Following my last couple of blogs on the results of our survey around data management and regulation, I said I would post some information about the various regulations in each region and how they were likely to impact..
In North America, the regulators have always been to a large extent more rules than principles-based – this is not going to change – and – in the future we can in fact expect even more rules – not less.
The US alternatives space has seen many changes, particularly around registration, where many hedge fund managers now required to register with the SEC would previously have been exempt – this is causing many European hedge fund operators to consider their long-term strategy in the US. The implication of registration is that full books have to be maintained. Each firm must retain all data, and be able to produce records for SEC inspection. SEC examination is a particularly onerous process – with site visits, extensive questionnaires and vast demands for data.
The movement of the Dodd-Frank bill through the senate in summer 2010 ushered in a new era of regulation in the US, and we expect to see major changes to issues such as corporate governance, executive compensation and levels of disclosure and transparency. What we do not know yet is how the bill will directly impact the many rules we expect to see the SEC deliver, but we do know that the bill will allow the regulators to wield significant power and to determine the level of impact it will have on the market.
With the establishment of the Financial Stability Oversight Council and the Office of Financial Research, there is likely to be a more active approach to the management of market risk. This will manifest itself in increased reporting by asset management firms and funds on areas such as financial accounts, performance data, concentrations of risk and exposures to third parties. Increased demands for disclosure and transparency, including filing of full portfolios could also be seen, and there may also be demands for SEC mandated slices and views of the portfolio breakdown. Recent changes by the SEC to Money Market funds with the updates to 2a-7 are perhaps the clearest insight we have as to what to expect for the broader investment fund market – based on what we see in 2a-7 we might expect to see more rules on post trade compliance, public information filing and risk exposures.
Meanwhile, FINRA will be continuing to focus on maintaining market integrity, protecting investors and implementing key strands of the Consumer Protection Act within the Dodd-Frank reforms.
In Canada, a large segment of the industry is focussed on the new ‘Point of Sale’ fund fact documents which must be presented to investors prior to writing any investment from as early as July of this year.
European regulators are moving toward the North American model of regulation. So what was mostly regulation by principle will become regulation by rule. Tensions and strains within the EU came to the fore with French led demands for a move away from ‘light touch’ to ‘heavy touch’ winning out. Ironically though, the UK regulatory environment is probably the most rules-based of the current batch – I think it will become even more rules oriented , especially now that the FSA comes under the remit of the Bank of England.
Most discussion in the City these days though is about RDR and how the removal of commission incentives is re-shaping the sales/advice arena , with many Asset Managers now actively looking at IFA businesses and other distribution channels to give them access to the market.
On the cross-border front, the big news is the UCITS IV directive, and from a data management perspective the key discussion point is the KIID – or Key Investor Information Document. The KIID much like the CSA’s Fund Facts, is a simple 2-page document that should be delivered to the investor prior to investment. With KIID I see some serious data management challenges, in particular with the scale of the narrative data management, while the quant data should be more straightforward to deal with. To complement the rollout of the KIID initiative, Germany has passed legislation mandating the delivery of ‘product information sheets’ for investment products which are not covered by UCITS IV.
On the offshore side of things, we are already seeing change in Luxembourg and Ireland – in particular Ireland where we have seen the arrival of Matthew Elderfield, a former FSA department head.
The rise of the ‘Newcit’ – ostensibly a hedge fund in UCITS clothing – is creating a lot of regulatory discussion – while welcoming the on-shoring of some hedge funds, it is thought that many of the ESMA regulators hope that hedge funds will migrate towards the Alternative Investment Fund Managers Directive.
That’s a quick summary of the regulations I think will impact reporting and therefore might cause data management issues. We’re still seeing regulation as the major hot topic at industry conferences – everyone is talking about it and trying to get prepared for change.