Category: Compliance, Industry Trends, Transfer Agency

New Year’s Regulations


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Craig Hollis, Chief Compliance Officer, recently talked with State Street’s Liz Strouse about the regulatory landscape for 2016, and its effects on their front-, middle-, and back-office partners, particularly on transfer agents (TAs). In case you don’t have access to State Street Talks archives to watch their 60-minute conversation, I offer a brief summary of their discussion.

Report Modernization

Back in May 2015, the SEC proposed several new regulations to modernize the reporting and disclosure of information by registered investment companies and registered advisors. While ultimately fund companies are responsible for reporting to the Commission, this is an area where the proposed changes potentially require engagement of the asset management firm’s team of service providers.

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Liquidity Risk Management (LRM)

Liz and Craig talked at length about the SEC’s September 22, 2015 proposal calling for open-ended funds (included ETFs but excluding money markets) to manage liquidity risk. As proposed, these rules create significant burden on the fund board to establish and document a formal LRM program, tailored to its own risk.

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The one aspect of these proposed rules that might significantly engage each of the fund company’s enterprise partners is swing pricing. Proven to be effective in Europe in times of high-trading volume associated with market duress, swing pricing seeks to offset the potential dilutive effect on existing shareholders by having those who are actively trading into or out of the fund bear their proportionate share of the trading and liquidity costs.

If the SEC rules for LRM are adopted as proposed, fund companies would have the option to include swing pricing in their LRM programs. If they choose this route, the program must include a swing factor, which is the amount the fund will adjust its NAV per share when net purchases or redemptions exceed a fund-specific swing threshold.

The TA’s primary role in swing pricing would be to support the timely and accurate daily fund flow information to fund accounting in order to determine whether or not the swing threshold has been reached. For most TAs, this type of intraday reporting is standard.

This starts to become more complicated when considering how funds can gain the same level of reliable fund flow information from other record keepers (e.g., subaccounting platforms, bank trust departments, and third-party administrators (TPAs)). Further exacerbating the issue, many omnibus record keepers and TPAs need a NAV from the fund to price transactions that are either share or percentage denominated before they can provide fund flow information back to the fund, resulting in the classic “chicken or the egg” scenario.

Proposed TA Rules

Craig and Liz next discussed the SEC’s December 22, 2015 Advance Notice of Proposed Rule Making (ANPRM) and concept release regarding modernization of TA rules, which have not been materially amended since the early ’80s. In addition to expressing a need to update the rules to reflect the current TA environment, the SEC is exploring how they might expand TA standards to omnibus record keepers.

Boston Financial analyzed both the ANPRM and the concept release, and sees them as generally aligned with what is already best practice for any leading edge, mature TA. There is little concern about the impact of the changes as presented by the SEC.

While operationally Boston Financial is in the position to comply with the updated TA rules, Craig voiced concerns about the prescriptive nature and the lack of rationale behind the proposed rule changes. He also suggested there are questions about both the need for and the security of new financial and legal data proposed for the publicly available TA-1 form. Public comments on the ANPRM and concept release are due to the SEC by Monday, February 29, 2016 and are available online.

What to Expect in 2016

At the start of the conversation, Craig praised SEC Chair Mary Jo White for the close alignment between the Commission’s mission, rule making and exam priorities.

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In 2016, fund companies and their service partners can look forward to another year of examinations focused on protecting consumers by investigating:

  • Conflict of interest, fraud, and disclosures within the intermediary community, particularly regarding
  • Market-wide risk management practices, including cybersecurity protections at large firms and clearing agencies

Ideally TAs and other front-, middle-, and back-office service providers are actively analyzing the SEC priorities, and providing their clients with a description of the controls in place around each area of focus.

At Boston Financial, we’re responding to a steady flow of pre-examination audit questions from clients, one of the many ways we provide our clients with reasonable assurance that no aspect of their compliance program is unduly exposed.

Gretchen Kinder

Gretchen Kinder

Gretchen Kinder works for Boston Financial's Sales Support and Corporate Marketing team where she works on sales support and strategy documents. Gretchen joined Boston Financial in 2014 after nearly two decades of professional experience in Boston’s nonprofit and municipal sectors. A Jane-of-all-trades, Gretchen earned her MSW/MPH from Boston University in 1997 and has held positions as a community organizer, program manager, fundraiser, event planner, strategic planning consultant, adult educator, philanthropic community manager, public information officer and grant writer/manager. She has worked in the fields of chronic disease management, community service learning, health professions education, philanthropic planning and wealth management, urban planning, public and community health, PK-12 public education, early literacy, mental health and dental insurance.


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