How to Improve an Investment Prospectus
Perhaps no industry enjoys a more complicated relationship with the concept of change than financial services. The publication Navigating the New Frontiers of Compliance warned that changes coming to broker-dealer and investment advisor regulation will make assessing risk—and developing the processes to manage it—more important than ever. The evolving nature of regulatory risk and compliance has many investment advisors reconsidering how they manage their mutual fund prospectus filings.
Any transformation in processes, however, must also adhere to the regulatory requirements of the investments industry. For example, registered mutual funds are subject to some of the most extensive disclosure requirements of any U.S. regulated financial product. The prospectus—a document provided by the fund to fund investors—serves as that disclosure, including all the information needed to make an informed investment decision.
Investment company prospectus filing is a high-volume operation. At a minimum, a mutual fund files a statutory prospectus and summary prospectus annually with the U.S. Securities and Exchange Commission (SEC). The documents also must be posted on a fund’s website and printed and distributed to shareholders. A prospectus is filed annually, and interim updates are filed when necessary to disclose any material changes in fund management. Investment advisors that manage multiple funds may create dozens of prospectus filings each year.
Ensuring accuracy and consistency across individual fund disclosures, let alone entire portfolios, can be an exhaustive undertaking—especially for those firms without proper tools in place to streamline the process.
Challenges of the prospectus reporting status quo
Outdated, time-consuming processes: Investment prospectus reporting is a long and drawn-out procedure for many firms. Many investment advisors are challenged by the limitations of manual production processes, old desktop publishing systems, inefficient external printer practices, and a corporate culture that resists change.
Lack of accurate, consistent, and easily accessible information: Legal and financial reporting teams work to extract prospectus information from disparate systems, files on individual hard drives, filers, and email attachments. The potential for document errors and missed filing deadlines is high.
Strains on the division of labor: Departments must work together to combine accurate financials with plain English disclosures into a single mutual fund prospectus. With edits and updates, this can lead to constant back-and-forth between document owners that only further delays the process.
Meeting new standards for compliance: An investment company's prospectus process that creates compliance risk falls squarely on the desk of the Chief Compliance Officer (CCO). A relatively new role mandated by the SEC, the CCO is responsible for a firm’s compliance protocols—including regulatory reporting. In a public statement, former SEC Commissioner Luis A. Aguilar emphasized that the CCO is charged with protecting investors and the integrity of the capital markets: “Given the vital role that CCOs play, they need to be supported.”
Meanwhile, the regulatory environment for mutual funds expands the concept of risk management to include operations, procedures, and protocols. Prospectus reporting does not drive a mutual fund firm, but poorly executed reporting can create problems significant enough to stop it in its tracks, ranging from reissued corrections to a total loss of public trust.
As Aguilar reminds us, "CCOs, of course, should not be expected to do it alone...an effective compliance program must necessarily start at the top. A company’s senior leadership should be strong advocates for a robust and enduring culture of compliance; such a culture fosters an environment where everyone understands the firm’s core values of honesty and integrity."
Like compliance, process improvement takes buy-in from the top down. Business leaders must be committed to providing the team with tools to facilitate change. To manage this high-volume regulatory filing, an investment advisor needs an alternative to the external printers that currently dominate the industry—for instance, a collaborative reporting process that can scale quickly while improving data integrity, risk management, and operational efficiencies.
What investment firms should look for in reporting technology
Across the industry, mutual fund portfolio management is drawing from the latest innovations in technology, including artificial intelligence and big data. Cutting-edge tools are being used for marketing, customer service, product development, and human resources. Yet many firms still use outdated desktop software combined with costly third-party printers for regulatory compliance and prospectus filing.
Despite a reputation for adopting the latest and greatest—so much so that the term fintech has spawned a multibillion dollar industry—financial services has been slow to transition toward advanced technologies for financial reporting. Many firms are sitting firmly in the evaluation phase, reviewing reports from analysts and consuming information from industry peers. Meanwhile, all the major financial management technology vendors have redirected the bulk of the R&D investments to cloud applications that are available now.
Today’s technology can handle the manual labor of collecting, aggregating, and collating documents. Cloud platforms like Wdesk help facilitate complex document management while enabling cross-department collaboration. Combined with an experienced Workiva staff of professional service advisors, talented reporting, compliance, and legal staff at investment firms get more time to focus on information analysis, narrative development, and delivering on the promise to provide investors all the insight they need to make an informed investment decision.
With Wdesk, investment advisors can increase operational efficiency, improve data integrity, and reduce compliance risk by streamlining the prospectus reporting process and adopting modern cloud applications designed specifically for mutual fund regulatory reporting.
To learn more about how you can better manage your fund disclosures and improve the investment prospectus process, view the Six Steps for a More Efficient Mutual Fund Prospectus Reporting Process white paper.