In September of 2008, history was made in the money market industry – the Primary Reserve Fund broke the buck.
When the value of a dollar of assets – the net asset value – in this benchmark money market fund fell below 100 cents, the ripple effect across the fund industry sparked a wave of volatile trading. Money market funds, long a haven for everyday investors, suddenly seemed unsafe.
As a result of this as well as the broader financial crisis, increased regulation is finally coming.
Although much attention is focused right now on the proposed reforms to derivatives trading, fund managers cannot afford to miss the tightening of regulation on what information about money market funds gets reported to investors, in the name of better protection.
The industry, quite simply, is moving beyond the principles of ‘know your customer’ and ‘know your product’ to a state of having to ‘know the right product for the customer.’
In order to prevent the 2008 buck-breaking experience, several updates to the Securities and Exchange Commission’s 2(a)-7 set of rules for limiting risks in tax-exempt money market funds are coming into effect. The update to 2(a)-7regulation will require money managers to apply pre- and post-trade rules on complying with its disclosure requirements and to beef up already stringent reporting requirements.
As SEC Chairman Mary L. Schapiro noted, "These new rules will have substantial benefits for investors and are an important first step in our efforts to strengthen the money market regime."
This ruling will create issues for anyone in the post-trade compliance arena, middle office or market operations.
In terms of enhanced disclosure of portfolio securities, the ruling specifically requires posting to the Web each month of detailed portfolio holding positions for investors to see. The portfolio holdings also must be reported each month to the SEC.
The onus is then placed on the fund provider to ensure that the data posted on websites and in monthly reports is 100 percent accurate. If errors surface, then it can result in a regulatory breach, which can lead to significant fines and negative publicity.
Regulators want to be publicly seen as taking a hard line with errant companies. So company fines are not kept secret.
Which shows that having accurate data in place is no longer just an operational function – it is a business priority as errant data could cause massive amounts of reputational damage for a firm.
Recently, the Financial Industry Regulatory Authority accused Morgan Keegan of failing to ensure the accuracy of advertising materials distributed to investors.
The firm is also accused of portraying one of its funds as a safer investment than it was, despite being aware of some risk in its portfolio relating to mortgage-related holdings which made it unsuitable for retail investors.
The management of data and in particular, the management of data that is going out to investors is on the checklist of all the major market regulators. They want to ensure that financial services organizations are treating their customers fairly and are now treating sales and marketing collateral as disclosure of material fact.
Regulatory bodies across North America and Europe are looking for timelines and consistency in the way data is gathered and then reported back to investors, whether through fact sheets or microsites.
As a result, regulators now want to audit processes related to how data is sourced and managed, how fact sheets are put together and how the client reporting process is handled. An investment manager should be able to demonstrate a watertight and streamlined process that is verifiable and repeatable. They are demanding that all processes that are involved in delivery of client-facing data are totally systematic and they are balking at the sight of manual error-prone processes.
So what does this all mean for asset managers? Asset managers should set up a data governance structure within their organizations, ensuring that there is full accountability, ownership and transparency on how investments are made and maintained.
In order to be successful, asset managers must develop effective methodology that is consistent with the organization’s stated objectives for making sure data on those investments is correct.
One way is to create a “Target Operating Model” that has a clear picture of the desired future method of operating. Firms also need to get executive buy-in and establish who owns, concretely, the quality of data presented to investors and the SEC.
Some asset managers have appointed “Data Stewards,” “Data Czars” or data governance steering groups to drive this. Regardless of title, firms must identify owners of the data who can be held accountable for the quality of the data they deliver into the business.
In addition, ownership of processes involving investors and the data they get must be driven right back to the data source, such as data flowing in from the fund administrator or from internal investment operations teams. This is generally the earliest point at which the organization has visibility of the data or influence over the data.
If ownership is pushed back to source – effectively de-centralized – then centralized oversight and strategic management of the process is required.
In addition, the organization needs to define a “Data Dictionary” so that common language is used across all departments. For instance, it’s not going to stand scrutiny by the SEC if one unit of a fund company classifies a mortgage backed security as ‘fixed income’ and another refers to it as ’asset-backed security’.
Product related data will need to be consolidated and normalised so that the quality management process can apply intelligent business rules to the product data before it is presented in the public domain.
Now is the time for firms to get rid of all manual, error-prone processes and automate them. They’ll need to define and measure data quality and set clear identifiable targets for accuracy, consistency and timeliness.
Such processes will require a lot of thought. Which means applying your best brains to create the best technology.
Before, not just after, regulations get put in place.
This article can also be found at SecuritiesIndustry.com.
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