Investment Management on the Brink of Change – What’s Coming in Regulatory Requirements

The investment management industry is no stranger to change, but as we look ahead, it’s clear that a new wave of regulatory scrutiny is on the horizon. There is a higher level of regulatory intensity this year, as the SEC plans to finalize over 20 new rules with fresh industry requirements¹. In the EU and UK, changes are expected in EMIR and MiFIR reporting. European firms also face more stringent rules around ESG disclosure requirements than their Americas counterparts. Applicable from January 17, 2025, the EU’s Digital Operational Resilience Act (DORA) is a new regulation that aims to strengthen the security of information and communication technology (ICT) that is used by financial entities. 

Recent years have seen an explosion in the complexity and frequency of regulatory demands. Global regulators are tightening controls in response to financial crises and market volatility, leaving investment management firms to navigate a labyrinth of new obligations. Take, for instance, the SEC’s upcoming amendments to Form PF, which aim to enhance oversight by requiring more granular data on leverage, liquidity, and counterparty exposures. This shift may demand larger funds transition from annual to quarterly reporting, potentially straining smaller firms lacking the necessary resources. With increasing demands for transparency and accountability, investment management firms will need to adapt quickly to an evolving landscape. 

Data transparency is an imperative

At the heart of these changes is a growing emphasis on data transparency. Regulators are demanding detailed, accurate, and timely information to assess risks and protect investors. The hedge fund industry must not only collect vast amounts of data but also ensure its integrity. This is where robust data management systems become essential — allowing firms to handle large volumes of information efficiently and accurately.

Technology solutions are a strategic advantage

As regulatory requirements escalate, technology is emerging as a vital ally. Many firms are adopting specialized regulatory technology “RegTech” solutions to automate reporting processes, enhance compliance, and improve data analytics. Advanced technologies like machine learning and artificial intelligence are being utilized to identify data anomalies and predict compliance issues, freeing up valuable resources for strategic decision-making.

Upcoming changes in regulatory reporting

Regulatory reporting has become a critical focus for investment management firms. Understanding the latest trends and forthcoming changes is imperative for maintaining compliance and encouraging investor confidence. Let’s break down some of the key changes coming down the pipeline and what they mean for the future of hedge fund operations.

1. Form PF amendments

The SEC has revamped Form PF, the document that investment management firms use to report on their risk profiles. What’s on the table? Effective from March 12, 2025, more granularity and mandatory information is required. The amendments include reporting separately on fund components for master-feeder and parallel fund structures. Advisers must include the value of investments in other private funds when determining reporting thresholds, rather than having the option to exclude them. This shift aims to enhance oversight, but it could also strain smaller firms that might lack the resources to keep up.

 2. A new marketing playbook

On February 6, 2024, the SEC issued a new marketing rule update, shaking things up for how investment management firms promote themselves. Stricter guidelines will govern performance advertising, ensuring that all claims are fair and balanced. Specifically, where gross and net performance returns are reported, net returns must be calculated over the same time period and using the same type of return and methodology as gross performance. This means investment management firms will need to tread carefully when showcasing their past successes. Moreover, new rules on testimonials and endorsements will require firms to ensure these aren’t misleading — essentially raising the bar for transparency in marketing practices.

3. The growing importance of environmental accountability

As ESG investing captures the attention of investors worldwide, investment management firms can expect more rigorous disclosure requirements regarding their environmental and social impact. In the UK, new Sustainability Disclosure Standards (UK SDS) went into effect on July 1, 2024. With first reporting under the EU Corporate Sustainability Reporting Directive (CSRD) due in early 2025 (based on FY24), in-scope firms must get to grips quickly with the extensive requirements of the ESRS². Soon, more firms will need to clearly outline how they integrate ESG factors into their investment strategies, along with metrics that demonstrate their impact. It’s not just a trend; it’s becoming a regulatory necessity.

4. Navigating liquidity risk

After the market turmoil during the pandemic, liquidity risk management has become a top priority for regulators. Recent SEC amendments to Form N-CEN will require open-end funds to report information about service providers that support their liquidity risk management programs³. Investment management firms may soon find themselves required to establish comprehensive liquidity frameworks and conduct stress tests to assess their ability to withstand market shocks. This change is about more than compliance; it’s about ensuring that funds can meet investor demands in times of crisis.

5. Cybersecurity is a new frontier

In our increasingly digital world, cybersecurity has emerged as a crucial concern for regulators. The SEC recently adopted amendments to Regulation S-P on May 14, 2024, to enhance customer data protection. This change requires entities to notify affected client firms and individuals of data breaches within 30 days of the incident. Meaning investment management firms will face new requirements to bolster their cybersecurity measures and report incidents promptly. This means firms need to take a proactive approach to protect sensitive data, their clients, and their reputations.

6. Derivatives reporting under scrutiny

As discussions around systemic risk heat up, regulators are rethinking derivatives reporting. By the end of this year, six jurisdictions will have amended their derivatives regulatory reporting rules, with more to follow in 2025⁴. As such, investment management firms may very soon be required to provide more frequent and detailed disclosures about their derivatives positions. This could include stricter margin requirements for non-centrally cleared derivatives, adding another layer of complexity to their operations.

7. The rise of alternative data regulations

With investment management firms increasingly relying on alternative data for investment decisions, regulatory scrutiny is intensifying. Firms may need to disclose how they source this data and ensure compliance with privacy laws. Transparency will be key, especially as regulators look for potential conflicts of interest in data usage.

8. Global harmonization is a complex puzzle

As investment management firms operate on a global scale, harmonizing regulations across borders is becoming essential. Expect to see efforts aimed at developing standardized reporting frameworks that simplify compliance for firms dealing with multiple jurisdictions. This could help alleviate some of the regulatory demands but will require close attention to detail.

Embracing change

In a financial world where the stakes are higher than ever, the ability to navigate regulatory challenges effectively will differentiate the leaders from the laggards. Flexibility is key in being able to maneuver the evolving landscape and maintain compliance. Cloud-based regulatory technology solutions can be a game changer for firms who want to keep pace with ever-evolving regulations. The journey of regulatory compliance is ongoing, and those who remain curious and proactive will undoubtedly lead the way into a new era of investment management.

As these regulatory changes loom on the horizon, it’s clear that adaptability will be the cornerstone of success for investment management firms. The emphasis on transparency, risk management, and investor protection is reshaping the industry. By proactively embracing these shifts and investing in technology and compliance culture, investment management firms can enhance their reputational standing and foster investor trust.