2013: the year of complianceRethink and rebuild to adapt and win

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Executive summaryLike the regulatory revolution that reshaped the airline and telecommunication industries in the 1980s and 1990s, rewriting the list of winners, the evolving compliance environment for 2013 will likely be a game changer for asset management — particularly in smaller firms. The reporting procedures that many firms — even midsized players — had in place before the financial crisis are likely insufficient to effectively handle the complexity of data aggregation and analysis required to prosper and grow in the new regulatory environment.

The added costs of compliance could not have come at a less opportune time — during the nascent industry recovery following the financial crisis, when many firms were looking back at excessive infrastructure spending made during the past bubble. With the benefit of hindsight, many firms now see their past spending during the exuberant days of the bubble as poorly planned.

Escalating costs of compliance — and the threat of even higher costs and damage to brand equity in defending an enforcement action — will no doubt squeeze the bottom line. In order to aggressively control upcoming compliance costs, remain competitive, manage risk and stay focused on core strengths, firms will be forced to carefully re-examine and rethink their operating model.

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2013: the year of compliance

22013: the year of compliance

While asset management firms would like to take advantage of the nascent recovery in the economy to revamp their business development efforts, taking center stage for the industry this year will be a new top priority: compliance. The industry is confronted with a complex array of new regulatory initiatives: the US Securities and Exchange Commission (SEC or the Commission) is aggressively hiring new, highly seasoned professionals directly from Wall Street, and its Office of Compliance, Inspection and Examinations (OCIE) has begun tenaciously carrying out exhaustive reviews focused on risk, with an expected uptick in enforcement proceedings. Given widespread voter distrust about the effectiveness of regulatory agencies during the financial crisis, the US administration started its new term by tightening up — rather than backing down — oversight of the asset management industry. President Obama’s nomination of Mary Jo White, a tough, highly successful federal prosecutor to head the SEC, was widely seen as signal to voters that his administration is getting tough on enforcing rules and will get tougher on rule breakers.

In fact, since the height of the financial crisis, the SEC has charged more than 150 firms and individuals with regulatory offenses, and secured $2.6 billion in fines. If recent rhetoric from Washington is anything to go by, few politicians today are willing to stand up and fight for less regulation, a weaker SEC or less investor protection.

On top of a retooled SEC, other major challenges on the horizon include a new examination strategy for recently registered advisory firms; the Form PF requirement launched last year — with many funds soon to file for first time; expanded jurisdiction of the Commodity Futures Trading Commission (CFTC) into many new areas of the industry; and the European Union’s (EU) Alternative Investment Fund Management Directive (AIFMD).

Smaller firms may feel the greatest pressure. The complex wave of new regulations, whether from the EU or the US, has posed considerable challenges for even the most sophisticated legal and compliance experts to clearly understand — much less fully implement. Many rules referred to in financial legislation have yet to be drafted by the appropriate regulatory agencies — making it nearly impossible for firms to prudently plan for future changes. While the largest asset management firms command the budgetary resources to dedicate significant headcount for compliance, as well as pay for external legal counsel to successfully navigate the new complex regulatory environment, smaller firms may be overwhelmed by the potential expenses. For smaller firms, the relative cost of doing business in the industry has become greater — and their ability to successfully survive and compete has become that much more difficult. The systemically important firms that are too big to fail may become even bigger and more systemically important.

Key issues in new compliance environment

New regulation-driven industry Along with airlines, health care, banking and defense, asset management is now one of the most highly regulated industries in the entire economy

Complexity New regulations are highly complex, with overlapping regulators — making compliance and business planning difficult

Cost challenges Firms with smallest compliance budgets likely to face far higher marginal costs — a distinct competitive disadvantage

Paradigm-shifting game changer

Like changes in telecom and airline industry, regulatory overhaul will create a paradigm shift in the entire asset management sector

Restructure business model Firms can win by implementing a smart, robust and flexible data strategy

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Issues facing asset managers • Dramatic increase in regulation: the tighter US compliance

environment for 2013 has a new level of complexity that now makes asset management one of the most heavily regulated economic activities in the global economy.

• Complex chaos: new regulations are being proposed at a fast and furious pace — with many rules yet to be clearly explained. As a result, the level of complexity is arguably far beyond the capability of most firms to implement or fully understand compliance on their own. Asset management firms are now faced with formidable challenges in absorbing the considerable costs of complying with not only tightened SEC regulations, but also new oversight from the CFTC. US firms may also fall under the jurisdiction of EU regulators, through legislation such as the globally applicable AIFMD, which covers all non-undertakings for collective investment in transferable securities funds.

• Firms with limited compliance budgets face the greatest challenges: the largest firms may have a sizable advantage, benefitting from far lower marginal compliance costs due to massively greater scale. In fact, as the largest firms gain advantages due to deeper pockets, innovation and competition may suffer, as new start-ups may be stifled by overwhelming filing requirements and associated costs. Fewer small asset management firms may imply a less competitive and more concentrated asset management industry.

• Playing field has changed: similar to the regulatory upheavals that affected the airline and telecommunication industries in decades past, rewriting the rule book on how to win, there may be a new list of winners and losers in asset management. This will be determined on whether firms can implement highly cost-effective and scalable operations — particularly in data architecture.

• New game plan: those who not only survive — but also succeed and win — will do so by reinventing their business operating model. This will be based on cost efficiency, enhanced productivity, smart data management, automated reporting processes and adaptability. Winning firms will be those that implement a new, holistic operating

model that is sufficiently flexible and robust to readily adapt to complex data requirements, and the changing regulatory environment.

A new SEC — a new review processThe SEC has thoroughly reviewed and revamped its systems, operations, internal communications and examination processes. In an era where the federal government is leaving no stone unturned to find cost savings, the SEC nearly stands alone in embarking on a new hiring initiative. It is currently bringing onboard technically experienced staff directly from the asset management industry, in such areas as alternative investments, with a particular focus on risk management, valuation, the Foreign Corrupt Practices Act, expense allocation and performance reporting. During a February 2013 appearance before the Senate Banking Committee, interim SEC Chair Elisse Walter testified that the Commission’s fiscal 2013 budget request of $1.566 billion — up from $1.321 billion last year — was earmarked for technology upgrades, as well the hiring of 676 new staff. Many existing staff are now implanted in asset management firms to gain more hands-on experience about how funds operate.

Simply put, the SEC has started aggressively looking at risk like never before. For example, the Investment Management Division has recently established a Risk and Examination Group (REG) to conduct rigorous quantitative analyses of fund managers and work closely with the OCIE — particularly for onsite visits to strategically important firms. Long gone are the days when firms were randomly selected for reviews and could operate for years without significant SEC contact. Instead, the SEC has implemented a new risk-based methodology — taking into account media coverage, whistle-blower tips and open market activity — to carefully select firms to review. The close coordination between OCIE and the newly formed REG is just one indication of how risk-focused the examination process has become.

In short, through major enhancements in headcount, training, systems and information sharing, the SEC has very quickly become very sophisticated in understanding risk and operations, as well as performance attribution and evaluation.

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Key red flag areas Valuation process: SEC examiners will look at the role of the valuation committee and third-party valuation service providers, and for the potential use of inflated valuations, in marketing and performance reporting, particularly for illiquid asset classes such as private equity.

Senior management and boards: the SEC will meet with senior management and board members to discuss enterprise risk, as well as financial, legal, compliance, operational and reputational risks. This initiative is designed to evaluate the culture of risk management and initiate a dialogue on key regulatory requirements. In fact, it should become standard procedure for senior management to proactively become involved, and meet personally with SEC examiners, so as to convey the primacy of risk management and compliance within the C-level suite.

Fund expenses: expenses for investment services should not necessarily be equally allocated to individual products, according to proportionate share of AUM (assets under management), which has typically been the easiest and most common allocation methodology. Rather, expenses should be allocated based on the services each specific product uses. Further, on a higher client-firm level, there should be a fair and transparent policy in place governing the methodology used to allocate expenses between the funds and the advisor.

Conflicts of interest: expense allocation between the firm and clients is just one of many areas where there could be potential conflicts of interest between the firm and its clients. The SEC will focus on specific conflicts, and steps taken to mitigate conflicts and disclosures made to investors, as well as the governance framework, to manage conflicts on an ongoing basis.

External service providers: regulators are conducting impromptu meetings with service providers to cross-check/validate information provided by investment advisors. For example, the SEC has started communicating with external auditors, and asking pointed questions about specific audit procedures.

Custody: as it has in the past, the SEC will utilize a risk-based verification process to confirm the safety of client assets and compliance with custody requirements. Examiners will review the measures in force to protect assets, the adequacy of audits and the effectiveness of policies and procedures governing custody.

Enforcement: enforcement staff can accompany and work closely with examination staff in asking pointed questions. It is widely expected that there will be an uptick in enforcement actions.

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Form PF: focus on riskThe release of the final version of Form PF as part of Dodd-Frank marked a watershed event in the ongoing regulatory trend towards increasing disclosure, and will continue to affect the industry in 2013. Again, the focus of Form PF is on risk — both risk assumed by individual investors, as well as systemic risk. This year, the SEC will receive Form PF filings from approximately 2,500 advisory firms reporting on behalf of more than 23,000 funds. The information filed will be used by the Financial Stability Oversight Council to monitor risks to the financial system, and to conduct risk assessments of private funds.

All registered investment advisers must file Form PF if they advise private funds greater than $150 million in regulatory assets under management (RAUM), or they solely advise venture capital funds. The SEC’s newly adopted definition of RAUM is the gross assets under management, without subtracting borrowings, short sales or other forms of leverage. This is distinctly different from the commonly used net assets under management (NAUM), which is calculated by subtracting outstanding liabilities from assets. As a result of using RAUM, small private funds that employ leverage or have unfunded investor commitments may be required to report on Form PF. Under the old NAUM definition, many of these smaller funds, regardless of their degree of potential leverage, could avoid reporting and still manage to fly under the regulatory radar.

More importantly, after the shell shock of reading and digesting the detailed questions contained within the 65-page Form PF document, many asset managers will realize they must start to refine their entire firm-wide data strategy. The new data strategy implemented, which may also include partnering with external administrators, should be designed not only to gather information required for this particular form alone, but also to meet many similarly complex reporting requirements in the future. Any new strategy is not merely intended for a single reporting requirement, but rather to position a firm so that it can efficiently and consistently tackle a myriad of reporting requirements on the horizon — well beyond Form PF.

Key areas of expanded CFTC authority Increased regulatory reporting: Form CPO-PQR (the CFTC’s version of Form PF) may be required for the first time by many registered funds that previously never filed a report with the CFTC, or filed Form PF with the SEC. In fact, between the CFTC and SEC, along with Forms ADV, PF, CPO-PQR, CTA-PR, TIC-S, TIC-SLT, 13F, ESMA, OPERA and others, firms can be required to file a veritable alphabet soup of some 40 forms of reporting.

Registered investment companies (RICs): for the first time, many RICs must also register with the CFTC. Previously, they only needed to be subject to oversight of the SEC.

Expanded Commodities Pool Operator (CPO) definition: as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the original definition of a CPO has been vastly broadened, and now includes “persons operating collective investment vehicles that trade swaps.” As CPOs are captured by CFTC jurisdiction, hedge funds that trade not only swaps, but also such products as futures, options, swaptions, options on futures, or retail FX, must now implement a CFTC compliance program.

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Commodity Futures Trading CommissionFollowing implementation of Dodd-Frank, the CFTC has now assumed new supervisory powers over many registered funds that perhaps have never dealt with CFTC regulation before. While the SEC and the CFTC may share the same objectives — protection of investors and stability of the financial system — they do operate two parallel and separate regulatory regimes. Their respective rules and review procedures can be frustratingly different for asset managers. Further, the CFTC is overseen at the legislative level by the U.S. Senate Committee on Agriculture, Nutrition & Forestry. The SEC, by contrast, is overseen by the entirely separate Senate Committee on Banking, Housing, and Urban Affairs.

As an example, for a European-based CPO, the presence of even a single US-domiciled investor may bring the entire pool under CFTC jurisdiction. Similarly, a US-registered firm which has never dealt with the CFTC before, but trades in certain derivatives, will likewise come under CFTC jurisdiction, and must create the appropriate CFTC-specific compliance infrastructure. While the key words in the CFTC name may be “commodity futures,” in fact, an array of derivatives products well beyond commodity futures now falls within the CFTC’s enforcement domain.

Newly registered? Get ready for national examsThe entrepreneurial process of setting up a new advisory firm has never been easy. Under the new regulatory initiatives, the process has certainly not become easier. On 21 February 2013, the SEC issued a detailed, 13-page letter outlining the highly thorough risk-based priorities for the National Examination Program (NEP).

Starting this year, the SEC will likely visit and conduct presence examinations on most new firms that initially registered by 31 March 2012. Since then, more than 1,000 investment advisers have registered for the first time. The majority of such firms is advising hedge funds and private equity funds, and have never been registered, regulated or examined under the NEP before.

The presence examination initiative is expected to run for two years and consists of four phases: engage new registrants, examine a substantial proportion of new registrants, analyze examination findings and report to the industry.

In addition to the presence exams, two other types of exams will also be conducted: routine exams and sweep-based exams. To conduct routine exams, the SEC will use a risk-based methodology — including whistleblower tips, media reports and open market activity — to select a wide variety of firms to visit. Sweep exams are conducted on the basis of SEC internally generated concerns which may arise from information and findings gathered during routine exams. For instance, once the SEC decides that a particular product area warrants further detailed investigation, they may select a small sample of the major providers of that product to examine in order to gather more data and insight.

Between the time-consuming demands of conducting presence exams, routine exams and sweep-based exams, it is no surprise that the SEC is one of the few government agencies aggressively growing headcount — budget sequestration or otherwise.

Alternative Investment Fund Managers DirectiveThe AIFMD is one of the most encompassing pieces of financial legislation to come from Brussels since the creation of the EU, which accounts for the second largest asset management market in the world next to North America. Drafted in response to the financial crisis, implementation of AIFMD into the legal system of all EU member states is yet another small step toward the globalization of financial regulatory policy.

AIFMD covers more than simply alternative vehicles, and is not simply a hedge fund directive. The broad definition of “alternative investment” under AIFMD encompasses a range of funds, and includes not just hedge funds (even Cayman Island funds, once thought untouchable), but also US ’40 Act funds, most non-UCITS funds, private equity funds and real estate funds.

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As this is an EU directive, firms based in the US with no EU presence may incorrectly assume that AIFMD is irrelevant. If the US-based manager does not market to EU investors, nor has any EU-sourced capital, then AIFMD would likely not apply. However, AIFMD may apply to US-based firms if they manage assets from a single EU-domiciled entity, if an employee visits an EU client to market their firm, or arguably even if their web site is available for potential EU clients to browse. Given the size of the EU market, few US-based firms can simply ignore EU-based investors as a whole. Essentially, AIFMD will cover US-based firms that have any EU-based clients, or any active plans for business development targeted at attracting EU-sourced funds.

AIFMD was first ratified by the Strasbourg-based European parliament in 2010, but many US-based managers will not need to comply — if at all — until the implementation date of 22 July 2013. The good news is that US-based managers, even if caught by the directive, may not necessarily have to comply fully with all six detailed categories of AIFMD provisions. Firms that merely market to EU investors need only comply with the transparency provision, which outlines detailed requirements for disclosure to investors, as well as leverage calculations. The reporting requirements are widely seen as more onerous than even the SEC’s voluminous Form PF. Firms may need to disclose remuneration of key staff, a controversial issue, as well as a host of other confidential data previously not disclosed to investors.

The end of the entrepreneur?The daunting challenges of setting up a new advisory business have lead critics to argue that the overwhelming number of new regulations will stifle entrepreneurship. At a January 2013 Florida banking conference, one chief executive officer indicated that the new regulatory environment has solidified the dominance and cost competitiveness of a handful of giant asset management firms. The largest firms command the scale, headcount and budgets to implement new internal procedures and systems at far lower marginal costs than smaller ones.

Within the EU, the burden of complying with AIFMD — as well as a host of other new pan-EU regulations — can be potentially so complex, that many critics suspect some smaller non-EU firms will be put off by the added compliance

Key steps to smart outsourcing• Define and target operating model strategy and

specific regulatory requirements

• Create business case and economic model development

• Determine baseline operational performance metrics

• Conduct market scan and competitive analysis (product, vendor, competitor)

• Develop RFP and vendor evaluation (criteria, scoring, pricing analysis and due diligence)

• Oversee execution of outsourcing plan

• Address post-outsourcing; evaluate and restructure organization

• Define SLA/KPI requirements for outsourced processes

• Design governance and performance framework to manage vendor relations

82013: the year of compliance

costs, and decide to avoid the entire market. Fewer firms competing to manage EU assets will translate into less competition within the asset management sector.

In fact, the Investment Company Institute, a Washington, DC-based trade association representing fund management companies and investors, has already launched several law suits against industry regulators. They argue that many new rules are not only unnecessary, redundant and overly burdensome, but in the end are against the interests of investors and eat into investment returns. In financial compliance, there is no free lunch; regulatory initiatives for any industry almost always come at a cost to consumers. With some estimates that compliance costs in Europe alone could reach $78 billion by 2015, this new regulatory environment has come at a highly challenging time for the entire asset management industry.

Traditionally, smaller firms have been so focused on raising assets and trading strategy that they have underinvested in infrastructure. In the hedge funds’ space, firms have started to divert planned spending away from front office and marketing functions toward compliance. In the Ernst & Young 2012 Global Hedge Fund and Investor Survey, some 45% of advisors indicated they planned to increase

headcount in compliance, and 58% planned increased spending on compliance-related technology. These increases are on top of 68% of the North American-based firms surveyed who indicated that they already faced across-the-board cost increases averaging some 15% during 2012.

One unusual outcome of the new compliance environment, given the potential for decreasing competition within the industry, may be increasing concentration — exactly the opposite intention that policymakers had in mind when drafting the new regulations. In principle, financial policymakers intended, among other goals, to reduce systemic risk by shifting from concentration within a few key firms and laying the groundwork, ideally, for a more robust, diversified and safer financial services industry. Yet, the degree of complexity in the wave of new regulations may have the exact opposite effect. The top 50 global asset management firms commanding enormous resources and scale will benefit from lower marginal costs, while smaller firms will face far greater marginal costs and challenges even to survive. At the same time, competition from small firms may be stifled, and the largest asset managers will likely further consolidate their dominance in the industry. More concentration within the industry will imply more systemic risk.

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Brief example of a winning game plan• Aggregate data overview and acquisition: a firm must

understand exactly how data is created, extracted, formatted to the specifications of the reporting system, stored and controlled from a variety of internal and external sources such as: front-middle-back-office, risk management, fund administrators, prime broker, custodian and pricing vendors.

• Repository layer: data must be structured and stored depending on how it is characterized. Several broad buckets are created: • Asset class (sovereign, corporate, asset backed,

equities, FX, private placements, derivatives)

• Risk (rate shock, volatility shock, index shock, credit spread shock, VAR), counterparty exposure (total by counterparty, percent collateralized, re-hypothecation, unsecured/secured)

• Performance (regulatory AUM, net AUM performance, correlation, risk-based returns, attribution)

• Investor (AUM weighting, high-water marks, investor concentration, domicile, redemption rights)

• Data presentation layer: automated reporting and ad-hoc analysis of data must be preformed depending on each specific regulation (Form PF, Form ADV, CPO-PRQ, CT-PR, CTA-PR, TIC-S, TIC-SLT, 13F, ESMA, OPERA FACTA, TIC, Investor Reporting).

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Exactly how the systemic risk debate plays out, and whether the asset management industry will continue the trend toward concentration, remains to be seen. While the costs of doing business for small investment managers have increased disproportionately, the adroit and nimble should manage — particularly through strategic outsourcing. The industry of services providers — fund administrators, prime brokers, compliance specialists and those that provide outsourced middle- and back-office functionalities — has quickly responded to the new market accordingly. For example, most fund administration service providers have created data aggregation and reporting services to address a wide variety of regulatory filings. More than a dozen outsourced administrators are aggressively marketing their outsourced services in preparation for Form PF alone — a daunting regulatory burden for any small fund.

Asset management firms of all sizes can benefit from a highly developed and competitive market for asset servicing. By comparison, following the 2001 recession, prime brokers rapidly adjusted their business model for the wave of start-up firms by establishing hedge fund hotels. This entailed providing new firms with a variety of incubator services — such as capital introduction and office space. Likewise, the asset servicing industry is expanding their product offerings to win business from even the smallest firms by providing comprehensive regulatory services that cover many of the 40 or so regulatory filing requirements.

An understanding of the landscape of service providers, pricing plans and how to successfully implement a strategic outsourcing program should ease an enormous amount of the compliance burden on senior management — many of whom typically prefer to focus on business development and portfolio management. Through implementing a program of outsourcing key compliance-related functionalities, the classic business model of a small fund, starting with little more than an office, a telephone, a prime brokerage account and a Bloomberg terminal, is by no means dead and buried.

It’s not just the SEC: investors have raised the bar as well Rebuilding the compliance infrastructure across a firm should not be treated merely as a means of keeping regulators happy. Instead, given that the due diligence

process conducted by institutional investors has rapidly intensified over the last few years, potential investors will likely focus on the same pointed questions as examiners regarding risk, expense allocation, performance reporting and valuation. After a variety of widely reported investment management scandals following the financial crisis that affected even sophisticated professional investors, many institutions now take the “trust, but verify” approach to fund manager selection.

In the recent Ernst & Young 2012 Global Hedge Fund and Investor Survey, 56% of institutional investors surveyed indicated that operational risk concerns — separate from performance — would cause them to redeem assets. Further, when asked where they think their allocated fund managers must direct further capital investment in technology, 68% indicated risk management, and 51% indicated compliance as key areas to target future IT spending. Essentially, rebuilding infrastructure to ensure more robust and thorough reporting can be viewed as part and parcel of business development. As the financial bubble and the era of double-digit returns appears to be behind us, investors have substantially raised the bar on the standards they demand from their advisors in terms or disclosure, operational risk, data infrastructure and transparency.

Rethink, redesign and rebuildIn an industry of growing competition, tightened margins and spiraling demands on limited budgets, the firms that win will be those that can effectively control costs while staying in compliance with new regulatory initiatives. Traditional approaches of assessing changing compliance requirements on an isolated regulation-by-regulation basis may prove in the long run to be short-sighted, sub-optimal and not cost effective. Given the magnitude of change now taking place, firms should adopt a new holistic strategy in order to minimize costs, ensure compliance and stay focused on growing AUM and improving performance.

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Added spending on redesigning and rebuilding infrastructure is certainly not a process that asset management firms will look upon with much enthusiasm. In an era of aggressive cost management, the natural reaction may be to freeze infrastructure spending and solider on by utilizing available resources. However, redesigning infrastructure should not be viewed as discretionary option that can be put off, but rather as implementing cost-effective strategy to ensure competitive survival in the long run. Regardless of whether firms are forced by regulators to rebuild their systems, the free market will ultimately decide. Those firms implementing highly transparent, robust reporting systems that can easily adjust and comply with the regulatory environment will safeguard their competitiveness, maintain the confidence of stakeholders and succeed in the market, as well as benefit from scalability and lower-marginal costs. Those firms relying on outdated pre-crisis systems and processes will likely face severe challenges.

While the amount and frequency of information that must be communicated to the regulators (and investors) has increased to a new level of complexity, the reporting requirements are not entirely unique and tend to overlap. Firms should focus not on any particular set of data points or specific regulation, but rather on an overall winning game plan: implementing a comprehensive data management strategy.

ConclusionAsset management firms are faced with a crucial juncture in history, and a potential paradigm shift that will lead to a new game plan. A carefully designed infrastructure that seamlessly shares data across their entire organization will ensure that a firm is able to successfully navigate the current regulatory environment, and efficiently adapt to inevitable regulatory changes. At the same time, the firm must maintain a competitive cost advantage, and remain keenly focused on their core strengths of business development, portfolio management and client service.

Key points in winning in the new regulatory environment• Data, data and data: winning in the new environment,

while controlling costs, will be a challenge in data management and automation. Overcoming this challenge will require focusing on sources and retrieval of data across the organization and from external service providers — rather than concentrating on any one specific regulatory form.

• Establish a disclosure policy: firms will need to disclose highly confidential data. While most regulatory forms are inaccessible to the public, it is likely that potential investors — given the heightened process of due diligence today — may request regulatory filings as a routine part of the manager selection process. Asset managers will likely need to implement increased transparency for all their investors, and should prepare a disclosure policy relating to the myriad of forms they will file.

• Plan well in advance: accurate filing of regulatory reporting requires considerable time and effort on the part of several different business units. Preparation of forms will likely be a firm-wide process. Firms should start the process well before rethinking and rebuilding their data infrastructure to minimize long-term costs and meet deadlines.

• Communicate: regulatory forms contain many ambiguities — particularly similar forms required by both the SEC and CFTC. Firms should not be afraid to contact the SEC or CFTC to seek clarifications. In fact, the SEC’s presence exams for newly registered advisors are intended as an educational and communicative outreach initiative as much as anything else.

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• When in doubt, document: there will be many discretionary judgment calls made to support reporting requirements. Many rules are far from simple to interpret, and they may be conflict of opinions among compliance professionals reading the same exact rule. Any investigation or questions about these judgment calls will likely arrive a year or more after the relevant forms are filed — and perhaps after key personnel have left the firm. A simple memo about the decision making behind complex discretionary judgments should ensure consistency for future judgment calls, and aid in any future audit.

• Prepare a back-up data bucket: while redesigning a new operating model focused on current regulations, the model should also be highly adaptable, with a back-up plan for unknown future requirements, such as data gathering, that may be required for new regulations or for regulations which firms have not yet assessed. More importantly, the regulatory process is an ongoing work in progress. The only certainty is that there will be continuous change for years to come.

ContactsTheodore J. Kim Strategic Analyst +1 212 773 7888 ted.kim@ey.com

Daniel New Executive Director +1 617 585 0912 daniel.new@ey.com

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How EY’s Global Asset Management Center can help your businessThe asset management sector is facing a number of fundamental challenges. These include changing customer demand, the need to innovate, downward margin pressure, the rising tide of regulation and investors’ increasing focus on governance. In response, the sector is restructuring, developing new products, improving risk management and seeking greater efficiency. EY’s Global Asset Management Center brings together a worldwide team of professionals with deep technical and business experience to help you succeed. The Center works to anticipate market trends, identify the implications and develop points of view on relevant sector issues that support our assurance, tax, transaction and advisory services. Ultimately, it enables us to help you meet your goals and compete more effectively.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.