Jonathan Flitt, Global Head of Alternative Investment Solutions at Clearwater Analytics, examines why the SEC is introducing new disclosure requirements, as well as how it will affect what, and when, firms report to regulators.
By Jonathan Flitt – Why the SEC is introducing new disclosure requirements, as well as how it will affect what and when firms report to regulators.
On January 26, the SEC proposed new measures that would significantly increase its visibility into PE funds and some hedge funds by increasing the amount and frequency of confidential information submitted to the agency by Form PF. According to SEC Chairman Gary Gensler, the proposal is meant to “allow regulators to better spot risks building in private markets, stepping up an effort that began after the 2008 financial crisis.”
For asset managers across insurers, hedge funds, institutions, banks and more, this increase in regulation highlights the accelerating need to embrace technologies that make it easier for investors to report their activity in a timely and accurate way, facilitating long-term metrics for tracking growth and compliance.
Bridging the Gap between 2011 and 2022
The SEC adopted Form PF in 2011 as part of a regulatory overhaul to increase the agency’s ability to maintain financial stability and assess systemic risk. According to Chairman Gensler, the SEC has now “identified significant information gaps” between Form PF and the current state of private investment, largely driven by growth in alternative assets.
Since 2013, investment in alternative assets, such as private equity, real estate, debt and more, has more than doubled from USD5 trillion to USD11 trillion. By 2025, it’s expected to reach USD17 trillion, with the largest gains coming from private equity and hedge funds.
In an attempt to close these gaps and increase transparency, the proposed disclosures would implement several new changes including:
• Reporting the departure of a fund’s general partner or termination of a fund’s investment period within one day;
• Reporting “extraordinary” investment losses or significant margin and counterparty default events within one day;
• Require large PE funds and large liquidity funds to enhance the information used for risk assessment and the Commission’s regulatory programmes;
• And reduce the reporting threshold from USD2 billion AUM to USD1.5 billion, increasing the number of advisers submitting information via Form PF.
These new requirements amplify the growing need among managers to implement technologies that arm them with a greater ability to measure and report on their holdings, which, in turn, provides a greater ability to meet SEC requirements and maintain transparency.
The Critical Need for Reporting Technology
The demand for complete, timely, accurate and consumable data and reporting has become both a growing need, and a concern for asset managers. In many cases, managers with billions in AUM are still operating with tech stacks that are built from spreadsheets or over-reliant on manual processes that are prone to human error and make timely delivery difficult.
While both systems are outdated, this latest increase in regulation makes them now obsolete. Managers who do not adopt advanced reporting technology tools will not only struggle to compete, but they will meet the ire of regulators who will now require far more specific and frequent checks on their investments and milestones.
In fact, according to a 2021 Insurance Investment Survey Report, only 8 per cent of managers in the insurance space were found to analyse risks to their investment portfolio on a daily basis. Alarmingly, 46 per cent analyse on a monthly basis, 30 per cent on a quarterly basis, and 3 per cent on an annual basis.
Without comprehensive investment analysis, managers will be unable to spot serious financial risks in a timely manner, which will result in an increase in added time and complexity needed to meet the SEC’s new regulatory requirements, several of which mandate same day reporting.
The SEC is not alone in the call for transparency. Managers are facing increasing scrutiny and pressure to deliver better returns and more timely reports that their investors can digest and understand. This is especially true considering the extreme growth the alternatives space has experienced and is expected to continue. According to Clearwater Analytics’ Insurance Investment Survey Report, 44 per cent of major insurers are turning to external managers to handle their investments in alternative assets.
Equally important is the ability to track and manage risk. While some forms of alternative assets, like real estate, are more familiar than assets like cryptocurrencies, both are equally susceptible to market risks, especially as the Federal Reserve wanes off its Covid-19 intervention policies and the market begins operating with an increasingly smaller level of government stimulus.
Asset managers from across the sector face a clear choice: adopt modern technology tools that can increase their reporting reliability, accuracy, and frequency, or meet investor and regulatory scrutiny. Those that undercut critical technology investments undercut their ability to compete.
Jonathan Flitt, Global Head of Alternative Investment Solutions, Clearwater Analytics
Jonathan Flitt is an experienced fintech and financial services operating executive. In his role, Jonathan leads product management, strategy and execution and works to design and implement innovative solutions that drive digitisation, operational efficiency and enhance service capabilities for clients. Prior to this role, he was the Head of Credit Fund and Private Debt Fund Services within BNY Mellon’s Alternative Investment Services business. Jonathan holds a Master of Business Administration from New York University, The Leonard N Stern School of Business and a BS in Business Administration from the University at Albany.