their funds to investors in those states and territories. Every fund must register their dollars for sale, referred to as a permit, and pay the required registration fee. Each state’s Blue Sky laws vary with respect to payment of fees and length of permit period. Craig noted the challenge is to obtain, retain, and manage information to provide the most efficient, cost-effective, and risk adverse program possible.
Craig described the current Blue Sky landscape, noting that states have clearly become more aggressive in their enforcement of Blue Sky laws to make up for lost revenue. Fund companies continue to deal with the ongoing evolution of intermediaries as recordkeepers to provide sales feeds to Blue Sky administrators. As the omnibus evolution continues, there is greater concern by management companies regarding how to administer some level of oversight over these intermediaries.
Craig noted that from a service provider perspective, Boston Financial is aware of our clients’ challenges understanding Blue Sky requirements. Some of our best practices to support them include: centralized infrastructure for state requirements, two independent legal sources, the proactive use of exemptions, and to the extent possible, segregation of business processes by subject matter expertise.
Guest speaker Lisa Borth, Vice President, Director, Partner Distribution Services, AllianceBernstein Investor Services shared lessons learned and best practices to create the most effective program possible from an asset management perspective. Lisa provided information around three key areas: governance, control, and oversight. Key points included:
- Have the right resources to make decisions about what trades or account types are excludable
- Know how to manage your registrations activity to reduce expenses
- Have the proper controls in place to avoid penalties
- Monitor sales for states that charge fees based on volume and understand how sales can drive additional registration fees
- Funds remain responsible for interpreting state criteria but are dependent on broker/dealers reporting correct state of residence
Guest speaker David Harpist, Manager, Risk and Regulatory, FS Advisory, PricewaterhouseCoopers emphasized that good governance requires effective oversight of processes, systems, and people. The Blue Sky process should have a distinct owner and clearly defined roles and responsibilities. Internal and external systems must work together safely and effectively. David indicated that an effective operating model requires continued training, testing, and tweaking. From an oversight standpoint, an established relationship with the broker/dealer is needed, as well as ongoing diligence and testing of the information they provide.
Finally, from a service provider perspective, Craig noted some recent trends. Funds are focused on striking a balance between reducing fees and accurate sales reporting, and taking advantage of all available exemptions.
In conclusion, one thing is clear – the Blue Sky landscape continues to be an area of heightened awareness and focus for management companies. The increase of intermediary sales feeds has added a layer of complexity that challenge firms trying to ensure the most efficient, cost-effective, and compliant programs possible. In order to be successful, management companies can no longer rely on just one person or any one area to manage their Blue Sky obligations. It requires a more collaborative and integrated approach, leveraging the experience and intellectual capital of the greater organization to achieve the best possible results.
If you are a NICSA member and would like to hear the webinar in its entirety, please visit: http://www.nicsa.org/default.asp?contentID=620.