BNY Mellon, the fund administration partner firm, has announced a new service for fund managers that helps them identify, aggregate and manage the regulatory reporting requirements of the Alternative Investment Fund Manager’s Directive.

BNY Mellon, the fund administration partner firm, has announced a new service for fund managers that helps them identify, aggregate and manage the regulatory reporting requirements of the Alternative Investment Fund Manager’s Directive.

Under the AIFMD, alternative investment fund managers must file a specifically formatted report with their home member state’s supervisory authority, or National Competent Authority. The report requirements are extensive and cover aspects of both the fund manager and the fund, such as investment strategies, exposures, portfolio concentration, total value of assets under management, principal markets and instruments in which investments are made, plus detailed information on the funds’ risk profile.

BNY Mellon will work with its fund administration clients to aggregate and collect the necessary data from designated sources, including AIFMs, administrators, custodians, prime brokers and risk vendors as appropriate. The company will then populate the AIFMD Regulatory Report for the AIFM to review, approve and file with the National Competent Authority.

BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of Sept. 30, 2013, BNY Mellon had $27.4 trillion in assets under custody and/or administration, and $1.5 trillion in assets under management. Compliance Matters asked Alan Flanagan, the head of product management, how it worked.

Q: Firstly, what does it cost?
A: The real answer is £negotiable. There is a fixed fee per filing, the amount depending on the complexity of that filing. The other part of the fee is a fixed fee with regard to implementation. This is a 'scalability' issue and goes up and down according to the size of the implementation. All filings after the first filing are automated. We can run the process without the fund manager needing to be involved in the process.
Q: Is the service actually a bit of software?
A: Well, it uses IT to process data, but our team gets embedded at the bank - collecting, aggregating, validating and filing on behalf of the client. They collect data from various sources - the manager, the administrators, and the platforms.
Q: Is BNY a fund administration partner in this context?
A: Yes. The directive has increased the disclosures that have to go to the investors. Alternative Investment Fund Managers or AIFMs have to provide quarterly, semi-annual or annual reports, depending on their size. Any alternative investment fund or AIF over €500 million marketed in Europe is subject to quarterly reporting. Report information goes from BNY Mellon to the regulators directly and the fund manager is entitled to access. The UK's FCA will be the most common destination but other regulators can get it - notably in Luxembourg and Ireland. Platforms are not involved in this process at any point so this wouldn’t affect them.
Q: Why is it called a 'seamless solution'?
A: A reference to the fact that once we complete planning, testing and implementation, the system is fully automated and there is no need for intervention from the fund manager.
Q: Have there been any jitters among fund managers about outsourcing this function (because whenever they outsource something they can't outsource the responsibility for it)?
A: There's a lot of sensitivity around outsourcing. We give the managers transparency into our process. We allow them the option of participating in the review process if they wish.

In its recent thematic report on outsourcing in the asset management industry (TR13/10, November) the FCA looked at the ways in which firms were keeping an eye on the effectiveness of outsourced work.  It reminded firms of rule SYSC 8.1.8R (5), which states that each firm must retain the necessary expertise to supervise the outsourced functions effectively and to manage the risks associated with the outsourcing, while also supervising those functions and manage those risks.

On the whole its findings were good, although it discovered that the practice of offshoring (outsourcing functions overseas) almost always led to overstretched operational lines and bad quality control. At one fund firm the member of staff responsible for the outsourcing of fund accounting services was a senior employee who had gained solid experience of that subject in the days when everything happened in-house. The FCA seemed to like this, as it always likes the idea of senior staff with appropriate experience spending a lot of time on compliance matters.

SYSC 8.1.9R states that each firm must ensure that the respective rights and obligations of the firm and of the service provider are clearly allocated and set out in a written agreement. This comes from article 14(3) of the European Union's MiFID implementing directive. In the survey, the FCA was pleased to find that all the 17 asset managers in the survey conformed to that rule by signing service-level agreements with their service providers. These set out the responsibilities of each party and the expected level of service in writing. All asset managers used management information reports to find out if their service-providers were fulfilling their side of the bargain. The reports were full of the usual key performance indicators (KPIs) and key risk indicators (KRIs). Their quality varied a good deal.

SYSC 8.1.1R requires each firm to avoid undue additional operational risk when relying on someone for the performance of operational functions that are crucial for the performance of regulated activities. Most asset managers in the sample did indeed identify and assess the operational risks associated with outsourcing, with varying degrees of rigour. All firms used their compliance and internal audit functions – but not always in leading roles – to help them oversee the outsourcers. The FCA expressed its disapproval for compliance departments that merely checked that the outsourcers were following control processes without checking the 'inputs and outputs' for themselves. Asset managers that were part of banking or insurance groups were less likely to be able to influence group internal audit planning to ensure that an audit of the oversight of outsourced services happened regularly.