Ron Kashden, founder, Ingenious Initiatives

Coping with regulatory reporting for your fund

Mon, 27/01/2014 - 09:08

By Ron Kashden, founder of Ingenious Initiatives – Just when you think the regulatory landscape couldn’t get any tougher, government agencies increase their reporting requirements. Whether it’s a US Commodity Futures Trading Commission (CFTC) rule or compliance with the Foreign Account Tax Compliance Act (FATCA), there is a growing burden to conform to government regulations. While there’s no doubt that a fund accountant’s job has become more complicated, there are measures that can be taken to lessen the load. Here are three tips that will help simplify reporting.

Categorise the fund’s income

With Regulation 4.22(a) from the CFTC, funds now have to report both realised and unrealised income for their investors. While the regulation is relatively new, the theme of segregating investor income into various buckets is not. For decades, accountants have been separating gains related to newly issued securities from other portfolio profits. The practice of reporting various components of the investor’s profit and loss (p/l) is becoming a common theme amongst the regulatory requirements. For instance, the Alternative Investment Fund Managers Directive (AIFMD) has requirements regarding the reporting of incentive and management fees. If you organise your accounting ledger to allow you to present activity based upon common buckets, it will greatly simplify the reporting for all the various authorities.  We recommend the following categories: new issue p/l, realised gains/losses, unrealised gains/losses, management fees and incentive fees.

Categorise the investors

Classifications, particularly pertaining to investors, continue as an underlying theme among the regulatory agencies. Along the same lines as grouping the income statement items, categorising your investors will also facilitate regulatory reporting. From the Security and Exchange Commission’s (SEC) Form-PF through the Financial Industry Regulatory Authority (FINRA) rules, there are growing requests for funds to report on the types of investors and their applicable fee tiers and structures. While some funds, by their nature, will categorise the investors, such as corporate feeders and their distinct classes and series, others will not have natural delineations. Through some careful organisation, you can greatly decrease the burden of many of these regulations. At the very least, we recommend grouping investors according to their fee arrangements and then by the type of entity, such as individual versus pension plan, for example.  

Automate investor accounting

Many organisations have focused purely on their portfolio record-keeping and reporting without any consideration to investor accounting. While regulatory authorities have concentrated their attention to the fund’s portfolio in the past, it has changed over the last few years as more directives have been issued with an eye toward the investor. For the implementation of an investor accounting system, or in the case of employing a fund administrator, institution of full shadowing will allow a fund to efficiently satisfy the various requirements. Many systems can automate the attribution of the fund’s investor base, thus easing the burden of categorising the investors. A few systems have flexible general ledger systems that make quick work of grouping and reporting investor income. There are even systems that will let you configure and automate the generation of regulatory reports.

As the regulatory environment tightens, the alternative investment community has to focus on their practices around investor accounting. By spending the time to review the current operations and institute various changes, a firm can significantly mitigate the reporting burdens. Those firms that continue to have a blind eye will face increasing workloads, as well as possible fines, as the agencies begin to enforce the various statues and directives.


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