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Accounting and Financial Reporting Update (2015)
The eighth annual accounting and financial reporting update discusses topics that may be of particular interest to investment management entities. It summarizes notable developments and activities that occurred during 2015, including (1) the FASB’s completion of the amendments to its consolidation requirements, (2) the continued activities related to the implementation of the FASB’s new revenue guidance, and (3) the SEC’s continued focus on rulemaking. Standard-setting activities that affect advisers are outlined in the first section of the publication, and standard-setting activities that affect funds are outlined in the second.
The U.S. stock market, which saw double-digit growth in 2014 and 2013, slowed considerably in 2015. The market also experienced significant volatility during 2015, which has increased the pressure on advisers to produce returns that outperform benchmarks as well as to develop less costly exchange-traded funds such as those that have been seen in the trend of mutual fund outflows of late. Uncertainties in the Federal Reserve’s timing for raising interest rates have further contributed to the market fluctuations and have been weighing on investor sentiment. Real estate and bond funds suffered similar fates during 2015 as Wall Street broadly braces for the impact of the recent interest rate hike, the first in nearly a decade.
Recently, the markets have experienced increasing volatility as a result of concerns about interest rate hikes, the oil price bust, and economic conditions in China, which have given pause to institutional and retail investors alike. The market appears to be at an inflection point, leaving investment managers to scrutinize how best to position themselves for the years ahead. In addition, the continued emergence of exchange-traded funds has increased the onus on active managers to justify the fees they charge. To achieve desired returns, investors are turning to investment managers that employ specialized investment strategies, financial products, and entity structures (including business development companies (BDCs)). Among those investors are baby boomers whose pensions and retirement savings will continue to represent a large market share for investment managers. Further, as technology continues to improve, investors are seeking additional diversification in their portfolios.
The industry also faces increased regulatory compliance and competition. As a result, investment managers should expect greater compliance costs as well as pressure to produce higher returns for lower management fees. To retain existing investors and attractive new prospects, investment managers will need to differentiate themselves.
Over the past few years, regulators have increased their scrutiny of the investment management sector in an effort to address market exposures. Regulators continue to focus on more robust data reporting, including transparency of portfolio holdings and management fee and risk disclosures; cybersecurity; and derivative disclosure requirements. The SEC has issued multiple releases containing staff guidance as well as new proposed rules on investment company reporting. These changes, among others, should be reviewed by investment companies, investment managers, auditors, and investors.