Managing the Onslaught of Regulatory Reporting

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by PwC AM on April 1, 2014

By Anthony Conte and Scott Weisman, Managing Directors, Regulatory Services

For large and mid-sized private fund managers, the challenges and costs of regulatory reporting can be staggering.  Systemic risk reports on Forms PF, CPO-PQR, and AIFMD Annex IV.  FATCA.  TIC forms.  Derivative reporting under EMIR.  EU short sale reporting.   Beneficial ownership reports, institutional holdings reports, and large trader reporting.  OPERA risk management reports that are increasingly demanded by investors (and thus quasi-regulatory).

Legal and compliance departments are all too familiar with the acronyms and jargon.

Form PF, CPO-PQR, and AIFMD Annex IV are especially difficult because of their breadth and complexity.  Assembling and validating data on investments, performance, counterparties, derivative positions, leverage, liquidity, risk metrics, and investor composition can require input from multiple internal departments – and service providers – under the guidance of compliance and legal personnel.   The process is highly labor intensive and adds additional responsibilities for key personnel.  For quarterly filers, preparations for the next report often begin soon after the current report is submitted.

Firms are also struggling with the content of these systemic-risk reports.  Take AIFMD Annex IV, which becomes a reality this year for U.S. private fund managers actively marketing funds into Europe.  The proposed report template is similar in purpose to Form PF, and many of the questions are substantially similar.  But some Annex IV questions require more granular fund data, different calculations, or new data altogether.  Additionally, the final form may vary by country, as each EU member country may add or modify questions when adopting the template into law.

The consequences can be severe for an inaccurate, incomplete, or missed report, and may include a regulatory examination, enforcement inquiry, penalties, and reputational harm.

In our view, firms are managing these challenges better with automated solutions for their most data-intensive reporting obligations.  In the case of Form PF, CPO-PQR, and Annex IV, for example, automation offers the potential for a more accurate, precise, repeatable, secure, and auditable process through the reporting lifecycle.  Technology performs the data collection, transfer, validation, warehousing, calculations, and submission – freeing up humans for high-value tasks such as reviewing the report, verifying key calculations, and ensuring the process and technology are working properly.  A robust technology can also assist with internal risk assessments that provide ancillary benefits.

As with most major technology investments, the key decision is whether to build an in-house solution, purchase an off-the-shelf or customized solution, or outsource the service to a third party.  There is no one-size-fits-all approach – the assessment depends on the firm’s business and regulatory requirements.

Outsourcing portions of the reporting process is an enticing option, provided that the manager takes steps to mitigate vendor risk during the selection process.  The upside includes flexibility, long-term cost savings, and scalability to meet changes in regulations – and changes to the business.

When selecting a vendor, however, the manager should define its business requirements early and effectively, while gaining comfort with the vendor’s regulatory expertise, reputation, technological capabilities, client service, responsiveness, and long-term commitment to the regulatory reporting space.

And of course, in the eyes of regulators, the manager bears full responsibility for its reporting, regardless of where or how the report is prepared and submitted.

This means a firm must continuously review and, when necessary, improve its policies, procedures, controls, and documentation surrounding the regulatory reporting process, from start to finish.   To the extent reporting functions are outsourced, the firm should perform ongoing due diligence on its vendor’s compliance controls and practices.

Regulatory reporting for asset managers is here to stay, but there are avenues available for leveraging the trials and experiences of other managers and their service providers.

David Harpest and Genevieve Gimbert contributed to this piece.


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