ICI report on ops headaches for interval fund sponsors flags areas where help is sorely needed, easily found
December 7, 2020 | Tom Wiedecker
An interesting recent paper from the ICI Broker/Dealer Advisory Committee, “Consider This: Interval Fund Operational Practices,” looks at several functional areas where interval fund sponsors run into operational challenges based on the unique characteristics of these products, which are designed to provide better liquidity than many alternative investments through a periodic share repurchase program. The paper considered Methods of Trading, Scheduling Repurchases and Subscription Periods, Communication, Trade Corrections, Share Class Conversions, and Distribution Processing and does a great job laying out the operational issues raised by interval funds for each activity.
The challenges are striking and they speak to the need for sponsors to seek the greatest flexibility possible when creating a shareholder accounting and servicing function. Looking at each of the seven functional areas addressed by the ICI report, a couple were especially frustrating for someone who spends their time working with forward looking investment organizations to develop technology solutions to simplify and optimize their shareholder accounting processes.
Methods of Trading
Intermediaries, the main engine for interval fund distribution, don’t have a standardized trading method for the products. The most popular platforms are DTCC’s Alternative Investment Product (AIP) platform and NSCC’s Fund/SERV.
The ICI notes that many accounting systems used by funds and intermediaries integrate with one or the other, but not both and, “as a result, interval funds traded through Fund/SERV may not be able to be easily distributed by intermediaries that are only integrated with AIP for interval funds, and vice versa.”
To overcome that hurdle, the report indicates that some sponsors have built parallel functionality to support their interval funds on both platforms, requiring them to duplicate all fund-level activities and to merge trading and reporting activities from the two platforms back into their own operations. To complicate matters, the two platforms feature different settlement processes with different schedules.
So an interval fund sponsor’s options essentially boil down to cobbling together a kludgy, duplicative approach to trading or ignoring roughly half of the most important distribution channel.
That’s no way to run a railroad! Sponsors need a multilingual shareholder accounting system that is fluent in both AIP and Fund/SERV right out of the gate.
Scheduling Repurchase (and Subscription) Periods
The report also highlighted the practical challenges Interval fund sponsors face managing their defining feature—the regular offer to buy back shares from shareholders. Strict rules govern the subscription period and subsequent processing dates when shares are transacted and shareholder accounts updated. The report stresses the imperative for any accounting system to allow trades entered during the interval period to be processed and disallow them outside that window.
The ICI whitepaper also highlights the challenges of accurately communicating the interval status within the sponsor organization and to the broader distribution network. This coordination can be especially difficult when holidays adjacent to the event come into play because sponsors tend to be short-staffed during holiday periods.
These special scheduling challenges associated with interval funds suggest that a shareholder accounting system supporting them needs to be rule based, automated and capable of communicating accurately with all stakeholders (and, ideally, with the systems supporting other products on the sponsor’s platform, including ‘40 Act funds).
According the ICI report, “Interval fund trade corrections identified outside a repurchase or periodic subscription process date may have significant legal, operational, and portfolio ramifications for related transactions. As a result, those corrections may be restricted, limited, or denied. This leaves the intermediary and its related shareholder(s) subject to market risk and a less-than-ideal client experience.”
Any corrections should be memorialized via a sound audit trail. This can be quite a challenge in cases where records are maintained via spreadsheets or processes not supported with appropriate checks and balances. A shareholder accounting system for interval funds, where the inability to quickly correct an error can have serious economic and reputational consequences, needs to be nimble and relational so that the correction can be confidently and accurately applied.
Executing trades, accurately adhering to the calendar and correcting errors are just three of the trouble areas highlighted in the ICI’s recent report. It was more than a little traumatic to read the whole thing and be reminded of all the headaches interval fund sponsors deal with every day as they cobble together their own solutions for administering these fascinating, but operationally cumbersome, products.
Why go it alone? We’ve been working with fund sponsors for more than 25 years and have already solved many of the operational challenges the ICI report outlines. Further, we can help craft agile, integrated solutions for the full array of traditional and alternative products. Even those that trade at intervals.
This article was originally published in The DIWire.Go Back
The time (at Blue Vault's 2nd Annual Broker Dealer Educational Summit) proved extremely informative.