If You Thought the SEC did You a Favor with T+1, You Might Be in for a Surprise

Digial flowMany years ago when I was on the front lines preparing financial statements, my colleagues and I used to joke that we wished we could just prepare the stupid things to the nearest cent. Rounded numbers have to be footed and ticked and tied and ten keyed to make sure all the numbers add up. It would be so much easier to just show the full numbers and avoid all of that tedious manual work. So even though you might think that rounding numbers would make the process easier, it actually makes it significantly more difficult and painful. Something similar happened when the SEC finalized its Investment Company Reporting Modernization rules in mid-October.

In the final rule, the SEC specified that Form N-PORT reporting should be on a T+1 basis. Funds have a narrow window between when the markets close and when they need to value the fund’s portfolio, usually too narrow a window to incorporate all of the day’s trades into the portfolio valuation. As a practical convention, Rule 2a-4 allows funds to value the fund using a portfolio that reflects trades on a one-day lag – trade date plus one or T+1 – since the impact of those trades are usually immaterial to the NAV per share. Financial statements, on the other hand, are presented on a T+0 basis – the holdings reflect trades on trade date rather than on a one-day lag. When preparing those statements, funds commonly adjust their accounting records for the last day’s trading activity so that they can get a clean set of data for reporting.

Using T+1 data for Form N-PORT was requested by most commenters to the proposal. The idea is that the data will be in a more raw state, the same state used for the NAV calculation, requiring fewer adjustments and making it easier to prepare the form inside of a challenging 30 day deadline. As with rounding in the financial statements, however, the reality is that at best T+1 presentation just creates different challenges, not fewer challenges, and in fact T+1 reporting might be more difficult and risky than T+0 reporting on Form N-PORT.

Most back-office teams have a fairly clean and well-oiled process for T+0 reporting for financial statements, so a T+1 Form N-PORT is not much of an operational benefit. In fact, it might cause difficulty on reporting month ends when the ops team will now need to suspend their T+0 adjustment process until they can process the data for Form N-PORT purposes. As well, they will need to back out their T+0 processing if they need to reprocess data for Form N-PORT. While a common reporting methodology would mean taking the time to synchronize numbers, that effort is replaced by the need to manage divergent processing between financial statement reporting funds and non-financial reporting funds each month. In turn it will create the need to reconcile between the two balances created using different methodologies. And that is the best case scenario. Processing and reconciling multiple versions of the truth, especially when they have common data sources, is much harder and riskier than ensuring two balances from two different reports are the same.

So at best you have a wash and more likely, the combined Form N-PORT-financial reporting process just got harder. As the old saying goes, be careful what you wish for, because you just might get it.

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