Trends & Developments - June 2015 - Cybersecurity, Valuations, Succession: Operating in a Complex Environment

June 16, 2015



Financial services firms, in particular asset managers, must undergo the arduous task of keeping up with various regulatory initiatives and other policies impacting their businesses to ensure they remain attractive to investors and can be prepared for government inquiries. To name a few, they need to make sure they have adequate cybersecurity measures in place to monitor threats, robust valuation policies and viable succession plans for their firms when the founder steps aside. And finally, for investment advisors specifically, they can expect to face enhanced data reporting requirements for mutual funds, ETFs and other registered investment companies ("RICs").


Asset managers, including hedge funds, private equity funds and venture capital firms, among others, continue to inquire about cybersecurity following the federal government's February creation of a new agency called the Cyber Threat Intelligence Integration Center ("CTIIC") to monitor cybersecurity threats, along with pooling and analyzing information on spectrum of risks. 

Gary Swiman, partner in EisnerAmper's Compliance and Regulatory Services ("CARS") group, suggested numerous industry best practices for asset managers to enhance and maintain information security of critical client and proprietary data including eliminating unnecessary data, ensuring essential controls are met and regularly audited to guarantee consistent implementation, and changing default credentials, among others.

"The question for every business owner or board of directors is no longer 'if we are attacked' but 'when we are attacked and are we ready,'" he said.

He added that other common practices include avoiding shared credentials, implementing a firewall or access control list ("ACL") on remote access/administration services, updating anti-virus and other software consistently, and implementing cybersecurity employee training and customer alerts to look for signs of tampering and fraud.

Valuation Policies

Valuation policies continue to remain an area of concern for both managers and investors. Managers must be able to demonstrate to investors they have reasonable methods, remain consistent and exhibit solid communication regarding their procedures.

"Investors are increasingly concerned about the details of the valuations and the policies around the process during their due diligence activity," said Craig Ter Boss, director in the Corporate Finance group at EisnerAmper.

Ter Boss added that funds should ensure they revisit their valuation policies on a continual basis and if a deviation occurs, best practices for such event would be to ensure the situation is well-documented. Further, the individual(s) responsible for valuing the fund's assets would benefit from communicating the processes throughout the year to their service providers, which can create an opportunity to address any instances of inconsistency.

Succession Planning

Asset managers continue to inquire about succession planning and how the firm's CFO can best prepare and maintain investor confidence when the founder steps aside. According to Nicholas Tsafos, an audit partner at the firm, the CFO needs to address three components of succession planning including governance, compensation and equity to ensure the transition is smooth for the person(s) taking over.

"Governance is one of the most important but also one of the most complicated aspects of succession planning because it encompasses the founder's family wealth," he said.

In addressing compensation, in the majority of cases, when the firm's founder runs the business, he or she is still incentivized. Finally, with the equity piece, if the founder wants to sell a certain percentage of their business, the firm must have a plan for how much equity he or she will maintain.  

Investment Advisors

Investment companies and investment advisors can expect to face enhanced reporting requirements in order to provide investors improved access to information about their fund's investments and give the SEC more useful information to monitor risks in the asset management industry. Last month, the SEC proposed a number of rules, forms and amendments to improve the quality and accessibility of information. Form N-PORT would require registered funds, other than money market funds and SBICs, to report portfolio-wide and position-level holdings data to the SEC on a monthly basis. Previously, they were required to do so quarterly. Form N-CEN would require funds to annually report certain census-type information in a structured data format to the SEC filed within 60 days of the end of the fund's fiscal year and replace Form N-SAR currently used which requires them to file semi-annually.

"We believe the new proposed rules and related forms are a product of the SEC initiatives, which began in early 2014, to focus on and to get a greater understanding of the alternative mutual fund space," said Garth Puchert, audit partner in the firm's Financial Services group.  "The new proposed portfolio form and enhanced derivative disclosures will help investors obtain better information about the mutual fund investments and risks associated with those investments on a more timely basis."


Asset managers need to keep up with all the regulatory requirements and other policies impacting their operational components of their business following both government and investor requirements.  If they are able to exhibit best practices in monitoring cybersecurity threats, having sound valuation policies and a viable succession plan, they have a greater chance of being more attractive to potential investors. Finally, if investment advisors in particular start preparing for the anticipated enhanced reporting requirements proposed by the SEC, they will be in a better position to provide allocators better quality and accessibility to information about their funds' investments.

Trends & Developments - June 2015

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