Top 5 Compliance Trends of 2016

Welcome to 2016. While resolutions are still fresh, IMP wanted to share five trends and regulatory changes to keep in mind in the new year. Our compliance experts monitor updates to SEC regulations and other compliance news in order to keep up to speed with regulatory pain points that our clients are facing, and help develop solutions to assist them. (Our blog also contains posts on the following topics).

Our top five for 2016:


1.  Proposed SEC Regulations for maintaining asset liquidity not going away

In September, SEC Chairperson White proposed new regulations for mutual funds that would require that a minimum percentage of highly liquid assets (e.g. cash and equivalents) be set-aside on a daily basis in order to meet shareholder redemptions. The need for this was further amplified by the Third Avenue fund liquidation headlines, which appeared in early December. Finally, in the last weeks of December, word broke that SEC was conducting a sweep of high yield managers to probe whether other funds had unusually high levels of exposure to low-liquidity securities. This shows that the issue of liquid assets in mutual funds is not going to go away any time soon.


2.  Updates to the 2014 and 2015 Rule 2a-7 Revisions will go into effect 

In September 2015, the Commission announced that the removal of the language in Rule 2a-7 pertaining to the relied upon NRSRO credit ratings would have a compliance date of October 14, 2016.

A second major change with the same compliance date is the removal of the 5% issuer test exemption for securities for which a fund is relying upon the credit quality of guarantors. Starting on the October 2016 compliance date, funds will only be able to invest up to 5% of their assets in any one issuer, regardless of whether they are relying upon a guarantor or not. This means that instead of being able to invest up to 10% in any one position that is backed by the same guarantor, should a fund want to maintain a guarantor position close to 10% of assets, it will need to invest in at least two separate issuers.

Finally, changes in requirements around calculating a floating NAV have already had a trickle-down effect regarding how fund shops classify their individual money market funds, and 2016 will likely see further impact to the industry as the October deadline approaches. Being able to calculate daily and weekly liquid assets for money funds accurately will be crucial in order to determine whether redemption fees can be imposed.

Although October may seem to be far off, it is imperative to take steps now to ensure that you are as prepared as possible on the compliance date.  


3.  The SEC’s proposals on derivatives monitoring will come to light

In early December the SEC proposed a new rule in order to further limit, and provide additional transparency around, mutual funds’ use of derivatives. The rule would require funds, including ETFs (several of which rely heavily on derivatives) and closed-end funds, to choose between a 150% aggregate exposure in derivatives and a 300% exposure limitation when using a risk-based model. The Commission may also require enhanced reporting for derivatives in the proposed Forms N-PORT and N-CEN, which would require monthly holdings and annual census-type reporting, respectively. The proposed rule, which can be found here, is now available for review by the public, with the SEC accepting comments through March 28, 2016.


4.  It will get harder for some investors to keep up with Shareholder Disclosure – Schedule 13D and 13G

All markets around the globe agree that shareholder disclosure requirements are good for the industry.  The problem is that each jurisdiction operates independently. Therefore this has led to an unlimited number of ways in which the requirements have been implemented.  Keeping up with the various regulations in different countries is challenging and onerous. 

Shareholding Disclosure regulations - including Schedule 13D and Schedule 13G, may be necessary to file in order to avoid enforcement actions by the SEC.  Failure to file the required forms and schedules on a timely basis can lead to reputational damage and business disruption on one end of the spectrum, or fines and imprisonment on the more extreme end of foreign jurisdictions.

Unfortunately, several drivers have made taming the shareholder disclosure beast a tough feat for even the best compliance teams.  Not only have regulations grown over time, they’ve become more fluid and complex.  Investment managers continue to struggle to monitor across portfolios and share classes to calculate thresholds.   Instruments, such as American Depositary Receipts (ADRs), warrants, and dual listings can follow different reporting obligations. Virtually every market has different filing requirements, and cross-border trading has made monitoring the reporting requirements across a global book a challenging task to say the least.


5.  Investment guideline setup errors in automated compliance rule libraries will still be one of the easiest errors to prevent - but will remain a leading risk for compliance teams.  

In 2015, we saw asset managers continue to make headlines around missed compliance violations, and at IMP, we see every day examples of how uncontrolled library growth, inadequate scrutiny and inconsistent interpretations of client guidelines can cause errors. We see this theme maintaining relevance in2016, as asset managers continue to deal with this risk to a firm’s financial standing and reputation.

Without a rigorous, periodic testing of the automated compliance rule library and supporting data, the results portfolio managers and compliance teams rely upon are statistically likely to harbor error rates of 25% or more. In fact, we find that up to 40% of a rules library requires some type of remediation in order make the rules as effective as possible.


IMP works closely with buy-side investment firms in helping them to either implement or assess their current portfolio compliance systems and rules library. We have hands-on experience in compliance systems such as Sentinel, CRIMS Compliance, Bloomberg AIM Compliance, Linedata Compliance, and BlackRock’s Aladdin. Our consultants are experienced compliance professionals, CCOs, Portfolio Managers and more from Fortune 100 investment firms that have previously worked with these systems and understand the nuances of each one.