In last week’s blog, IMP’s Guide: Preparing for the Proposed Names Rule Updates (Part 1), we examined the Names Rule amendments proposed on May 25, 2022. The amendments will impact how and when buy-side firms monitor the 80% investment policy requirement if approved. To help buy-side firms prepare for the proposed Names Rule (35d-1) changes, IMP has created the 3-step guide outlined below:
- Identify, Update, & Maintain Documentation
Since the proposed amendments will increase the scope of funds required to monitor the 80% investment policy requirement, buy-side firms will need to review and identify all funds that may be impacted. Once identified, source documentation should be updated to include all new requirements. To confirm coverage, new requirements should be mapped directly to compliance rules. If new requirements are not adequately captured, appropriate compliance rules cannot be relied upon to enforce them. Compliance personnel would be unable to effectively enforce a regulatory requirement if the basis for its existence was not correctly documented. As a result, coverage could weaken over time and lead to trade violations.
- Review & Revise Compliance Rule Coding
Next, it is critical that buy-side firms adjust compliance rule coding to monitor for the new 80% investment policy requirement properly. For instance, an amendment in The Names Rule proposal changes the derivative exposure calculation from market value to notional value. This is a significant change and should be reflected in the compliance rule coding if buy-side firms are to calculate exposure accurately. Also, using terms like “sustainable” or “growth” in fund names will now trigger the 80% investment policy threshold concentration. Likewise, order management systems (OMS) must maintain the appropriate data to correctly identify and aggregate securities positions with these attributes. Finally, the manager must be ready to precisely define HOW the holdings which comprise the 80% threshold are determined and to communicate this effectively to the Marketing staff. Without this level of precision, the Names Rule would be nothing more than a good idea.
- Implement a Notification System
Lastly, buy-side firms should configure a notification system for Portfolio Managers (PMs) and compliance teams if funds fall below the minimum 80% investment policy requirement. With more stringent conditions governing deviations being introduced, configuring daily notifications could aid PMs in optimizing the 30-day ‘safe harbor’ period funds have available to return to compliant levels. PMs and compliance teams should be aware of the deviation period and understand the specific circumstances in which they are allowed to depart from the 80% investment policy requirement. Such circumstances include significant market fluctuations and unusually high periods of shareholder redemptions.
Utilizing IMP’s CLEAR Compliance™, buy-side firms can update and store source documentation, map requirements to compliance rules, and set up notifications all on one platform. If you want to learn more about CLEAR Compliance™ and how to prepare for the proposed Names Rule amendments, please contact IMP Professionals.
