Is Your Firm Regulation-Ready?

In Spring of 2022, the U.S. Securities and Exchange Commission (SEC) charged various executives at Archegos Capital Management with misleading counterparties. While an internet search can provide many colorful stories, the highlight reel is that Archegos defaulted on loans from losses on a concentrated portfolio of risky stocks.¹ The size of the losses and the family office’s ability to manipulate stock prices and conceal investment positions without triggering public disclosure requirements shocked the market.

The SEC responded to the scandal with regulations directly targeting derivatives and security-based swaps that caused the collapse, as well as broader disclosure requirements for private fund advisors. This December, the SEC goes live with rules to better track relationships between asset managers and counterparties.² Specifically, the SEC adopted an amendment to Form PF that targets the timeliness of information referred to as “current reporting”. Section 5 requires firms to aggregate and calculate ratios on NAV, margin, redemptions, and defaults, and also consider business continuity plans. The rule overlays a time clock of 72 hours to report an event.

Chief compliance officers I’ve spoken with expect new Form PF requirements to be a daily fire drill and have for some time now. While there is uncertainty about how existing regulations, such as Form PF, will evolve and what new rules will surface, firms must remain nimble and diligent in meeting current and upcoming regulatory reporting requirements.

Primordial regulatory soup

Decades ago, compliance consulting was born out of unassuming offices that focused on the minutiae not associated with top-line revenue. Before the Global Financial Crisis, a coterie of businesses specialized in various filings and developed long-standing relationships with regulators. Dodd-Frank added a meaningful tailwind to the growth of these firms. The SEC’s launch of the NEAT platform added a technical bent to the regulator’s forensic prowess.

Compliance consulting firms were also overlaying tech to keep up with the added spend in the market.

There was a palpable change in the space. For example, I was in DC meeting with senior SEC folks in early 2014 to discuss a proprietary surveillance platform. We spent a portion of the meeting talking about Mongo indexes and left wondering what was happening — did they really ask us how to encrypt a collection?

Around 2015, Europe was also ramping up its transaction reporting regimes. PE firms didn’t wait long to roll up various tooling for compliance and regulatory purposes.

Regulatory technology — RegTech — became a thing.

Yet, while PE firms quickly added plug-and-play regulatory tools to their technology ecosystems, tech stacks remained weak. This isn’t meant to be (too) critical, but it may explain the crescendo of angst now evident with the introduction of Form PF daily testing atop traditional quarterly activities.

Businesses were annuitized too early and there was no room for innovation — everyone was in an earnout. A glaring gap now exists between legacy offerings and what’s required to future-proof against dynamic regulatory overlays.

The changing regulatory landscape

The source of unpredictability doesn’t really matter – or if Archegos was an isolated incident. Regulatory change is going to be the norm in a space that didn’t exist 20 years ago. Right now, we’re knee-deep fielding calls regarding NAV, margin, tracking wires, and implementing policy overlays on prime broker relationships.

In a recent discussion with our European sales team, a summary of the coming TR- and MiFID-related changes reminded me of a recent chat I had with a senior compliance officer at a large global investment house.

We had been discussing their capabilities at scale to compile NAV and margin data per filing entity — now a daily task for Form PF Section 5. In response, the compliance officer said, “Form PF is a problem, but we’re all much more worried about disaggregation”. In other words, the asset manager was most concerned about proposals not yet approved.

Upcoming global regulations