If you work in the US funds space and don’t live under a rock, then you know that this summer the SEC proposed comprehensive changes to the way that fund companies communicate with their shareholders, with a focus on retail investors (the “proposal”). Among a whole host of changes, the proposal would establish a new type of summary shareholder report, transform the annual and semi-annual report into an online presentation of data, and change certain components of the prospectus and the requirements for its distribution to existing shareholders annually. Now in the comment phase, the SEC will accept submissions until January 4, 2021. The implications for the industry are far-reaching and the world’s biggest fund managers are racing to figure out what this will mean and how they will both comply with and take advantage of the opportunity that the SEC presents with this rule.

12-17-SEC’s-Big-Changes-quote-250x250As a global leader in investment data management automation for regulatory, financial and investor reporting, Confluence has been solving these kinds of challenges for our clients for close to 30 years. This proposal suggests a bunch of changes to the way that funds communicate with shareholders and we have been solving these exact challenges for our clients for years. We developed our flagship Unity financial reporting product in the wake of the Sarbanes-Oxley legislation to help our clients comply with certain funds requirements from that landmark law and have made significant investments into our solution over the years to make it the market-leading financial reporting solution that it is today. Combining our solutions with our expertise and track record of execution, we will once again ensure that we have the solutions that our clients need when this rule eventually becomes final and effective.

But where to start? First, it is high time that the industry stop looking for the regulators to change the way that we interact with shareholders and start making advancements on our own. Let’s face it, funds are communicating with shareholders today largely the same way that they were in the 1980s and 1990s. While so much has changed since then in terms of the makeup of shareholders and, in particular, the technology that we all use, the way that shareholders consume fund data has not. Think about this: the reboot of Saved by the Bell began last month around 30 years after the original first aired. Back then, funds “snail-mailed” fund information (documents with fund data, commentary, marketing materials, etc.) to shareholders and forced them to sift through pages and pages to get information that was relevant to them. Today? It really is not much different. Sure, we advanced as an industry and allow people to opt into reading a .pdf document electronically instead of getting a delivery from the post office - BIG DEAL. If you want to call that significant advancement, that’s your prerogative.

While the contents of the final rule are, obviously, still unknown, there will undoubtedly be challenges – and anxiety – that the industry faces as it contemplates the potential impact of the new regulations. It is too early to know what the final rule will look like, but it is never too early to start preparing.

At Confluence, we are focused on engaging with our clients, helping them understand the proposal, and ensuring that they and we are asking the right questions. As financial reporting teams, treasurer’s offices and oversight groups at asset managers and third party administrators begin to think about what this proposal will means to them, their clients, and the fund shareholders, there are a few questions that are critical to ask to get the conversation going and begin to contemplate the impact of the rule on our industry. By doing this, when the time comes that a final rule becomes effective, Confluence will be ready to deliver to our clients what they need and have come to expect from us, and they in turn will be able to meet their clients’ and fund shareholders’ requirements.

  1. Will you use this rule as an opportunity to improve your product and your clients’ and shareholders’ experience? Or are you simply going to react to the requirements and just do the minimum that needs to be done?
    • In the proposal, the SEC is very much encouraging funds to use interactive electronic communication tools for funds to share data with shareholders1. As such, beyond what is required, this might be an opportunity to transform your shareholders’ experience and create a truly digital experience.
  1. As proposed, the rule would require fund data to be included in the twice-annual N-CSR filings and be posted online1, likely on a fund’s website.
    • Asset managers: Will you have the team that’s responsible for fund content on the web today also be responsible for posting this information to your website, or will you move that responsibility into the team that produces the financial statements and N-CSR filing? What will the new workflow look like for posting this information to the web? Might you depend on an outsourced provider for assistance?
    • Fund Administrators: Will you expand your offering and provide clients a service to maintain fund financial information on their websites? What will the new workflow look like for producing and posting this information to the web?
    • The industry has struggled for years to find the line between meeting requirements to shareholders as set forth by the SEC and using certain reports as advertisements to shareholders. This might be an opportunity to look again at the purpose of certain reports and redefine what is included.
  1. Will you use the same tools (people, process, technology) that you use to produce financial statements today to produce the new “summary” shareholder report?
    • While the SEC is silent on how firms must produce the multiple shareholder reports and filings contemplated in the proposal (summary shareholder report, N-CSR filing, N-CSR data onto the web) it would make sense that all of this output is created in one location, using one or similar processes in order to avoid reconciliation of data outside the system to ensure consistency.

While there is much work to be done and many changes to be made before the final rule is determined and likely released in 2021, it is clear that we need to prepare for changes to the requirements of reporting fund information to shareholders and not be afraid to bring this industry forward into the 21st century. The time is upon us to truly transform the way that funds provide data to shareholders and for the industry to embrace the digital revolution that has made almost every other industry better. At Confluence, we’re asking ourselves and our clients these critical questions to ensure that we will be ready to act when the full contours of the new rule are known. We hope that everyone else is doing the same – in many ways, the future of our industry depends on it.

1: https://www.sec.gov/news/press-release/2020-172

Disclaimer: The information contained in this communication is for informational purposes only. Confluence/StatPro is not providing, legal, financial, accounting, compliance or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.

Gary Casagrande

Gary Casagrande

Vice President of Global Market Strategy, Confluence

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