Current SEC/Mutual Fund Accounting and Reporting Issues

Transcription

1 Current SEC/Mutual Fund Accounting and Reporting Issues Second in a Series of Cohen & Company Investment Industry Webinars for 2017 PRESENTED BY: PEGGY MCCAFFREY, PARTNER, INVESTMENT INDUSTRY SERVICES DIVISION JEFF HANELINE, SENIOR MANAGER, INVESTMENT INDUSTRY SERVICES DIVISION JAKE VOGEL, MANAGER, INVESTMENT INDUSTRY SERVICES DIVISION

2 welcome & introductions

3 Your Presenters Moderator Peggy McCaffrey, CPA Panelists Jeff Haneline, CPA Jake Vogel, CPA 3

4 FASB Updates for the Investment Industry

5 FASB Updates Disclosure Framework: Fair Value Measurements (Topic 820) Proposed Disclosure Eliminations Policy on the timing of transfers Amounts transferred between Level 1 and 2 Proposed Disclosure Modifications Valuation process for Level 3 fair value measurements Measurement uncertainty Quantitative information about unobservable inputs Level 3 roll forward 5

6 FASB Updates Disclosure Framework: Fair Value Measurements (Topic 820) Proposed New Disclosures Unrealized gains and losses Status of Update 6

7 FASB Updates Technical Corrections to Topic 820 Valuation technique and approach Examples Valuation approaches: market approach, income approach, cost approach Valuation techniques: matrix pricing, Black-Scholes Effective date: fiscal and interim periods beginning after 12/15/2016 7

8 FASB Updates Disclosure Framework: Assessing Materiality in Notes to Financial Statements (Topic 235) Materiality is a legal concept (CON 8) Disclosures should be evaluated as material if there is a substantial likelihood that the omitted or misstated disclosure would have been viewed by a reasonable resource provider as having significantly altered the total mix of information available in making a decision. (U.S. Supreme Court) Materiality would be applied to quantitative and qualitative disclosures, individually and in the aggregate in the context of the financial statements taken as a whole Omitting a disclosure of immaterial information would not be an accounting error Status of update 8

9 Investment Company Modernization and Regulation S-X Amendments

10 SEC Investment Company Reporting Modernization Timeline May 20, 2015 SEC Issues Proposed Rule: Investment Company Reporting Modernization June 12, 2015 Proposal is published in the Federal Register. 60 day comment period commences October 15, 2015 Comment period is extended for 90 days, in conjunction with the release of the Liquidity Risk Management Proposal in the Federal Register October 13, 2016 SEC adopts new rules and forms, as well as amendments to existing rules and forms to enhance transparency and modernize reporting requirements for registered investment companies December 11, 2015 Amendments to Form N-PORT and Form N-CEN are proposed within the Use of Derivatives proposal August 1, 2017 Compliance Date for Regulation S-X Amendments June 1, 2018 Compliance Date for N-PORT (greater then $1B in AUM) and N-CEN June 1, 2019 Compliance Date for N-PORT (less than $1B in AUM) 10

11 Form N-PORT New portfolio holdings reporting that will be filed by all Registered Investment Companies (RICs) and Exchange Traded Funds (ETFs) organized as Unit Investment Trusts (UITs). Excludes money market funds and small business investment companies (SBICs) Coincides with the rescission of Form N-Q Portfolio information must be reported on the same basis used to calculate a fund s NAV, which is generally T+1 Primarily designed for use by the SEC and its Staff, not for disclosing information directly to individual investors. Form N-PORT will be filed monthly no later than 30 days after each month-end, with every third month being made available to the public 60 days after quarter-end 11

12 Form N-PORT Requires detailed information about portfolio holdings, including: Portfolio level risk metrics Securities lending Return information Flow information Repurchase agreements and reverse repurchase agreements Derivative instruments Liquidity 12

13 Form N-PORT Portfolio level risk metrics If the average value of the fund s debt securities positions for the previous three months, in the aggregate, exceeds 25% or more of the fund s net asset value, provide the change in value of the portfolio resulting from a 1 and 100 basis point change in interest rates for 3 month, 1 year, 5 year, 10 year and 30 year maturities. Additional items to be provided for credit spread risk. Securities Lending For each borrower, provide: Name of borrower Aggregate value of all securities on loan to the borrower 13

14 Form N-PORT Return Information Monthly total returns of the fund for each of the preceding three months For each of the preceding three months, monthly net realized gain/loss and net change in unrealized appreciation/depreciation attributable to derivatives for each of the following categories: Commodity contracts Credit contracts Equity contracts Interest rate contracts Flow Information Total net asset value of shares sold (including exchanges but excluding reinvestments), reinvestments, and shares redeemed, during each of the preceding three months 14

15 Form N-PORT Repurchase agreements and reverse repurchase agreements Provide the name of the counterparty Category of investments that most closely represent the collateral Derivative Instruments Provide the name of the counterparty Description of reference instrument Liquidity Levels 15

16 Form N-PORT Challenges Time SEC s estimates In-House Option 3 rd Party Option Burden Hours to Compile (per fund) - 1st Filing Burden Hours to Compile (per fund) - Subsequent Filings 14 9 Burden Hours to Compile (per fund) - First Year Burden Hours to Compile (per fund) - Subsequent Years Costs (SEC s estimates) In-House Option average per fund cost, per year = $ 4,805 3 rd Party Option average per fund cost, per year = $11,440 Data 16

17 Form N-CEN New census reporting form that will be filed annually by all RICs, other than face-amount certificate companies Will coincide with the rescission of Form N-SAR Filed 75 days after fiscal year-end for RICs and 75 days after calendar year-end for UITs; unlike Form N-PORT, becomes effective for all entities as of June 1, 2018 As with Form N-SAR, the sections of Form N-CEN that a fund is required to complete will depend on the type of registrant 17

18 Form N-CEN Requires census-type information, including: Background and classification of funds Investments in controlled foreign corporations Fund expenses waived, reduced, or recouped Information about a fund s directors and chief compliance officer Requires disclosure of reliance upon certain rules under 1940 Act and/or exemptive orders during reporting period 18

19 Form N-CEN Per the SEC, Form N-SAR is being updated for two primary reasons In the past two decades, the SEC has not substantively updated the information reported on Form N-SAR to reflect new market developments, products, investment practices, or risks The technology by which funds file reports on Form N-SAR has not been updated and limits the Staff s ability to extract and analyze the data reported 19

20 Form N-CEN Challenges Data Costs Time 20

21 Amendments to Regulation S-X Standardized derivative disclosures Adoption of new schedules, including prescribed tabular formats for open futures contracts, open forward foreign currency contracts, and open swap contracts 21

22 Amendments to Regulation S-X Enhanced disclosure of contracts on non-public indices and custom baskets Indication of (1) whether an investment was fair valued by using significant unobservable inputs and (2) whether an investment cannot be sold because of restrictions or conditions applicable to the investment Intended to increase transparency into the marketability and observability of valuation inputs 22

23 Amendments to Regulation S-X Disclosure of reference rate and spread for variable rate securities In order to provide more transparency into a fund s debt securities, SEC has required that for all variable rate securities the following are disclosed: Reference rate Spread End of period interest rate 23

24 Compliance Dates Form/Amendment Filing Frequency Due Date Compliance Date Specific Example Form N-PORT (Fund groups with AUM in excess of $1B) Monthly 30 days after each month-end June 1, 2018 First filing date will be July 30, 2018, based on data as of June 30, Form N-PORT (Fund groups with less than $1B in AUM) Monthly 30 days after each month-end June 1, 2019 First filing date will be July 30, 2019, based on data as of June 30, Form N-CEN Annually 75 days after fiscal year-end June 1, 2018 First filing date will be September 13, 2018, based on data as of June 30, Regulation S-X Ongoing Ongoing August 1, 2017 First fiscal year-ends impacted will be August (annual) and February (semi-annual). 24

25 Classification, Reporting, and Oversight Considerations when Implementing the Liquidity Rules

26 Overview Scope Compliance Dates Program Assessment, management, and review of risk Classification Highly liquid investment minimum Limitation on illiquid investments Redemptions in kind Board involvement Recordkeeping Disclosure Requirements 26

27 Challenges/Considerations Definitions Highly liquid investment minimum Reasonably foreseeable, reasonable, primarily De Minimis (ETFs) Significant Program Administration Who is responsible? Third party involvement Sub-advisor(s) Frequency of monitoring 27

28 Challenges/Considerations (continued) Asset Classification Repeatable Process Equity vs. Fixed Income Exceptions Rules/Triggers? Illiquid Investments 15% limit Reporting More frequent assessment 28

29 Challenges/Considerations (continued) Highly liquid investment minimum Determined by fund Shortfall policies and procedures Reporting Exclusions ETFs In-kind vs. cash Additional considerations 29

30 Board Involvement Education Structure and design of program Committee (if applicable) Reporting Definitions Responsibilities Initial Ongoing Implementation Discussions How soon is too soon? 30

31 Questions?

32 Contact Information Peggy McCaffrey Partner Jeff Haneline Senior Manager Jake Vogel Manager

33 Future Events Next Webinar Wednesday, August 9 th Conference October 11-13, 2017 Cohen Client Conference Nashville, TN 33

34 Thank you.